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Filed Pursuant to 424(b)(3)
Registration No. 333-128662
CNL INCOME PROPERTIES, INC.
Supplement No. Four dated December 7, 2006
to Prospectus dated April 4, 2006
This Supplement is part of, and should be read in conjunction with, the prospectus dated April 4, 2006. This Prospectus Supplement replaces all prior Supplements and Sticker Supplements to the prospectus.Capitalized terms used in this Prospectus Supplement have the same meaning as in the prospectus unless otherwise stated herein. The terms “we,” “our,” “us” and “CNL Income Properties” include CNL Income Properties, Inc. and its subsidiaries.
Information as to the number and types of properties we have entered into initial commitments to acquire, properties we have acquired and loans we have made is presented as of December 1, 2006, and all references to property acquisitions, commitments and loans should be read in that context. Properties that we enter into initial commitments to acquire, as well as properties we acquire and loans we make after December 1, 2006, will be reported in a subsequent supplement.
RECENT DEVELOPMENTS
At December 1, 2006, we had a portfolio of 40 lifestyle properties, including interests in retail and commercial properties at seven resort villages, one merchandise mart, two waterpark resorts, two outdoor waterpark resorts, one sky lift attraction, one dealership, 13 golf courses, two ski properties and 11 family entertainment centers. We have made four loans, three of which are outstanding, and have committed to make one additional loan. We have also committed to acquire one additional golf course property, four additional ski properties and the retail and commercial properties at one resort village property. All of the properties in which we own an interest are, or will be, leased on a long-term basis to either affiliated or third-party tenants and managed by third-party operators that we consider to be significant industry leaders.
On December 1, 2006, we committed to acquire four ski resorts from affiliates of Booth Creek Ski Holdings, Inc. for a purchase price of $170.0 million. The four ski properties to be acquired are the Northstar-at-TahoeTM Resort in Lake Tahoe, California, the Sierra-at-Tahoe® Resort in South Lake Tahoe, California, the Summit-at-Snoqualmie Resort in Snoqualmie Pass, Washington and the Loon Mountain Resort in Lincoln, New Hampshire (collectively, the “Booth Creek Ski Properties”).
The Northstar-at-Tahoe Resort is located near the north end of Lake Tahoe, California. The resort’s 8,600-foot Mount Pluto features 2,480 acres of skiable terrain and a 2,280-foot vertical drop. The resort’s 79 ski trails are served by 16 chairlifts. The resort also has approximately 50 kilometers of groomed trails for cross-country skiing and snowshoeing and on-mountain terrain parks for snowboarders and adventurous skiers. Other amenities include restaurants, shops, a 36,000 square-foot skier services facility, a 19,000 square-foot ski lodge, a 10,000 square-foot rental equipment facility and a 5,800 square-foot children’s ski school facility. Summer activities include an 18-hole golf course, mountain biking trails, tennis courts, horseback riding, fly-fishing and swimming pools. The resort consists of approximately 7,300 acres of privately owned land.
The Sierra-at-Tahoe Resort is located near South Lake Tahoe, California. The resort’s 8,852-foot peak offers 1,680 skiable acres and a 2,212-foot vertical drop. The resort’s 46 ski trails are served by 12 chairlifts. The resort operates a 46,000 square-foot base lodge, which offers food, retail and other skier services. The resort consists of approximately 20 acres of fee simple land and 1,669 acres of land leased under a Special Use Permit from the United States Department of Agriculture, Forest Service (the “Forest Service”).
The Summit-at-Snoqualmie Resort is located in the Cascade Mountains in Snoqualmie Pass, Washington and consists of four separate resorts (the “Summit”), which collectively offer 1,697 acres of skiable terrain. In total, the Summit has 96 designated trails and downhill runs served by 26 chairlifts, which combine to transport approximately 33,000 skiers uphill per hour. The Summit features a Nordic center which offers approximately 55
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kilometers of cross-country skiing and a tubing center which offers special tubing lifts and groomed lanes. The Summit offers ten lodges which provide an aggregate of approximately 122,000 square-feet of restaurant space, and is one of the largest learn-to-ski areas in the United States, with approximately 15% to 20% of its annual skier days typically being attributable to guests enrolled in ski school programs. In addition, the Summit is the largest night skiing complex in the United States, with approximately 20% to 25% of its skier visits each season being recorded at night. The Summit consists of 686 acres of its 4,102 gross acreage, leases approximately 440 acres under a private permit, utilizes 1,280 acres for cross-country skiing under an annual operating agreement with the Forest Service and utilizes 1,697 acres of mountain terrain under a Forest Service Special Use Permit.
The Loon Mountain Resort is located in the White Mountains in Lincoln, New Hampshire. The resort’s 3,050-foot peak features 275 skiable acres and a 2,100-foot vertical drop. The resort’s 50 trails are served by ten operating lifts. Amenities at the resort include a base lodge with a food and beverage services, two restaurants, a 17,600-square-foot lodge, a retail shop, a rental shop and an equipment repair shop. The resort also features a 17,300 square-foot children’s center, trails for cross-country skiing, snowshoe tours, tubing runs, horseback riding, indoor and outdoor climbing walls and a steam engine railroad for shuttling visitors. The resort consists of approximately 60 acres and leases 1,366 acres of land in the White Mountain National Forest under a Special Use Permit issued by the Forest Service permitting year-round recreational use.
As part of our agreement to acquire the Booth Creek Ski Properties, we have also committed to acquire 46 condominiumized retail and commercial spaces at the Northstar Commercial Village in Lake Tahoe, California for $22.0 million and to extend a $12.0 million loan to Booth Creek Resort Properties LLC. Booth Creek Resort Properties LLC is an entity newly formed by the current principals of Booth Creek Ski Holdings, Inc. to acquire certain properties and operating assets from Booth Creek Ski Holdings, Inc. We expect to enter into long-term, triple net leases with wholly-owned subsidiaries of Booth Creek Resort Properties LLC to operate the Booth Creek Ski Properties and with Northstar Group Commercial Properties, LLC to operate the Northstar Commercial Properties. Northstar Commercial Village is a newly developed village located at the base of Northstar Mountain in Lake Tahoe, California.
The $12.0 million loan to Booth Creek Resort Properties LLC is expected to be collateralized by a first mortgage or the substantial equivalent on the Waterville Valley Ski Resort in Waterville Valley, New Hampshire, the Mount Cranmore Ski Resort in North Conway, New Hampshire and a tract of land at the Northstar-at-Tahoe Resort in Lake Tahoe, California referred to as the Porcupine Hill Estates subdivision.
We expect to close on these transactions on or prior to December 20, 2006. The transactions are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be completed.
On November 16, 2006, we acquired six golf course properties, committed to purchase one additional golf course property and purchased a 47.5% interest in the partnership that owns the Cowboys Golf Club in Grapevine, Texas for an aggregate purchase price of $59.0 million (the “EAGL Properties”). One of the EAGL Properties, the Clear Creek Golf Club, was closed into escrow pending receipt of a consent assigning the underlying ground lease, and we expect to close the purchase of that property by the end of December 2006. We expect to acquire the remaining interests in the partnership that owns the Cowboys Golf Club in a separate transaction by the end of the first quarter of 2007. If we do not acquire the remaining interests in the partnership, or if we acquire the remaining partnership interests and fail to operate the Cowboys Golf Club according to certain standards, we will lose the right to use the Cowboys name and logo at the property under the terms of our license agreement. The acquisition of the Clear Creek Golf Club and the partnership interests in the Cowboys Golf Club are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be completed.
The following table sets forth the name and location of each of the EAGL Properties:
Name | Location | |
Mansfield National Golf Club (subject to a ground lease) | Dallas-Fort Worth, Texas | |
Plantation Golf Club | Dallas-Fort Worth, Texas |
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Name | Location | |
Lake Park Golf Club (subject to a concession agreement) | Dallas-Fort Worth, Texas | |
Golf Club at Fossil Creek | Fort Worth, Texas | |
The Golf Club at Cinco Ranch | Houston, Texas | |
Canyon Springs Golf Club | San Antonio, Texas | |
Clear Creek Golf Club* (subject to a concession agreement) | Houston, Texas | |
Cowboys Golf Club (subject to a ground lease) | Grapevine, Texas |
* | Closed into escrow |
All of the EAGL Properties are public golf courses and each of the properties features an 18-hole golf course and, generally, a golf range, a practice facility and a clubhouse that includes a pro shop and a restaurant. In addition to an 18-hole golf course, Lake Park Golf Club also features a 9-hole executive golf course.
We have entered into long-term, triple-net leases with EAGL Golf, a golf course investment and management company, for all of the EAGL Properties except the Cowboys Golf Club. The EAGL Cowboys Property is currently being managed pursuant to an agreement that was entered into with EAGL Golf in connection with our acquisition of the EAGL Properties. In the event that we acquire the remaining interests in the Cowboys Golf Club, we expect to enter into a new long-term, triple-net lease with EAGL Golf under similar terms to the leases we have for the other EAGL Properties.
On October 6, 2006, we acquired 11 family entertainment center properties (“FECs”) for a purchase price of $35.2 million. The properties range in size from five to 18 acres and feature various combinations of activities such as miniature golf, go-karts, video arcades, laser tag, batting cages, bumper boats, paintball, rock climbing, amusement rides and casual dining. We have entered into long-term, triple-net leases with Zuma Holdings, LLC, an affiliate of Trancas Capital, LLC, for the management of each of the 11 properties. The following table sets forth the brand name and location of the acquired properties:
Name | Location | |
Zuma Fun Center | Charlotte, North Carolina | |
Zuma Fun Center | Knoxville, Tennessee | |
Zuma Fun Center | North Houston, Texas | |
Zuma Fun Center | South Houston, Texas | |
Mountasia Family Fun Center | North Richland Hills, Texas | |
Grand Prix Tampa | Tampa, Florida | |
Fiddlesticks Fun Center | Tempe, Arizona | |
Funtasticks Fun Center | Tucson, Arizona | |
Camelot Park (subject to a ground lease) | Bakersfield, California |
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Name | Location | |
Putt Putt Fun Center (subject to a ground lease) | Lubbock, Texas | |
Putt Putt Fun Center (subject to a ground lease) | Raleigh, North Carolina |
On October 16, 2006, we acquired the Weston Hills Country Club, a private golf club in Weston, Florida, for a purchase price of $35.0 million. Heritage Golf, through a subsidiary, also currently operates our Palmetto Hall Property. We have agreed to pay Heritage Golf a supplemental purchase price of up to $5.3 million in the aggregate if certain calculation and performance targets are met in 2009 with respect to the Weston Hills Country Club. The club features two 18-hole golf courses designed by Robert Trent Jones, Jr. and includes a 15-acre teaching center, a 50,000-square-foot clubhouse with a pro shop and dining room, tennis courts and a swimming pool. A subsidiary of Heritage Golf operates the golf course under a triple-net lease, which is cross-defaulted with our Palmetto Hall Property and two other properties we have acquired from Heritage affiliates.
On October 16, 2006, we also acquired Heritage Golf Group West Coast, Inc., an entity formed by Heritage Golf, for a purchase price of $57.0 million and reimbursable capital expenses of $533,000. We have agreed to pay Heritage Golf a supplemental purchase price of up to $8.6 million in the aggregate if certain performance targets are met in 2009 with respect to the two golf courses owned by Heritage West Coast: the Valencia Country Club, a private golf club located in Santa Clarita, California and the Talega Golf Club, a public golf course located in San Clemente, California. The Valencia Property consists of an 18-hole golf course designed by Robert Trent Jones, Sr., a practice center, a 45,000-square-foot clubhouse with a pro shop, a ballroom and a restaurant. The Talega Property consists of an 18-hole public golf course and a 13,450-square-foot clubhouse with a restaurant and a pro shop. We have entered into long-term, triple-net leases with an entity formed by Heritage Golf to operate the golf courses.
On September 8, 2006, we acquired Bear Creek Golf Club in Dallas, Texas for a purchase price of $11.1 million. This property features two 18-hole public golf courses, a practice facility and a 5,700-square-foot clubhouse with a pro shop and a bar and grill. We entered into a long-term, triple-net lease with an affiliate of Billy Casper Golf, LLC, a golf course investment and management company, to operate the golf courses.
On August 10, 2006, as a condition for clearing our offering in Pennsylvania, we made an undertaking to the Pennsylvania Securities Commission to amend certain provisions of Section 10 and Section 12 of our amended and restated Articles of Incorporation (the “Articles”). Our board has adopted resolutions amending, and has recommended that our stockholders approve amendments to, Section 10 and Section 12 of our Articles.
If the proposed amendments are not approved by our stockholders at our next annual meeting, we have assured the Pennsylvania Securities Commission that we will immediately cease making offers and sales of our securities to Pennsylvania residents and that we will not offer or sell our securities in the Commonwealth of Pennsylvania in the future. Additionally, pursuant to Section 504 of the Pennsylvania Securities Act of 1972, as amended, and the regulations promulgated thereunder, we have agreed to extend to all residents of the Commonwealth of Pennsylvania that have purchased our shares pursuant to our current registration statement filed with the SEC (SEC File No. 333-128662) which was declared effective on April 4, 2006, a written offer of rescission. Thus, if these proposals are not approved by our stockholders, we may have to return monies to investors who are residents of the Commonwealth of Pennsylvania. Doing so, however, could have a material adverse effect on our business and financial condition depending on the amount of proceeds that we raise under our current offering from Pennsylvania residents. The proposed amendments are discussed in more detail below under “Summary of the Articles of Incorporation and Bylaws.”
Additional information regarding these amendments will be included in our proxy statement for our 2007 annual meeting of stockholders, which we anticipate will be held in the second half of June 2007. We will distribute that proxy statement to our stockholders in advance of the meeting in accordance with our bylaws and applicable law. A copy of the proxy statement also will be available on the SEC’s website at www.sec.gov. Our stockholders are urged to carefully read that proxy statement when it becomes available.
On October 1, 2006, our board of directors declared a distribution of $0.0483 per share to stockholders of record on October 1, 2006. On October 17, 2006, our board declared a distribution of $0.0492 per share to stockholders of record on November 1, 2006. On November 8, 2006, our board declared a distribution of $0.05 per share to stockholders of record on December 1, 2006. All of the foregoing dividends will be paid by December 31, 2006.
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All references to “Wachovia Bank” throughout the prospectus are replaced with “USBank Corporate Trust Services.”
COVER PAGE
The following paragraph updates the legends on the cover page of the prospectus:
We will only use proceeds from this offering for the purposes stated in the “Use of Proceeds” section of the prospectus. Subscription funds will initially be held in an interest-bearing escrow account for our benefit.
SUITABILITY STANDARDS
HOWTO SUBSCRIBE
The following paragraph updates and replaces the second paragraph of this section on page iii of the prospectus:
If you meet the suitability standards described above and wish to subscribe for shares, complete and execute the subscription agreement and deliver it to your broker-dealer with a check for the full purchase price of the shares. Checks should continue to be made payable to “WBNA Escrow Agent for CNL Income Properties, Inc.” Certain participating broker-dealers who have “net capital,” as defined in the applicable federal securities regulations, of $250,000 or more, may instruct their customers to make their checks for shares for which they have subscribed payable directly to them. Partnerships, individual fiduciaries signing on behalf of trusts, estates, and in other capacities, and persons signing on behalf of corporations and corporate trustees may be required to provide additional documents to participating broker-dealers. We may reject any subscription in whole or in part, regardless of whether you meet the minimum suitability standards.
THE OFFERING
As of October 31, 2006, we had received $226.2 million (22,749,077 shares) in subscriptions proceeds for this offering, including $7.7 million (807,573 shares) received through our reinvestment plan. As of that same date, we had received $747.4 million (74,857,421 shares) in total proceeds in connection with our public offerings, including proceeds received through our reinvestment plan. This amount excludes $200,000 for 20,000 shares purchased by our Advisor preceding the commencement of our initial offering and $1.2 million for 117,708 restricted common shares issued to CNL Financial Group, Inc. in December 2004.
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RISK FACTORS
REAL ESTATEAND OTHER INVESTMENT RISKS
The following risk factor heading is added to the last paragraph on page 20 of the prospectus under the section titled “There are risks associated with lending:”
Borrower defaults may be costly for us due to litigation expenses of recovering funds and the possibility that borrowers are unable to pay their debt to us.
The following risk factor is added after the first full risk factor on page 17 of the prospectus:
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; maintenance of our Investment Company Act exemption imposes limits on our operations. We are not registered as an investment company under the Investment Company Act of 1940, as amended, based on exclusions that we believe are available to us. We have conducted our operations and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We believe that there are a number of exemptions under the Investment Company Act that may be applicable to us.
If we fail to maintain an exemption or other exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid registering as an investment company or (b) to register as an investment company. If we were registered as an investment company, we would have to comply with a variety of substantive requirements that would:
• | place limits on our capital structure |
• | impose restrictions on specified investments |
• | prohibit transactions with affiliates |
• | require us to change the composition of our board of directors |
• | require us to comply with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations |
In order to maintain our exemption from regulation under the Investment Company Act, we must engage primarily in the business of buying real estate assets or real estate related assets. These investments must be made within a year after the offering ends. If we are unable to invest a significant portion of the proceeds of this offering in real estate assets within one year of terminating the offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns. Doing so would likely reduce the cash available for distribution to you.
Further, to maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. To avoid regulation as an investment company, we must be engaged primarily in a business other than that of owning, holding, trading or investing in securities. We may invest in assets that are determined to be securities rather than interests in, or liens upon, real estate. If a sufficient amount of our assets were determined to be securities instead of interests in, or liens upon, real estate, we would be required to register as an investment company.
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business. Also, because affiliate transactions are prohibited under the Investment Company Act, failure to maintain our exemption would force us to terminate our Advisory Agreement and all other agreements with affiliates. Any of these results would be likely to have a material adverse effect on our business, our financial results and our ability to make distributions to stockholders.
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The following risk factor is added after the first full risk factor on page 19 of the prospectus:
Compliance with the Americans with Disabilities Act may reduce our expected distributions. Under the Americans with Disabilities Act, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we intend to acquire properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.
The following risk factor is added on page 23 of the prospectus:
Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.Terrorist attacks may negatively affect our operations and your investment. We may acquire real estate assets located in areas that are susceptible to attack. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.
More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy, all of which could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.
BUSINESS
SKI RESORTS
The following information supplements the second paragraph of the Ski Resorts section under the heading “Industry Overview,” which begins on page 59 of the prospectus:
Industry sources have estimated that over the next five years skier and snowboarder visits could reach 60 million in a single season. During the 2005/2006 ski season, skier and snowboarder visits have increased to 5.8 million visits.
OTHER ATTRACTIONS
The following information supplements the Other Attractions section, which begins on page 66 of the prospectus:
Family Entertainment Centers.Family Entertainment Centers (FECs) comprise the local park segment of the amusement park industry. Typically, FECs draw their core audience from within a 25-mile radius of their location. According to the PricewaterhouseCoopers LLP “Global Entertainment and Media Outlook: 2006-2010” report, the amusement park industry collectively accounts for approximately $11.0 billion in annual revenues. A recent CB Richard Ellis, Inc. profile on the industry states that the FEC segment has accounted for approximately $3.0 billion of this revenue opportunity. The FEC industry has continued to demonstrate growth over the years in its demographic reach, average spending per-capita and visiting patterns, all of which contribute to the health of the industry.
PROPERTY ACQUISITIONS
The following information updates and replaces the first two sentences in the section relating to “Merchandise Marts” under the heading “Dallas Market Center Property,” which begins on page 67 of the prospectus:
Dallas Market Center Property
Through a partnership with the Dallas Market Center (“DMC”), a Dallas company affiliated with Crow Holdings, Inc., we own an 80% interest in the Dallas Market Center (the “DMC Partnership”). We acquired our initial interest in the DMC Partnership and the Dallas Market Center through a series of three investments contributing approximately $71.1 million in equity.
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The following information updates and replaces the first sentence in the section relating to “Destination Retail and Entertainment Centers” under the heading “Intrawest Resort Village Properties” beginning on page 69 of the prospectus:
Intrawest Resort Village Properties
In December 2004, we acquired an 80% interest, through unconsolidated entities (the “Intrawest Partnership”), and invested approximately $41.9 million in retail and commercial properties at seven resort villages in the U.S. and Canada (the “Resort Village Properties”), six of which are located near ski resorts and one of which is located near a beach and golf resort.
As of October 26, 2006, Intrawest Corporation was acquired by funds managed by Fortress Investment Group LLC. Intrawest Corporation subsequently changed its name to Intrawest ULC. There was no impact on the Intrawest Partnership or the Resort Village Properties.
The following table replaces the table on pages 76 and 77 of the prospectus:
The following table presents the historical operating data of the Resort Village Properties including average occupancy rates and effective annual rents per square foot for the past five years or the period during which the property has been in operation, whichever is longer.
Location | Fiscal year (1) | Average occupancy rate | Effective annual rent per square foot(2) | ||||||
Blue Mountain | 2005 | 97 | % | $ | 30.60 | (3) | |||
2004 | 95 | % | 19.87 | (3) | |||||
2003 | 100 | % | 23.73 | (3) | |||||
2002 | — | (4) | — | (4) | |||||
Whistler Creekside | 2005 | 93 | % | $ | 31.15 | (3) | |||
2004 | 86 | % | 8.46 | (3)(5) | |||||
2003 | 100 | % | — | (5) | |||||
2002 | 100 | % | — | (5) | |||||
2001 | 100 | % | — | (5) | |||||
Copper(6) | 2005 | 94 | % | $ | 18.93 | ||||
2004 | 73 | % | 18.42 | ||||||
2003 | 82 | % | 19.94 | ||||||
2002 | 81 | % | 15.21 | ||||||
Mammoth | 2005 | 95 | % | $ | 37.15 | ||||
2004 | 86 | % | 25.40 | ||||||
2003 | 0 | % | — | (7) | |||||
Sandestin(8) | 2005 | 100 | % | $ | 25.19 | ||||
2004 | 100 | % | 36.24 | ||||||
2003 | 100 | % | 20.54 | ||||||
2002 | 0 | % | — | (8) | |||||
Snowshoe | 2005 | 95 | % | $ | 25.34 | ||||
2004 | 86 | % | 22.22 | ||||||
2003 | 83 | % | 21.72 | ||||||
2002 | 91 | % | 21.50 | ||||||
2001 | 91 | % | — |
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Location | Fiscal year (1) | Average occupancy rate | Effective annual rent per square foot(2) | |||||
Stratton | 2005 | 99 | % | $ | 19.72 | |||
2004 | 100 | % | 25.35 | |||||
2003 | 100 | % | 15.97 | |||||
2002 | 100 | % | 21.55 | |||||
2001 | 100 | % | 10.67 |
FOOTNOTES:
(1) | Data presented for 2005 is for the calendar year ended December 31 and data presented for 2001-2004 is presented for fiscal year ended June 30. |
(2) | The effective annual rent per square foot for each Resort Village Property was calculated by dividing the total annual rent by the total leasable square footage in the Resort Village Property at year end (including vacant spaces), subject to adjustment per notes 1, and 4-6. |
(3) | Amount converted from Canadian dollars to U.S. dollars as of the applicable year-end date. The exchange rate at December 31, 2005 was $0.858 U.S. dollar for $1.00 Canadian dollar. The exchange rate at June 30, 2004 was $0.744 U.S. dollar for $1.00 Canadian dollar. The exchange rate at June 30, 2003 was $0.743 U.S. dollar for $1.00 Canadian dollar. |
(4) | Construction of the first building was completed in fiscal year 2002; however, no tenants occupied the space until fiscal year 2003. A new building was completed during fiscal year 2003 and was under lease-up during fiscal year 2004. |
(5) | The annual revenue used to calculate the effective annual rent per square foot does not reflect rent for Intrawest and its related party tenants who were not charged rent during the periods prior to the sale of the Canadian Resort Village Properties. The occupancy rate, however, reflects the occupancy of all commercial space at Whistler Creekside that is included in this transaction, including commercial space occupied by Intrawest and its affiliates. |
(6) | Annual revenue used to calculate the effective annual rent per square foot does not reflect rent for Intrawest and its related party tenants who were not charged rent during the periods prior to the sale of the U.S. Resort Village Properties. The underlying square footage data used to calculate the occupancy excludes the retail and commercial space occupied by Intrawest and its related party tenants who were not charged rent. |
(7) | Construction of the retail and commercial space was completed in fiscal year 2003; however, no tenants occupied the space until fiscal year 2004. |
(8) | Construction of the retail and commercial space was completed on the first building in fiscal year 2002; however, no tenants occupied the space until fiscal year 2003. |
The fifth paragraph of the section relating to “Other Attractions” under the heading “Great Wolf Waterpark Resorts” on page 78 of the prospectus is deleted.
The following information on new acquisitions supplements the Property Acquisitions section, which begins on page 67 of the prospectus:
SKI PROPERTIES
Cypress Mountain
On May 30, 2006, we acquired the Cypress Mountain ski area in British Columbia, Canada (the “Cypress Mountain Property”) for a purchase price of $27.5 million from Cypress Bowl Recreations Limited Partnership (“Boyne – Cypress”), a subsidiary of Boyne USA, Inc. (“Boyne”). The property is located approximately 13 miles north of Vancouver, British Columbia and 42 miles from the U.S./Canadian border on land owned by the Province
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of British Columbia, which has issued a permit allowing use and operation of a ski area until 2034. Due to certain legal and tax requirements, we acquired the land permit and real property at the Cypress Mountain Property through a trust (the “Trust”) and the personal property assets through a separately capitalized Canadian entity (the “Personal Property Owner”). Boyne has the option to repurchase the property at a price that will result in a fixed return to us. The option is exercisable by Boyne beginning in the seventh year through the 25th year following the acquisition.
Cypress Mountain will host the freestyle skiing and snowboarding competitions during the 2010 Winter Olympics. Consistently ranked the second most-visited ski resort in British Columbia, the property features 38 downhill runs, five chairlifts, a base lodge and an elaborate system of multi-purpose trails. Cypress Mountain has an average annual snowfall of 20 feet, 358 skiable acres and a vertical rise of 1,712 feet. The ski area offers downhill skiing, snowboarding and cross-country skiing activities for more than 2,000 skiers per day on 12 miles of groomed trails. The Cypress Mountain Property, which is primarily a family-oriented, day-ski venue, offers night skiing/riding, snowsport instruction, a cafeteria, lounge facilities and an equipment retail, rental and repair shop. The property will benefit from an estimated $10.3 million in improvements expected to be made to the property and paid for by the Vancouver Olympic Committee. The improvements for these events will include the installation of an additional chairlift, snowmaking equipment, an aerial jump site, a mogul course and a snowboard half-pipe.
The approximate federal income tax basis of the depreciable portion of the property is $27,500,000. We believe the property is adequately insured, and there are currently no major capital expenditures, other than the Olympic improvements, planned for the ski area.
Leases. At the time of the acquisition of the Cypress Mountain Property, the Trust and the Personal Property Owner each entered into long-term, triple-net leases with Boyne – Cypress as tenant. Each of the leases has a term of 20 years with four 5-year renewal options and is cross-defaulted with the lease covering the Gatlinburg Sky Lift Property. The combined minimum annual rent in the initial year is annualized at approximately $2.9 million and will increase during the term of the lease to a maximum of $3.7 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. These U.S. dollar amounts have been converted from Canadian dollars based on an exchange rate of $0.907 U.S. dollar for $1.00 Canadian dollar as of June 2, 2006. Boyne has guaranteed the tenant’s payment of minimum annual rent under the leases for the first four years. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.” Gross revenues at Cypress Mountain Property for the 2002-2003 season were $8.5 million, for the 2003-2004 season were $13.9 million and for the 2004-2005 season were $9.3 million.
Boyne USA, Inc. For information on this operator, see the section entitled “Business-Property Acquisitions-Other Attractions-Gatlinburg Sky Lift Attraction-Boyne USA, Inc.” on page 82 of the prospectus.
Competition.Cypress Mountain is located in British Columbia and generally competes with 36 other ski and snowboard areas. Whistler and Blackcomb Mountains, Grouse Mountain and Mount Seymour are the closest in proximity to Cypress Mountain. Whistler and Blackcomb Mountains are located two hours from Vancouver, British Columbia. Whistler Mountain has an average annual snowfall of 30 feet, 4,757 skiable acres, over 100 trails, eight restaurants, a peak elevation of 7,160 feet and 16 chairlifts. Blackcomb Mountain has an average annual snowfall of 30 feet, 3,414 skiable acres, over 100 trails, nine restaurants, a peak elevation of 7,494 feet and 17 chairlifts. In addition, Grouse Mountain and Mount Seymour, located 15 minutes from downtown Vancouver, compete directly with Cypress Mountain for day-skier visits. Grouse Mountain offers a summit elevation of 4,100 feet, a vertical drop of 1,260 feet, 212 skiable acres, nine chairlifts, 24 trails and has an average annual snowfall of ten feet. Mount Seymour has a summit elevation of 4,134 feet, a vertical drop of 1,115 feet, 600 skiable acres, five chairlifts, 24 trails and an average annual snowfall of over 14 feet.
Bretton Woods Resort
On June 23, we acquired the Bretton Woods Mountain Resort, a ski destination located in northern New Hampshire (the “Bretton Woods Property”), from MWH Preservation Limited Partnership (“MWH”) for a purchase price of $45.0 million, excluding closing costs. We paid $38.5 million of the purchase price at closing and issued a note for $6.5 million bearing interest at 5.8% per annum due on the fourth anniversary of the closing. The total amount anticipated to be due to MWH on the fourth anniversary of the closing is $8.0 million.
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The Bretton Woods Property includes the Bretton Woods Ski Area, the Bretton Woods Ski Lodge, tennis facilities, the four-season National Historic Landmark Mount Washington Hotel, The Bretton Arms Country Inn, The Lodge at Bretton Woods and a freestanding 4,500 square-foot restaurant. The Bretton Woods Ski Area includes 434 skiable acres, 62 miles of groomed trails and 9 chairlifts. The lodging facilities on the property provide a total of 284 rooms. BW Land Holdings, LLC (“BW Holdings”), an entity formed by Celebration Associates and Crosland, Inc., acquired the remaining 900 acres of the resort, which includes two golf courses, equine stables, the Nordic Ski Center, utilities and undeveloped land that may allow for the future development of real estate units and other amenities (the “BW Holdings Property”). BW Holdings has given us a right of first offer to purchase any portion of commercially developed BW Holdings Property prior to marketing it for sale.
The approximate federal income tax basis of the depreciable portion of the Bretton Woods Property is $40,500,000. We believe the Bretton Woods Property is adequately insured, and we have agreed to fund an additional $17.5 million for improvements to be made to the property over the next three years.
Lease.We have entered into two long-term, triple-net leases with BW Resort Management Company, an entity formed by Celebration Associates and Crosland, Inc. BW Resort Management Company has engaged National Resort Management Group, LLC, a resort management company, to market and operate the Bretton Woods Property. The leases each have a term of 10 years with four 5-year renewal options. The combined minimum annual rent in the initial year is approximately $3.3 million and will increase during the term of the lease to a maximum of $4.5 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property net cash flow. Crosland, Inc. has guaranteed the payment of all rent up to a total amount $5.0 million for the first four years of the lease period. The general terms of the lease are described in the section of the prospectus entitled “Business – Description of Property Leases.” The gross revenues of the Bretton Woods Property were $30.4 million in 2003, $30.9 million in 2004 and $33.0 million in 2005.
The following table contains information on the historical average occupancy rates, ADR and RevPar for the Bretton Woods Property. See the description of RevPAR in the “Other Attractions – Great Wolf Waterpark Resorts” section that begins on page 78 of the prospectus.
Year | Average occupancy rate | ADR | RevPar | ||||||
2005 | 47.8 | % | $ | 191.63 | $ | 91.60 | |||
2004 | 46.2 | % | $ | 183.84 | $ | 84.93 |
Celebration Associates & Crosland, Inc. Celebration Associates is a nationally recognized developer and operator of award-winning, master-planned, mixed-use communities and villages. Crosland, Inc. is one of the Southeast’s leading and most diversified real estate companies. Prior to our making a commitment to acquire the Bretton Woods Property, none of Celebration Associates, Crosland nor their subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.
Competition. Stratton Mountain, Stowe Mountain, Loon Mountain and Waterville Valley are the closest competitors in terms of similarity of product and experience within a 150-mile radius. While not a destination ski area, Mount Wachusett is also a competitor of Bretton Woods Mountain Resort for the Boston ski market and is located one hour outside of Boston. The lodging operations at the Bretton Woods Resort currently compete regionally with non-ski resort properties such as The Balsams, Wentworth by the Sea, Woodstock Inn, Equinox Resort & Spa and The Sagamore.
GOLFCOURSES
Palmetto Hall Plantation Club
On April 27, 2006, we acquired Palmetto Hall Plantation Club in Hilton Head, South Carolina (the “Palmetto Hall Property”) for a purchase price of $7.6 million. The property includes two 18-hole public golf courses designed by Arthur Hills and Robert Cupp, a 14,000 square-foot clubhouse with a pro shop, a golf maintenance center, two tennis courts and a swimming pool. On November 14, 2006, we financed the Palmetto Hall Property as described in the section of this supplement entitled “Business – Borrowing.”
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The approximate federal income tax basis of the depreciable portion (the building and equipment portion) of the property is $6,840,000. We believe the property is adequately insured, and there are currently no major capital expenditures planned for the golf courses.
Lease. At the time of our acquisition of the Palmetto Hall Property, we entered into a long-term, triple-net lease with a subsidiary of Heritage Golf Group, LLC, a nationwide owner and operator of golf properties (“Heritage Golf”), to operate the Palmetto Hall Property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent in the initial year is approximately $640,000, increasing during the term of the lease to approximately $720,000. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of the property’s gross revenues. The general terms of the lease are described in the section of the prospectus entitled “Business – Description of Property Leases.” The gross revenues for the Palmetto Hall Property in 2003 were $4.0 million, in 2004 were $3.5 million and in 2005 were $2.9 million.
Heritage Golf Group, LLC. Heritage Golf began operations in 1999. The company has acquired and developed a portfolio of well-known and acclaimed high-end, daily fee, resort and private golf facilities in California, Texas, Georgia, Florida, and South Carolina. Heritage Golf currently operates 99 of the 261 holes available for public play on Hilton Head Island. Prior to our acquisition of the Palmetto Hall Property, none of Heritage Golf, its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.
Competition. There are currently 24 golf courses located on Hilton Head Island, and more than half of these golf courses are available for public play, including Palmetto Hall Plantation Club. There are 22 other golf courses located in the nearby off-Island area.
Raven Golf Club at South Mountain™
On June 9, 2006, we acquired Raven Golf Club at South Mountain™ in Phoenix, Arizona (the “South Mountain Property”) from Intrawest Golf Holdings, Inc., a subsidiary of Intrawest Corporation, for a purchase price of $12.75 million. The property, which was built in 1995 on 160 acres, includes an 18-hole public golf course with a practice facility and a 4,600 square-foot clubhouse with a pro shop, locker room and a restaurant. We licensed the use of the Raven brand from Intrawest for uses specific to this property for up to four years. On November 14, 2006, we financed the South Mountain Property as described in the section of this supplement entitled “Business – Borrowing.”
The approximate federal income tax basis of the depreciable portion of the property is $7,175,000. We believe the property is adequately insured. We have agreed to invest approximately $500,000 in improvements to the property.
Lease. Upon our acquisition of the South Mountain Property, we entered into a long-term, triple-net lease with a subsidiary of I.R.I. Golf Group, LLC, a golf course investment and management company (“IRI”), to operate the property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent for the South Mountain Property is approximately $1.1 million in the initial year. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreement are described in the section of the prospectus entitled “Business – Description of Property Leases.” The gross revenues at the South Mountain Property for 2003 were $4.8 million, for 2004 were $4.3 million and for 2005 were $4.8.
I.R.I. Golf Group, LLC. IRI was founded in 1991 by Jeff Silverstein. Since 1996, IRI has broadened its geographical scope in the Southwest, developing four facilities in Texas and Nevada. I.R.I. has extensive golf management experience, owning and operating 19 golf facilities in Arizona, Nevada, North Carolina, South Carolina, Texas and Washington. Prior to the consummation of our acquisition of the South Mountain Property, none of IRI, or its subsidiaries or affiliates, was related to us, was affiliated with us or was a partner in our business.
Competition. The Phoenix metropolitan area has more than 200 golf courses. The South Mountain Property competes with a limited number of high-end, daily-fee golf courses located near downtown Phoenix. The property’s two principal competitors are the Legacy Golf Resort and Whirlwind Golf Club, both of which charge similar rates per round to the South Mountain course. The other nearby courses charge lower rates per round.
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Bear Creek Golf Club
On September 8, 2006, we acquired Bear Creek Golf Club in Dallas, Texas (the “Bear Creek Property”) from Bear Creek DFW Associates, Ltd., an entity affiliated with Hyatt Corporation and Hunt-Woodbine Realty Corporation, for a purchase price of $11.1 million. We acquired a long-term leasehold interest in the real property from the Dallas/Fort Worth International Airport Board, along with improvements to the property. The Bear Creek Property features two 18-hole public golf courses, a practice facility and a 5,700-square-foot clubhouse with a pro shop and a bar and grill. On November 14, 2006, we financed the Bear Creek Property as described in the section of this supplement entitled “Business – Borrowing.”
The approximate federal income tax basis of the depreciable portion of the property is $12.0 million. We believe the property is adequately insured and that there are currently no major capital expenditures planned for the golf courses.
Lease. At the time of acquisition, we entered into a long-term, triple-net lease with an affiliate of Billy Casper Golf, LLC, a golf course investment and management company (“Billy Casper Golf”), to operate the property. The lease has a term of 22 years and four 5-year renewal options. The minimum annual rent for the Bear Creek Property is approximately $1.0 million in the initial year and will increase annually to a maximum of $1.1 million. Beginning with the third lease year, total percent rent will be a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreement are described in the section of the prospectus entitled “Business – Description of Property Leases.” The gross revenues at the Bear Creek Property were $4.3 million for 2003, $4.8 million for 2004 and $5.0 million for 2005.
Billy Casper Golf, LLC. Billy Casper Golf, headquartered in Northern Virginia, currently manages or leases 68 golf courses in 21 states. Billy Casper, who captured two U.S. Open wins and a Master championship while on the PGA Tour, partnered with Peter M. Hill and Robert C. Morris to establish the company in 1989. The company has developed and opened 24 new golf courses. Prior to the consummation of our acquisition of the Bear Creek Property, none of Billy Casper Golf, its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.
Competition. The Bear Creek Property competes with approximately 12 other daily-fee courses located within 15 miles of the club and the Dallas/Fort Worth International Airport, only two of which feature more than 18 holes. The green fees at the Bear Creek Property are positioned between the lower end of the high-priced courses and the upper end of the moderately priced courses, which helped the club host more than 25,000 outing rounds in 2005. The three closest competitors to the Bear Creek Property are the Sky Creek Ranch Golf Course, Bridlewood Golf Course and the Links at Water Chase, 18-hole golf courses which charge similar rates per round to the Bear Creek courses. The other nearby courses charge lower rates per round.
Weston Hills Country Club
On October 16, 2006, we acquired the Weston Hills Country Club, a private golf club in Weston, Florida (the “Weston Hills Property”) from WHCC, LLC, an affiliate of Heritage Golf for a purchase price of $35.0 million. We have agreed to pay Heritage Golf a supplemental purchase price of up to $5.3 million in the aggregate if certain performance targets are met in 2009 with respect to the Weston Hills Property. The Weston Hills Property features two 18-hole golf courses designed by Robert Trent Jones, Jr. and includes a 15-acre teaching center, a 50,000-square-foot clubhouse with a pro shop and dining room, tennis courts and a swimming pool. The approximate federal income tax basis of the depreciable portion of the property is $32.3 million. The Weston Hills Property is adequately insured, and the only major capital expenditure planned for the property is a $1.3 million renovation to the locker rooms at the clubhouse. On November 30, 2006, we financed the Weston Hills Property as described in the section of this supplement entitled “Business – Borrowing.”
Lease. A subsidiary of Heritage Golf operates the Weston Hills Property under a triple-net lease with an initial term of 20 years and six five-year renewal options. The lease is cross-defaulted with our Palmetto Hall Property and two other properties we have acquired from Heritage Golf affiliates as described below. The minimum annual rent for the Weston Hills Property will be approximately $2.8 million in the initial year and will increase annually to approximately $3.0 million. Additional rent is a negotiated percentage of incremental total revenue over a certain threshold. The gross revenues for the Weston Hills Property were $13.3 million for 2003, $13.7 million for 2004 and $12.7 million for 2005.
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Heritage Golf Group, LLC. For information on this operator, see the section entitled “Business – Property Acquisitions – Golf Courses – Palmetto Hall Plantation Club.”
Competition. The Weston Hills Property competes for members primarily with the Tournament Players Club at Eagle Trace, a private golf club in Coral Springs, Florida, the Grande Oaks Golf Club, a private golf club in Ft. Lauderdale, Florida and The Club at Doral, a private golf club in Miami, Florida.
Valencia Country Club and Talega Golf Club
On October 16, 2006, we also acquired Heritage Golf Group West Coast, Inc. (“Heritage West Coast”), an entity formed by Heritage Golf, for a purchase price of $57.0 million and reimbursable capital expenses of $533,000. We have agreed to pay Heritage Golf a supplemental purchase price of up to $8.6 million in the aggregate if certain performance targets are met in 2009 with respect to the two golf courses owned by Heritage West Coast: the Valencia Country Club, a private golf club located in Santa Clarita, California (the “Valencia Property”) and the Talega Golf Club, a public golf course located in San Clemente, California (the “Talega Property”). The Valencia Property consists of an 18-hole golf course designed by Robert Trent Jones, Sr., a practice center, a 45,000-square-foot clubhouse with a pro shop, a ballroom and a restaurant. On November 30, 2006, we financed the Valencia Property as described in the section of this supplement entitled “Business – Borrowing.” The Talega Property consists of an 18-hole public golf course and a 13,450-square-foot clubhouse with a restaurant and a pro shop. On November 30, 2006, we financed the Talega Property as described in the section of this supplement entitled “Business – Borrowing.” The approximate federal income tax basis of the depreciable portion of the properties is $27.0 million. The properties are adequately insured, and the only major capital expenditure planned for the properties, other than the $533,000 paid at closing, mostly for improvements being completed to the driving range at the Talega Property, is an additional $1.2 million for sound wall construction and restaurant renovations at the Valencia Property.
Leases. Heritage Golf Master Lease, LLC, an entity formed by Heritage Golf, operates both golf courses under triple-net leases with initial terms of 20 years and six five-year renewal options. The leases are cross-defaulted with our Palmetto Hall Property and our Weston Hills Property. The minimum annual rent for the Valencia Property will be approximately $3.2 million in the initial year and will increase annually to a maximum of $3.4 million. The minimum annual rent for the Talega Property will be approximately $1.4 million in the initial year and will increase annually to a maximum of $1.6 million. Additional rent is a negotiated percentage of incremental total revenue over thresholds set for each of these properties. The combined revenues for the Valencia Property and the Talega Property were $14.6 million for 2003, $15.0 million for 2004 and $14.4 million for 2005.
Heritage Golf Group, LLC. For information on this operator, see the section entitled “Business – Property Acquisitions – Golf Courses – Palmetto Hall Plantation Club.”
Competition. The Talega Property in San Clemente, California, competes with nearby San Clemente Municipal Golf Course and Shore Cliffs Golf Club, which are 18-hole daily fee courses charging much lower rates per round than the Talega Golf Club. The Talega Property will also compete with the nearby Pelican Hill Golf Club, a 36-hole resort/daily fee course that is closed for renovations until late 2007. The Valencia Property in Santa Clarita, California competes with three local private golf clubs: El Caballero Country Club in Tarzana, California, North Ranch Country Club in Thousand Oaks, California and Wood Ranch Country Club in Simi Valley, California. Valencia Country Club leads its competitors with the highest initiation fee and second highest monthly rate.
EAGL Golf Clubs and Cowboys Golf Club Partnership Interest
On November 16, 2006, we acquired six golf course properties, committed to purchase one additional golf course property and purchased a 47.5% interest in the partnership that owns the Cowboys Golf Club in Grapevine, Texas, from affiliates of Evergreen Alliance Golf Limited, L.P. (“EAGL Golf”) for an aggregate purchase price of $59.0 million (the “EAGL Properties”). One of the EAGL properties, the Clear Creek Golf Club, was closed into escrow pending receipt of a consent assigning the underlying ground lease, and we expect to close the purchase of that property by the end of December 2006. We expect to acquire the remaining interests in the partnership that owns the Cowboys Golf Club in a separate transaction by the end of the first quarter of 2007. If we do not acquire the remaining interests in the partnership, we will lose the right to use the Cowboys name and logo at the property in November 2008 under the terms of our license agreement. Whether or not we acquire the remaining partnership
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interests, certain events such as the failure to operate the Cowboys Golf Club according to certain standards will also cause us to lose the right to use the Cowboys name and logo as soon as they occur. The acquisition of the Clear Creek Golf Club and the partnership interests in the Cowboys Golf Club are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be completed.
The following table sets forth the name and location of each of the EAGL Properties:
Name | Location | |
Mansfield National Golf Club (the “Mansfield Property”) (subject to a ground lease) | Dallas-Fort Worth, Texas | |
Plantation Golf Club (the “Plantation Property”) | Dallas-Fort Worth, Texas | |
Lake Park Golf Club (the “Lake Park Property”) (subject to a concession agreement) | Dallas-Fort Worth, Texas | |
Golf Club at Fossil Creek (the “Fossil Creek Property”) | Fort Worth, Texas | |
The Golf Club at Cinco Ranch (the “Cinco Ranch Property”) | Houston, Texas | |
Canyon Springs Golf Club (the “Canyon Springs Property”) | San Antonio, Texas | |
Clear Creek Golf Club* (the “Clear Creek Property”) (subject to a concession agreement) | Houston, Texas | |
Cowboys Golf Club (the “Cowboys Property”) (subject to a ground lease) | Grapevine, Texas |
* | Closed into escrow |
All of the EAGL Properties feature an 18-hole public golf course and, generally, a golf range, a practice facility and a clubhouse that includes a pro shop and a restaurant. In addition to an 18-hole golf course, the Lake Park Property also features a 9-hole executive golf course. The approximate federal income tax basis of the depreciable portion of the properties is $53.1 million. The properties are adequately insured, and there are no major capital expenditures planned.
Leases. We have entered into long-term, triple-net leases with EAGL Golf for all of the EAGL Properties except the Cowboys Golf Club. The triple-net leases have initial terms of 20 years and four five-year renewal options, subject to the terms and renewal provisions of certain underlying ground leases or concession agreements. An interest owned under a concession agreement is similar to a leasehold interest except that concession agreements are land rights granted by a government entity. As such, they are subject to similar risks as leasehold interests or permitted land in that we do not own the land and, in certain circumstances, the government may have the right to take actions on that land which interferes with our tenants’ ability to pay rent. The leases are cross-defaulted. The minimum annual rent for the EAGL Properties, including the Clear Creek Golf Club which is currently being held in escrow, is approximately $3.9 million in the initial year and will increase annually to approximately $4.5 million. Additional rent is a negotiated percentage of incremental total revenue over a threshold. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.” The EAGL Cowboys Property is currently being managed pursuant to an agreement that was entered into with
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EAGL Golf simultaneous with our acquisition of the EAGL Properties. In the event of our purchase of the remaining interests in the Cowboys Golf Club, we expect to lease the property to EAGL Golf under a triple net lease with similar terms to the leases we have with our other EAGL Properties. The combined revenue for the properties in the EAGL Portfolio, not including the Cowboys Property, were $15.9 million in 2003, $17.4 million in 2004 and $18.4 million in 2005.
Evergreen Alliance Golf Limited, L.P. EAGL Golf was acquired by Premier Golf Management, Inc. (“Premier Golf”) as part of a series of transactions that included our acquisition of the EAGL Properties. EAGL Golf operates approximately 50 golf course properties throughout the United States. Joe Munsch, who has 30 years of experience in the golf industry, will serve as President and Chief Executive Officer of EAGL Golf. Mr. Munsch spent almost 20 years with ClubCorp in various executive positions and joined the former EAGL Golf in 2001 as its President overseeing the operation of its 27 golf courses. Premier Golf, which was founded by Bob Williams in 2002, currently owns and operates approximately 20 golf courses. Mr. Williams has 30 years of experience in the golf industry, working with ClubCorp and American Golf Corporation before forming Golf Enterprises, Inc. in 1993. Mr. Williams will serve as Chairman of EAGL Golf. Prior to our acquisition of these properties, none of EAGL Golf, Premier Golf Management, Inc., or any of their subsidiaries or affiliates, was related to us, was affiliated with us or was a partner in our business.
Competition.Our prospectus contains a general discussion of competition in the golf sector. Provided below is specific competition for each of the EAGL Properties.
The Mansfield Property competes primarily with the Prairie Lakes, the Tierra Verde and the Tangle Ridge public golf courses located in the Dallas-Fort Worth, Texas area. The Plantation Property competes primarily with the Ridgeview Ranch, the Chase Oaks and the Trails of Frisco public golf courses located in the Dallas-Fort Worth area. The Lake Park Property competes primarily with the Grapevine Municipal, the Coyote Ridge and the Riverchase public golf courses located in the Dallas-Fort Worth area. The Fossil Creek Property competes primarily with the Doral Tesoro, the Sky Creek Ranch and the Tour 18 public golf courses located in Fort Worth, Texas. The Cinco Ranch Property competes primarily with the Meadowbrook, the Bear Creek and the Greatwood public golf courses located in the Houston, Texas area. The Canyon Springs Property competes primarily with the Silverhorn, the Westin La Cantera and the Quarry public golf courses located in San Antonio, Texas. The Clear Creek Property competes primarily with the Southwyck, the Wildcat and the Clear Lake public golf courses located in Houston, Texas. The Cowboys Property competes primarily with the Tour 18, the Bridlewood and the Fours Seasons public golf courses located in the Dallas-Fort Worth, Texas area.
DEALERSHIPS
Route 66 Harley-Davidson Dealership
On April 27, 2006, we acquired the Route 66 Harley-Davidson dealership in Tulsa, Oklahoma (the “Route 66 Harley-Davidson Property”) from Route 66 Real Estate, LLC for a purchase price of $6.5 million. The 46,000 square-foot facility includes merchandise, parts and service departments, a 50’s-style5 & Diner restaurant and conference and event facilities. The Route 66 Harley-Davidson dealership was named the 2006 Grand Prize Winner among Dealernews Top 100 powersport retailers in the country.
The approximate federal income tax basis of the depreciable portion of the property is $5,850,000. We believe the property is adequately insured, and there are currently no major capital expenditures planned for the dealership.
Lease. At the time of the acquisition, we entered into a long-term, triple-net lease with Route 66 Real Estate, LLC to operate the property. The lease has a term of 20 years with four 5-year renewal options. The minimum annual rent in the initial year is approximately $560,000, increasing during the term of the lease to approximately $1.0 million. Total percent rent is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreement are described in the section of the prospectus entitled “Business – Description of Property Leases.” The gross revenues for the Route 66 Harley-Davidson Dealership Property were $10.7 million in 2003, $12.5 million in 2004 and $15.1 million in 2005.
Route 66 Real Estate, LLC. Route 66 Real Estate, LLC acquired the Harley-Davidson dealership in December of 1998. The dealership was re-branded with Route 66 as a new prototype dealership. Route 66 Real
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Estate, LLC is owned by Dr. Larry Wofford, a former Professor of Finance and Real Estate at the University of Tulsa. Prior to our acquisition of the Route 66 Harley-Davidson Property, neither Route 66 Real Estate, LLC nor its subsidiaries or affiliates was related to us, affiliated with us or a partner in our business.
Competition.The Route 66 Harley-Davidson dealership in Tulsa competes directly with one other Harley-Davidson dealership and two Honda dealerships. The competing Harley-Davidson dealership, Myers-Duren Harley-Davidson, is of similar size to the Route 66 Harley-Davidson dealership, but it does not have a restaurant and its revenues are driven primarily from motorcycle sales and servicing. Nationally, Honda is generally recognized as the biggest Harley-Davidson competitor in the big-twin motorcycle category, a style of motorcycle for which Harley-Davidson is most known. Also competing indirectly with the Route 66 Harley-Davidson dealership are two Kawasaki dealerships and two Suzuki dealerships, both of which are within 12 miles of Tulsa. There is also a Big Dog Motorcycles dealership in Tulsa that may impact the local market. Big Dog Motorcycles is a relatively new manufacturer that mass-produces specialized custom-look, big-twin motorcycles.
OTHER ATTRACTIONS
Hawaiian Falls Waterparks
On April 21, 2006, we acquired two Hawaiian Falls-branded outdoor waterparks near Dallas, Texas for an aggregate purchase price of $12.1 million. The properties are located in the towns of The Colony and Garland, Texas on municipally owned land. The waterparks feature a variety of slide, tube, wave pool and lazy river attractions, as well as special children’s areas. We entered into long-term, triple-net sub-leases with HFE Horizon, LP (“HFE Horizon”) to operate the waterparks. HFE Horizon, LP has entered into a licensing and merchandising agreement with Big Idea, Inc. in 2006 for daily appearances at the parks by certain VeggieTales characters.
The Hawaiian Falls in The Colony, Texas (the “Hawaiian Falls Colony Property”) is located on 7.5 acres 30 miles north of Dallas. The waterpark opened in May of 2004 and operates from May through September each year, recording over 152,000 visitors in 2005. The population within a 15-mile radius of the property, which includes the Texas cities of Plano, Frisco, Addison, Lewisville, Carrolton and Little Elm, is estimated to be 1.46 million. The property operates under a ground lease with the local municipality that expires in December 2043 and has two 5-year extension options.
The Hawaiian Falls in Garland, Texas (the “Hawaiian Falls Garland Property”) is located on 10 acres of the 129-acre W. Cecil Winters Regional Park, 15 miles north of Dallas. The waterpark opened in May of 2003 and operates from May through September each year, and recorded approximately 138,000 visitors in 2005. The population within a 15-mile radius of the property is estimated to be 2.02 million. The property operates under a ground lease with the local municipality that expires in May 2033.
The approximate federal income tax basis of the depreciable portion of the Hawaiian Falls Colony Property is $5,820,000. The approximate federal income tax basis of the depreciable portion of the Hawaiian Falls Garland Property is $6,305,000. We believe the properties are adequately insured, and there are currently no major capital expenditures planned for the waterparks.
Leases. At the time of the acquisition, we entered into two long-term, triple-net sub-leases with HFE Horizon to operate the properties. The leases each have a term of 27 years with no renewal options. The minimum annual rent for the Hawaiian Falls Colony Property is approximately $570,000 in the initial year, increasing during the term of the lease to approximately $640,000. The minimum annual rent for the Hawaiian Falls Garland Property is approximately $615,000 in the initial year, increasing during the term of the lease to approximately $700,000. Total percent rent in each lease is a negotiated percentage of revenue capped at a variable percentage of property gross revenues. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.” The combined gross revenues for the Hawaiian Falls Garland Property and the Hawaiian Falls Colony Property were $2.2 million in 2003, $3.2 million in 2004 and $4.1 million in 2005. Gross revenues were impacted by the Hawaiian Falls Garland Property opening late in 2003, and the Hawaiian Falls Colony Property opening late in season in 2004.
HFE Horizon, LP. HFE Horizon, formerly a division of Herschend Family Entertainment (“HFE”), focuses its business on micro-waterparks. The principals of HFE Horizon have been involved in the ownership and operation of theme parks, waterparks and family entertainment centers since 1972. Prior to our acquisition of the waterparks, none of HFE Horizon or its subsidiaries or affiliates was related to us, was affiliated with us or was a partner in our business.
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Competition.Nationally, Palace Entertainment and Six Flags waterparks compete with smaller waterparks such as the Hawaiian Falls Colony Property and the Hawaiian Falls Garland Property. Locally, the Dallas-Fort Worth summer entertainment market for visitors and residents is served primarily by regional waterparks including Water Works Waterpark, Wet Zone and NRH2O Waterpark, which compete with the properties. The major amusement park in the area is Six Flags Over Texas and its Six Flags Hurricane Harbor waterpark, which competes directly with the properties in the Dallas market.
Trancas Capital Family Entertainment Centers
On October 6, 2006, we acquired 11 family entertainment center properties (FECs) from Trancas Capital, LLC (“Trancas Capital”), a real estate management and operating company, for a purchase price of $35.2 million (the “Trancas Properties”). We also have a six-month option to purchase the Fiddlesticks Fun Center in Scottsdale, Arizona on the same terms, conditions and purchase price as set forth in the asset purchase agreement. The properties range in size from five to 18 acres and feature various combinations of activities such as miniature golf, go-karts, video arcades, laser tag, batting cages, bumper boats, paintball, rock climbing, amusement rides and food service. The following table sets forth the brand name and location of the acquired properties:
Name | Location | |
Zuma Fun Center (the “Zuma Charlotte Property”) | Charlotte, North Carolina | |
Zuma Fun Center (the “Zuma Knoxville Property”) | Knoxville, Tennessee | |
Zuma Fun Center (the “Zuma North Houston Property”) | Houston, Texas | |
Zuma Fun Center (the “Zuma South Houston Property”) | Houston, Texas | |
Mountasia Family Fun Center (the “Mountasia Property”) | North Richland Hills, Texas | |
Grand Prix Tampa (the “Grand Prix Tampa Property”) | Tampa, Florida | |
Fiddlesticks Fun Center (the “Fiddlesticks Tempe Property”) | Tempe, Arizona | |
Funtasticks Fun Center (the “Funtasticks Tucson Property”) | Tucson, Arizona | |
Camelot Park (the “Camelot Park Bakersfield Property”) (subject to a ground lease) | Bakersfield, California | |
Putt Putt Fun Center (the “Putt Putt Lubbock Property”) (subject to a ground lease) | Lubbock, Texas | |
Putt Putt Fun Center (the “Putt Putt Raleigh Property”) (subject to a ground lease) | Raleigh, North Carolina |
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The approximate federal income tax basis of the depreciable portion of the properties is $16.8 million. The properties are adequately insured, and there are no major capital expenditures planned for the properties. There are potential environmental issues relating primarily to gasoline leakage associated with the go-kart operations at the properties in Tempe, Arizona, Raleigh and Charlotte, North Carolina and Tampa, Florida. Trancas Capital has agreed to indemnify us against any clean-up costs, claims or other expenses relating to such environmental issues.
Leases. We have entered into long-term, triple-net leases with Zuma Holdings, LLC, an affiliate of Trancas Capital, for the management of each of the 11 Trancas properties. The Trancas Capital affiliate will continue to operate eight of the 11 properties. The Raleigh Putt Putt Property, the Lubbock Putt Putt Property and the Grand Prix Property were previously, and will continue to be, operated by third-party operators pursuant to three separate subleases with Zuma Holdings, LLC. The combined minimum annual rent for the 11 properties in the initial year is approximately $3.2 million and will increase during the term of the lease to a maximum of $3.4 million. Total percentage rent is a negotiated percentage of revenue in excess of a minimum threshold. All 11 leases are cross-defaulted and co-terminous regarding renewal options. The general terms of the lease agreements are described in the section of the prospectus entitled “Business – Description of Property Leases.” The combined gross revenues estimated by previous owners of the Trancas Properties were $12.4 million in 2003, $12.1 million in 2004 and $11.9 million in 2005.
Trancas Capital, LLC. Trancas Capital was founded in 2003 and focuses on acquiring and operating family entertainment centers. Trancas Capital and its subsidiary, Zuma Fun Centers, manage FECs under the Camelot Park, Mountasia Family Fun Center, Fiddlesticks, Funtasticks and Zuma Fun Center brand names. The company is the second largest operator of FECs in the United States. The founder, who is also Chief Executive Officer of the company, has more than 15 years experience in development, operations, acquisition and financial aspects of the amusement industry. He co-founded Palace Entertainment which is the largest operator of FECs in the United States. Prior to our acquisition of these 11 properties, neither Trancas Capital nor its subsidiaries or affiliates were related to us, affiliated with us or a partner in our business.
Competition.Nationally, Palace Entertainment’s family amusement and waterpark operations, Chuck E. Cheese’s restaurant and Dave & Buster’s restaurant/entertainment complexes compete with the Trancas Capital FEC properties. Locally, the competition occurs primarily with local retail and games amusement areas.
PENDING INVESTMENTS
The following information replaces the Pending Investments section, which begins on page 82 of the prospectus:
Booth Creek Ski
On December 1, 2006, we committed to acquire four ski resorts from affiliates of Booth Creek Ski Holdings, Inc. for a purchase price of $170.0 million. On December 1, 2006, we provided a deposit of $5.0 million under the terms of the agreement. The four ski properties to be acquired are the Northstar-at-Tahoe Resort in Lake Tahoe, California (the “Northstar Property”), the Sierra-at-Tahoe Resort in South Lake Tahoe, California (the “Sierra Property”), the Summit-at-Snoqualmie Resort in Snoqualmie Pass, Washington (the “Summit Property”) and the Loon Mountain Resort in Lincoln, New Hampshire (the “Loon Mountain Property”) (collectively, the “Booth Creek Ski Properties”). In addition, we have agreed to fund approximately $28.7 million in capital expenditures at the Northstar-at-Tahoe Resort and Loon Mountain Resort over the next four years.
The Northstar-at-Tahoe Resort is located near the north end of Lake Tahoe, California. The resort’s 8,600-foot Mount Pluto features 2,480 acres of skiable terrain and a 2,280-foot vertical drop. The resort’s 79 ski trails are served by 16 chairlifts. The resort also has approximately 50 kilometers of groomed trails for cross-country skiing and snowshoeing and on-mountain terrain parks for snowboarders and adventurous skiers. Other amenities include restaurants, shops, a 36,000 square-foot skier services facility, a 19,000 square-foot ski lodge, a 10,000 square-foot rental equipment facility and a 5,800 square-foot children’s ski school facility. Summer activities include an 18-hole golf course, mountain biking trails, tennis courts, horseback riding, fly-fishing and swimming pools. The resort consists of approximately 7,300 acres of privately owned land.
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The Sierra-at-Tahoe Resort is located near South Lake Tahoe, California. The resort’s 8,852-foot peak offers 1,680 skiable acres and a 2,212-foot vertical drop. The resort’s 46 ski trails are served by 12 chairlifts. The resort operates a 46,000 square-foot base lodge, which offers food, retail and other skier services. The resort consists of approximately 20 acres of fee simple land and 1,669 acres of land leased under a Special Use Permit from the United States Department of Agriculture, Forest Service (the “Forest Service”).
The Summit-at-Snoqualmie Resort is located in the Cascade Mountains in Snoqualmie Pass, Washington and consists of four separate resorts (the “Summit”), which collectively offer 1,697 acres of skiable terrain. In total, the Summit has 96 designated trails and downhill runs served by 26 chairlifts, which combine to transport approximately 33,000 skiers uphill per hour. The Summit features a Nordic Center which offers approximately 55 kilometers of cross-country skiing and a Tubing Center which offers special tubing lifts and groomed lanes. The Summit offers ten lodges which provide an aggregate of approximately 122,000 square-feet of restaurant space, and is one of the largest learn-to-ski areas in the United States, with approximately 15% to 20% of its annual skier days typically being attributable to guests enrolled in ski school programs. In addition, the Summit is the largest night skiing complex in the United States, with approximately 20% to 25% of its skier visits each season being recorded at night. The Summit consists of 686 acres of its 4,102 gross acreage, leases approximately 440 acres under a private permit, and utilizes 1,280 acres for cross-country skiing under an annual operating agreement with the Forest Service and an additional 1,697 acres of mountain terrain under a Forest Service Special Use Permit.
The Loon Mountain Resort is located in the White Mountains in Lincoln, New Hampshire. The resort’s 3,050-foot peak features 275 skiable acres and a 2,100-foot vertical drop. The resort’s 50 trails are served by ten operating lifts. Amenities at the resort include a base lodge with a food and beverage services, two restaurants, a 17,600-square-foot lodge, a retail shop, a rental shop and an equipment repair shop. The resort also features a 17,300 square-foot children’s center, trails for cross-country skiing, snowshoe tours, tubing runs, horseback riding, indoor and outdoor climbing walls and a steam engine railroad for shuttling visitors. The resort consists of approximately 60 acres and leases 1,366 acres of land in the White Mountain National Forest under a Special Use Permit issued by the Forest Service permitting year-round recreational use.
As part of our agreement to acquire the Booth Creek Ski Properties, we have also committed to acquire 46 condominiumized retail and commercial spaces at the Northstar Commercial Village in Lake Tahoe, California for $22.0 million and to extend a $12.0 million loan to Booth Creek Resort Properties LLC. Booth Creek Resort Properties LLC is an entity newly formed by the current management of Booth Creek Ski Holdings, Inc. to acquire certain properties and operating assets from Booth Creek Ski Holdings, Inc. Northstar Commercial Village is a newly developed village located at the base of Northstar Mountain in Lake Tahoe, California.
The $12.0 million loan to Booth Creek Resort Properties LLC is expected to be collateralized by a first mortgage or the substantial equivalent on the Waterville Valley Ski Resort in Waterville Valley, New Hampshire, the Mount Cranmore Ski Resort in North Conway, New Hampshire and a tract of land at the Northstar-at-Tahoe Resort in Lake Tahoe, California referred to as the Porcipine Hills Estates subdivision as further described in the section of this supplement entitled “Business—Mortgage Loans and Other Loans.”
We expect to close on these transactions on or prior to December 20, 2006. The transactions are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be completed.
Leases. We expect to enter into long-term, triple net leases with wholly-owned subsidiaries of Booth Creek Resort Properties LLC to operate the Booth Creek Ski Properties and with Northstar Group Commercial Properties, LLC to operate the Northstar Commercial Properties. The initial terms of the leases are expected to be 20 years with three 10-year renewal options, provided that the terms do not exceed the term of any underlying United States Forest Service permits. The combined minimum annual rent for the Booth Creek Ski Properties and the Northstar Commercial Properties is expected to be approximately $18.2 million in the initial year and will increase during the term of the lease to a maximum of $21.9 million. Total percentage rent is expected to be a negotiated percentage of incremental total revenue in excess of a minimum threshold. All of the leases are expected to be cross-defaulted. We anticipate that the property will be adequately insured upon acquisition.
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Booth Creek Resort Properties LLC. Booth Creek Resort Properties LLC was formed by principals of Booth Creek Ski Holdings, Inc. The principals have a combined 40 years of ski resort operations experience, and for the last eight years have been with Booth Creek Ski Holdings, Inc., the fifth largest resort owner in North America. Before joining Booth Creek Ski Holdings, Inc., several of the principals were with Vail Associates, Inc. and related companies. Prior to our acquisition of the Booth Creek Ski Properties, none of Booth Creek Ski Holdings, Inc, Booth Creek Resort Properties LLC, or their respective subsidiaries or affiliates, was related to us, affiliated with us or a partner in our business.
Competition. The Northstar Property and the Sierra Property compete locally with the Squaw Valley, Alpine Meadows, Sugar Bowl, Kirkwood and Heavenly ski areas. The Summit Property’s local competition includes Stevens Pass, Mission Ridge, Crystal Mountain, Mount Baker, Mount Bachelor and Mount Hood Meadows. The Loon Mountain Property competes locally with Mount Sunapee, Bretton Woods, Ragged Mountain, Gunstock and Cannon Mountain. Our prospectus provides additional detail regarding competition in the ski industry beginning at page 61 under the section entitled “Ski Resorts.”
MORTGAGE LOANSAND OTHER LOANS
On December 1, 2006, we committed to extend a $12.0 million loan to Booth Creek Resort Properties LLC. Booth Creek Resort Properties LLC is an entity newly formed by the current management of Booth Creek Ski Holdings, Inc. to acquire certain properties and operating assets from Booth Creek Holdings, Inc. The $12.0 million loan to Booth Creek Resort Properties LLC is expected to be collateralized by a first mortgage or the substantial equivalent on the Waterville Valley Ski Resort in Waterville Valley, New Hampshire, the Mount Cranmore Ski Resort in North Conway, New Hampshire and a tract of land near the Northstar-at-Tahoe Resort in Lake Tahoe, California referred to as the Porcupine Hill Estates subdivision. The loan is expected to mature in three years, and have one 12-month extension. It is anticipated that the loan will carry an interest rate of 9.00% per annum and there will be an exit fee in an amount equal to a 15% annualized return on the loan. The loan will be guaranteed by Booth Creek. It is anticipated that the loans will be cross-defaulted with the Booth Creek Ski and Northstar Commercial Properties leases. The loan may be prepaid at any time and will be accelerated upon customary events of default. There can be no assurance that the loan will be made as anticipated.
BORROWING
The following information supplements the Borrowing section, which begins on page 96 of the prospectus:
On October 6, 2006, we entered into an agreement for a non-revolving construction line of credit for $20.0 million including $2.5 million to be set aside as interest reserve with Colonial Bank, N.A. The line of credit will be used to finance the expansion and improvements to the Bretton Woods Mountain Resort. The non-revolving line of credit will be collateralized by a first real estate mortgage on the Bretton Woods Mountain Resort in New Hampshire, will bear interest at the 30-day LIBOR plus 2.0%, have a term of three years with one one-year extension for a fee and will require monthly payments of interest only and principal due at maturity. The financing is expected to close by the end of the fourth quarter 2006. There can be no assurance that the loan will close.
On November 14, 2006, we borrowed approximately $16.5 million from Sun Life Assurance Company of Canada (“Sun Life”). The loan is collateralized by mortgages on each of the following golf properties for the amount indicated: the Palmetto Hall Property for approximately $4.0 million, the South Mountain Property for $6.7 million and the Bear Creek Property for approximately $5.8 million. The loan bears interest annually at a fixed rate of 6.18% for a term of ten years, with monthly payments of principal and interest based on a 25-year amortization period. Prepayment is prohibited for the first two years after which early repayment is subject to a prepayment fee. We intend to use the proceeds of this loan to fund additional acquisitions.
On November 30, 2006, we borrowed approximately $46.7 million from Sun Life. The loan is collateralized by mortgages on each of the following golf properties for the amount indicated: the Valencia Property for approximately $19.9 million, the Talega Property for $9.1 million and the Weston Hills Property for
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approximately $17.8 million. The loan bears interest annually at a fixed- rate of 6.33% for a term of ten years, with monthly payments of principal and interest based on a 25-year amortization period. Prepayment is prohibited for the first two years, after which early repayment is subject to a prepayment fee. We intend to use the proceeds of this loan to fund additional acquisitions.
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SELECTED FINANCIAL DATA
The following selected financial data for CNL Income Properties should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations:”
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
2006 | 2005(1) | 2005(1) | 2004(1) | 2003(1) | ||||||||||||||||
Operating Data: | ||||||||||||||||||||
Revenues | $ | 11,484,156 | $ | 1,417 | $ | 226,666 | $ | — | $ | — | ||||||||||
Operating loss | (275,941 | ) | (3,557,187 | ) | (4,983,770 | ) | (1,280,470 | ) | — | |||||||||||
Net income (loss) | 14,895,675 | 4,660,932 | 6,583,431 | (683,263 | ) | — | ||||||||||||||
Net income (loss) per share | 0.28 | 0.29 | 0.33 | (0.17 | ) | — | ||||||||||||||
Weighted average number of shares outstanding (basic and diluted) | 53,077,692 | 15,944,406 | 19,795,649 | 4,075,979 | 20,000 | |||||||||||||||
Cash distributions declared and paid(2) | 21,490,338 | 6,092,865 | 10,096,429 | 1,172,688 | — | |||||||||||||||
Cash distributions declared and paid per share | 0.41 | 0.40 | 0.54 | 0.26 | — | |||||||||||||||
Cash provided by (used in) operating activities | 21,135,321 | 1,136,796 | 4,616,474 | 754,656 | (199,000 | ) | ||||||||||||||
Cash used in investing activities | 159,570,038 | 89,615,753 | 199,063,392 | 41,780,499 | — | |||||||||||||||
Cash provided by financing activities | 221,706,836 | 137,269,935 | 251,541,482 | 77,734,960 | 200,000 | |||||||||||||||
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||||||
2006 | 2005(1) | 2005(1) | 2004(1) | 2003(1) | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Real estate investment properties | $ | 148,881,005 | $ | — | $ | 20,952,902 | $ | — | $ | — | ||||||||||
Investment in unconsolidated entities | 178,177,539 | 123,519,064 | 207,150,838 | 41,913,212 | — | |||||||||||||||
Mortgages and other notes receivable | 54,139,185 | 3,000,000 | 3,171,083 | — | — | |||||||||||||||
Cash | 176,685,210 | 85,501,095 | 93,804,681 | 36,710,117 | 1,000 | |||||||||||||||
Total assets | 582,844,389 | 226,735,858 | 336,795,107 | 85,956,427 | 1,311,797 | |||||||||||||||
Long-term debt obligations | 6,837,892 | — | — | — | — | |||||||||||||||
Total liabilities | 28,752,057 | 14,409,602 | 12,163,277 | 11,004,049 | 1,111,797 | |||||||||||||||
Stockholders’ equity | 554,092,332 | 212,326,256 | 324,631,830 | 74,952,378 | 200,000 | |||||||||||||||
Other Data: | ||||||||||||||||||||
Funds from operations (“FFO”)(3) | 27,666,710 | 9,337,586 | 14,170,298 | (579,129 | ) | — | ||||||||||||||
FFO per share | 0.52 | 0.59 | 0.72 | (0.14 | ) | — | ||||||||||||||
Properties owned by unconsolidated entities at end of the period | 10 | 8 | 10 | 7 | — | |||||||||||||||
Properties owned directly at the end of period | 9 | — | 1 | — | — | |||||||||||||||
Investments in mortgages and other notes receivable at the end of period | 3 | 1 | 1 | — | — |
FOOTNOTES:
(1) | Operations commenced on June 23, 2004 when we received minimum offering proceeds of $2.5 million and funds were released from escrow. We completed our first investment in December 2004. The results of operations for the years ended December 31, 2005 and 2004 are not necessarily indicative of future performance due to the limited time during which we were operational, our incurrence of organizational costs, and having not completed our first investment until December 2004. The results from operations for the nine months ended September 30, 2005 includes equity in earnings of our unconsolidated entities, interest income, asset management fees to advisor and general operating and administrative expense. Selected financial data for 2003 covers the period August 11, 2003 (date of inception) through December 31, 2003. |
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(2) | Cash distributions are declared by the board of directors and generally are based on various factors, including expected and actual net cash from operations and our general financial condition, among others. Approximately 74.9%, 54.0%, 51.9%, 24.0% and 0.0% of the distributions received by stockholders were considered to be ordinary income and approximately 25.1%, 46.0%, 48.1%, 76.0% and 0.0% were considered a return of capital for federal income tax purpose for the nine months ended September 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003, respectively. We have not treated such amounts as a return of capital for purposes of calculating the stockholders’ return on their invested capital. |
(3) | We consider funds from operations (“FFO”) to be an indicative measure of operating performance due to the significant effect of depreciation of real estate assets on net income. FFO, based on the revised definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and as used herein, means net income determined in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. We believe that by excluding the effect of depreciation and amortization, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO (i) does not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income); (ii) is not necessarily indicative of cash flow available to fund cash needs; and (iii) should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO as presented may not be comparable to amounts calculated by other companies. Accordingly, we believe that in order to facilitate a clear understanding of the consolidated historical operating results, FFO should be considered in conjunction with our net income as reported in the accompanying consolidated financial statements and notes thereto. |
Reconciliation of net income (loss) to FFO for the nine months ended September 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003:
Nine Months End September 30, | Year Ended December 31, | ||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||
Net income (loss) | $ | 14,895,675 | $ | 4,660,932 | $ | 6,583,431 | $ | (683,263 | ) | $ | — | ||||||||
Adjustments: | |||||||||||||||||||
Depreciation and amortization | 3,701,568 | — | 17,224 | — | — | ||||||||||||||
Equity in earnings of unconsolidated entities | (10,649,748 | ) | (7,461,670 | ) | (10,289,841 | ) | (218,466 | ) | — | ||||||||||
Pro-rata share of FFO from unconsolidated entities(a) | 19,719,215 | 12,138,324 | 17,859,484 | 322,600 | — | ||||||||||||||
Total funds from operations | $ | 27,666,710 | $ | 9,337,586 | $ | 14,170,298 | $ | (579,129 | ) | $ | — | ||||||||
Weighted average number of shares of common stock outstanding (basic and diluted) | 53,077,692 | 15,944,406 | 19,795,649 | 4,075,979 | 20,000 | ||||||||||||||
FFO per share (basic and diluted) | $ | 0.52 | $ | 0.59 | $ | 0.72 | $ | (0.14 | ) | $ | — | ||||||||
FOOTNOTES:
(a) | In calculating our pro-rata share of FFO from unconsolidated entities, we first calculate FFO independently for each unconsolidated entity. We then determine our share of the FFO from each unconsolidated entity by multiplying the FFO for each such entity by the percentage of income that we recognize in our equity in earnings from the unconsolidated entity during the reporting period. The percentage of income that we recognize as equity in earnings for each unconsolidated entity is determined using the HLBV method of accounting. Because of the way income and FFO are allocated using the HLBV method of accounting, the historical FFO we recognized from our unconsolidated entities is not indicative of FFO that we will be allocated to us in the future. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the quarters and nine months ended September 30, 2006 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 102 of the prospectus:
INTRODUCTION
The following discussion is based on the condensed consolidated financial statements as of September 30, 2006 and December 31, 2005 and for the quarters and nine months ended September 30, 2006 and 2005. Amounts as of December 31, 2005 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005.
STATEMENTREGARDINGFORWARDLOOKINGINFORMATION
The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as “may,” “will,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: conditions affecting the CNL brand name, increased direct competition, changes in general economic conditions, changes in government regulations, changes in local and national real estate conditions, terrorism, extended U.S. military combat operations, our ability to obtain additional lines of credit or permanent financing on satisfactory terms, availability of proceeds from our offering of shares, changes in interest rates, our ability to identify suitable investments, our ability to close on identified investments, inaccuracies of our accounting estimates, our ability to locate suitable tenants and operators for our properties and borrowers for mortgage loans, and the ability of such tenants and borrowers to make payments under their respective leases or loans. Given these uncertainties, we caution you not to place undue reliance on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.
GENERAL
CNL Income Properties, Inc. was organized pursuant to the laws of the State of Maryland on August 11, 2003. We were formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20 years, plus multiple renewal options), triple-net or gross basis to tenants or operators who are significant industry leaders. We may also make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments related to interests in real estate and may purchase equity and other interests in financings. We currently operate and have elected to be taxed as a real estate investment trust (a “REIT”) for federal income tax purposes beginning with the taxable year ended December 31, 2004. We have retained CNL Income Corp. as our advisor to provide management, acquisition, advisory and administrative services.
Our activities from August 11, 2003, our inception, through June 23, 2004, were devoted to the organization of the company. Beginning April 16, 2004, we offered for sale up to 200 million shares of common stock at $10.00 per share ($2.0 billion) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended. We commenced active operations on June 23, 2004, when the minimum required offering proceeds were received and funds were released to us from escrow. On March 31, 2006, we terminated our initial offering and on April 4, 2006, a new registration statement for up to 200 million shares of common stock at $10.00 per share ($2.0 billion) on Form S-11 under the Securities Act of 1933, as amended, was declared effective, and we began selling shares of common stock under the current offering.
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The following table summarizes our public offerings as of September 30, 2006:
Initial offering | Current offering | Total | |||||||||||||||||
Shares | Proceeds (in millions) | Shares | Proceeds (in millions) | Shares | Proceeds (in millions) | ||||||||||||||
Subscriptions received | 51,246,465 | $ | 513.0 | 12,163,101 | $ | 120.7 | 63,409,566 | $ | 633.7 | ||||||||||
Subscriptions received pursuant to reinvestment plan | 861,879 | 8.2 | 807,573 | 7.7 | 1,669,452 | 15.9 | |||||||||||||
Redemptions | (146,995 | ) | (1.4 | ) | — | — | (146,995 | ) | (1.4 | ) | |||||||||
Total | 51,961,349 | $ | 519.8 | 12,970,674 | $ | 128.4 | 64,932,023 | $ | 648.2 | ||||||||||
Number of investors | 17,505 | 4,511 | 22,016 |
In addition to the shares sold through our public offerings, our advisor purchased 20,000 shares for $200,000 preceding the commencement of our initial offering. In December 2004, CNL Financial Group, Inc., a company affiliated with our advisor and wholly-owned indirectly by our Chairman of the board and his wife, purchased 117,708 restricted common shares for approximately $1.2 million.
We have and will continue to focus our investment activities on and use the proceeds of our offerings primarily for the acquisition, development and ownership of lifestyle properties.
LIQUIDITYAND CAPITAL RESOURCES
General
Our principal demand for funds will be for property acquisitions, loans and other permitted investments and the payment of operating expenses and distributions to stockholders. Generally, our cash needs for items other than property acquisitions will be generated from operations and from our revolving line of credit.
We intend to continue to acquire properties, make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments with proceeds from our public offerings and permanent debt financing to be obtained. If sufficient capital is not raised, it would limit our ability to acquire additional properties, and make or acquire loans or permitted investments. This could impact our ability to pay distributions or raise the distribution rate due to our limited income from operations, unless we choose to borrow to do so. Our ability to acquire properties is in part dependent upon our ability to locate and contract with suitable third-party tenants. The inability to locate suitable tenants may delay our ability to acquire certain properties. Not only are we experiencing increased competition in our targeted asset classes, we are also challenged due to the complex and expensive structures we must use to acquire properties due to the tax and legal requirements of being a REIT. Delays in acquiring properties or making or acquiring loans with the capital raised from our common stock offering dilute our ability to pay distributions to our existing stockholders.
We intend to continue to pay distributions to our stockholders on a quarterly basis. Operating cash flows are expected to be generated from properties, loans and other permitted investments to cover such distributions. In the event we are unable to acquire properties at the pace expected, we may not be able to continue to pay distributions to stockholders or may need to reduce the distribution rate or borrow to continue paying distributions, all of which may negatively impact a stockholder’s investment in the long term.
We believe that our current and anticipated capital resources, including cash on hand and the availability of funds from our revolving line of credit as well as expected offering and loan proceeds are sufficient to meet our liquidity needs for the coming year.
Common Stock Offerings
As of September 30, 2006, we have received total proceeds of approximately $649.6 million (65,079,018 shares) from investors through our public offerings. For the nine months ended September 30, 2006, we received subscription proceeds of approximately $271.7 million (27,214,176 shares) from our initial and current offerings. During the period October 1, 2006 through November 6, 2006, we received additional subscription proceeds of approximately $159.5 million (15,950,773 shares) under our current offering. We primarily use the capital we raise to acquire properties, make or acquire loans and other permitted investments and to pay fees and expenses in connection with our stock offerings and acquisitions.
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Investments in and Distributions from Unconsolidated Entities
As of September 30, 2006, we had invested in properties at ten locations through our unconsolidated entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities. For the nine months ended September 30, 2006 and 2005, we received operating distributions of approximately $14.2 million and $4.4 million, respectively, from the operation of these entities. These distributions are generally received within 45 days after each quarter end. Distributions receivable from our unconsolidated entities as of September 30, 2006 and December 31, 2005 were approximately $2.9 million and $4.9 million, respectively.
The following table summarizes the change in distributions declared to us from our unconsolidated entities (in thousands):
Period | Wolf Partnership (1) | DMC Partnership (2) | Intrawest Venture (3) | Total | |||||||||
Nine months ended 2006 | $ | 1,535 | $ | 7,963 | $ | 2,729 | $ | 12,227 | |||||
Nine months ended 2005 | — | 4,508 | 3,382 | 7,890 | |||||||||
Increase (decrease) | $ | 1,535 | $ | 3,455 | $ | (653 | ) | $ | 4,337 | ||||
FOOTNOTES:
(1) | The Wolf Partnership acquired the properties during the fourth quarter of 2005. The amount excludes the capital distribution of approximately $43.7 million from the Wolf Partnership during the nine months ended September 30, 2006. |
(2) | For the nine months ended September 30, 2006 as compared to 2005, the increase in distributions declared is primarily due to the ownership of the World Trade Center and International Floral Gift Center (collectively the DMC property) for the entire nine months ended September 30, 2006. During the same period in 2005, the distributions declared reflect the ownership of the World Trade Center from February 14, 2005 through September 30, 2005 and International Floral Gift Center from May 25, 2005 through September 30, 2005. |
(3) | The overall decrease in distributions declared from the Intrawest Venture is primarily due to an increase in working capital reserves which reduced cash available for distribution during the nine months ended September 30, 2006 in comparison to the same period in 2005. |
The agreements governing our ventures provide for us to receive a preferred return on our invested capital ahead of any returns to our partners. We expect to receive our full preferred returns from our ventures for the year ending December 31, 2006 with the exception of the Wolf Partnership, for which we expect to receive less than our full preference as a result of the properties owned by this partnership performing below expectations for the year.
Borrowings
We intend to borrow money to acquire assets and to pay certain related fees. We also intend to encumber assets in connection with such borrowings. In general, the aggregate amount of permanent financing is not expected to exceed 50% of our total assets on an annual basis; however, it may likely exceed 50% for a limited period in our early acquisition stage. The maximum amount we may borrow is 300% of our net assets in the absence of a satisfactory showing that a higher level of borrowing is appropriate. In order to borrow an amount in excess of 300% of our net assets, a majority of the independent members of our board of directors must approve the borrowing, and the borrowing must be disclosed and explained to stockholders in our first quarterly report after such approval occurs. We have borrowed and may continue to borrow money to pay distributions to stockholders.
We plan to obtain lines of credit in an amount up to $100 million. The lines of credit may be increased at the discretion of our board of directors and may be repaid with offering proceeds, proceeds from the sale of assets and the repayment of loans made, working capital or permanent financing. On March 24, 2006, we obtained a $20.0 million revolving line of credit from Colonial Bank, N.A. The line of credit replaced a previously existing $5.0 million line of credit obtained from Branch Banking & Trust Company and is used for working capital, to temporarily fund distributions to stockholders and to bridge financing on real estate investments. The line of credit is unsecured and bears interest at a rate of 30-day LIBOR (approximately 5.32% on September 29, 2006) plus 2.25%. The line of credit has a term of two years with monthly payments of interest only and principal due at maturity on March 24, 2008. As of September 30, 2006, borrowings outstanding under the line of credit were approximately $8.4 million. The balance outstanding on our previous line of credit at December 31, 2005 was approximately $4.5 million. The terms of the line of credit require us to meet
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certain customary financial covenants and ratios including (a) a total permanent debt to total assets ratio of no more than 65%, (b) a tangible net worth of no less than $200.0 million and (c) a ratio of distributions to funds from operations of no more than 110%. We were in compliance with these covenants at September 30, 2006. Additionally, we are required to maintain a zero balance on the line of credit for a 30-day period during the first quarter of each year beginning in 2007. We believe we will have sufficient cash on hand or other sources of liquidity available to meet this requirement.
As of September 30, 2006 we had the following notes payable:
Description | Amount | Interest rate | Terms | |||||
Note payable to seller in connection with the acquisition of Bretton Woods | $ | 6,500,000 | 5.77 | % | All principal and interest due on June 19, 2010. We have obtained a letter of credit collateralized by an $8.0 million certificate of deposit. | |||
Note payable to seller in connection with the acquisition of Bretton Woods | $ | 337,892 | 5.20 | % | All principal and interest due on June 19, 2009. |
See the section below titled “Off Balance Sheet and Other Arrangements – Borrowings of Our Unconsolidated Entities” for a description of the borrowings of our unconsolidated entities.
Mortgages and Other Notes Receivable
On August 14, 2006, we have received repayment of principal and interest on a $3.0 million mortgage loan from Consolidated Conversion, LLC. As of September 30, 2006, we have the following loans outstanding:
Borrower and description of property | Date of loan agreement | Maturity date | Interest rate | Loan principal amount | Accrued interest | ||||||||
Plaza Partners, LLC (hotel conversion) | 2/28/2006 | 2/28/2007 | 15.0 | %(1) | $ | 16,800,000 | $ | 122,500 | |||||
Mizner Court Holdings, LP (condominium conversion) | 3/10/2006 | 11/9/2007 | LIBOR + 7.0 | %(2) | $ | 15,000,000 | $ | 113,025 | |||||
Shorefox Development, LLC (lifestyle community development) | 3/13/2006 | 3/10/2009 | 13.5 | %(3) | $ | 20,000,000 | $ | — |
FOOTNOTES:
(1) | Pursuant to the loan agreement, the loan requires monthly interest payments based on an annual percentage rate of 8.75% with the remaining 6.25% becoming due and payable upon the loan’s maturity. The term of the loan may be extended by the borrower for up to two additional six-month periods. The loan is collateralized by a first mortgage on the property. |
(2) | The loan was purchased from Column Financial, Inc., as former lender, to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, LP. The mezzanine loan is collateralized by a pledge of all the partnership interests in Mizner Court, LP and is guaranteed as to interest payments and as to completion by Morris L. Stoltz II. |
(3) | Pursuant to the loan agreement, we agreed to provide financing up to $40.0 million in connection with the development of the infrastructure of an Orvis-branded lifestyle community in Granby, Colorado. As of September 30, 2006, we had advanced $20.0 million. The loan requires interest payments based on an annual interest rate of 9.5% paid monthly with the remaining 4.0% becoming due and payable upon the loan’s maturity. The term of the loan may be extended by the borrower up to 12 months. The loan may not be prepaid during the first year. The loan is collateralized by a first mortgage on a portion of the Granby property. The loan is personally guaranteed by the principals of Shorefox Development, LLC until $10.0 million in infrastructure is completed. Loan origination fees of $400,000 were paid to us in connection with making this loan. This amount was recorded as a reduction in the value of the note receivable on the accompanying condensed consolidated balance sheet and its being amortized into interest income over the initial term of the loan. |
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Two of the loans we have made are for condominium conversion projects in Florida. Since making the loans, the Florida condominium market has softened considerably and, accordingly, our borrowers are evaluating their alternatives. While our borrowers remain current under these loans, if the market conditions continue to decline we may be exposed to additional risk of non-payment and impairment of these loans.
Related Party Arrangements
In accordance with the advisory agreement, the advisor and affiliates are entitled to receive certain fees and reimbursable expenses in connection with our offerings. These fees and reimbursable expenses include: selling commissions on gross offering proceeds, a marketing support fee on gross offering proceeds and reimbursement of actual expenses incurred in connection with due diligence of the offering. The managing dealer is entitled to selling commissions of up to 6.5% and 7.0% of gross offering proceeds and a marketing support fee of 2.5% and 3.0% of gross offering proceeds for our initial and current offerings, respectively, as well as actual expenses of up to 0.10% incurred in connection with due diligence of the offering. A substantial portion of the selling commissions and marketing support fees and all of the due diligence expenses are reallowed to third-party participating broker dealers.
As of September 30, 2006 and December 31, 2005, we owed our advisor and certain of its affiliates approximately $9.4 million and $7.1 million, respectively, for certain organizational and offering expenses, acquisition fees, asset management fees, selling commissions, marketing support fees, due diligence expense reimbursements and operating expenses incurred on our behalf. In accordance with our amended and restated articles of incorporation, the total amount of certain offering, organizational and stock issuance costs we pay may not exceed 13% of the aggregate offering proceeds. We are not obligated to pay our advisor or certain of its affiliates costs that exceed the 13% limitation at the end of each offering. As of September 30, 2006, there were no offering costs in excess of the 13% limitation that had been billed to us.
In addition, to the extent that operating expenses, in any four consecutive fiscal quarters (the “Expense Year”), exceed the greater of 2% of average invested assets or 25% of net income, the advisor is required to reimburse us the amount by which the total operating expenses paid or incurred exceed the greater of the 2% or 25% threshold (the “Expense Cap”). For the Expense Year ended September 30, 2006, operating expenses did not exceed the Expense Cap.
We maintain certain bank accounts in a bank in which our chairman and a director of our board also serve as directors, and in which CNL Financial Group, Inc., an affiliate of our advisor, is a stockholder. The amount deposited with this bank was approximately $5.0 million as of September 30, 2006.
Distributions
We intend to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors, including expected and actual net cash from operations for the year, our financial condition, an analysis of current and projected long-term stabilized cash flows from our properties, our objective of continuing to qualify as a REIT for federal income tax purposes, the actual operating results of each quarter, economic conditions, other operating trends, capital requirements and avoidance of volatility of distributions. Operating cash flows are expected to be generated from properties, loans and other permitted investments acquired or made by us. We declared and paid distributions of approximately $21.5 million ($0.4147 per share) and $6.1 million ($0.398 per share) for the nine months ended September 30, 2006 and 2005, respectively. We funded the distribution payment of approximately $8.4 million for the quarter ended September 30, 2006 with proceeds from our revolving line of credit. We intend to repay borrowings under our line of credit with payments we receive under operating leases for our properties, interest payments we receive from the loans we have made, security deposits from tenants under operating leases and distributions we receive from our unconsolidated entities.
The distributions declared and paid during the nine months ended September 30, 2006 exceeded net income for the same period by approximately $6.6 million. Distributions to stockholders may be considered a return of capital to the extent the amount of such distributions exceeds net income calculated in accordance with generally accepted accounting principles (“GAAP”). Accordingly, for the nine months ended September 30, 2006, approximately 30.7% of the distributions represented a return of capital, if calculated using GAAP net income as the basis. Approximately 25.1% of the distributions for the nine months ended September 30, 2006 constitutes a return of capital for federal income tax purposes. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of
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calculating the stockholders’ return on their invested capital. The characterization of distributions declared for the quarter and nine months ended September 30, 2006 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2006.
Cash Flow Analysis
Our net cash flows provided by operating activities were approximately $21.1 million for the nine months ended September 30, 2006 and were comprised primarily of interest earned on uninvested offering proceeds, rental revenues, interest income on mortgages and other notes receivable, the receipt of distributions from our unconsolidated entities and security deposits from our third-party tenants, offset by payments made for operating expenses (including asset management fees to our advisor), as compared to the net cash flow paid for operating activities of $1.1 million for the nine months ended September 30, 2005, which was primarily attributable to interest earned on invested cash offset by payments made for operating expenses.
Cash flows used in investing activities were approximately $159.6 million for the nine months ended September 30, 2006 and consisted primarily of cash paid for properties acquired totaling approximately $119.2 million, investments in mortgages and other notes receivable, net of repayment, totaling $48.8 million, investments in unconsolidated entities totaling approximately $14.7 million, a short-term investment of $8.0 million and the payment of acquisition fees and costs totaling approximately $12.0 million, offset by approximately $43.7 million in distributions from unconsolidated entities representing proceeds from debt financing through our partnership with Great Wolf Resorts. During the nine months ended September 30, 2005, we made contributions to acquire our interests in the DMC Partnership of approximately $73.5 million, made a loan of $3.0 million and paid acquisition fees and costs of approximately $13.1 million.
For the nine months ended September 30, 2006, net cash flows provided by financing activities were approximately $221.7 million consisting primarily of approximately $271.7 million of subscription proceeds and approximately $3.9 million of net borrowings under our line of credit, less the payment of approximately $31.1 million in stock issuance costs in connection with the offering and distributions and redemptions paid to stockholders of approximately $21.5 million and $1.2 million, respectively. The net cash flows provided by financing activities for the nine months ended September 30, 2005 were approximately $137.3 million and consisted primarily of subscriptions proceeds received of approximately $160.4 million, the payment of approximately $19.8 million in stock issuance costs, distributions paid to stockholders of approximately $6.1 million and approximately $2.8 million of net borrowings under our line of credit.
CRITICAL ACCOUNTING POLICIES
Consolidation.The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and entities in which we have a controlling interest in accordance with the provisions of Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (“SOP 78-9”) and Emerging Issues Task Force Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”), or are the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46”). The application of FIN 46, SOP 78-9 and EITF 04-5 requires management to make significant estimates and judgments about our and our venture partners’, rights, obligations and economic interests in the related venture entities. The equity method of accounting is applied in the consolidated financial statements with respect to those investments in entities in which we are not the primary beneficiary under FIN 46 or have less than a controlling interest due to the significance of rights and obligations held by other parties under SOP 78-9 and EITF 04-5.
Investments in unconsolidated entities. The equity method of accounting is applied with respect to investments in entities for which we have determined that consolidation is not appropriate under FIN 46, SOP 78-9 and EITF 04-5. We recognize equity in earnings from our unconsolidated entities under the hypothetical liquidation at book value (“HLBV”) method of accounting due to the capital structure of those entities and the rights and priorities of the partners. The HLBV method differs from other generally accepted accounting methods in which an investing partner recognizes its share of a venture’s net income or loss based upon the partner’s percentage of ownership. Under the HLBV method, we must estimate at the balance sheet date what we would receive or be obligated to pay in accordance with the governing agreements if our unconsolidated entities were to liquidate all of their assets, pay their debts and distribute the remaining equity at book value. As a result, we recognize income (equity in earnings) in each reporting period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. Under this method, in any given period we could be recording more or less income than actual cash distributions received and more or less than we may receive in the event of an actual liquidation.
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Leases. Our leases are accounted for under the provisions of Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” and have been accounted for as operating leases. This statement requires management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant. Changes in our estimates or assumptions regarding collectibility of lease payments, the residual value or economic lives of the leased property could result in a change in accounting for the lease.
Mortgages and Other Notes Receivable.Mortgages and other notes receivable are recorded at the lower of cost or market. Whenever future collection of a specific note appears doubtful, a valuation allowance will be established. The allowance represents the difference between the carrying value and the amount expected to be received. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in impairments and provisions on assets. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan, including an impaired loan, is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, a borrower’s financial condition is such that collection of interest is doubtful. Subsequent interest is recorded as income when collected. At this time we have not established a valuation allowance on our loans as collection is expected to occur.
IMPACTOF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. We must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes”. The interpretation clearly excludes income tax positions related to FASB Statement No. 5, “Accounting for Contingencies.” We will adopt the provisions of this statement beginning in the first quarter of 2007. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings on January 1, 2007. We do not anticipate that the adoption of this statement will have a material effect on our financial position or results of operations.
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RESULTSOF OPERATIONS
The following tables summarize our operations for the quarter and nine months ended September 30, 2006, as compared to the quarter and nine months ended September 30, 2005.
Quarter Ended | |||||||||||||||
September 30, | |||||||||||||||
2006 | 2005 | $ Change | % Change | ||||||||||||
Revenue: | |||||||||||||||
Rental income from operating leases | $ | 4,705,241 | $ | — | $ | 4,705,241 | n/a | ||||||||
Interest income on mortgages and | — | ||||||||||||||
other notes receivable | 1,873,594 | 1,417 | 1,872,177 | 132122.6 | % | ||||||||||
Total revenue | 6,578,835 | 1,417 | 6,577,418 | 464179.1 | % | ||||||||||
Expenses: | |||||||||||||||
Asset management fees to advisor | 1,414,788 | 811,193 | 603,595 | 74.4 | % | ||||||||||
General and administrative | 1,945,024 | 800,284 | 1,144,740 | 143.0 | % | ||||||||||
Depreciation and amortization | 2,542,266 | — | 2,542,266 | n/a | |||||||||||
Total expenses | 5,902,078 | 1,611,477 | 4,290,601 | 266.3 | % | ||||||||||
Operating income (loss) | 676,757 | (1,610,060 | ) | 2,286,817 | 142.0 | % | |||||||||
Other income (expense): | |||||||||||||||
Interest and other income | 1,783,266 | 442,126 | 1,341,140 | 303.3 | % | ||||||||||
Interest expense and loan cost amortization | (248,288 | ) | (19,647 | ) | (228,641 | ) | (1163.7 | )% | |||||||
Equity in earnings of unconsolidated entities | 3,828,678 | 2,979,572 | 849,106 | 28.5 | % | ||||||||||
Total other income | 5,363,656 | 3,402,051 | 1,961,605 | 57.7 | % | ||||||||||
Net income | $ | 6,040,413 | $ | 1,791,991 | $ | 4,248,422 | 237.1 | % | |||||||
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Nine Months Ended | |||||||||||||||
September 30, | |||||||||||||||
2006 | 2005 | $ Change | % Change | ||||||||||||
Revenue: | |||||||||||||||
Rental income from operating leases | $ | 7,529,142 | $ | — | $ | 7,529,142 | n/a | ||||||||
Interest income on mortgages and other notes receivable | 3,955,014 | 1,417 | 3,953,597 | 279011.8 | % | ||||||||||
Total revenue | 11,484,156 | 1,417 | 11,482,739 | 810355.6 | % | ||||||||||
Expenses: | |||||||||||||||
Asset management fees to advisor | 3,634,063 | 1,802,145 | 1,831,918 | 101.7 | % | ||||||||||
General and administrative | 4,407,073 | 1,755,042 | 2,652,031 | 151.1 | % | ||||||||||
Depreciation and amortization | 3,718,961 | — | 3,718,961 | n/a | |||||||||||
Total expenses | 11,760,097 | 3,557,187 | 8,202,910 | 230.6 | % | ||||||||||
Operating income (loss) | (275,941 | ) | (3,555,770 | ) | 3,279,829 | 92.2 | % | ||||||||
Other income (expense): | |||||||||||||||
Interest and other income | 4,941,469 | 799,195 | 4,142,274 | 518.3 | % | ||||||||||
Interest expense and loan cost amortization | (419,601 | ) | (44,163 | ) | (375,438 | ) | (850.1 | )% | |||||||
Equity in earnings of unconsolidated entities | 10,649,748 | 7,461,670 | 3,188,078 | 42.7 | % | ||||||||||
Total other income | 15,171,616 | 8,216,702 | 6,954,914 | 84.6 | % | ||||||||||
Net income | $ | 14,895,675 | $ | 4,660,932 | $ | 10,234,743 | 219.6 | % | |||||||
Rental income from operating leases.The increase in rental income and FF&E reserve income for the quarter and nine months ended September 30, 2006 as compared to the quarter and nine months ended September 30, 2005 was due to the acquisition of real estate properties in December 2005 through September 30, 2006. These real estate properties are leased on a long-term triple-net basis to third-party tenants. Prior to December 2005, we did not have any properties that we consolidated in our financial statements and all of our investments were owned through our unconsolidated entities where our primary source of income was generated from equity in earnings.
Interest income on mortgages and other notes receivable.Between September 2005 and 2006, we made four loans to third-party borrowers, which resulted in interest income of approximately $1.8 million and $3.9 million for the quarter and nine months ended September 30, 2006 and $1,417 for the quarter and nine months ended September 30, 2005. On August 14, 2006, one of the loans was repaid in full. We had not made any loans prior to September 2005.
Asset management fees to advisor.Asset management fees of 0.08334% of invested assets are paid to the advisor for the acquisition of real estate assets and making loans. For the quarter and nine months ended September 30, 2006 asset management fees to our advisor were approximately $1.4 million and $3.6 million, respectively. For the quarter and nine months ended September 30, 2005 asset management fees to our advisor were $811,193 and approximately $1.8 million, respectively. The increase in such fees is due to the acquisition of additional real estate properties and loans made during to the fourth quarter of 2005 through the third quarter of 2006.
General and administrative.General and administrative expenses were approximately $1.9 million and $4.4 million for the quarter and nine months ended September 30, 2006 and $800,284 and approximately $1.8 million for the quarter and nine months ended September 30, 2005, respectively. The increase is primarily due to the overall increase in our operating activities.
Interest and other income.The increase in interest income is a result of greater average cash on hand from uninvested offering proceeds during the third quarter of 2006 as compared to 2005.
Interest expense and loan cost amortization.Interest expense increased due to the greater average outstanding balance on the line of credit as well as interest expense incurred on the notes payable in connection with the Bretton Woods acquisition.
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Equity in earnings. The following table summarizes equity in earnings from our unconsolidated entities:
Quarter Ended September 30, | |||||||||||||
2006 | 2005 | $ Change | % Change | ||||||||||
Wolf Partnership | $ | 512,982 | $ | — | $ | 512,982 | n/a | ||||||
DMC Partnership | 2,343,229 | 1,902,077 | 441,152 | 23.2 | % | ||||||||
Intrawest Venture | 972,467 | 1,077,495 | (105,028 | ) | (9.7 | )% | |||||||
$ | 3,828,678 | $ | 2,979,572 | $ | 849,106 | 28.5 | % | ||||||
Nine Months Ended September 30, | |||||||||||||
2006 | 2005 | $ Change | % Change | ||||||||||
Wolf Partnership | $ | 671,140 | $ | — | $ | 671,140 | n/a | ||||||
DMC Partnership | 6,667,844 | 4,217,003 | 2,450,841 | 58.1 | % | ||||||||
Intrawest Venture | 3,310,764 | 3,244,667 | 66,097 | 2.4 | % | ||||||||
Total | $ | 10,649,748 | $ | 7,461,670 | $ | 3,188,078 | 42.7 | % | |||||
The overall increase in equity in earnings of approximately $3.2 million for the nine months ended September 30, 2006 in comparison to the same period in 2005 is primarily due to the ownership of the Wolf Partnership and the DMC Partnership during the entirety of the nine months ended September 30, 2006. For the quarter and nine months ended September 30, 2005, our equity in earnings reflects our investments in the retail and commercial properties at seven resort villages and the DMC Property from February 14, 2005 (acquisition date) through September 30, 2005. The quarter and nine months ended September 30, 2006, includes equity in earnings from our interests in the retail and commercial properties at seven resort villages, the DMC Property and two waterpark resorts, which were all operating during the entire nine months period.
Equity in earnings from our unconsolidated entities is recognized under the HLBV method as discussed earlier in “Critical Accounting Policies.” The unconsolidated entities’ formation agreements provide us a stated return on our investment with a priority over any returns of our partners. Because our equity in earnings is calculated in this manner we have historically recognized more income than the underlying unconsolidated entities have generated and our partners have historically been allocated significant losses which offset the earnings that we have recorded from these entities. Additionally, during the quarter ended September 30, 2006, our partners’ unreturned capital in the Intrawest Ventures was reduced to zero as a result of the losses they have recognized and the distributions that they have received from this entity. Since the date that this occurred we no longer recognize significant amounts of income and in the future may recognize losses that this entity incurs. While this method of recognizing earnings and losses from the unconsolidated entity is not expected to have an impact on the distributions we receive, it will likely result in reductions or fluctuations in our net income, earnings per share, funds from operations (as defined below) and FFO per share.
Our results of operations for the quarter and nine months ended September 30, 2006 are not necessarily indicative of what the results of operations will be for the year ending December 31, 2006 and in the future. The investments that we have acquired or will be acquiring may have a significant impact on our results of operation and our actual results could differ materially.
OTHER
Funds from Operations
We consider funds from operations (“FFO”) to be an indicative measure of operating performance due to the significant effect of depreciation of real estate assets on net income. FFO, based on the revised definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and as used herein, means net income determined in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. We believe that by excluding the effect of depreciation and amortization, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO (i) does not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income), (ii) is not necessarily indicative of cash flow available to fund cash needs and (iii) should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO as presented may not be comparable to amounts calculated by other companies.
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Accordingly, we believe that in order to facilitate a clear understanding of the consolidated historical operating results, FFO should be considered in conjunction with our net income and cash flows as reported in the accompanying consolidated financial statements and notes thereto.
Reconciliation of net income to FFO for the quarter and nine months ended September 30, 2006 and 2005:
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income | $ | 6,040,413 | $ | 1,791,991 | $ | 14,895,675 | $ | 4,660,932 | ||||||||
Adjustments: | ||||||||||||||||
Depreciation and amortization | 2,531,602 | — | 3,701,568 | — | ||||||||||||
Equity in earnings of unconsolidated entities | (3,828,678 | ) | (2,979,572 | ) | (10,649,748 | ) | (7,461,670 | ) | ||||||||
Pro-rata share of FFO from unconsolidated entities | 7,354,968 | 5,132,901 | 19,719,215 | 12,138,324 | ||||||||||||
Total funds from operations | 12,098,305 | 3,945,320 | 27,666,710 | 9,337,586 | ||||||||||||
Weighted average number of shares of common stock outstanding (basic and diluted) | 61,073,005 | 21,031,765 | 53,077,692 | 15,944,406 | ||||||||||||
FFO per share (basic and diluted) | $ | 0.20 | $ | 0.19 | $ | 0.52 | $ | 0.59 | ||||||||
FOOTNOTES:
(1) | In calculating our pro-rata share of FFO from unconsolidated entities, we first calculate FFO independently for each unconsolidated entity. We then determine our share of the FFO from each unconsolidated entity by multiplying the FFO for each such entity by the percentage of income that we recognize in our equity in earnings from the unconsolidated entity during the reporting period. The percentage of income that we recognize as equity in earnings for each unconsolidated entity is determined using the HLBV method of accounting. FFO per share decreased during the nine months ended September 30, 2006 as compared to the same period in 2005 primarily due to (i) our partner in the DMC Partnership receiving a greater share of earnings and FFO during 2006 than in 2005 as a result of income and FFO being allocated between us and our partners using the HLBV method of accounting and (ii) as a result of the dilution caused by uninvested offering proceeds received from our common stock offering. Because of the way income and FFO are allocated using the HLBV method of accounting, the historical FFO we recognized from our unconsolidated entities is not indicative of FFO that we will be allocated to us in the future. |
[Intentionally left blank.]
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Borrowings of Our Unconsolidated Entities
Our unconsolidated entities are subject to the following fixed rate debt:
Unconsolidated entity | Type of loan | Interest rate | Payment | Maturity date | Principal balance at September 30, 2006 | |||||||
Intrawest U.S. Venture | Mortgage loan | 5.75 | % | Monthly principal and interest payment of $289,389 | 5/20/2015 | $ | 44,929,983 | |||||
Intrawest Canadian Venture | Mortgage loan | 5.83 | % | Monthly interest payment only of $110,880(1) | 12/11/2014 | 23,884,140 | ||||||
DMC Partnership | Mortgage loan | 6.04 | % | Monthly principal and interest payment of $889,145 | 9/1/2014 | 138,740,632 | ||||||
DMC Partnership | Mortgage loan | 5.45 | % | Monthly principal and interest payment of $110,663 | 9/1/2012 | 15,698,615 | ||||||
Wolf Partnership | Mortgage loan | 6.08 | % | Monthly interest only of $319,200(2) | 3/1/2013 | 63,000,000 | ||||||
Total | $ | 286,253,370 | ||||||||||
FOOTNOTES:
(1) | Amount was converted from Canadian dollars to U.S. dollars at an exchange rate of 0.898 U.S. dollar for $1.00 Canadian dollar as of September 30, 2006 and 0.858 U.S. dollar for $1.00 Canadian dollar as of December 31, 2005. Effective December 2006, monthly principal and interest payments of $134,350 are due until maturity. |
(2) | Effective April 1, 2009, monthly principal and interest payments shall be payable on the loan based on a 30-year amortization schedule. |
COMMITMENTS, CONTINGENCIESAND CONTRACTUAL OBLIGATIONS
The following table presents our contingent commitments and contractual obligations and the related payment periods as of September 30, 2006:
Payments due in | |||||||||||||||
Less than 1 year | Years 1-3 | Years 3-5 | More than 5 years | Total | |||||||||||
Line of credit | $ | 8,396,184 | $ | — | $ | — | $ | — | $ | 8,396,184 | |||||
Contingent purchase consideration(1) | — | 9,750,000 | — | — | 9,750,000 | ||||||||||
Loan funding commitments (2) | — | 20,000,000 | — | — | 20,000,000 | ||||||||||
DMC capital commitments(3) | 1,706,600 | — | — | — | 1,706,600 | ||||||||||
Notes payable (principal and interest)(4) | — | — | 8,393,392 | — | 8,393,392 | ||||||||||
Capital improvements(5) | 126,000 | 17,500,000 | — | — | 17,626,000 | ||||||||||
Total contractual obligations | $ | 10,228,784 | $ | 47,250,000 | $ | 8,393,392 | $ | — | $ | 65,872,176 | |||||
FOOTNOTES:
(1) | In connection with the purchase of the resort village property located at Copper Mountain, Colorado, the CNL Retail Village Partnership agreed to pay additional future purchase consideration contingent upon the Copper Mountain |
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property achieving certain levels of financial performance, as specified in the purchase and sale agreement. The amount of the contingent purchase price will be determined as of December 31, 2008, and in no event, will the amount exceed $3.75 million. We have guaranteed the payment of the contingent purchase price to Intrawest on behalf of the CNL Retail Village Partnership.
In connection with the purchase of the Wolf Dells property and the Wolf Sandusky property, Great Wolf may receive an additional contingent purchase price of up to $3.0 million per waterpark resort if those properties achieve certain financial performance goals during 2007 and 2008. The amount of the contingent purchase price will be determined during those years, and in no event will the amount exceed a total of $6.0 million for both properties.
(2) | Pursuant to the loan agreement, we agreed to provide financing of up to $40.0 million in connection to the development of the infrastructure of an Orvis branded lifestyle community in Granby, Colorado. As of September 30, 2006, we have funded $20.0 million. See description above underItem 2.“Mortgages and Other Notes Receivable” for more details. |
(3) | We have committed to fund our share of costs for development of the Trade Mart Expansion at the Dallas Market Center. This amount represents our remaining share of the approximately $17.0 million in total expected development costs. As of September 30, 2006, we had contributed approximately $15.3 million to date. |
(4) | In connection with the acquisition of Bretton Woods Mountain Resort in northern New Hampshire, we have signed two promissory notes, a $6.5 million note that bears interest at an annual interest rate of 5.77% and a $337,892 note that bears interest at 5.20% compounded annually. Interest on both notes will accrue until maturity on June 19, 2010 and June 9, 2009, respectively, at which time total amount of principal and interest are due and payable. |
(5) | We have committed to invest approximately $500,000 in improvements to the South Mountain property and as of September 30, 2006, we have spent approximately $374,000. In addition, we have also agreed to the fund an additional $17.5 million for improvements to the Bretton Woods property during the next three years, which we expect to finance. |
Subsequent to September 30, 2006, we acquired Heritage West Coast Inc., which owned the Valencia and Talega properties, and the Weston Hills property. Pursuant to the stock and asset purchase agreements, Heritage Golf, LLC may receive supplemental purchase price payments not to exceed $8.6 million and $5.3 million, respectively, if the properties achieve certain financial performance goals in 2009.
On October 6, 2006, we entered into an agreement for a non-revolving construction line of credit for $20.0 million including $2.5 million to be set aside as interest reserve with Colonial Bank, N.A. The line of credit will be used to finance the expansion and improvements to the Bretton Woods Mountain Resort. The non-revolving line of credit is collateralized by a first real estate mortgage on the Bretton Woods Mountain Resort in New Hampshire, will bear interest at the 30-day LIBOR plus 2.0%, have a term of three years with one one-year extension for a fee and will require monthly payments of interest only and principal due at maturity. The financing is expected to close by the end of the fourth quarter 2006.
On October 5, 2006 and October 26, 2006, we entered into a commitment for two loans of approximately $16.5 million and $47.2 million with Sun Life Assurance Company of Canada. The $16.5 million loan will be collateralized by Palmetto Hall Plantation Club, Raven Golf Club at South Mountain and Bear Creek Golf Club and the $47.2 million loan will be collateralized by Valencia Country Club, Talega Golf Club and Weston Hills Country Club. The loans will bear interest annually, at a fixed rate of 6.18% and 6.33%, respectively, for a term of ten years, with monthly payments of principal and interest based on a 25-year amortization period. Prepayments, on both loans, are prohibited for the first two years after which early repayment is subject to a prepayment fee. We have provided deposits of $165,450 and $471,500, respectively, in consideration to these commitments. The loans are expected to close by the end of fourth quarter of 2006.
MANAGEMENT
The following information should be read in conjunction with the “Management” section under the heading “Directors and Executive Officers” beginning on page 116 of the prospectus:
On August 18, 2006, our board appointed R. Byron Carlock, Jr. as our Chief Executive Officer. Mr. Carlock had served as our Interim Chief Executive Officer since Thomas J. Hutchison III resigned in August 2005. On that same date, Mr. Carlock was appointed Chief Executive Officer of our advisor, CNL Income Corp.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information should be read in conjunction with the “Certain Relationships and Related Transactions” section beginning on page 124 of the prospectus:
Our managing dealer received selling commissions amounting to 6.5% of the total amount raised from the sale of shares in our initial offering, up to 6.0% of which was paid or has accrued and will be paid as commissions to other broker-dealers. Our managing dealer is entitled to receive selling commissions up to 7.0% of the total amount raised from the sale of shares from this offering, of which up to 6.5% may be paid as commissions to other broker-dealers. During the period January 1, 2006 through September 30, 2006, we incurred approximately $17.8 million of such fees in connection with our offerings, the majority of which has been or will be paid by CNL Securities Corp. as commissions to other broker-dealers.
In addition, our managing dealer was entitled to receive a marketing support fee equal to 2.5% of the total amount raised from the sale of shares in our initial offering, all or a portion of which was or may be reallowed to other broker-dealers. Our managing dealer is entitled to receive a marketing support fee of 3.0% of the total amount raised from the sale of shares from this offering, up to 2.5% of which may be reallowed to other broker-dealers who enter into a participating broker agreement with the managing dealer. During the period January 1, 2006 through September 30, 2006, we incurred approximately $7.2 million of such fees in connection with our offerings, the majority of which has been or will be reallowed to other broker-dealers.
In connection with our offerings, our advisor was and is entitled to receive Acquisition Fees for services provided in connection with the selection, purchase, development or construction of real property and the incurrence of debt from lines of credit and permanent financing that are used to acquire properties or to make or acquire loans and other permitted investments equal 3.0% of the total amount raised from the sale of shares in our offerings and 3.0% of loan proceeds from permanent financing; however, no Acquisition Fees will be paid on proceeds from any line of credit until such time as all Net Offering Proceeds have been invested. During the period January 1, 2006 through September 30, 2006, we incurred approximately $8.1 million of such fees in connection with our offerings. For the period January 1, 2006 through September 30, 2006, we incurred Acquisition Fees totaling approximately $1.3 million as a result of permanent financing used to acquire certain properties.
We entered into an Advisory Agreement with our advisor pursuant to which our advisor receives a monthly asset management fee of 0.08334% of an amount equal to the total amount invested in our properties, loans and other Permitted Investments (exclusive of acquisition fees and expenses) as of the end of the preceding month. The asset management fee, which will not exceed fees which are competitive for similar services in the same geographic area, may or may not be taken, in whole or in part as to any year, in the sole discretion of our advisor. All or any portion of the asset management fee not taken as to any fiscal year shall be deferred without interest and may be taken in such other fiscal year as our advisor shall determine. During the period commencing January 1, 2006 through September 30, 2006, we incurred approximately $3.6 million of such fees.
Our advisor and its Affiliates provide various general operating and administrative services to us, including services related to accounting, financial, tax and regulatory compliance reporting, stockholder distributions and reporting, due diligence and marketing, and investor relations (including administrative services in connection with the offering of shares) on a day-to-day basis. During the period commencing January 1, 2006 through September 30, 2006, we incurred $934,837 in fees for these services.
AFFILIATE LITIGATION
The following paragraph updates and replaces the corresponding paragraph on page 130 of the prospectus:
In 2004, stockholders in CNL Hotels & Resorts, Inc. (“CHR”) filed two class action complaints in the United States District Court for the Middle District of Florida against, among others, CHR, CNL Hospitality Corp. (“CHC”), certain affiliates of CHR and CHC, and certain of CHR’s directors and officers, including James M. Seneff, Jr., and Robert A. Bourne. Messrs. Seneff and Bourne are also members of our board of directors. Neither we, nor our advisor or our directors or officers, in their respective capacities with CNL Income Properties, are defendants in the CHR litigation. On November 10, 2004, the two complaints were consolidated (the “Consolidated CHR Litigation”). In the Consolidated CHR Litigation, plaintiffs seek money damages, rescission of their securities purchases, and various injunctions relating to the proposed merger of CHR and CHC. Plaintiffs allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act and Section 14(a), including Rule 14a-9 hereunder, and Section 20(a) of the Exchange Act.
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On February 6, 2006, the parties to the litigation entered into a non-binding confidential memorandum of understanding which would resolve all claims in the litigation subject to certain conditions including but not limited to: the completion of confirmatory discovery, the parties’ ability to negotiate and enter into a final signed and binding agreement, a sufficient number of class members not opting out of the final signed agreement, and court approval. On April 3, 2006, the parties entered into and filed with the court a Stipulation of Settlement. The court entered an order approving the settlement on April 24, 2006 and notice was sent to the class in May 2006. On August 2, 2006, the court issued its final order approving the settlement and the determination of legal fees.
DISTRIBUTION POLICY
DISTRIBUTIONS
The following table presents total distributions (in thousands) and distributions per share, and it updates and replaces the corresponding table on page 138 of the prospectus:
2004 Quarters | First | Second | Third | Fourth | Year | ||||||||||
Total distributions declared | — | — | $ | 470,512 | $ | 702,176 | $ | 1,172,688 | |||||||
Distributions per share | — | — | 0.1342 | 0.1251 | 0.2593 | ||||||||||
2005 Quarters | First | Second | Third | Fourth | Year | ||||||||||
Total distributions declared | $ | 1,280,706 | $ | 2,027,860 | $ | 2,784,299 | $ | 4,003,564 | $ | 10,096,429 | |||||
Distributions per share | 0.1272 | 0.1334 | 0.1374 | 0.1374 | 0.5354 | ||||||||||
2006 Quarters | First | Second | Third | Fourth | Year | ||||||||||
Total distributions declared | $ | 5,813,301 | $ | 7,280,851 | 8,396,186 | — | $ | 21,490,338 | |||||||
Distributions per share | 0.1374 | 0.1374 | 0.1399 | — | 0.4147 |
SUMMARY OF THE ARTICLES OF INCORPORATION AND BYLAWS
The following information updates, modifies or supersedes certain information contained in “Summary of the Articles of Incorporation and Bylaws – Amendments to the Articles of Incorporation” and “– Mergers, Combinations and Sale of Assets” commencing on page 142 of the prospectus:
As of August 10, 2006, the Commonwealth of Pennsylvania and the State of Minnesota cleared us to offer and sell our common stock in those states. As a result, our offering is now cleared in all “blue sky” jurisdictions. As a condition for clearing our offering in Pennsylvania, however, the Pennsylvania Securities Commission has required us to undertake to amend certain provisions of Section 10 and Section 12 of our amended and restated Articles of Incorporation (our “Articles”). Our board has adopted resolutions amending, and recommending that our stockholders approve, amendments to Section 10 and Section 12 of our Articles. The proposed amendments are discussed below:
Amendments to Our Articles
Amendment to Section 10.1. Section 10.1 of our Articles currently provides that a 2/3rds vote of stockholders is required to amend the provisions of our Articles relating to the procedures by which the board of directors and stockholders of our company shall approve extraordinary transactions such as mergers, sale of significant assets and share exchanges. Under the proposed amendment (which must be approved by such 2/3rds vote), subsequent changes to this provision would require only a majority vote. In addition, Section 10.1(ii) states: “[T]he Directors may amend these Articles of Incorporation without the consent of the Stockholders to the fullest extent so provided by the MGCL.” Our board has adopted a resolution amending Section 10.1 to eliminate this provision.
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Amendments to Sections 10.2, 10.3 and 12.1. Sections 10.2 and 10.3 of our Articles currently provide that the affirmative vote of at least a majority of our stockholders is required for a merger or consolidation of our company into, or a share exchange with, another or new entity. However, these provisions would not require a vote of stockholders in connection with certain mergers, consolidations or share exchanges where our company would be the surviving entity and Maryland law would not otherwise require that our stockholders were entitled to vote on such matter.
Our board has adopted resolutions to amend Sections 10.2, 10.3 and 12.1 of our Articles to require that stockholder approval be required for all mergers, consolidations and share exchanges of our company with or into other entities, except where a merger of another entity with our company is effected through a wholly-owned subsidiary of our company and the consideration to be paid by our company in the merger consists solely of cash, the merger may be approved solely by our directors unless the party to the merger is an Affiliate of our Sponsor, our advisor or our company. These amendments therefore would impact the approvals needed by us to complete such mergers. If these amendments to our Articles are approved, our board will no longer have the ability to approve, without stockholder approval, potential mergers in which we will issue common stock as consideration in the merger.
Stockholder Approval
On August 18, 2006, our board adopted resolutions amending, and recommending that our stockholders approve, amendments to Sections 10.1, 10.2, 10.3 and 12.1 of our Articles. We currently expect to seek stockholder approval of the amendments at our next regular annual meeting of stockholders to be held on or around the third week of June 2007. Under the existing Articles, the proposed amendments must be approved by the affirmative vote of not less than 2/3rds of our stockholders entitled to vote thereon. If our stockholders vote to approve the amendments, we will file the amended Articles with the State Department of Assessments and Taxation of Maryland at which time the amendments will become effective.
If the proposed amendments are not approved by our stockholders at the next annual meeting, we have assured the Pennsylvania Securities Commission that we will immediately cease making offers and sales of our securities to Pennsylvania residents and that we will not offer or sell our securities in the Commonwealth of Pennsylvania in the future. Additionally, pursuant to Section 504 of the Pennsylvania Securities Act of 1972, as amended, and the regulations promulgated thereunder, we have agreed to extend to all residents of the Commonwealth of Pennsylvania that have purchased our shares pursuant to our current registration statement filed with the SEC (SEC File No. 333-128662) which was declared effective on April 4, 2006, a written offer of rescission. Thus, if these proposals are not approved by our stockholders, we may have to return monies to investors who are residents of the Commonwealth of Pennsylvania. Doing so, however, could have a material adverse effect on our business and financial condition depending on the amount of proceeds that we raise under our current offering from Pennsylvania residents.
Additional information regarding these amendments will be included in our proxy statement for our 2007 annual meeting of stockholders. We will distribute that proxy statement to our stockholders in advance of the meeting in accordance with our bylaws and applicable law. A copy of the proxy statement also will be available on the SEC’s website at www.sec.gov. Our stockholders are urged to carefully read that proxy statement when it becomes available.
THE OFFERING
PLANOF DISTRIBUTION
The following paragraph replaces the last paragraph on page 161 of the prospectus:
In order to encourage purchases in excess of 500,000 shares, by the categories of investors described above, in addition to a discount equal to the 7.0% selling commissions and the 3.0% marketing support fee discount described above, if the investor is a “purchaser” (as defined below) and buys in excess of 500,000 shares, and all such shares were purchased through the same registered investment adviser, participating broker or the managing dealer, such purchase and any subsequent purchase will be subject to a reduced Acquisition Fee of 1.0% (as opposed to 3.0%). In such instance, the initial purchase price per share will be $8.80.
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The volume discount table is corrected by replacing $0.60 in the first row of the last column with $0.65 on page 162 of the prospectus.
EXPERTS
The following paragraph updates and replaces the corresponding paragraph which begins on page 167 of the prospectus:
The balance sheets of CNL Income Properties as of December 31, 2005 and 2004, the statements of operations, statements of stockholders’ equity and cash flows of CNL Income Properties for the years ended December 31, 2005 and 2004 and the period from August 11, 2003 (date of inception) through December 31, 2003, the consolidated financial statements of CNL Village Retail Partnership, LP and its Subsidiaries as of and for the year ended December 31, 2005 and the period from October 1, 2004 (date of inception) to December 31, 2004, the consolidated financial statements of CNL Dallas Market Center, LP and its Subsidiaries as of and for the period from February 14, 2005 (date of inception) to December 31, 2005, the consolidated financial statements of CNL Income GW Partnership, LLLP and its Subsidiaries as of and for the period from October 11, 2005 (date of inception) through December 31, 2005 included in this registration statement have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm given on the authority of said firm as experts in auditing and accounting.
The balance sheet of Gatlinburg Skylift LLC as of December 31, 2004 and December 31, 2003 and the related statement of operations, parent’s investment account and cash flows for the years ended December 31, 2004, 2003, and 2002 included in this registration statement have been audited by Moss Adams LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The balance sheet of Cypress-Bowl Recreations Limited Partnership as of December 31, 2005 and December 31, 2004 and the related statement of operations, parent’s investment account and cash flows for the years ended December 31, 2005 and 2004 included in this registration statement have been audited by Moss Adams LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of Great Bear Lodge of Wisconsin Dells, LLC and Great Bear Lodge of Sandusky, LLC as of and for the periods ended December 20, 2004, December 31, 2003 and December 31, 2002 included in this registration statement have been audited by RubinBrown LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The audited historical combined statement of revenue and certain expenses of the DMC Properties as of and for the year ended January 31, 2005 included in this registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The combined statement of revenue and certain expenses of Intrawest Portfolio Commercial Properties, for the year ended June 30, 2004 included in this registration statement have been audited by KPMG LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Booth Creek Ski Holdings, Inc. at October 28, 2005 and October 29, 2004, and for each of the three years in the period ended October 28, 2005, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The financial statements of WHCC, LLC (d.b.a. Weston Hills Country Club) as of and for the periods ended December 31, 2005, 2004 and 2003 included in this registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.
The financial statements of Heritage Golf Group West Coast, Inc. as of and for the periods ended December 31, 2005, 2004 and 2003 included in this registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The financial statements of Palmetto Hall Plantation Club (a wholly owned property of Greenwood Development Corporation) as of and for the periods ended December 31, 2005, 2004 and 2003 included in this registration statement have been audited by Elliott Davis, LLC, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
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CNL Income Properties, Inc.
Pro Forma Consolidated Financial Information: | ||
F - 1 | ||
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2006 | F - 2 | |
F - 3 | ||
Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2005 | F - 4 | |
Notes to Unaudited Pro Forma Consolidated Financial Statements | F - 5 | |
Interim Unaudited Condensed Consolidated Financial Statements as recently filed in CNL Income Properties Inc.’s September 30, 2006 Form 10-Q: | ||
Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005 | F - 14 | |
F - 15 | ||
F - 16 | ||
F - 17 | ||
F - 18 | ||
Financial Statement Schedules: | ||
Schedule III – Real Estate and Accumulated Depreciation for the year ended December 31, 2005 | F - 31 | |
Schedule IV – Mortgage Loans on Real Estate for the year ended December 31, 2005 | F - 32 | |
F - 33 |
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AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Consolidated Balance Sheet of CNL Income Properties, Inc. (the “Company”) is presented as if the acquisitions described in Note (b) had occurred on September 30, 2006.
The following Unaudited Pro Forma Consolidated Statements of Operations are presented for the nine months ended September 30, 2006 and for the year ended December 31, 2005 (the “Pro Forma Periods”), and include certain pro forma adjustments to illustrate the estimated effect of the transactions described in the notes to the pro forma financial statements as if they had occurred on January 1, 2005.
This pro forma 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 consolidated financial information should not be viewed as indicative of the Company’s financial results or conditions in the future.
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AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2006
Historical (a) | Pro Forma Adjustments | Pro Forma | ||||||||||
ASSETS | ||||||||||||
Real estate investment properties under operating leases, net | $148,881,005 | $ | 384,819,134 | (b) | $ | 533,700,139 | ||||||
Investment in unconsolidated entities | 178,177,539 | 9,465,244 | (b) | 187,642,783 | ||||||||
Mortgages and other notes receivable | 54,139,185 | 12,480,000 | (b) | 66,619,185 | ||||||||
Cash | 176,685,210 | 205,393,552 | (c) | — | ||||||||
(382,078,762 | )(d) | |||||||||||
Restricted cash | 619,703 | — | 619,703 | |||||||||
Short-term investment | 8,000,000 | — | 8,000,000 | |||||||||
Accounts and other receivables | 2,250,532 | — | 2,250,532 | |||||||||
Distributions receivable from unconsolidated entities | 2,940,660 | — | 2,940,660 | |||||||||
Prepaid expenses and other assets | 11,150,555 | 7,082,536 | (c) | 2,716,475 | ||||||||
(15,516,616 | )(b) | |||||||||||
Total Assets | $582,844,389 | $ | 221,645,088 | $ | 804,489,477 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Due to affiliates | $ | 9,354,008 | $ | — | $ | 9,354,008 | ||||||
Line of credit | 8,396,184 | — | 8,396,184 | |||||||||
Notes payable | 6,837,892 | — | 6,837,892 | |||||||||
Security deposits | 3,050,449 | 9,169,000 | (e) | 12,219,449 | ||||||||
Accounts payable and accrued expenses | 1,113,524 | — | 1,113,524 | |||||||||
Total Liabilities | 28,752,057 | 9,169,000 | 37,921,057 | |||||||||
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 September 30, 2006 | ||||||||||||
65,216,726 shares issued and 65,069,731 shares outstanding (historical) | ||||||||||||
88,825,180 shares issued and 88,678,185 shares outstanding (pro forma basis) | 650,697 | 236,084 | (c) | 886,781 | ||||||||
Capital in excess of par value | 565,796,837 | 212,240,004 | (c) | 778,036,841 | ||||||||
Accumulated earnings | 20,795,843 | — | 20,795,843 | |||||||||
Accumulated distributions | (32,759,455 | ) | — | (32,759,455 | ) | |||||||
Accumulated other comprehensive loss | (391,590 | ) | — | (391,590 | ) | |||||||
554,092,332 | 212,476,088 | 766,568,420 | ||||||||||
Total Liabilities and Stockholders’ Equity | $582,844,389 | $ | 221,645,088 | $ | 804,489,477 | |||||||
See accompanying notes to unaudited pro forma consolidated financial statements
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AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Historical (1) | Pro Forma Adjustments | Pro Forma Results | ||||||||||
Revenues: | ||||||||||||
Rental income from operating leases | $ | 6,785,961 | $ | 32,473,517 | (2) | $ | 40,799,481 | |||||
1,540,003 | (3) | |||||||||||
FF&E reserve income | 743,181 | 7,055,631 | (4) | 7,798,812 | ||||||||
Interest income on mortgages and other notes receivable | 3,955,014 | 1,153,674 | (5) | 5,108,688 | ||||||||
11,484,156 | 42,222,825 | 53,706,981 | ||||||||||
Expenses: | ||||||||||||
Asset management fee to advisor | 3,634,063 | 3,555,937 | (6) | 7,190,000 | ||||||||
General and administrative | 4,407,073 | 1,540,003 | (3) | 5,947,076 | ||||||||
Depreciation and amortization | 3,718,961 | 14,586,975 | (7) | 18,305,936 | ||||||||
11,760,097 | 19,682,915 | 31,443,012 | ||||||||||
Operating income (loss) | (275,941 | ) | 22,539,910 | 22,263,969 | ||||||||
Other income (expense): | ||||||||||||
Interest and other income | 4,941,469 | (4,887,419 | )(8) | 54,050 | ||||||||
Interest expense and loan cost amortization | (419,601 | ) | (294,381 | )(9) | (713,982 | ) | ||||||
Equity in earnings of unconsolidated entities | 10,649,748 | (597,906 | )(10) | 9,950,883 | ||||||||
(69,459 | )(12) | |||||||||||
(31,500 | )(13) | |||||||||||
Total other income | 15,171,616 | (5,880,665 | ) | 9,290,951 | ||||||||
Net income | $ | 14,895,675 | $ | 16,659,245 | $ | 31,554,920 | ||||||
Earnings Per Share of Common Stock (Basic and Diluted) | $ | 0.28 | $ | 0.36 | ||||||||
Weighted Average Number of Shares of Common Stock Outstanding (Basic and Diluted) | 53,077,692 | (14) | 88,678,185 | |||||||||
See accompanying notes to unaudited pro forma consolidated financial statements
F-3
Table of Contents
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
Historical (1) | Pro Forma Adjustments | Pro Forma Results | ||||||||||
Revenues: | ||||||||||||
Rental income from operating leases | $ | 101,134 | $ | 51,047,964 | (2) | $ | 53,718,438 | |||||
2,569,340 | (3) | |||||||||||
FF&E reserve income | 10,532 | 9,376,949 | (4) | 9,387,481 | ||||||||
Interest income on mortgages and other notes receivable | 115,000 | 1,445,104 | (5) | 1,560,104 | ||||||||
226,666 | 64,439,357 | 64,666,023 | ||||||||||
Expenses: | ||||||||||||
Asset management fee to advisor | 2,558,973 | 6,725,337 | (6) | 9,284,310 | ||||||||
General and administrative | 2,614,239 | 2,569,340 | (3) | 5,183,579 | ||||||||
Depreciation and amortization | 37,224 | 24,252,368 | (7) | 24,289,592 | ||||||||
5,210,436 | 33,547,045 | 38,757,481 | ||||||||||
Operating income (loss) | (4,983,770 | ) | 30,892,312 | 25,908,542 | ||||||||
Other income (expense): | ||||||||||||
Interest and other income | 1,346,505 | (1,322,214 | )(8) | 24,291 | ||||||||
Interest expense and loan cost amortization | (69,145 | ) | (392,555 | )(9) | (461,700 | ) | ||||||
Equity in earnings of unconsolidated entities | 10,289,841 | 754,660 | (10) | 12,055,436 | ||||||||
1,307,987 | (11) | |||||||||||
(92,612 | )(12) | |||||||||||
(204,440 | )(13) | |||||||||||
Total other income | 11,567,201 | 50,826 | 11,618,027 | |||||||||
Net income | $ | 6,583,431 | $ | 30,943,138 | $ | 37,526,569 | ||||||
Earnings Per Share of Common Stock (Basic and Diluted) | $ | 0.33 | $ | 0.42 | ||||||||
Weighted Average Number of Shares of Common Stock Outstanding (Basic and Diluted) | 19,795,649 | (14) | 88,678,185 | |||||||||
See accompanying notes to unaudited pro forma consolidated financial statements
F-4
Table of Contents
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet:
(a) | Reflects the Company’s historical balance sheet as of September 30, 2006. |
(b) | Represents the Company’s pending and completed property acquisitions subsequent to September 30, 2006: |
Properties | Purchase Price | Closing Cost | Acquisition Fees | Total | ||||||||
Valencia & Talega(i) | $ | 57,533,000 | $ | 171,396 | $ | 2,301,320 | $ | 60,005,716 | ||||
Weston Hills(ii) | 35,000,000 | 388,426 | 1,400,000 | 36,788,426 | ||||||||
Family Entertainment Centers(iii) | 35,222,000 | 516,325 | 1,408,880 | 37,147,205 | ||||||||
EAGL Golf(iv) | 47,124,000 | 688,827 | 1,884,960 | 49,697,787 | ||||||||
Booth Creek Ski(v) | 192,000,000 | 1,500,000 | 7,680,000 | 201,180,000 | ||||||||
Total | $ | 366,879,000 | $ | 3,264,974 | $ | 14,675,160 | $ | 384,819,134 | ||||
FOOTNOTES:
(i) | On October 16, 2006, the Company acquired the Valencia Country Club, in Santa Clarita, California, and the Talega Golf Club, in San Clemente, California, from Heritage Golf Group, LLC (“Heritage Golf”) for an aggregate purchase price of approximately $57.5 million. The Company leased the properties to Heritage Golf Master Lease, LLC, an entity formed by Heritage Golf to operate the golf courses under a triple-net lease with an initial term of 20 years and six five-year renewal options. The pro forma adjustment represents the total cost of approximately $60.0 million including closing costs of $171,396 and the reclassification of certain acquisition fees of approximately $2.3 million that were previously capitalized in other assets. Pursuant to the stock purchase agreement, Heritage Golf may receive supplemental purchase price payments of up to $8.6 million in aggregate, for both properties, if the properties achieve certain financial performance goals in fiscal year 2009. |
(ii) | On October 16, 2006, the Company acquired the Weston Hills Country Club, in Weston, Florida from WHCC, LLC for a purchase price of $35.0 million. The Company leased the property to an existing subsidiary of Heritage Golf under a triple-net lease with an initial term of 20 years and six five-year renewal options. The pro forma adjustment represents the total purchase price of approximately $36.8 million, including closing costs of $388,426 and the reclassification of certain acquisition fees of $1.4 million that were previously capitalized in other assets. Pursuant to the asset purchase agreement, Heritage Golf may receive a supplemental purchase price payment of up to $5.3 million if the Weston Hill property achieves certain financial performance goals in fiscal year 2009. |
(iii) | On October 6, 2006, the Company acquired 11 family entertainment center properties in 11 various locations, from Trancas Capital, LLC, for a purchase price of approximately $35.2 million. The Company leased the properties to an affiliate of Trancas that currently operates, and will continue to operate, eight of the 11 properties. The remaining three properties were previously, and will continue to be, operated by third-party operators pursuant to three separate leases with the Trancas affiliate. These properties are leased under a triple-net lease with an initial term of 30 years with two 10-years renewal options. The pro forma adjustment represents the purchase price of approximately $37.1 million, including closing cost of $516,325 and the reclassification of certain acquisition fees of $1.4 million that were previously capitalized in other assets. |
(iv) | On November 16, 2006, the Company acquired seven golf course properties and a 47.5% partnership interest in Cowboys Golf Club in Grapevine, Texas from an affiliate of Evergreen Alliance Golf Limited, L.P. (“EAGL Golf”). The Company leased the seven golf course properties to EAGL Golf, which was acquired by Premier Golf, to operate all of the EAGL properties under a triple-net lease with an initial term of 20 years and four five-year renewal options. The pro forma adjustment represents the total purchase price of the seven golf course properties of approximately $49.7 million, including closing costs of $688,827 and the reclassification of certain acquisition fees of approximately $1.9 million that were previously capitalized in other assets. The Company paid approximately $9.0 million plus a portion of closing costs of $67,388 and acquisition fees of $361,456 for its 47.5% interest in the Cowboys Partnership which is included in investment in unconsolidated entities and is accounted for under the equity method of accounting. The Company expects to acquire the remaining 52.5% interest in the Cowboys Partnership, in a separate transaction, by the end of the first quarter of 2007. |
F-5
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet(Continued):
(v) | On November 30, 2006, the Company entered into an agreement to acquire four ski resort properties and retail and commercial space from Booth Creek Ski Group, Inc. for an aggregate purchase price of approximately $192.0 million. The Company will lease the properties and the retail and commercial space to a newly created tenant entity that will be formed by certain members of the existing management of Booth Creek Ski Group, Inc. under a triple-net lease with an initial term of 20 years with renewal options. The pro forma adjustment represents the purchase price of approximately $201.2 million, including estimated closing costs of approximately $1.5 million and the reclassification of certain acquisition fees of approximately $7.7 million that were previously capitalized in other assets. In connection with the transaction, the Company will also make loans to Booth Creek Ski Holdings, Inc. in the amount of $12.0 million. Approximately $480,000 in acquisition fees and closing costs are expected to be attributable to the loans and will be amortized over the loan terms. The loans will bear interest at a fixed rate of 9.0% for a term of three years with monthly interest payments only. Principal and exit fees are due and payable upon the loans’ maturity. The transaction is expected to close by December 20, 2006. |
(c) | Represents the receipt of approximately $236.1 million in additional gross offering proceeds from the sale of 23,608,454 shares and the payment of selling commissions of approximately $16.5 million (7.0% of gross proceeds) and marketing support fees of approximately $7.1 million (3.0% of gross proceeds), both of which have been netted against stockholders’ equity. Also reflects the payment and capitalization of additional acquisition fees of approximately $7.1 million (3.0% of gross proceeds). The additional offering proceeds included in the pro forma adjustments have been limited to approximate the amount of proceeds necessary to acquire the Company’s investments described in Note (b) above. |
(d) | Represents the reduction in cash in connection with the Company’s acquisition of the properties described in Note (b) above, net of cash deposits from tenants leasing these properties described in Note (b) above. |
(e) | Represents security deposits received from the third-party tenants in connection with the Company’s acquisition of the properties described in Note (b) above. Security deposits are generally in form of cash or a letter of credit to secure rental payments and performance that are obligated under the lease. |
Unaudited Pro Forma Consolidated Statements of Operations:
(1) | Represents the Company’s historical operating results for the respective pro forma periods being presented. |
(2) | Represents the estimated pro forma rental income and percentage rent adjustments from operating leases as a result of the pending and completed acquisitions of the following real estate investment properties. Percentage rent is generally based on a percentage of gross revenues. The historical revenues of the properties were used to estimate percentage rent for the pro forma periods presented. |
Pro forma adjustments | ||||||||
Properties | Acquisition date | Year ended December 31, 2005 | Nine months ended September 30, 2006 | |||||
Booth Creek Ski | Pending | $ | 20,333,902 | $ | 15,265,427 | |||
EAGL Golf | 11/16/2006 | 4,317,937 | 3,238,453 | |||||
Valencia & Talega | 10/16/2006 | 5,072,213 | 3,804,161 | |||||
Weston Hills | 10/16/2006 | 3,115,814 | 2,336,860 | |||||
Family Entertainment Centers | 10/06/2006 | 3,395,701 | 2,546,776 | |||||
Bear Creek | 9/08/2006 | 1,100,330 | 759,041 | |||||
Gatlinburg Sky Lift | 12/22/2005 | 2,536,531 | — | |||||
Cypress Mountain | 5/30/2006 | 3,449,799 | 1,368,761 | |||||
Harley-Davidson | 4/27/2006 | 696,424 | 220,829 | |||||
Hawaiian Falls | 4/21/2006 | 1,351,230 | 413,417 | |||||
Palmetto Hall | 4/27/2006 | 695,856 | 218,545 | |||||
South Mountain | 6/09/2006 | 1,170,467 | 507,548 | |||||
Bretton Woods | 6/23/2006 | 3,811,760 | 1,793,699 | |||||
Total | $ | 51,047,964 | $ | 32,473,517 | ||||
F-6
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
(3) | Represents the estimated pro forma adjustments for ground leases, park use permit and land permit fees paid by the third-party tenants related to the properties. Ground leases, park use permit and land permit fees are generally a percentage of gross revenue exceeding a certain threshold. The historical revenues of the properties were used to estimate ground leases, park use permit and land permit fees for the pro forma periods presented. |
Pro forma adjustments | ||||||||
Properties | Year ended December 31, 2005 | Nine months ended September 30, 2006 | Description | |||||
Booth Creek Ski | $ | 780,273 | $ | 853,186 | Special ground lease agreement with U.S. Forest Service | |||
EAGL Golf | 275,152 | 206,364 | Three long-term ground leases | |||||
Family Entertainment Centers | 215,801 | 162,166 | Three long-term ground leases | |||||
Bear Creek | 293,235 | 180,950 | Special facilities ground leases agreement with Dallas/Fort Worth International Airport Board | |||||
Gatlinburg Sky Lift | 658,662 | — | One long-term ground lease | |||||
Cypress Mountain | 184,722 | 137,337 | Special park use permit from Canadian Provincial Government | |||||
Hawaiian Falls | 161,495 | — | Two long-term municipal ground leases | |||||
Total | $ | 2,569,340 | $ | 1,540,003 | ||||
(4) | FF&E reserve income represents amounts set aside by the tenants and paid to the Company for capital expenditure purposes. The Company has exclusive rights to and ownership of the accounts. Generally, the amounts are based on an agreed upon percentage of the tenants’ gross revenues as defined in the respective leases. The historical revenues of the properties were used to estimate FF&E reserves due under the leases for the pro forma periods presented. |
Pro forma adjustments | ||||||
Properties | Year ended December 31, 2005 | Nine months Ended September 30, 2006 | ||||
Booth Creek Ski | $ | 6,029,000 | $ | 4,723,500 | ||
EAGL Golf | — | 324,847 | ||||
Valencia & Talega | 431,638 | 323,729 | ||||
Weston Hills | 381,089 | 285,817 | ||||
Family Entertainment Centers | 239,167 | 179,375 | ||||
Bear Creek | — | 111,401 | ||||
Gatlinburg Sky Lift | 224,341 | — | ||||
Cypress Mountain | 554,164 | 397,210 | ||||
Harley-Davidson | 24,000 | 8,000 | ||||
Hawaiian Falls | — | — | ||||
Palmetto Hall | 88,320 | 18,117 | ||||
South Mountain | 95,080 | 48,097 | ||||
Bretton Woods | 1,310,150 | 635,538 | ||||
Total | $ | 9,376,949 | $ | 7,055,631 | ||
F-7
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
(5) | On March 10, 2006, the Company purchased a $15.0 million mezzanine loan from Column Financial, Inc., as former lender to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, L.P. The proceeds from the mezzanine loan, in addition to the proceeds from an $89.0 million first mortgage loan, were used to acquire an apartment complex in Boca Raton, Florida. The loan earns interest at a rate of one month LIBOR plus 7.0% per year and requires monthly interest payments. The pro forma adjustments include interest income from the date the loan was originated, on October 14, 2005, of $343,674 and $365,104 for the nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively. |
The pro forma adjustments also include interest income on the $12.0 million loan made in connection with the Booth Creek Ski transaction of $810,000 and approximately $1.1 million for the nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively.
(6) | Represents asset management fees associated with owning interests in or making loans in connection with real estate, including the Company’s proportionate share of properties owned through its unconsolidated entities. The assets and loans are managed by the Company’s advisor for an annual asset management fee of 1% of the Company’s pro-rata share of the “Real Estate Asset Value” as defined in the Company’s Prospectus. The pro forma adjustments include asset management fees for all properties acquired, loans made and pending acquisitions as if the acquisitions had occurred at the beginning of the pro forma periods presented. |
(7) | Depreciation and amortization is computed using the straight-line method of accounting over the estimated useful lives of the related assets as follows: |
Pro forma adjustments | |||||||||||||
Properties | Assets | Purchase price | Estimated useful life | Year ended December 31, 2005 | Nine months ended September 30, 2006 | ||||||||
Booth Creek Ski | Land | $ | 40,380,059 | n/a | $ | — | $ | — | |||||
Land improvements | 62,311,221 | 15 years | 4,154,081 | 3,115,561 | |||||||||
Permit rights | 5,192,602 | 40 years | 129,815 | 97,361 | |||||||||
Building | 51,864,430 | 39 years | 1,329,857 | 997,393 | |||||||||
Ski lift | 24,232,141 | 20 years | 1,211,607 | 908,705 | |||||||||
FF&E | 12,116,071 | 7 years | 1,730,867 | 1,298,150 | |||||||||
Intangible - in place lease | 5,083,476 | 20 years | 254,174 | 190,631 | |||||||||
Total | $ | 201,180,000 | $ | 8,810,401 | $ | 6,607,801 | |||||||
EAGL Golf | Land | $ | 6,811,345 | n/a | $ | — | $ | — | |||||
Land improvements | 30,651,055 | 15 years | 2,043,404 | 1,532,553 | |||||||||
Leasehold interest | 4,378,722 | 40 years | 109,468 | 82,101 | |||||||||
Building | 4,865,247 | 39 years | 124,750 | 93,563 | |||||||||
FF&E | 1,946,099 | 7 years | 278,014 | 208,511 | |||||||||
Intangible - in place lease | 1,045,319 | 20 years | 52,266 | 39,200 | |||||||||
Total | $ | 49,697,787 | $ | 2,607,902 | $ | 1,955,928 | |||||||
Valencia & Talega | Land | $ | 20,057,553 | n/a | $ | — | $ | — | |||||
Land improvements | 26,279,066 | 15 years | 1,751,938 | 1,313,954 | |||||||||
Building | 11,602,915 | 39 years | 297,511 | 223,133 | |||||||||
FF&E | 873,995 | 7 years | 124,856 | 93,642 | |||||||||
Intangible - in place lease | 1,192,187 | 20 years | 59,609 | 44,707 | |||||||||
Total | $ | 60,005,716 | $ | 2,233,914 | $ | 1,675,436 | |||||||
F-8
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
Pro forma adjustments | |||||||||||||
Properties | Assets | Purchase price | Estimated useful life | Year ended December 31, 2005 | Nine months ended September 30, 2006 | ||||||||
Weston Hills | Land | $ | 6,295,258 | n/a | $ | — | $ | — | |||||
Land improvements | 13,980,065 | 15 years | 932,004 | 699,003 | |||||||||
Building | 14,282,281 | 39 years | 366,212 | 274,659 | |||||||||
FF&E | 1,500,893 | 7 years | 214,413 | 160,810 | |||||||||
Intangible - in place lease | 729,929 | 20 years | 36,496 | 27,372 | |||||||||
Total | $ | 36,788,426 | $ | 1,549,125 | $ | 1,161,844 | |||||||
Family Entertainment Centers | Land | $ | 20,539,098 | n/a | $ | — | $ | — | |||||
Land improvements | 6,307,709 | 15 years | 420,514 | 315,386 | |||||||||
Leasehold interest | 360,893 | 25 years | 14,436 | 10,827 | |||||||||
Building | 7,069,609 | 25 years | 282,784 | 212,088 | |||||||||
FF&E | 2,065,081 | 7 years | 295,012 | 221,259 | |||||||||
Intangible - in place lease | 804,815 | 20 years | 40,241 | 30,181 | |||||||||
Total | $ | 37,147,205 | $ | 1,052,987 | $ | 789,741 | |||||||
Bear Creek | Land improvements | $ | 6,830,587 | 15 years | $ | 455,372 | $ | 308,960 | |||||
Leasehold interest | 2,679,821 | 80 years | 33,498 | 19,017 | |||||||||
Building | 1,091,471 | 39 years | 27,986 | 18,380 | |||||||||
FF&E | 951,416 | 7 years | 135,917 | 88,368 | |||||||||
Intangible - in place lease | 235,133 | 20 years | 11,757 | 8,817 | |||||||||
Total | $ | 11,788,428 | $ | 664,530 | $ | 443,542 | |||||||
Gatlinburg Sky Lift | Leasehold interest | $ | 19,674,026 | 48 years | $ | 403,782 | $ | — | |||||
Building | 162,700 | 39 years | 4,060 | — | |||||||||
FF&E | 1,133,400 | 7 years | 150,896 | — | |||||||||
Total | $ | 20,970,126 | $ | 558,738 | $ | — | |||||||
Cypress Mountain | Permit rights | $ | 16,910,433 | 28 years | $ | 603,944 | $ | 63,532 | |||||
Building | 597,364 | 28 years | 21,334 | 7,124 | |||||||||
Ski lifts | 7,213,576 | 20 years | 360,679 | 93,439 | |||||||||
FF&E | 3,884,233 | 7 years | 554,890 | — | |||||||||
Intangible - in place lease | 838,953 | 20 years | 41,948 | 14,068 | |||||||||
Total | $ | 29,444,559 | $ | 1,582,795 | $ | 178,163 | |||||||
Harley-Davidson | Land | $ | 999,127 | n/a | $ | — | $ | — | |||||
Building | 5,650,730 | 39 years | 144,891 | 29,944 | |||||||||
FF&E | 199,392 | 7 years | 28,484 | — | |||||||||
Total | $ | 6,849,249 | $ | 173,375 | $ | 29,944 | |||||||
Hawaiian Falls | Land improvements | $ | 3,123,166 | 15 years | $ | 208,211 | $ | 60,728 | |||||
Leasehold interest | 3,663,072 | 32 years | 114,471 | 32,875 | |||||||||
Building | 1,081,730 | 33 years | 32,780 | 9,140 | |||||||||
FF&E | 5,038,037 | 7 years | 719,720 | 133,858 | |||||||||
Total | $ | 12,906,005 | $ | 1,075,182 | $ | 236,601 | |||||||
F-9
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
Pro forma adjustments | |||||||||||||
Properties | Assets | Purchase price | Estimated useful life | Year ended December 31, 2005 | Nine months ended September 30, 2006 | ||||||||
Palmetto Hall | Land | $ | 37,647 | n/a | $ | — | $ | — | |||||
Land improvements | 3,203,768 | 15 years | 213,585 | — | |||||||||
Building | 4,187,971 | 39 years | 107,384 | — | |||||||||
FF&E | 730,705 | 7 years | 104,386 | — | |||||||||
Total | $ | 8,160,091 | $ | 425,355 | $ | — | |||||||
South Mountain | Land | $ | 3,083,416 | n/a | $ | — | $ | — | |||||
Land improvements | 8,616,186 | 15 years | 574,412 | 315,385 | |||||||||
Building | 1,401,125 | 39 years | 35,926 | 10,876 | |||||||||
FF&E | 385,427 | 7 years | 55,061 | 10,408 | |||||||||
Total | $ | 13,486,154 | $ | 665,399 | $ | 336,669 | |||||||
Bretton Woods | Land | $ | 6,197,305 | n/a | $ | — | $ | — | |||||
Land improvements | 4,523,494 | 15 years | 301,566 | 138,218 | |||||||||
Building | 25,619,552 | 39 years | 656,912 | 300,948 | |||||||||
FF&E | 12,139,312 | 7 years | 1,734,187 | 612,140 | |||||||||
Total | $ | 48,479,663 | $ | 2,692,665 | $ | 1,051,306 | |||||||
The above purchase price allocations are preliminary. The final allocations of purchase price may include other identifiable assets which may have varying estimated lives and could impact the amount of future depreciation or amortization expense.
In addition to the adjustments above, the pro forma adjustments include $120,000 and $160,000 for the amortization of acquisition fees associated with the $12.0 million loan made in connection with the Booth Creek Ski transaction for the nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively.
(8) | Reflects a reduction in interest income due to the decrease in the amount of cash available to invest in interest bearing accounts after the Company’s acquisition of the real estate investment properties. |
(9) | Represents interest expense associated with two promissory notes signed in connection with the acquisition of Bretton Woods. One of the promissory notes bears interest at 5.77% with principal and interest totaling approximately $8.0 million due in June 2010 and the other bears interest at 5.20% with principal and interest of $390,507due in June 2009. |
(10) | The pro forma adjustment represents the Company’s equity in earnings generated from an unconsolidated partnership (“the GW Partnership”) with Great Wolf Resorts, Inc. and affiliates (“Great Wolf”). On October 11, 2005, the Company entered into a joint venture with Great Wolf and formed the GW Partnership that acquired two waterpark resorts: the 309-suite Great Wolf Lodge in Wisconsin Dells, Wisconsin and the 271-suite Great Wolf Lodge in Sandusky, Ohio (the “Great Wolf Properties”), both of which were previously owned and operated by Great Wolf. The Great Wolf Properties were contributed to the GW Partnership from Great Wolf and valued at $114.5 million, excluding transaction costs of approximately $1.3 million. The Company contributed approximately $80.0 million to the GW Partnership for a 70% partnership interest in connection with the transaction and Great Wolf holds the remaining 30% interest in the partnership. |
On March 1, 2006, the GW Partnership obtained previously anticipated debt financing on the properties for $63.0 million. The loan has a seven-year term with payments of interest only for the first three years with a fixed interest rate of 6.08%. The pro forma adjustment for the nine months ended September 30, 2006 represents the effect of interest expense in connection with the debt financing as if it had occurred on January 1, 2005.
F-10
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
The following estimated operating results of the Great Wolf Properties and equity in earnings of the Company are presented as if the investment had been made on January 1, 2005:
Year ended December 31, 2005 | ||||
Revenues (hotel operations)(i) | $ | 36,156,152 | ||
Hotel and property operating expenses(i) | (26,086,952 | ) | ||
Management & license fees(ii) | (2,530,931 | ) | ||
Depreciation and amortization(iii) | (4,261,002 | ) | ||
Interest expense including loan cost amortization of $63,000(iv) | (3,893,400 | ) | ||
Pro forma net loss of the properties | $ | (616,133 | ) | |
Allocation of loss to: | ||||
Great Wolf | $ | (978,302 | ) | |
The Company | 362,169 | |||
Less: amount recognized in historical results | (392,491 | ) | ||
Net pro forma income adjustment | $ | 754,660 | ||
FOOTNOTES:
(i) | Amounts for the pro forma period for the year ended December 31, 2005 are derived from the unaudited combined statement of operations for the year ended December 31, 2005. |
(ii) | A subsidiary of Great Wolf continues to operate the Great Wolf Properties and license the Great Wolf Lodge brand to the venture pursuant to a 25-year management and license agreement. The agreement provides for management fees of 3% and license fees of 3% to be paid based on a percentage of gross revenue. In addition, there is a 1% license fee paid to a third-party. |
(iii) | Depreciation and amortization of long-lived assets is based on the allocation of the base purchase price of the Properties of $114.5 million and closing costs. |
(iv) | Interest expense is based on the debt financing on the properties up to $63.0 million obtained through a third-party lender for a term of seven years with a fixed interest rate of 6.08%. The loan is interest only for the first three years with principal and interest payments thereafter. |
The net cash flows of the GW Partnership are distributed to each partner first to pay preferences on unreturned capital balances and the residual is allocated based on each partners’ respective ownership percentage. The Company records its share of equity in earnings of the GW Partnership using the hypothetical liquidation at book value (“HLBV”) method of accounting. Under the HLBV method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.
F-11
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
(11) | The pro forma adjustment represents the Company’s equity in earnings generated from an unconsolidated partnership (the “DMC Partnership”) with Dallas Market Center Company Ltd. (“DMC”). On January 14, 2005, the Company announced its intent to form the DMC Partnership to acquire, in two phases, interests in certain real estate and related assets at the Dallas Market Center in Dallas, Texas. In the first phase, which occurred on February 14 and March 11, 2005, the DMC Partnership was formed and acquired the Trade Mart, the World Trade Center, Market Hall and surface and garage parking areas at the Dallas Market Center (the “DMC Property”). The DMC Property consists of approximately 4.3 million leaseable square feet of showroom and exhibition space and is leased to Dallas Market Center Operating, L.P., a subsidiary of the existing management company, Market Center Management Company, Ltd., (“MCMC”) which continues to manage the DMC Property. The Company invested approximately $60.0 million in the DMC Partnership, excluding transaction costs, for an 80% equity ownership interest in the DMC Property. |
In phase two of the transaction, which was completed on May 25, 2005, the Company invested an additional $11.2 million in the DMC Partnership, excluding certain transaction costs and fees. Concurrently, the DMC Partnership acquired the International Floral and Gift Center (the “IFGC”) located at the Dallas Market Center. The IFGC consists of approximately 440,000 square feet of wholesale merchandising and exhibition space and is leased to a subsidiary of MCMC which continues to manage the IFGC. The DMC Partnership acquired the IFGC for approximately $31.0 million including the assumption of an existing mortgage loan in the amount of approximately $17.0 million. The Company’s $11.2 million investment represents its 80% equity ownership interest in the IFGC.
The following estimated operating results of the properties owned by the DMC Partnership and the allocation of profits and losses are presented as if the investment had been made on January 1, 2005:
Year ended December 31, 2005 | ||||
Revenue (net rental revenues under triple-net leases) (i) | $ | 25,268,524 | ||
Depreciation and amortization(ii) | (6,977,911 | ) | ||
Interest expense including loan cost amortization of $150,758(iii) | (9,710,168 | ) | ||
Pro forma net income of the DMC Property and IFGC | $ | 8,580,445 | ||
Allocation of income to: | ||||
DMC | $ | 561,642 | ||
The Company | 8,018,803 | |||
Less: amount recognized in historical results | (6,710,816 | ) | ||
Net pro forma income adjustment | $ | 1,307,987 | ||
FOOTNOTES:
(i) | Amounts for the pro forma period ended December 31, 2005 are derived from the audited combined statement of operations for the period from February 14, 2005 through December 31, 2005 and were annualized as if the investment had been made on January 1, 2005. |
(ii) | Depreciation and amortization of long-lived assets for the year ended December 31, 2005, is based on the audited combined statement of operations depreciated on the straight-line method over each respective useful life. |
(iii) | Interest expense is based on the debt financing on WTC and IFDC in the aggregate approximate amount of $160.0 million obtained through a third-party lender. The term for WTC is for approximately 28 years with a fixed interest rate of 6.037% and monthly principal and interest payment of $889,146. The term for IFDC is for nine years with a fixed interest rate of 5.45% and monthly and principal payment of $110,664. |
F-12
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Statements of Operations(Continued):
Cash flows are distributed to each partner first to pay preferences on unreturned capital balances and the residual is allocated 50% to each partner. The Company records its share of equity in earnings of the DMC Partnership using the HLBV method of accounting. Under the HLBV method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.
(12) | Represents the Company’s share of equity in earnings from its 47.5% investment interest in the Cowboy Partnership in connection with the EAGL Golf acquisition discussed in Note (b) above. The pro forma adjustment is based on historical results as recognized by the previous owner and may not be indicative of future performance. |
(13) | Represents additional amortization of capitalized acquisition fees and debt acquisition fees paid to the Company’s advisor in connection with the Company’s unconsolidated investments. The fees are paid and capitalized upon the sale of shares or incurrence of debt and subsequently allocated to the basis of the investments upon closing. These capitalized fees are amortized over the life of the related underlying assets or debt amortization period. |
(14) | Historical earnings per share were calculated based upon the actual weighted average number of shares of common stock outstanding during the respective pro forma periods presented. The pro forma earnings per share were calculated assuming that proceeds from the sale of shares were sufficient to fund the acquisitions at the beginning of the pro forma periods and that those shares of common stock were outstanding for the entire pro forma periods presented. |
F-13
Table of Contents
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2006 | December 31, 2005 | |||||||
ASSETS | ||||||||
Real estate investment properties under operating leases, net | $ | 148,881,005 | $ | 20,952,902 | ||||
Investments in unconsolidated entities | 178,177,539 | 207,150,838 | ||||||
Mortgages and other notes receivable | 54,139,185 | 3,171,083 | ||||||
Cash | 176,685,210 | 93,804,681 | ||||||
Restricted cash | 619,703 | — | ||||||
Short-term investment | 8,000,000 | — | ||||||
Accounts and other receivables | 2,250,532 | 72,715 | ||||||
Distributions receivable from unconsolidated entities | 2,940,660 | 4,873,746 | ||||||
Prepaid expenses and other assets | 11,150,555 | 6,769,142 | ||||||
Total Assets | $ | 582,844,389 | $ | 336,795,107 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Due to affiliates | $ | 9,354,008 | $ | 7,057,233 | ||||
Line of credit | 8,396,184 | 4,503,563 | ||||||
Notes payable | 6,837,892 | — | ||||||
Security deposits | 3,050,449 | — | ||||||
Accounts payable and accrued expenses | 1,113,524 | 602,481 | ||||||
Total Liabilities | 28,752,057 | 12,163,277 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value per share | — | — | ||||||
Excess shares, $.01 par value per share | — | — | ||||||
Common stock, $.01 par value per share | 650,697 | 379,784 | ||||||
Capital in excess of par value | 565,796,837 | 329,620,995 | ||||||
Accumulated earnings | 20,795,843 | 5,900,168 | ||||||
Accumulated distributions | (32,759,455 | ) | (11,269,117 | ) | ||||
Accumulated other comprehensive loss | (391,590 | ) | — | |||||
554,092,332 | 324,631,830 | |||||||
Total Liabilities and Stockholders’ Equity | $ | 582,844,389 | $ | 336,795,107 | ||||
See accompanying notes to condensed consolidated financial statements.
F-14
Table of Contents
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue: | ||||||||||||||||
Rental income from operating leases | $ | 4,705,241 | $ | — | $ | 7,529,142 | $ | — | ||||||||
Interest income on mortgages and other notes receivable | 1,873,594 | 1,417 | 3,955,014 | 1,417 | ||||||||||||
Total revenue | 6,578,835 | 1,417 | 11,484,156 | 1,417 | ||||||||||||
Expenses: | ||||||||||||||||
Asset management fees to advisor | 1,414,788 | 811,193 | 3,634,063 | 1,802,145 | ||||||||||||
General and administrative | 1,945,024 | 800,284 | 4,407,073 | 1,755,042 | ||||||||||||
Depreciation and amortization | 2,542,266 | — | 3,718,961 | — | ||||||||||||
Total expenses | 5,902,078 | 1,611,477 | 11,760,097 | 3,557,187 | ||||||||||||
Operating income (loss) | 676,757 | (1,610,060 | ) | (275,941 | ) | (3,555,770 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Interest and other income | 1,783,266 | 442,126 | 4,941,469 | 799,195 | ||||||||||||
Interest expense and loan cost amortization | (248,288 | ) | (19,647 | ) | (419,601 | ) | (44,163 | ) | ||||||||
Equity in earnings of unconsolidated entities | 3,828,678 | 2,979,572 | 10,649,748 | 7,461,670 | ||||||||||||
Total other income | 5,363,656 | 3,402,051 | 15,171,616 | 8,216,702 | ||||||||||||
Net income | $ | 6,040,413 | $ | 1,791,991 | $ | 14,895,675 | $ | 4,660,932 | ||||||||
Earnings per share of common stock (basic and diluted) | $ | 0.10 | $ | 0.09 | $ | 0.28 | $ | 0.29 | ||||||||
Weighted average number of shares of common stock outstanding (basic and diluted) | 61,073,005 | 21,031,765 | 53,077,692 | 15,944,406 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
F-15
Table of Contents
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2006 and Year Ended December 31, 2005
(UNAUDITED)
Common Stock | |||||||||||||||||||||||||||||||
Number of Shares | Par Value | Capital in Excess of Par Value | Accumulated Earnings | Accumulated Distributions | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Comprehensive Income (Loss) | ||||||||||||||||||||||||
Balance at December 31, 2004 | 8,838,978 | $ | 88,390 | $ | 76,719,939 | $ | (683,263 | ) | $ | (1,172,688 | ) | $ | — | $ | 74,952,378 | ||||||||||||||||
Subscriptions received for common stock through public offering and reinvestment plan | 29,163,572 | 291,636 | 290,881,372 | — | — | 291,173,008 | |||||||||||||||||||||||||
Redemption of common stock | (24,193 | ) | (242 | ) | (229,592 | ) | — | — | (229,834 | ) | |||||||||||||||||||||
Stock issuance and offering costs | — | — | (37,750,724 | ) | — | — | (37,750,724 | ) | |||||||||||||||||||||||
Net income | — | — | — | 6,583,431 | — | — | 6,583,431 | ||||||||||||||||||||||||
Distributions, declared and paid ($0.5354 per share) | — | — | — | — | (10,096,429 | ) | — | (10,096,429 | ) | ||||||||||||||||||||||
Balance at December 31, 2005 | 37,978,357 | $ | 379,784 | $ | 329,620,995 | $ | 5,900,168 | $ | (11,269,117 | ) | $ | — | $ | 324,631,830 | |||||||||||||||||
Subscriptions received for common stock through public offering and reinvestment plan | 27,214,176 | 272,141 | 271,446,519 | — | — | 271,718,660 | |||||||||||||||||||||||||
Redemption of common stock | (122,802 | ) | (1,228 | ) | (1,163,018 | ) | — | — | (1,164,246 | ) | |||||||||||||||||||||
Stock issuance and offering costs | (34,107,659 | ) | — | — | (34,107,659 | ) | |||||||||||||||||||||||||
Net income | — | — | — | 14,895,675 | — | 14,895,675 | $ | 14,895,675 | |||||||||||||||||||||||
Distributions, declared and paid ($0.4147 per share) | — | — | — | — | (21,490,338 | ) | — | (21,490,338 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (391,590 | ) | (391,590 | ) | (391,590 | ) | ||||||||||||||||||||
Total comprehensive income | $ | 14,504,085 | |||||||||||||||||||||||||||||
Balance at September 30, 2006 | 65,069,731 | $ | 650,697 | $ | 565,796,837 | $ | 20,795,843 | $ | (32,759,455 | ) | $ | (391,590 | ) | $ | 554,092,332 | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
F-16
Table of Contents
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Increase (decrease) in cash: | ||||||||
Operating activities: | ||||||||
Net cash provided by operating activities | $ | 21,135,321 | $ | 1,136,796 | ||||
Investing activities: | ||||||||
Acquisition of real estate | (119,239,877 | ) | — | |||||
Investments in unconsolidated entities | (14,719,858 | ) | (73,503,837 | ) | ||||
Distribution of loan proceeds from unconsolidated entity | 43,702,314 | — | ||||||
Investments in mortgage loan receivable, net of repayment | (48,800,000 | ) | (3,000,000 | ) | ||||
Decrease in deposits on properties | 100,000 | — | ||||||
Acquisition fees and costs | (11,992,914 | ) | (13,111,916 | ) | ||||
Short-term investment | (8,000,000 | ) | — | |||||
Increase in restricted cash | (619,703 | ) | — | |||||
Net cash used in investing activities | (159,570,038 | ) | (89,615,753 | ) | ||||
Financing activities: | ||||||||
Subscriptions received from stockholders | 271,718,660 | 160,387,575 | ||||||
Redemptions | (1,164,246 | ) | — | |||||
Stock issuance costs | (31,112,193 | ) | (19,771,024 | ) | ||||
Borrowings under line of credit, net of payments | 3,892,621 | 2,784,299 | ||||||
Payment of loan costs | (137,668 | ) | (38,050 | ) | ||||
Distributions to stockholders | (21,490,338 | ) | (6,092,865 | ) | ||||
Net cash provided by financing activities | 221,706,836 | 137,269,935 | ||||||
Effect of exchange rate fluctuation on cash | (391,590 | ) | — | |||||
Net increase in cash | 82,880,529 | 48,790,978 | ||||||
Cash at beginning of period | 93,804,681 | 36,710,117 | ||||||
Cash at end of period | $ | 176,685,210 | $ | 85,501,095 | ||||
Supplemental disclosure of non-cash investing activities: | ||||||||
Amounts incurred but not paid (included in due to affiliates): | ||||||||
Acquisition fees and costs | $ | 867,267 | $ | — | ||||
Allocation of acquisition fees to real estate investments | $ | 4,949,610 | $ | — | ||||
Allocation of acquisition fees to mortgages and other notes payable | $ | 2,072,000 | $ | — | ||||
Allocation of acquisition fees to investments in unconsolidated entities | $ | — | $ | 3,583,567 | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Amounts incurred but not paid (included in due to affiliates): | ||||||||
Offering and stock issuance costs | $ | 1,336,185 | $ | 1,640,481 | ||||
Redemption of stock received but not paid | $ | — | $ | 229,834 | ||||
See accompanying notes to condensed consolidated financial statements.
F-17
Table of Contents
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
1. | Organization and Nature of Business: |
CNL Income Properties, Inc. (the “Company”) was organized in Maryland on August 11, 2003. The Company operates and has elected to be taxed as a real estate investment trust (a “REIT”) for federal income tax purposes. Various wholly-owned subsidiaries have been and will be formed by the Company for the purpose of acquiring and owning direct or indirect interests in real estate. The Company was formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20-years, plus multiple renewal options), triple-net or gross basis to tenants or operators who are significant industry leaders. To a lesser extent, the Company also leases properties to taxable REIT subsidiary (“TRS”) tenants and engages independent third-party managers to operate those properties. The asset classes in which the Company is most likely to invest or has invested include the following:
• | Property leased to dealerships |
• | Campgrounds or recreational vehicle (“RV”) parks |
• | Health clubs |
• | Parking lots |
• | Merchandise marts |
• | Destination retail and entertainment centers |
• | Marinas |
• | Ski resorts, including real estate in and around ski resorts such as ski-in/ski-out alpine villages, lodging and other related properties |
• | Golf courses and golf resorts, including real estate in and around golf courses |
• | Amusement parks, waterparks and family entertainment centers, which may include lodging facilities |
• | Real estate in and around lifestyle communities |
• | Vacation ownership interests |
• | Other attractions, such as sports-related venues, and cultural facilities such as visual and performing arts centers, zoological parks or aquariums. |
The Company may also make or acquire loans (mortgage, mezzanine and other loans) or other permitted investments related to interests in real estate and may purchase equity and other interests in financings. In addition, the Company may invest up to 10% of its assets in businesses that provide services, or are otherwise ancillary, to the types of properties in which it is permitted to invest. As of September 30, 2006, the Company has invested in retail and commercial properties at seven resort villages, one merchandise mart, two waterpark resorts, two outdoor waterparks, three golf courses, one dealership, one sky lift attraction, two ski properties and has three outstanding loans.
2. | Significant Accounting Policies: |
Basis of Presentation –The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim period presented. Operating results for the quarter and nine months ended September 30, 2006 may not be indicative of the results that may be expected for the year ending December 31, 2006. Amounts as of December 31, 2005 included in the condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date, but do not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2005.
F-18
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
2. | Significant Accounting Policies(Continued): |
Principles of Consolidation –The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and entities in which the Company has a controlling interest in accordance with the provisions of Statement of Position 78-9 “Accounting for Investments in Real Estate Ventures” (“SOP 78-9”) and Emerging Issues Task Force Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”), or is the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46”). All significant intercompany balances and transactions have been eliminated in consolidation.
Investment in Unconsolidated Entities –The equity method of accounting is applied with respect to investments in entities in which the Company has determined that consolidation is not appropriate under FIN 46, SOP 78-9 or EITF 04-5. The difference between the Company’s carrying amount of its investments in unconsolidated entities and the underlying equity in the net assets of the entities is due to acquisition fees and expenses paid to affiliates which have been allocated to the Company’s investment. These amounts are amortized over the estimated useful life of the underlying real estate tangible assets when the properties were acquired. The Company records its equity in earnings of the entities under the hypothetical liquidation at book value method of accounting. Under this method, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.
Allocation of Purchase Price for Acquisition of Properties –The Company allocates the purchase price of properties to tangible and intangible assets acquired and liabilities assumed as provided by Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations.” For each acquisition, the Company assesses the value of the land, the as-if vacant building, equipment and intangible assets, including in-place lease origination costs, and the above or below market lease values based on their estimated fair values. The values determined are based on independent appraisals, discounted cash flow models and our estimates reflecting the facts and circumstances of each acquisition.
Real Estate Investment Properties –Real estate properties are generally comprised of land, buildings and improvements, leasehold interests, and equipment and are recorded at historical cost. Depreciation is computed using the straight-line method of accounting over the estimated useful lives of the related assets. Buildings and improvements are depreciated over the lesser of 39 years or the remaining life of the ground lease including renewal options and leasehold interests and equipment are depreciated over their estimated useful lives. When the properties or equipment are sold, the related cost and accumulated depreciation will be removed from the accounts and any gain or loss from sale will be reflected in the Company’s results of operations.
Intangible Assets –Amortization of intangible assets, such as in-place leases and above and below market leases, are computed using the straight-line method of accounting over the lease term. Intangible assets with indefinite lives are not amortized. Intangible assets have been included in prepaid expenses and other assets in the accompanying unaudited condensed consolidated balance sheet and totaled approximately $1.1 million as of September 30, 2006. Amortization expense related to intangible assets was $17,393 during the nine months ended September 30, 2006.
Asset Retirement Obligation –In accordance with SFAS No. 143, “Asset Retirement Obligations”, the Company records the fair value of the liability for an asset retirement obligation to the extent it is estimatable in the period in which it is acquired with a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement costs included in the carrying amount of the related asset are depreciated over the estimated useful life of the related asset.
Lease Accounting – The Company’s leases are accounted for under the provisions of SFAS No. 13, “Accounting for Leases,” and have been accounted for as operating leases. This statement requires management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant.
F-19
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
2. | Significant Accounting Policies(Continued): |
Restricted Cash – Certain amounts of cash are restricted to fund capital expenditures for the Company’s real estate investment properties. The Company’s restricted cash balances as of September 30, 2006 and December 31, 2005 were $619,703 and zero dollars, respectively.
Short-Term Investment –The Company holds a certificate of deposit that earns interest at a rate of 5.189% and matures on April 20, 2007. The certificate secures a letter of credit which is pledged as collateral for a note payable as described in Note 8. The Company did not have any short-term investments at December 31, 2005.
Distributions Receivable –In accordance with the partnership agreements governing the unconsolidated entities in which the Company has invested, at the end of each quarter the partner distributions are calculated for the period and the partnership is obligated to make those distributions generally within 45 days after the quarter end. As such, the Company has recorded its share of the distributions receivable from its unconsolidated entities.
Mortgages and Other Notes Receivable –Mortgages and other notes receivable are recorded at the lower of cost or market. Whenever future collection of a specific note appears doubtful, a valuation allowance will be established. The allowance represents the difference between the carrying value and the amount expected to be received. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in impairments and provisions on assets. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan, including an impaired loan, is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that collection of interest is doubtful. Subsequent interest is recorded as income when collected. At this time the Company has not established a valuation allowance on its loans as collection is expected to occur.
Loan origination and other fees received by the Company in connection with making the loans are recorded as a reduction of the note receivable and amortized into interest income over the initial term of the loan. The Company records acquisition fees incurred in connection with making the loans as part of the mortgages and other notes receivable balance and amortizes the amounts as a reduction of interest income over the term of the notes.
Reclassifications –Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation.
New Accounting Pronouncements – In July 2006, the FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, “Accounting for Income Taxes”. The interpretation clearly excludes income tax positions related to FASB Statement No. 5, “Accounting for Contingencies.” The Company will adopt the provisions of this statement beginning in the first quarter of 2007. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings on January 1, 2007. The Company does not anticipate that the adoption of this statement will have a material effect on the Company’s financial position or results of operations.
F-20
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
3. | Real Estate Investment Properties: |
During the nine months ended September 30, 2006, the Company acquired the following real estate investment properties and entered into long-term triple-net leases with third-party tenants:
Property | Location | Date of Acquisition | Purchase Price | ||||
Hawaiian Falls Waterparks | Garland and The Colony, Texas | 4/21/06 | $ | 12,125,000 | |||
Route 66 Harley-Davidson Dealership | Tulsa, Oklahoma | 4/27/06 | 6,500,000 | ||||
Palmetto Hall Plantation Club | Hilton Head, South Carolina | 4/27/06 | 7,600,000 | ||||
Cypress Mountain Ski Area | Vancouver, British Columbia | 5/30/06 | 27,500,000 | ||||
Raven Golf Club at South Mountain | Phoenix, Arizona | 6/09/06 | 12,750,000 | ||||
Bretton Woods Mountain Resort | Bretton Woods, New Hampshire | 6/23/06 | 45,000,000 | ||||
Bear Creek Golf Course | Dallas, Texas | 9/08/06 | 11,100,000 | ||||
Total | $ | 122,575,000 | |||||
As of September 30, 2006 and December 31, 2005, real estate investment properties under operating leases consisted of the following:
September 30, 2006 | December 31, 2005 | |||||||
Land & land improvements | $ | 37,027,088 | $ | — | ||||
Leasehold interest | 41,940,296 | 19,674,026 | ||||||
Buildings | 41,639,208 | 162,700 | ||||||
Equipment | 31,993,205 | 1,133,400 | ||||||
Less: accumulated depreciation | (3,718,792 | ) | (17,224 | ) | ||||
$ | 148,881,005 | $ | 20,952,902 | |||||
4. | Investment in Unconsolidated Entities: |
As of September 30, 2006 and December 31, 2005, the Company owned investments in unconsolidated entities accounted for under the equity method of accounting with carrying values totaling approximately $178.2 million and $207.2 million, respectively. The unconsolidated entities are engaged in the business of owning and leasing real estate. The Company contributed approximately $11.8 million to the DMC Partnership during the nine months ended September 30, 2006 for the expansion of the DMC property as further discussed in Note 12. Additionally, during the nine months ended September 30, 2006, the Company received a distribution of approximately $43.7 million representing its share of proceeds from the $63.0 million debt financing obtained by the Wolf Partnership. As of September 30, 2006 and December 31, 2005, the Company had distributions receivable of approximately $2.9 million and $4.9 million, respectively from its unconsolidated entities.
F-21
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
4. | Investment in Unconsolidated Entities(Continued): |
Under the hypothetical liquidation at book value method of accounting, the Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. The following presents the condensed financial information for the unconsolidated entities for the quarter and nine months ended September 30, 2006 and 2005 (in thousands):
Quarter Ended September 30, 2006 | ||||||||||||||||
Wolf Partnership | DMC Partnership | Intrawest Venture | Total | |||||||||||||
Revenue | $ | 11,621 | $ | 6,585 | $ | 3,900 | $ | 22,106 | ||||||||
Property operating expenses | (8,050 | ) | (172 | ) | (2,015 | ) | (10,237 | ) | ||||||||
Depreciation & amortization expenses | (1,676 | ) | (1,942 | ) | (1,358 | ) | (4,976 | ) | ||||||||
Interest expense & loan cost amortization | (1,015 | ) | (2,096 | ) | (1,404 | ) | (4,515 | ) | ||||||||
Interest and other income | 4 | 5 | 129 | 138 | ||||||||||||
Net income (loss) | $ | 884 | $ | 2,380 | $ | (748 | ) | $ | 2,516 | |||||||
Income (loss) allocable to other venture partners(1) | $ | 269 | $ | (83 | ) | $ | (1,783 | ) | $ | (1,597 | ) | |||||
Income allocable to the Company(1) | $ | 615 | $ | 2,463 | $ | 1,035 | $ | 4,113 | ||||||||
Amortization of capitalized costs | (102 | ) | (120 | ) | (62 | ) | (284 | ) | ||||||||
Equity in earnings of unconsolidated entities | $ | 513 | $ | 2,343 | $ | 973 | $ | 3,829 | ||||||||
Distributions declared to the Company(2) | $ | — | $ | 2,815 | $ | 1,144 | $ | 3,959 | ||||||||
Distributions received by the Company(2) | $ | — | $ | 2,694 | $ | 1,282 | $ | 3,976 | ||||||||
Quarter Ended September 30, 2005 | ||||||||||||||||
Wolf Partnership (3) | DMC Partnership | Intrawest Venture | Total | |||||||||||||
Revenue | $ | — | $ | 6,155 | $ | 4,161 | $ | 10,316 | ||||||||
Property operating expenses | — | (139 | ) | (1,651 | ) | (1,790 | ) | |||||||||
Depreciation & amortization expenses | — | (1,939 | ) | (1,470 | ) | (3,409 | ) | |||||||||
Interest expense & loan cost amortization | — | (2,410 | ) | (1,392 | ) | (3,802 | ) | |||||||||
Interest and other income | — | 1 | 43 | 44 | ||||||||||||
Net income (loss) | $ | — | $ | 1,668 | $ | (309 | ) | $ | 1,359 | |||||||
Loss allocable to other venture partners(1) | $ | — | $ | (347 | ) | $ | (1,449 | ) | $ | (1,796 | ) | |||||
Income allocable to the Company(1) | $ | — | $ | 2,015 | $ | 1,140 | $ | 3,155 | ||||||||
Amortization of capitalized costs | — | (113 | ) | (62 | ) | (175 | ) | |||||||||
Equity in earnings of unconsolidated entities | $ | — | $ | 1,902 | $ | 1,078 | $ | 2,980 | ||||||||
Distributions declared to the Company(2) | $ | — | $ | 2,239 | $ | 1,455 | $ | 3,694 | ||||||||
Distributions received by the Company(2) | $ | — | $ | 1,598 | $ | 861 | $ | 2,459 | ||||||||
F-22
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
4. | Investment in Unconsolidated Entities(Continued): |
Nine Months Ended September 30, 2006 | ||||||||||||||||
Wolf Partnership | DMC Partnership | Intrawest Venture | Total | |||||||||||||
Revenue | $ | 30,832 | $ | 22,243 | $ | 12,206 | $ | 65,281 | ||||||||
Property operating expenses | (23,641 | ) | (603 | ) | (5,761 | ) | (30,005 | ) | ||||||||
Depreciation & amortization expenses | (4,663 | ) | (5,887 | ) | (4,183 | ) | (14,733 | ) | ||||||||
Interest expense & loan cost amortization | (2,096 | ) | (6,463 | ) | (4,268 | ) | (12,827 | ) | ||||||||
Interest and other income | 61 | 9 | 570 | 640 | ||||||||||||
Net income (loss) | $ | 493 | $ | 9,299 | $ | (1,436 | ) | $ | 8,356 | |||||||
Income (loss) allocable to other venture partners(1) | $ | (309 | ) | $ | 2,258 | $ | (4,927 | ) | $ | (2,978 | ) | |||||
Income allocable to the Company(1) | $ | 802 | $ | 7,041 | $ | 3,491 | $ | 11,334 | ||||||||
Amortization of capitalized costs | (131 | ) | (373 | ) | (180 | ) | (684 | ) | ||||||||
Equity in earnings of unconsolidated entities | $ | 671 | $ | 6,668 | $ | 3,311 | $ | 10,650 | ||||||||
Distributions declared to the Company(2) | $ | 1,535 | $ | 7,963 | $ | 2,729 | $ | 12,227 | ||||||||
Distributions received by the Company(2) | $ | 3,517 | $ | 7,936 | $ | 2,707 | $ | 14,160 | ||||||||
Nine Months Ended September 30, 2005 | ||||||||||||||||
Wolf Partnership (3) | DMC Partnership | Intrawest Venture | Total | |||||||||||||
Revenue | $ | — | $ | 14,555 | $ | 12,050 | $ | 26,605 | ||||||||
Property operating expenses | — | (321 | ) | (4,810 | ) | (5,131 | ) | |||||||||
Depreciation & amortization expenses | — | (4,614 | ) | (4,325 | ) | (8,939 | ) | |||||||||
Interest expense & loan cost amortization | — | (5,727 | ) | (4,290 | ) | (10,017 | ) | |||||||||
Interest and other income | — | 1 | 63 | 64 | ||||||||||||
Net income (loss) | $ | — | $ | 3,894 | $ | (1,312 | ) | $ | 2,582 | |||||||
Loss allocable to other venture partners(1) | $ | — | $ | (614 | ) | $ | (4,693 | ) | $ | (5,307 | ) | |||||
Income allocable to the Company(1) | $ | — | $ | 4,508 | $ | 3,381 | $ | 7,889 | ||||||||
Amortization of capitalized costs | — | (291 | ) | (136 | ) | (427 | ) | |||||||||
Equity in earnings of unconsolidated entities | $ | — | $ | 4,217 | $ | 3,245 | $ | 7,462 | ||||||||
Distributions declared to the Company(2) | $ | — | $ | 4,508 | $ | 3,382 | $ | 7,890 | ||||||||
Distributions received by the Company(2) | $ | — | $ | 2,269 | $ | 2,153 | $ | 4,422 | ||||||||
FOOTNOTES:
(1) | Income is allocated to the Company under the hypothetical liquidation at book value method of accounting. |
(2) | The Company receives interest payments from a loan made to the Intrawest Venture in connection with two Canadian properties. These payments are reflected as distributions received from unconsolidated entities. The amount excludes the capital distribution of approximately $43.7 million from the Wolf Partnership during the nine months ended September 30, 2006 as discussed above. |
(3) | The Wolf Partnership was formed in October 2005 and accordingly did not have operations during the quarter and nine months ended September 30, 2005. |
F-23
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
4. | Investment in Unconsolidated Entities(Continued): |
The following presents the condensed financial information for the unconsolidated entities as of September 30, 2006 and December 31, 2005 (in thousands):
As of September 30, 2006 | |||||||||||||||
Wolf Partnership | DMC Partnership | Intrawest Venture | Total | ||||||||||||
Real estate assets, net | $ | 111,195 | $ | 249,280 | $ | 107,391 | $ | 467,866 | |||||||
Intangible assets, net | 562 | 11,043 | 3,446 | 15,051 | |||||||||||
Other assets | 6,589 | 8,479 | 7,385 | 22,453 | |||||||||||
Mortgages and other notes payable | 63,000 | 154,439 | 79,914 | 297,353 | |||||||||||
Other liabilities | 6,028 | 4,454 | 7,465 | 17,947 | |||||||||||
Partners’ capital | 49,318 | 109,909 | 30,843 | 190,070 | |||||||||||
Difference between carrying amount of investment and the Company’s share of partners’ capital | 2,718 | 5,928 | 3,241 | 11,887 | |||||||||||
Carrying amount of investment(1) | 37,481 | 95,698 | 44,999 | 178,178 | |||||||||||
Percentage of ownership at end of reporting period | 70.0 | % | 80.0 | % | 80.0 | % | |||||||||
As of December 31, 2005 | |||||||||||||||
Wolf Partnership | DMC Partnership | Intrawest Venture | Total | ||||||||||||
Real estate assets, net | $ | 101,485 | $ | 238,969 | $ | 110,128 | $ | 450,582 | |||||||
Intangible assets, net | 689 | 11,286 | 4,138 | 16,113 | |||||||||||
Other assets | 18,710 | 4,217 | 5,727 | 28,654 | |||||||||||
Mortgages and other notes payable | — | 156,389 | 79,504 | 235,893 | |||||||||||
Other liabilities | 9,284 | 3,953 | 6,886 | 20,123 | |||||||||||
Partners’ capital | 111,600 | 94,130 | 33,603 | 239,333 | |||||||||||
Difference between carrying amount of investment and the Company’s share of partners’ capital | 1,437 | 6,278 | 3,376 | 11,091 | |||||||||||
Carrying amount of investment(1) | 79,557 | 83,419 | 44,175 | 207,151 | |||||||||||
Percentage of ownership at end of reporting period | 70.0 | % | 80.0 | % | 80.0 | % |
FOOTNOTES:
(1) | The carrying amount of the Company’s investment includes a loan made to the Intrawest Venture in connection with two Canadian properties. |
F-24
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
5. | Offerings and Stock Issuance Costs: |
On April 16, 2004, the Company began the offering and sale of up to $2.0 billion in common stock (200 million shares of common stock at $10.00 per share) (the “1st Offering”), pursuant to a registration statement on Form S-11 under the Securities Act of 1933. On March 31, 2006, the 1st Offering was terminated, and on April 4, 2006, the Company commenced a second offering for sale of up to $2.0 billion in common stock (200 million shares of common stock at $10.00 per share) (the “2nd Offering”), pursuant to a registration statement on Form S-11 under the Securities Act of 1933. The 2nd Offering is expected to continue until April 2008 unless terminated earlier. The Company incurs costs in connection with the offerings and issuance of shares, including filing fees, legal, accounting, printing, selling commissions, marketing support fees, due diligence expense reimbursements and escrow fees, which are deducted from the gross proceeds of the offerings. As of September 30, 2006, the Company has raised approximately $649.6 million in proceeds and incurred stock issuance costs of approximately $83.1 million in connection with the offerings.
6. | Mortgages and Other Notes Receivable: |
On August 14, 2006, the Company received repayment of principal and interest on a $3.0 million mortgage loan from Consolidated Conversion, LLC. As of September 30, 2006, the Company has the following loans outstanding:
Borrower and Description of Property | Date of Loan Agreement | Maturity | Interest Rate | Loan Principal Amount | Accrued Interest | ||||||||
Plaza Partners, LLC (hotel conversion) | 2/28/2006 | 2/28/2007 | 15.0 | %(1) | $ | 16,800,000 | $ | 122,500 | |||||
Mizner Court Holdings, LP (condominium conversion) | 3/10/2006 | 11/9/2007 | LIBOR 7.0 | + %(2) | $ | 15,000,000 | $ | 113,025 | |||||
Shorefox Development, LLC (lifestyle community development) | 3/13/2006 | 3/10/2009 | 13.5 | %(3) | $ | 20,000,000 | $ | — |
FOOTNOTES:
(1) | Pursuant to the loan agreement, the loan requires monthly interest payments based on an annual percentage rate of 8.75% with the remaining 6.25% becoming due and payable upon the loan’s maturity. The term of the loan may be extended by the borrower for up to two additional six-month periods. The loan is collateralized by a first mortgage on the property. |
(2) | The loan was purchased from Column Financial, Inc., as former lender, to Mizner Court Holdings, LP. Mizner Court Holdings, LP is a partnership owned by a subsidiary of GE Capital called GEBAM, Inc. and by Stoltz Mizner Court, LP. The mezzanine loan is collateralized by a pledge of all the partnership interests in Mizner Court, LP and is guaranteed as to interest payments and as to completion by Morris L. Stoltz II. |
(3) | Pursuant to the loan agreement, the Company agreed to provide financing up to $40.0 million in connection with the development of the infrastructure of an Orvis-branded lifestyle community in Granby, Colorado. As of September 30, 2006, the Company had advanced $20.0 million. The loan requires interest payments based on an annual interest rate of 9.5% paid monthly with the remaining 4.0% becoming due and payable upon the loan’s maturity. The term of the loan may be extended by the borrower up to 12 months. The loan may not be prepaid during the first year. The loan is collateralized by a first mortgage on a portion of the Granby property. The loan is personally guaranteed by the principals of Shorefox Development, LLC until $10.0 million in infrastructure is completed. Loan origination fees of $400,000 were paid to the Company in connection with making this loan. This amount was recorded as a reduction in the value of the note receivable on the accompanying condensed consolidated balance sheet and is being amortized into interest income over the initial term of the loan. |
F-25
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
6. | Mortgages and Other Notes Receivable(Continued): |
The Company records acquisition fees incurred in connection with making the loans as part of the mortgages and other notes receivable balance and amortizes the amounts as a reduction of interest income over the term of the notes. As of September 30, 2006 and December 31, 2005, acquisition fees, net of accumulated amortization, were $1,364,677 and $100,000, respectively and loan origination costs, net of accumulated amortization, were $325,323 and zero, respectively. The deferred portion of interest receivable as of September 30, 2006 and December 31, 2005, totaling $1,064,306 and $49,833, respectively, is also included in the mortgages and other notes receivable balance.
7. | Line of Credit: |
On March 24, 2006, the Company obtained a $20.0 million revolving line of credit from Colonial Bank, N.A. The line of credit replaced a previously existing $5.0 million line of credit obtained from Branch Banking & Trust Company and is used for working capital , to temporarily fund distributions to stockholders and to bridge financing on real estate investments. The line of credit is unsecured and bears interest at a rate of 30-day LIBOR (approximately 5.32% on September 29, 2006) plus 2.25%. The line of credit has a term of two years with monthly payments of interest only and principal due at maturity on March 24, 2008. As of September 30, 2006, borrowings outstanding under the line of credit were approximately $8.4 million. The balance outstanding on the previous line of credit at December 31, 2005 was approximately $4.5 million. The terms of the line of credit require the Company to meet certain customary financial covenants and ratios including (a) a total permanent debt to total assets ratio of no more than 65%, (b) a tangible net worth of no less than $200.0 million and (c) a ratio of distributions to funds from operations of no more than 110%. The Company was in compliance with these covenants at September 30, 2006. Additionally, the Company is required to maintain a zero balance on the line of credit for a 30-day period during the first quarter of each year beginning in 2007.
8. | Notes Payable: |
As of September 30, 2006 the Company had the following notes payable:
Description | Principal | Interest Rate | Terms | |||||
Note payable to seller in connection with the acquisition of Bretton Woods | $ | 6,500,000 | 5.77 | % | All principal and interest due on June 19, 2010. The Company has obtained a letter of credit collateralized by an $8.0 million certificate of deposit. | |||
Note payable to seller in connection | $ | 337,892 | 5.20 | % | All principal and interest due on June 19, 2009. |
9. | Related Party Arrangements: |
Certain directors and officers of the Company hold similar positions with CNL Income Corp., which is both a stockholder of the Company and its advisor, and CNL Securities Corp., which is the managing dealer for the Company’s public offering. The Company’s chairman of the board indirectly owns a controlling interest in the parent company of the advisor. These affiliates receive fees and compensation in connection with the Company’s stock offerings and the acquisition, management and sale of the Company’s assets.
F-26
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
9. | Related Party Arrangements(Continued): |
During the quarters and nine months ended September 30, 2006 and 2005, CNL Securities Corp. earned fees and incurred reimbursable expenses as follows:
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Selling commissions | $ | 5,199,756 | $ | 3,928,204 | $ | 17,790,744 | $ | 10,129,456 | ||||
Marketing support fee & due diligence expense reimbursements | 2,228,467 | 1,511,829 | 7,229,713 | 3,907,693 | ||||||||
Total | $ | 7,428,223 | $ | 5,440,033 | $ | 25,020,457 | $ | 14,037,149 | ||||
The managing dealer is entitled to selling commissions of up to 6.5% and 7.0% of gross offering proceeds and marketing support fees of 2.5% and 3.0% of gross offering proceeds, in connection with the 1st and 2nd Offerings, respectively, as well as actual expenses of up to 0.10% incurred in connection with due diligence. A substantial portion of the selling commissions and marketing support fees and all of the due diligence expenses are reallowed to third-party participating broker dealers.
During the quarters and nine months ended September 30, 2006 and 2005, the advisor and its affiliates earned fees and incurred reimbursable expenses as follows:
Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Acquisition fees(1): | ||||||||||||
Acquisition fees from offering proceeds | $ | 2,196,600 | $ | 1,857,935 | $ | 8,076,989 | $ | 4,814,081 | ||||
Acquisition fees from debt proceeds | — | 38,049 | 1,323,000 | 4,946,948 | ||||||||
Total | 2,196,600 | 1,895,984 | 9,399,989 | 9,761,029 | ||||||||
Asset management fees(2): | 1,414,788 | 811,193 | 3,634,063 | 1,802,145 | ||||||||
Reimbursable expenses (3): | ||||||||||||
Offering costs (4) | 1,106,663 | 4,628,079 | 9,087,202 | 8,602,835 | ||||||||
Acquisition costs | 795,148 | 498,579 | 2,148,156 | 1,077,662 | ||||||||
Operating expenses (reimbursements) | 563,783 | 303,945 | 934,837 | 784,536 | ||||||||
Total | 2,465,594 | 5,430,603 | 12,170,195 | 10,465,033 | ||||||||
Total fees earned and reimbursable expenses | $ | 6,076,982 | $ | 8,137,780 | $ | 25,204,247 | $ | 22,028,207 | ||||
FOOTNOTES:
(1) | Acquisition fees for services in the selection, purchase, development or construction of real property, generally equal to 3.0% of gross offering proceeds, and 3.0% of loan proceeds for services in connection with the incurrence of debt. |
(2) | Asset management fees are 0.08334% per month of the Company’s “real estate asset value,” as defined in the Company’s prospectus dated April 4, 2006 and the outstanding principal amount of any mortgage loan as of the end of the preceding month. |
(3) | The advisor and its affiliates are entitled to reimbursement of certain expenses incurred on behalf of the Company in connection with the Company’s organization, offering, acquisition, and operating activities. Pursuant to the advisory agreement, the Company will not reimburse the advisor any amount by which total operating expenses paid or incurred by the Company exceed the greater of 2.0% of average invested assets or 25.0% of net income (the “Expense Cap”) in any expense year as defined in the advisory agreement. For the expense year ended September 30, 2006, operating expenses did not exceed the Expense Cap. |
(4) | In accordance with the Company’s amended and restated articles of incorporation, the total amount of certain offering, organizational and stock issuance costs that the Company pays may not exceed 13% of the aggregate offering proceeds. As of December 31, 2005, approximately $4.6 million in offering costs had been incurred in excess of the 13% limitation that subsequently became payable within the 13% cap as offering proceeds were received during the nine months ended September 30, 2006. |
F-27
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
9. | Related Party Arrangements(Continued): |
Amounts due to affiliates for fees and expenses described above are as follows:
September 30, 2006 | December 31, 2005 | |||||
Due to the advisor and its affiliates: | ||||||
Offering expenses | $ | 5,986,184 | $ | 3,136,789 | ||
Asset management fees | 470,763 | 300,489 | ||||
Operating expenses | 317,722 | 734,970 | ||||
Acquisition fees and expenses | 867,267 | 1,318,983 | ||||
Total | $ | 7,641,936 | $ | 5,491,231 | ||
Due to CNL Securities Corp: | ||||||
Selling commissions | $ | 1,199,037 | $ | 1,131,002 | ||
Marketing support fees and due diligence expense reimbursements | 513,035 | 435,000 | ||||
Total | $ | 1,712,072 | $ | 1,566,002 | ||
Total due to affiliates | $ | 9,354,008 | $ | 7,057,233 | ||
The Company also maintains accounts at a bank in which the Company’s chairman and a member of its board of directors serve as directors and in which CNL Financial Group, an affiliate of the Advisor, is a stockholder. The Company has deposits of approximately $5.0 million at this bank as of September 30, 2006 and zero as of December 31, 2005.
10. | Redemption of Shares: |
During the quarter and nine months ended September 30, 2006, the Company redeemed 61,994 and 122,802 shares for an average price of approximately $9.47 and $9.48 per share for a total of $587,320 and $1.2 million, respectively. As of September 30, 2006, the Company has redeemed a total of 146,995 shares, at an average price of approximately $9.48 per share, for a total of $1.4 million.
11. | Distributions: |
The Company declared and paid distributions of approximately $21.5 million ($0.4147 per share) for the nine months ended September 30, 2006.
For the nine months ended September 30, 2006, approximately 74.9% of the distributions paid to the stockholders were considered ordinary income and approximately 25.1% were considered a return of capital for federal income tax purposes. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the stockholders’ return on their invested capital. The characterization of distributions declared for the quarter and nine months ended September 30, 2006 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2006.
F-28
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
12. | Commitments & Contingencies: |
On October 12, 2005, the Company, through the DMC Partnership with DMC, entered into a memorandum of understanding and a development agreement to develop an approximately 500,000 square foot lighting center expansion (160,000 leasable square feet) at the Dallas Trade Mart (the “Trade Mart Expansion”) at the DMC property. The total construction costs are expected to be approximately $21.3 million. The Company’s total contribution to the DMC Partnership for the Trade Mart Expansion is estimated to be approximately $17.0 million and will be made in accordance with the current partnership structure. As of September 30, 2006, the Company had contributed approximately $15.3 million and its partner had contributed approximately $3.8 million. The remaining costs will be funded over the remainder of the development period. The Trade Mart Expansion is expected to be completed in early 2007 and will be leased to an affiliate of DMC.
As discussed in Note 6, on March 13, 2006, the Company agreed to provide financing to Shorefox Development, LLC up to $40.0 million in connection with the development of the infrastructure of an Orvis-branded lifestyle community in Granby, Colorado. As of September 30, 2006, the Company has advanced $20.0 million to the project and has committed to fund the remaining $20.0 million during the life of the loan.
In connection with the purchase of the resort village property located at Copper Mountain, Colorado, the CNL Retail Village Partnership agreed to pay additional future purchase consideration contingent upon the Copper Mountain property achieving certain levels of financial performance, as specified in the purchase and sale agreement. The amount of the contingent purchase price will be determined as of December 31, 2008, and in no event will it exceed $3.75 million. The Company has guaranteed the payment of the contingent purchase price to Intrawest on behalf of the CNL Retail Village Partnership.
In connection with the purchase of the Wolf Dells property and the Wolf Sandusky property, Great Wolf may receive an additional contingent purchase price of up to $3.0 million per waterpark resort if those properties achieve certain financial performance goals during 2007 and 2008. The amount of contingent purchase price will be determined during those years, and in no event will it exceed a total of $6.0 million for both properties.
The Company has committed to invest approximately $500,000 in improvements to the South Mountain property and $17.5 million for improvements at the Bretton Woods property over the next three years. As of September 30, 2006, the Company has spent approximately $374,000 for improvements at the South Mountain property.
13. | Subsequent Events: |
The Company’s board of directors declared distributions of $0.0483 per share to stockholders of record at the close of business on October 1, 2006. The board of directors also declared a distribution of $0.0492 per share to stockholders of record at the close of business on November 1, 2006. These distributions are to be paid by December 31, 2006.
Subsequent to September 30, 2006, the Company acquired the following real estate investment properties, all of which have been leased on a long-term triple-net lease to third-party tenants:
Property | Location | Date of Acquisition | Purchase Price | ||||
Family Entertainment Centers | 11 locations in various states | 10/06/2006 | $ | 35.0 million | |||
Weston Hills Country Club (1) | Weston, Florida | 10/16/2006 | 35.0 million | ||||
Valencia Country Club(2) | Santa Clarita, California | 10/16/2006 | 39.5 million | ||||
Talega Golf Club(2) | San Clemente, California | 10/16/2006 | 17.5 million | ||||
Total | $ | 127.0 million | |||||
FOOTNOTES:
(1) | Upon closing, the Company leased its interest in the Weston Hills property to an existing subsidiary of Heritage Golf, LLC (“Heritage Golf”) under a triple-net lease with an initial lease term of 20 years. Pursuant to the asset purchase agreement, Heritage Golf may receive a supplemental purchase price payment of up to $5.3 million if the Weston Hill property achieves certain financial performance goals in fiscal year 2009. |
F-29
Table of Contents
CNL INCOME PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
13. | Subsequent Events(Continued): |
(2) | The Company acquired Heritage West Coast, Inc. (“Heritage West Coast”), an entity formed by Heritage Golf that owns two golf courses: the Valencia Country Club, a private golf club located in Santa Clarita, California and Talega Golf Club, a public golf course located in San Clemente, California. In this acquisition, the Company acquired 100% of the outstanding shares of stock in Heritage West Coast, which is treated for US Federal Income Tax purposes as a corporation taxed under Subchapter C, Title 26 U.S.C. (a “C Corp”). As a result, there was determined to be approximately $2,000,000 of “non-REIT” earnings and profits (“E&P”) which will be distributed as taxable income to the Company’s shareholders sometime during January 2007. Due to the nature of the acquisition, the Company inherited Heritage West Coast’s bases in the underlying assets owned by Heritage West Coast. This could result in a contingent taxable gain (“Built-in Gain”) to the Company of approximately $23,000,000 should the assets be sold prior to the end of a mandated holding period of ten years. Upon closing, the Company leased its interest in the golf courses to Heritage Golf Master Lease, LLC, an entity formed by Heritage Golf to operate the golf courses under triple-net leases with an initial lease term of 20 years. Pursuant to the stock purchase agreement, Heritage Golf may receive supplemental purchase price payments of up to $8.6 million in aggregate, for both properties, if the properties achieve certain financial performance goals in fiscal year 2009. |
On October 6, 2006, the Company entered into an agreement for a non-revolving construction line of credit for $20.0 million, including $2.5 million to be set aside as interest reserve, with Colonial Bank, N.A. The line of credit will be used to finance the expansion and improvements to the Bretton Woods Mountain Resort. The non-revolving line of credit is secured by a first real estate mortgage on the Bretton Woods Mountain Resort in New Hampshire and will bear interest at a rate of 30-day LIBOR plus 2.0%, have a term of three years with one one-year extension for a fee and will require monthly payments of interest only and principal due at maturity. The financing is expected to close by the end of fourth quarter 2006.
On October 5, 2006 and October 26, 2006, the Company entered into a commitment for two loans of approximately $16.5 million and $47.2 million with Sun Life Assurance Company of Canada. The $16.5 million loan will be secured by Palmetto Hall Plantation Club, Raven Golf Club at South Mountain and Bear Creek Golf Club and the $47.2 million loan will be secured by Valencia Country Club, Talega Golf Club and Weston Hills Country Club. The loans will bear interest annually, at a fixed rate of 6.18% and 6.33%, respectively, for a term of ten years, with monthly payments of principal and interest based on a 25-year amortization period. Prepayments, on both loans, are prohibited for the first two years after which early repayment is subject to a prepayment fee. The Company has provided deposits of $165,450 and $471,500, respectively, in consideration to these commitments. The loans are expected to close by the end of fourth quarter of 2006.
F-30
Table of Contents
CNL INCOME PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
Initial Costs | Costs Capitalized Subsequent to Acquisition | Gross Amounts at which Carried at Close of Period | Date Acquired | Life on which depreciation in latest income statements is computed | |||||||||||||||||||||||||||||||||||
Description | Leasehold Interest | Buildings | Equipment | Improvements | Carrying Costs | Leasehold Interest | Buildings | Equipment | Total | Accumulated Depreciation | Date of Construction | ||||||||||||||||||||||||||||
Gatlinburg Sky Lift (sky lift attraction) | $ | 19,674,026 | $ | 162,700 | $ | 1,133,400 | $ | — | $ | — | $ | 19,674,026 | $ | 162,700 | $ | 1,133,400 | $ | 20,970,126 | $ | (17,224 | ) | In 1953 | 12/22/2005 | (1) | |||||||||||||||
Gatlinburg, Tennessee | |||||||||||||||||||||||||||||||||||||||
Transactions in real estate and accumulated depreciation during 2005 are as follows: | |||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2005 | $ | — | |||||||||||||||||||||||||||||||||||||
Acquisitions | 20,970,126 | ||||||||||||||||||||||||||||||||||||||
Accumulated depreciation | (17,224 | ) | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2005 | $ | 20,952,902 | |||||||||||||||||||||||||||||||||||||
FOOTNOTES:
(1) | Buildings and improvements are depreciated over 39 years. Leasehold improvements and equipment are depreciation over their estimated useful lives. |
F-31
Table of Contents
CNL INCOME PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE IV – MORTGAGE LOANS ON REAL ESTATE
December 31, 2005
Description | Interest Rate | Final Maturity Date (2) | Periodic Payment Term | Prior Liens | Face Amount of Mortgages | Carrying Amount of Mortgages | Principal Amount of Loans subject to Delinquent Principal or Interest | |||||||||||
Consolidated Conversions, LLC (hotel conversion) | 15.0 annually | % (1) | 4/30/2007 | Monthly interest only payments with a balloon at maturity | n/a | $ | 3,000,000 | $ | 3,000,000 | $ | — |
FOOTNOTES:
(1) | Pursuant to the loan agreement, the loan earns interest at a rate of 15% per year and requires monthly interest payments based on an annual percentage rate of 8.5% with the remaining 6.5% becoming due and payable upon the loan’s maturity. As of December 31, 2005, the receipt of approximately $50,000 in interest income has been deferred until maturity. |
(2) | The loan matures on April 30, 2007 or earlier upon the sale of the condominium hotel units. |
F-32
Table of Contents
INDEX TO OTHER FINANCIAL STATEMENTS
The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s acquiring a ski property from Cypress Recreations, LP. For information regarding this investment and the leases into which the Company has entered, see the “Business - Property Acquisitions.”
Page | ||
Cypress Bowl Recreations, LP | ||
Unaudited Financial Statements as of March 31, 2006 and for Quarters Ended March 31, 2006 and 2005 | ||
F - 37 | ||
F - 38 | ||
F - 39 | ||
F - 40 | ||
Balance Sheets as of December 31, 2005 and 2004 and the related Statements of Income, Partner’s Capital and Accumulated Other Comprehensive Income (Loss), and Cash Flows for the years ended December 31, 2005 and 2004 | ||
F - 42 | ||
F - 43 | ||
F - 44 | ||
Statement of Partner’s Capital and Accumulated Other Comprehensive Income (Loss) | F - 45 | |
F - 46 | ||
F - 47 |
The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s acquisition of the Palmetto Hall Plantation Club golf course property which is leased to a subsidiary of Heritage Golf Group, LLC. For information regarding this investment and the leases into which the Company has entered, see the “Business - Property Acquisitions.”
F-33
Table of Contents
INDEX TO OTHER FINANCIAL STATEMENTS (Continued)
The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s acquisition of the Weston Hills Country Club golf course property from an affiliate of Heritage Golf Group, LLC. For information regarding this investment and the lease into which the Company has entered, see the “Business - Property Acquisitions.”
The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s acquisition of the Heritage Golf Group West Coast, Inc. which owns two golf course properties, the Valencia Country Club and the Talega Golf Club, from an affiliate of Heritage Golf Group, LLC. For information regarding this investment and the leases into which the Company has entered, see the “Business - Property Acquisitions.”
Page | ||
Heritage Golf Group West Coast, Inc. | ||
Unaudited Financial Statements as of September 30, 2006 and for the Nine Months Ended September 30, 2006 and 2005 | ||
F - 107 | ||
F - 108 | ||
F - 109 | ||
F - 110 | ||
F - 111 |
F-34
Table of Contents
INDEX TO OTHER FINANCIAL STATEMENTS (Continued)
Page | ||
Years Ended December 31, 2005 and 2004 | ||
F - 114 | ||
F - 115 | ||
F - 116 | ||
F - 117 | ||
F - 118 | ||
F - 119 |
The following financial information is filed as part of the Prospectus Supplement as a result of the Company’s pending transaction with Booth Creek Ski Holdings, Inc. For information regarding this investment and the leases into which the Company will enter, see the “Business – Pending Investments.”
The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of the Bretton Woods Mountain Resort. For information regarding this investment and the leases into which the Company has entered, see the “Business – Property Acquisitions.”
The Bretton Woods Property | ||
F - 166 |
The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of 11 family entertainment center properties from Trancas Capital LLC. For information regarding this investment and the leases into which the Company has entered, see the “Business – Property Acquisitions.”
Family Entertainment Centers | ||
F - 167 |
F-35
Table of Contents
INDEX TO OTHER FINANCIAL STATEMENTS (Continued)
The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of six golf course properties and a 47.5% partnership interest in a partnership owning an additional golf course property from Evergreen Alliance Golf Limited, LP. For information regarding this investment and the leases into which the Company has entered, see the “Business – Property Acquisitions.”
The EAGL Properties | ||
F - 168 |
F-36
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
UNAUDITED BALANCE SHEET
MARCH 31, 2006 AND DECEMBER 31, 2005
2006 | 2005 | |||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 3,356,912 | $ | 736,509 | ||
Accounts receivable | 70,065 | 142,442 | ||||
Inventories | 94,212 | 209,409 | ||||
Prepaids | 141,689 | 249,372 | ||||
Total current assets | 3,662,878 | 1,337,732 | ||||
PROPERTIES, FACILITIES, AND EQUIPMENT, net | 8,331,795 | 8,524,337 | ||||
DEFERRED TAX ASSET | 57,466 | 57,466 | ||||
OTHER LONG TERM ASSETS | ||||||
Park use permit, net of accumulated amortization | 7,620,486 | 7,689,044 | ||||
Total assets | $ | 19,672,625 | $ | 17,608,579 | ||
LIABILITIES AND PARTNER’S CAPITAL | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable and accrued liabilities | $ | 1,515,200 | $ | 1,621,337 | ||
Current portion of long term obligations and allocated senior debt | — | 117,782 | ||||
Allocated Income tax payable | 1,266,974 | 1,004,986 | ||||
Deferred revenue | 53,268 | 926,098 | ||||
Total current liabilities | 2,835,442 | 3,670,203 | ||||
LONG TERM OBLIGATIONS AND ALLOCATED SENIOR DEBT, net of current portion | 5,135,395 | 4,096,948 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||
PARTNER’S CAPITAL | ||||||
Partner’s contributed capital | 4,736,161 | 4,736,161 | ||||
Retained earnings | 4,475,591 | 2,574,730 | ||||
Accumulated other comprehensive income | 2,490,036 | 2,530,537 | ||||
11,701,788 | 9,841,428 | |||||
$ | 19,672,625 | $ | 17,608,579 | |||
See accompanying notes.
F-37
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
UNAUDITED STATEMENT OF INCOME
QUARTERS ENDED MARCH 31, 2006 AND 2005
2006 | 2005 | |||||||
RESORT AND RETAIL REVENUES | $ | 6,950,852 | $ | 3,934,130 | ||||
RESORT AND RETAIL OPERATIONS | ||||||||
EXPENSE, INCLUDING | ||||||||
DIRECT PAYROLL | 2,783,035 | 1,369,523 | ||||||
UNALLOCATED OPERATING EXPENSES | ||||||||
General and administrative | 402,431 | 252,785 | ||||||
Selling and marketing | 98,426 | 58,898 | ||||||
Depreciation and amortization | 394,147 | 341,034 | ||||||
895,004 | 652,717 | |||||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | (105,378 | ) | (78,788 | ) | ||||
(105,378 | ) | (78,788 | ) | |||||
NET INCOME BEFORE INCOME TAXES | 3,167,435 | 1,833,102 | ||||||
INCOME TAX EXPENSE | 1,266,974 | 733,241 | ||||||
NET INCOME | $ | 1,900,461 | $ | 1,099,861 | ||||
See accompanying notes.
F-38
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
UNAUDITED STATEMENT OF CASH FLOWS
QUARTERS ENDED MARCH 31, 2006 AND 2005
2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,900,461 | $ | 1,099,861 | ||||
Adjustments to reconcile net income to net cash flows from operating activities | ||||||||
Depreciation and amortization | 394,147 | 341,034 | ||||||
Loss on sale of equipment | — | 8,299 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 72,377 | 46,469 | ||||||
Inventories | 115,197 | 24,406 | ||||||
Prepaids | 107,683 | 78,789 | ||||||
Accounts payable and accrued liabilities | (106,137 | ) | (410,472 | ) | ||||
Accrued income taxes | 261,988 | 581,429 | ||||||
Deferred revenue | (872,830 | ) | (1,280,797 | ) | ||||
1,872,886 | 489,018 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of facilities and equipment | (133,047 | ) | — | |||||
(133,047 | ) | — | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net advances to parent | 740,409 | (1,023,831 | ) | |||||
740,409 | (1,023,831 | ) | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 140,155 | (32,698 | ) | |||||
CHANGE IN CASH AND CASH EQUIVALENTS | 2,620,403 | (567,511 | ) | |||||
CASH AND CASH EQUIVALENTS | ||||||||
Beginning of year | 736,509 | 1,174,776 | ||||||
End of year | $ | 3,356,912 | $ | 607,265 | ||||
See accompanying notes.
F-39
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 2006
1. | General |
The statements presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited balance sheet as of December 31, 2005 and 2004, and the related statement of income, statement of partner’s capital and accumulated other comprehensive income (loss) and statement of cash flows for the years ended December 31, 2005 and 2004. In the opinion of management, all adjustments that are deemed necessary have been made in order to fairly present the unaudited interim financial statements for the period and accounting policies have been consistently applied.
F-40
Table of Contents
CYPRESS BOWL RECREATIONS
LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
INDEPENDENT AUDITOR’S REPORT
and
FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
F-41
Table of Contents
To the Partners
Cypress Bowl Recreations Limited Partnership
(A wholly owned subsidiary of Boyne USA, Inc.)
We have audited the accompanying balance sheets of Cypress Bowl Recreations Limited Partnership (the Company) (a wholly owned subsidiary of Boyne USA, Inc.) as of December 31, 2005 and 2004, and the related statements of income, partner’s capital and accumulated other comprehensive income (loss), 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 generally accepted auditing standards (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 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 Cypress Bowl Recreations Limited Partnership at December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Seattle, Washington
March 27, 2006
F-42
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
BALANCE SHEET
DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 736,509 | $ | 1,174,776 | ||
Accounts receivable | 142,442 | 101,846 | ||||
Inventories | 209,409 | 157,458 | ||||
Prepaids | 249,372 | 375,568 | ||||
Total current assets | 1,337,732 | 1,809,648 | ||||
PROPERTY, FACILITIES, AND EQUIPMENT, net | 8,524,337 | 8,002,697 | ||||
DEFERRED TAX ASSETS | 57,466 | — | ||||
OTHER LONG TERM ASSETS | ||||||
Park use permit, net of accumulated amortization of $1,328,944 and $1,053,990 | 7,689,044 | 7,965,345 | ||||
Total assets | $ | 17,608,579 | $ | 17,777,690 | ||
LIABILITIES AND PARTNER’S CAPITAL | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable and accrued liabilities | $ | 1,621,337 | $ | 1,013,325 | ||
Current portion of long term obligations and allocated senior debt | 117,782 | 39,085 | ||||
Income tax payable | 1,004,986 | 151,812 | ||||
Deferred revenue | 926,098 | 2,466,144 | ||||
Total current liabilities | 3,670,203 | 3,670,366 | ||||
DEFERRED TAX LIABILITY | — | 142,705 | ||||
LONG TERM OBLIGATIONS AND ALLOCATED SENIOR DEBT, net of current portion | 4,096,948 | 5,674,778 | ||||
COMMITMENTS AND CONTINGENCIES (Note 5) | ||||||
PARTNER’S CAPITAL | ||||||
Partner’s contributed capital | 4,736,161 | 4,736,161 | ||||
Retained earnings | 2,574,730 | 1,367,508 | ||||
Accumulated other comprehensive income | 2,530,537 | 2,186,172 | ||||
9,841,428 | 8,289,841 | |||||
$ | 17,608,579 | $ | 17,777,690 | |||
See accompanying notes.
F-43
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
RESORT AND RETAIL REVENUES | $ | 9,236,066 | $ | 9,491,104 | ||||
RESORT AND RETAIL OPERATIONS | ||||||||
EXPENSE, INCLUDING | ||||||||
DIRECT PAYROLL | 4,312,227 | 5,033,743 | ||||||
UNALLOCATED OPERATING EXPENSES | ||||||||
General and administrative | 943,642 | 956,667 | ||||||
Selling and marketing | 203,150 | 201,188 | ||||||
Depreciation and amortization | 1,424,313 | 1,532,133 | ||||||
2,571,105 | 2,689,988 | |||||||
OTHER INCOME (EXPENSE) | ||||||||
Unrealized foreign exchange gain (loss) | — | (202,346 | ) | |||||
Interest expense | (340,697 | ) | (350,333 | ) | ||||
(340,697 | ) | (552,679 | ) | |||||
NET INCOME BEFORE INCOME TAXES | 2,012,037 | 1,214,694 | ||||||
FOREIGN INCOME TAX EXPENSE (BENEFIT) | ||||||||
Current | 1,004,986 | 196,212 | ||||||
Deferred | (200,171 | ) | (35,845 | ) | ||||
804,815 | 160,367 | |||||||
NET INCOME | $ | 1,207,222 | $ | 1,054,327 | ||||
See accompanying notes.
F-44
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
STATEMENT OF PARTNER’S CAPITAL AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2005 AND 2004
Partner’s Contributed Capital | Retained Earnings | Comprehensive Income | Accumulated Other Comprehensive Income | Total | |||||||||||
BALANCE, December 31, 2003 | $ | 4,736,161 | $ | 313,181 | $ | 1,536,473 | $ | 6,585,815 | |||||||
Net income | — | 1,054,327 | $ | 1,054,327 | — | 1,054,327 | |||||||||
Foreign currency translation adjustment | — | — | 649,699 | 649,699 | 649,699 | ||||||||||
Comprehensive income | — | — | $ | 1,704,026 | — | — | |||||||||
BALANCE, December 31, 2004 | 4,736,161 | 1,367,508 | 2,186,172 | 8,289,841 | |||||||||||
Net income | — | 1,207,222 | $ | 1,207,222 | — | 1,207,222 | |||||||||
Foreign currency translation adjustment | — | — | 344,365 | 344,365 | 344,365 | ||||||||||
Comprehensive income | — | — | $ | 1,551,587 | — | — | |||||||||
BALANCE, December 31, 2005 | $ | 4,736,161 | $ | 2,574,730 | $ | 2,530,537 | $ | 9,841,428 | |||||||
See accompanying notes.
F-45
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,207,222 | $ | 1,054,327 | ||||
Adjustments to reconcile net income to net cash flows from operating activities | ||||||||
Depreciation and amortization | 1,424,313 | 1,532,133 | ||||||
Gain on sale of equipment | (29,641 | ) | — | |||||
Unrealized foreign exchange loss | — | 202,346 | ||||||
Deferred income taxes | (200,171 | ) | (35,845 | ) | ||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (36,638 | ) | 43,213 | |||||
Inventories | (46,032 | ) | 87,124 | |||||
Prepaids | 135,682 | (97,249 | ) | |||||
Accounts payable and accrued liabilities | 564,852 | (485,025 | ) | |||||
Accrued income taxes | 853,174 | — | ||||||
Deferred revenue | (1,589,164 | ) | 1,010,307 | |||||
2,283,597 | 3,311,331 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of facilities and equipment | (1,406,604 | ) | (457,507 | ) | ||||
Proceeds from sale of equipment | 29,641 | — | ||||||
(1,376,963 | ) | (457,507 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Repayments of long term obligations and allocated senior debt | (1,577,830 | ) | (3,416,606 | ) | ||||
Net advances to parent | — | (257,107 | ) | |||||
(1,577,830 | ) | (3,673,713 | ) | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 232,929 | 461,166 | ||||||
CHANGE IN CASH AND CASH EQUIVALENTS | (438,267 | ) | (358,723 | ) | ||||
CASH AND CASH EQUIVALENTS | ||||||||
Beginning of year | 1,174,776 | 1,533,499 | ||||||
End of year | $ | 736,509 | $ | 1,174,776 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash paid during the year for interest | $ | 339,627 | $ | 1,314,277 | ||||
Assets acquired under capital lease agreements | $ | 75,708 | $ | — | ||||
See accompanying notes.
F-46
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - Operations and Principles of Combination
Operations - Cypress Bowl Recreations Limited Partnership (“Cypress” or the “Company”), a British Columbia, Canada, Limited Partnership, own and operate a year-round mountain resort facility in Vancouver, British Columbia. Cypress’ facilities are located on land owned by the Canadian Provincial Parks and operations are carried out under a Special Use Permit subject to certain terms and limitations (Note 6).
Cypress Bowl Recreations Limited Partnership is a wholly owned subsidiary of Boyne USA, Inc. and subsidiaries (collectively “Boyne USA” or the “Parent”). Boyne USA, through its wholly owned subsidiaries, is a multi-dimensional organization operating in the resort and recreation industry. Boyne USA owns and operates seasonal and year-round facilities consisting of ski, golf, lodging, restaurant, retail and other property management. During August 2005 Boyne USA entered into an agreement with CNL Income Properties, Inc. whereby CNL agreed to acquire the resort assets of the Cypress and related park use permit operating rights (Note 10).
Cypress’ operations are not accounted for as a separate entity within the organization of the Parent. The accompanying financial statements of Cypress are carved out of the Parent’s consolidated financial statements and have been prepared on a historical cost basis under established accounting methods, practices, procedures and policies and the accounting judgments and estimation methodologies of the Parent. These financial statements may not necessarily be indicative of the financial position, results of operations or cash flows that would have resulted if Cypress had been operated as a stand alone entity. Management believes the judgments made in preparing these financial statements were reasonable.
In order to reflect all of Cypress’s costs of operations, these financial statements reflect the pushdown of the identifiable intangible asset (Park Use Permit - Note 6) and related amortization, general and administrative costs, allocated debt, interest expense, and income taxes. The debt was allocated based on designated use of proceeds and reflects debt which is collateralized by substantially all of Cypress’s assets including cross collateralization for the debt related to other wholly owned subsidiaries of Boyne USA. Income taxes have been allocated based on net taxable income and related deferred tax assets and liabilities of Cypress subject to Canadian and provincial taxes.
Financial Statement Presentation and Foreign Currency Translation - The financial statements are presented in U.S. Dollars which is the Parent’s functional currency. Assets and liabilities denominated in local currencies (Canadian Dollars) are translated to U.S. Dollars using the year end exchange rate for assets and liabilities and the average exchange rate for the period for income and expense items.
F-47
Table of Contents
CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 1 - Operations and Principles of Combination(Continued)
Allocated debt and certain long-term assets including the allocated Park Permit are translated at the historical exchange rate. The year end exchange rate at December 31, 2005 and 2004 was approximately $1.17 and $1.20, respectively. The average exchange rate for the years ended December 31, 2005 and 2004 was approximately $1.19 and $1.30, respectively.
Note 2 - Summary of Significant Accounting Policies
Seasonality - The Company has two distinct seasons with skiing and other winter activities generally occurring from December through April and limited summer operations occurring from June through September. Winter activities represent substantially all revenues generated. Operations are subject to unusual seasonality and operating results are highly dependent upon weather conditions. The 2004/2005 season experienced adverse weather conditions and as a result certain resort revenues included in deferred revenue at December 31, 2004 were reclassified to accrued liabilities for refunds paid during 2005.
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 the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all cash and short-term investments with a maturity at date of purchase of three months or less, to be cash equivalents.
Accounts Receivable - Accounts receivable are stated at an amount management expects to collect and accounts are written off on a specific identification method, which management does not believe materially differs from the allowance method required under accounting principles generally accepted in the United States of America. Based on management’s assessment of the credit history of the customers with outstanding balances, it has concluded that potential future losses on balances outstanding at year end will be immaterial.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 2 - Summary of Significant Accounting Policies(Continued)
Inventories - The Company values inventories at the lower of cost or market with cost determined on the weighted-average or first-in, first-out (FIFO) method. Inventories consist of the following at December 31:
2005 | 2004 | |||||
Retail and demo equipment | $ | 141,880 | $ | 142,475 | ||
Food, beverage, and supplies | 67,529 | 14,983 | ||||
$ | 209,409 | $ | 157,458 | |||
Property, Facilities, and Equipment - Property, facilities, and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets (15 to 39 years for buildings and improvements, 3 to 20 years for machinery and equipment, and 3 to 15 years for furniture and fixtures). Leasehold improvements are depreciated or amortized over the shorter of the estimated useful lives of the related assets or the lease term. Maintenance and repair costs are charged to operations as incurred and additions, renewals, and improvements are capitalized.
Park Use Permit - The Special Use Permit represents an identified intangible. The fair value of the permit was calculated to be $8,716,000 at the time of the Cypress acquisition during 2001, based upon exchange rates at such time, and is being amortized over the remaining useful life of the permit, or approximately 30 years. Annual amortization expense amounts to approximately $275,000 per year for the years ended December 31, 2005 and 2004. Amortization expense for the next 5 years is expected to be approximately $275,000 per year.
Impairment of Long-Lived Assets - The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value based on the present value of estimated expected future cash flows. No such impairments have been determined to be present.
Revenue Recognition - Revenue derived from resort activities and merchandise sales is generally recognized at the point of sale when earned, as the facilities are used, when the services are rendered, or when the retail merchandise is sold.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 2 - Summary of Significant Accounting Policies(Continued)
The Company sells season passes and multi-week packages for various amenities, including equipment rentals and ski instructions. Revenues from season passes are recognized over the season in which the facilities are utilized, generally December 1st to April 15th. Revenues for multi-week packages and amenities are recognized as the services are performed.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. From time to time, the Company’s cash deposits at a single institution exceed federally insured amounts. Cash and cash equivalents are deposited with high credit, quality financial institutions.
Comprehensive Income - Comprehensive income includes all changes in equity during the period from non-owner sources such as foreign currency translation adjustments. Accumulated other comprehensive income (loss), as presented on the accompanying statement of stockholder’s equity, consists of the cumulative foreign currency translation adjustment resulting from the translation from the local currency (Canadian Dollars) to the reporting currency (U.S. Dollars).
Income Taxes - Cypress is limited partnership and as a result the resulting income tax obligations from the resort operations are passed through to the partners, Boyne Canada ULC and Cypress Bowl ULC, both Canadian entities and wholly owned subsidiaries of Boyne USA, Inc. The partners are subject to Canadian Federal and Provincial taxes. For purposes of these carve-out financial statements, income taxes have been reflected utilizing the “separate return” method and an income tax provision has been included for the taxable earnings reflected, including the impacts of certain allocated income and expenses. Certain allocations from the Parent have not been included in determining the provision for income taxes as the Parent is not subject to Canadian Federal or Provincial taxes and such costs do not impact the taxable income for such purposes. The Company has deferred income tax assets and liabilities due to the deferred benefits and obligations resulting from differences in the carrying basis between book reporting and Canadian tax purposes in property, equipment and facilities. Changes in these deferred benefits and liabilities are reflected in the deferred tax expense (benefit) within the statement of income.
Advertising and Promotion Expense - Advertising and promotion costs are expensed when incurred or expensed ratably over the advertising or promotional campaign. During 2005 and 2004, the Company expensed $80,000 and $74,000 for advertising and promotion costs.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements - In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51” (“FIN 46R”), which provided, among other things, immediate deferral of the application of FIN 46 for entities that did not originally qualify as special purpose entities, and provided additional scope exceptions for joint ventures with business operations and franchises. The Company’s adoption of FIN 46R did not have an impact on its financial statements.
Note 3 - Property, Facilities, and Equipment
Property, facilities, and equipment consist of the following at December 31:
2005 | 2004 | |||||
Land and improvements | $ | 2,483,769 | $ | 1,904,741 | ||
Buildings and improvements | 2,537,810 | 2,458,939 | ||||
Machinery and equipment | 13,086,654 | 12,564,989 | ||||
Construction-in-progress | 83,740 | 142,630 | ||||
18,191,973 | 17,071,299 | |||||
Less accumulated depreciation and amortization | 9,667,636 | 9,068,602 | ||||
$ | 8,524,337 | $ | 8,002,697 | |||
The Company has capitalized equipment under capital leases totaling $338,000 and $194,000 at December 31, 2005 and 2004 with related accumulated amortization amounting to $82,000 and $54,000, respectively.
Note 4 - Long Term Obligations and Allocated Senior Debt
Long term obligations and allocated senior debt consists of balances due under a term note payable and capital leases, and allocated amounts due under the Parent’s senior debt facilities.
Term Notes Payable - The Company has a term note payable as of December 31, 2004 resulting from the acquisition of equipment which was paid in full upon maturity on November 22, 2005.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 4 - Long Term Obligations and Allocated Senior Debt(Continued)
Capital Leases - The Company leases certain equipment under capital leases, which expire at various dates through 2007. Capital lease obligations outstanding at December 31, 2005 and 2004 were $228,056 and $96,539, respectively. Certain capital leases require monthly payments, due in six equal monthly payments from December 1st to April 1st over the lives of the leases, with no payments being made between May to November. The total weighted average interest rate of capital lease agreements amounts to approximately 8.0%.
Allocated Senior Debt - Allocated senior debt consists of a portion of the senior debt obligations as recorded by the Parent which have been allocated to the Company. The allocation of the senior debt recorded by the Company reflect the amount attributable to the assets and operations included within these carve-out financial statements, including consideration of intercompany advances and repayments between the Company, the Parent and affiliates. The allocated senior debt is not indicative of the necessary funding requirements if the Company was a stand alone entity or the terms and conditions that the Company could obtain for similar financing arrangements.
On December 31, 2005 the Company’s Parent has a credit agreement with a financial institution which includes long-term revolving line of credit and a term note payable. The credit agreement was entered into on September 30, 2005 and refinanced certain outstanding obligations of the Parent, including an outstanding balance included in a separate revolving line of credit which was partially utilized during 2001 to acquire the Company. As a result of the refinance on September 30, 2005, the assets and operations of Cypress Bowl Recreation Limited Partnership are subject to the collateralization provisions of the new agreement. The aggregate outstanding balance as recorded by the Parent under the credit agreements under which the Company is collateralized amounts to $52,797,000 and accrues interest at an annual rate of 7.50%.
Prior to the Parent’s refinance on September 30, 2005 the Company was subject to collateralization of a separate revolving credit facility. At December 31, 2004, the outstanding balance under the credit facility as recorded by the Parent was $24,236,591 and accrues interest at an annual rate of LIBOR plus 100 basis points.
The financial statements include allocated interest at the average annual borrowing rate of the Parent based upon the allocated debt during the periods presented.
The Parents credit agreements is collateralized by substantially all assets of the Company, including assignment in trust of the Company’s interest and rights under the Special Use Permit (see Note 6). The Company is subject to certain restrictive financial covenants and other matters.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 4 - Long Term Obligations and Allocated Senior Debt(Continued)
Maturities of senior debt for future years ending December 31 are as follows:
Allocated Senior Debt | Capital Leases | Total | |||||||
2006 | $ | 250,000 | $ | 117,782 | $ | 367,782 | |||
2007 | 250,000 | 127,474 | 377,474 | ||||||
2008 | 250,000 | — | 250,000 | ||||||
2009 | 250,000 | — | 250,000 | ||||||
Thereafter | 2,986,674 | — | 2,986,674 | ||||||
3,986,674 | 245,256 | 4,231,930 | |||||||
Less amount representing interest | — | 17,200 | 17,200 | ||||||
$ | 3,986,674 | $ | 228,056 | $ | 4,214,730 | ||||
Note 5 - Income Taxes
The income tax provision is calculated under the “separate return” basis and is derived from the estimated effective tax rates and taxable income related to the resort operations and assets within Canada as if Cypress were operating as a stand alone entity. The deferred tax assets (liabilities), income tax expense (benefit) and related income tax obligations may not be indicative of the impacts of Canadian and provincial taxing jurisdictions if Cypress was not part of consolidated Boyne USA, Inc.
The estimated income tax expense (benefit) differs from expected income tax expense (benefit) as follows:
2005 | 2004 | |||||
Expected income tax expense | 40.0 | % | 40.0 | % | ||
Unrealized foreign exchange gain/loss | — | (20.0 | ) | |||
Corporate allocations and credits | — | (7.0 | ) | |||
40.0 | % | 13.0 | % | |||
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 5 - Income Taxes(Continued)
The Company’s deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for federal income tax purposes. The Company’s net deferred tax assets (liability) at December 31, 2005 and 2004 result from differences in the recorded amounts for property, facilities and equipment. At December 31, 2004, accumulated unrealized foreign exchange rate gains and losses on amounts due to the Parent were treated as permanent differences due to the uncertainty of repayment and related recognition for tax purposes.
Note 6 - Commitments and Contingencies
Leases - The Company leases equipment under non-cancelable operating lease agreements, which expire at various dates through 2005. Lease expense for 2005 and 2004 under the agreements and other month-to-month lease agreements amounted to $77,515 and $76,734, respectively.
There are no scheduled future payments under the non-cancelable operating lease agreements for the year ended December 31, 2005.
Special Park Use Permit - The Company operates on land owned by the Canadian Provincial Parks (the Provincial Government) and operations are carried out under a Special Park Use Permit subject to certain terms and limitations (see Note 2). The commencement date of the Special Use Permit was September 17, 1984 and is valid for 50 years, or until October 31, 2034. However, anytime after the 40-year anniversary of the commencement date, the Company may petition to renew the term for an additional 50 years.
Under the terms of the Special Use Permit, the Company is required to pay a fee to the Provincial Government based on revenue, as defined by the Special Use Permit. Fees paid to the Provincial Government during each year amount to approximately 2.0% of revenues.
Contingencies - Injury claims are filed against the Company during the normal course of business. The Company believes the ultimate liability, if any, of such claims will not have a significant effect on the Company’s results of operations, liquidity, or financial position. The Company’s insurance policy includes provisions by which the Company is reimbursed for claims paid over $1.0 million, at which point stop-loss coverage is carried.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 7 - Related Party Transactions
Insurance - The Company’s primary insurance provider is Lone Peak Insurance Company, LTD (“Lone Peak”), an offshore (Bermuda) captive insurance company that is a wholly owned subsidiary of Boyne USA. Its principal activity is the insurance of general liability risks of Boyne USA and subsidiaries under a claims made policy. During the years ended December 31, 2005 and 2004, the Company’s insurance premium expense included within resort operating expenses amounted to approximately $390,000 and $177,000, respectively. Unamortized insurance premiums paid to Lone Peak included within prepaids as of December 31, 2005 and 2004 amount to approximately $154,000 and $398,000, respectively.
Note 8 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair values for the Company’s financial instruments:
Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable - The carrying amounts of these items approximate their fair values at December 31, 2005 and 2004.
Term Note Payable and Capital Leases - Borrowings under the term note payable and capital lease obligations are subject to terms and conditions that reflect those currently available for similar financing arrangements. The carrying amount of these items approximates their fair values at December 31, 2005 and 2004.
Note 9 - 2010 Olympics and Sponsorship Agreement
In 2002, Cypress signed a Games Venue Agreement (the Agreement) with the Vancouver 2010 Bid Corporation (Bid Corp) regarding the use of existing and proposed additional facilities at Cypress during the 2010 Winter Olympic Games (the Games). The Agreement includes terms which would allow Bid Corp and its successor to host the freestyle skiing and snowboarding events of the Games at Cypress. The hosting of the Games at Cypress is expected to accrue tangible and intangible benefits to Cypress. Cypress has both fiduciary and non-fiduciary obligations as it relates to the Agreement.
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CYPRESS BOWL RECREATIONS LIMITED PARTNERSHIP
(A wholly owned subsidiary of Boyne USA, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note 9 - 2010 Olympics and Sponsorship Agreement(Continued)
Cypress entered into a sponsorship agreement with Bell Canada in 2004. Terms of the agreement call for annual payments in exchange for exclusivity within the “telecommunications” category as a top tier Cypress sponsor and a supplier with respect to products. The annual payments are due in Canadian Dollar, amounting to the following based exchange rates at December 31, 2004: $104,000 beginning in 2004 through 2007, $125,000 during 2008 and 2009; and $145,000 due during 2010 to 2011. In addition, Bell contributed $33,000 in 2004 to Cypress towards the initial costs of a snowboard terrain park. Beginning in 2005 (through 2011), Bell will contribute $21,000 per year for other agreed upon “enhancements to winter property.” Both Cypress and Bell have various other obligations under the agreement which expires April 30, 2012.
Note 10 - Subsequent Event
During August 2005 Boyne USA entered into an agreement with CNL Income Properties, Inc. (CNL), whereby CNL agreed to acquire the resort assets of Cypress Bowl Recreation Limited Partnership and related park use permit operating rights for approximately $27.5 million. The closing was subject to various conditions including successful transfer of the park use permit.
The closing contingencies were successfully achieved and on May 30, 2006 CNL and Boyne USA, including Cypress Bowl Recreation Limited Partnership, completed the transaction and closed on the sale of substantially all of the resort assets of the Company. The Company received pre-tax proceeds of $27.5 million resulting in a pre-tax gain of approximately $20.0 million. In conjunction with the sale, the Company entered into two long term triple-net lease with the CNL for the Cypress assets sold and for the operating rights under the park use permit. The initial lease terms are 20 years with four five-year renewal options. The combined minimum annual rent is approximately $2.9 million and will increase annually to a maximum of approximately $3.7 million. Additionally, percentage rent due under the leases on a combined basis is equal to 9.0% of gross revenues in excess of $10.9 million. Boyne guaranteed the tenant’s payment of minimum annual rent under the leases for the first four years.
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PALMETTO HALL PLANTATION CLUB
(A WHOLLY OWNED PROPERTY OF GREENWOOD
DEVELOPMENT CORPORATION)
REPORT ON FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2006 AND 2005
AND DECEMBER 31, 2005
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
BALANCE SHEETS
March 31, 2006 (Unaudited) | December 31, 2005 (Audited) | |||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash | $ | 1,200 | $ | 1,200 | ||
Receivables | 520,387 | 901,678 | ||||
Inventory | 90,033 | 93,310 | ||||
Prepaid expenses | 73,013 | 91,844 | ||||
Total current assets | 684,633 | 1,088,032 | ||||
NONCURRENT ASSETS | ||||||
Property and equipment - Net | 9,193,303 | 9,301,099 | ||||
Initiation deposit receivables | — | 128,061 | ||||
Total noncurrent assets | 9,193,303 | 9,429,160 | ||||
Total assets | $ | 9,877,936 | $ | 10,517,192 | ||
LIABILITIES AND OWNER’S EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable | $ | 40,553 | $ | 119,818 | ||
Accrued expenses and other liabilities | 14,938 | 36,912 | ||||
Refundable initiation deposits | — | 185,875 | ||||
Deferred revenue | 756,996 | 964,510 | ||||
Total current liabilities | 812,487 | 1,307,115 | ||||
LONG-TERM LIABILITIES | ||||||
Refundable initiation deposits | �� | 1,794,500 | 1,539,625 | |||
Total liabilities | 2,606,987 | 2,846,740 | ||||
OWNER’S EQUITY | 7,270,949 | 7,670,452 | ||||
$ | 9,877,936 | $ | 10,517,192 | |||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
STATEMENTS OF OPERATIONS AND CHANGES IN OWNER’S EQUITY
For the three-month period ended March 31, | ||||||||
2006 (Unaudited) | 2005 (Unaudited) | |||||||
OPERATING REVENUES | ||||||||
Golf revenues | $ | 632,318 | $ | 560,215 | ||||
Food and beverage revenues | 139,280 | 100,382 | ||||||
Pro shop sales | 33,159 | 50,220 | ||||||
Other | 11,400 | 6,831 | ||||||
Total operating revenues | 816,157 | 717,648 | ||||||
OPERATING EXPENSES | ||||||||
Golf course | 802,714 | 725,105 | ||||||
Cost of food and beverage | 66,419 | 32,675 | ||||||
Cost of pro shop sales | 29,524 | 31,013 | ||||||
Depreciation | 153,227 | 125,683 | ||||||
Total operating expenses | 1,051,884 | 914,476 | ||||||
Net operating loss | (235,727 | ) | (196,828 | ) | ||||
OWNER’S EQUITY | ||||||||
Beginning of period | 7,670,452 | 7,194,078 | ||||||
Greenwood Development Corporation distributions, net | (163,776 | ) | (56,353 | ) | ||||
End of period | $ | 7,270,949 | $ | 6,940,897 | ||||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
STATEMENTS OF CASH FLOWS
For the three-month period ended March 31, | ||||||||
2006 (Unaudited) | 2005 (Unaudited) | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss | $ | (235,727 | ) | $ | (196,828 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 153,227 | 125,683 | ||||||
Changes in deferred and accrued amounts | ||||||||
Receivables | 509,352 | 377,754 | ||||||
Inventory | 3,277 | (35,356 | ) | |||||
Prepaid expenses | 18,831 | 17,916 | ||||||
Accounts payable | (79,265 | ) | (37,581 | ) | ||||
Refundable initiation deposits | 69,000 | — | ||||||
Deferred revenue | (207,514 | ) | (179,681 | ) | ||||
Accrued expenses and other liabilities | (21,974 | ) | 8,688 | |||||
Net cash provided by operating activities | 209,207 | 80,595 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchase of property and equipment | (45,431 | ) | (24,242 | ) | ||||
Net cash used for investing activities | (45,431 | ) | (24,242 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Greenwood Development Corporation distributions, net | (163,776 | ) | (56,353 | ) | ||||
Net cash used for financing activities | (163,776 | ) | (56,353 | ) | ||||
Net increase (decrease) in cash | — | — | ||||||
CASH, BEGINNING OF PERIOD | 1,200 | 900 | ||||||
CASH, END OF PERIOD | $ | 1,200 | $ | 900 | ||||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The statements presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited balance sheet as of December 31, 2005, and the related statements of operations, changes in owner’s equity, and cash flows for the year ended December 31, 2005. In the opinion of management, all adjustments that are deemed necessary have been made in order to fairly present the unaudited interim financial statements for the period and accounting policies have been consistently applied.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
SCHEDULE OF GOLF COURSE OPERATING EXPENSES
For the three-month period ended March 31, | ||||||
2006 (Unaudited) | 2005 (Unaudited) | |||||
Salaries and wages | $ | 325,636 | $ | 317,781 | ||
Casual labor | 8,138 | 2,507 | ||||
Other payroll expenses | 70,167 | 86,137 | ||||
Repairs and maintenance | 139,555 | 84,804 | ||||
Property insurance | 23,010 | 25,492 | ||||
Property taxes | 26,332 | 22,470 | ||||
Utilities and telephone | 31,887 | 24,662 | ||||
Security services | 455 | 4,769 | ||||
Management fees | 17,565 | 16,727 | ||||
Professional services | 69,552 | 8,013 | ||||
Credit card discount | 10,721 | 4,323 | ||||
Premier golf member coupons | 4,571 | 30,411 | ||||
Closing incentives | 2,100 | 5,680 | ||||
Operating supplies | 10,146 | 5,395 | ||||
Office supplies and expense | 9,222 | 4,434 | ||||
Tournament expenses | — | 1,005 | ||||
Community services | 6,210 | 16,060 | ||||
Advertising | 15,928 | 26,797 | ||||
Travel | 2,296 | 2,090 | ||||
Recruiting | 4,660 | 1,285 | ||||
Miscellaneous | 24,563 | 34,263 | ||||
Total golf course operating expenses | $ | 802,714 | $ | 725,105 | ||
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PALMETTO HALL PLANTATION CLUB
(A WHOLLY OWNED PROPERTY OF GREENWOOD
DEVELOPMENT CORPORATION)
REPORT ON FINANCIAL STATEMENTS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 2005
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PALMETTO HALL PLANTATION CLUB
(A WHOLLY OWNED PROPERTY OF GREENWOOD
DEVELOPMENT CORPORATION)
HILTON HEAD ISLAND, SOUTH CAROLINA
F - 65 | ||
FINANCIAL STATEMENTS | ||
F - 66 | ||
F - 67 | ||
F - 68 | ||
F - 69 | ||
SUPPLEMENTAL SCHEDULE | ||
F - 73 |
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
CNL Income Properties, Inc.
Orlando, Florida
We have audited the accompanying balance sheets of Palmetto Hall Plantation Club (a wholly owned property of Greenwood Development Corporation) as of December 31, 2005, 2004, and 2003, and the related statements of operations and changes in owner’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Club’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 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 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 Palmetto Hall Plantation Club (a wholly owned property of Greenwood Development Corporation) as of December 31, 2005, 2004, and 2003, 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. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
As further discussed in Notes 1 and 7, Greenwood Development Corporation sold all operations of Palmetto Hall Plantation Club to CNL Income Properties, Inc. on April 27, 2006 pursuant to an agreement between the parties.
/s/ Elliott Davis, LLC
November 16, 2006
Greenwood, South Carolina
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
BALANCE SHEETS
DECEMBER 31, | |||||||||
2005 | 2004 | 2003 | |||||||
ASSETS | |||||||||
CURRENT ASSETS | |||||||||
Cash | $ | 1,200 | $ | 900 | $ | 900 | |||
Receivables | 901,678 | 790,681 | 648,835 | ||||||
Inventory | 93,310 | 105,108 | 111,020 | ||||||
Prepaid expenses | 91,844 | 97,371 | 32,204 | ||||||
Total current assets | 1,088,032 | 994,060 | 792,959 | ||||||
NONCURRENT ASSETS | |||||||||
Property and equipment - Net | 9,301,099 | 8,627,268 | 7,871,890 | ||||||
Initiation deposit receivables | 128,061 | 106,375 | 155,301 | ||||||
Total noncurrent assets | 9,429,160 | 8,733,643 | 8,027,191 | ||||||
Total assets | $ | 10,517,192 | $ | 9,727,703 | $ | 8,820,150 | |||
LIABILITIES AND OWNER’S EQUITY | |||||||||
CURRENT LIABILITIES | |||||||||
Accounts payable | $ | 119,818 | $ | 97,223 | $ | 64,300 | |||
Accrued expenses and other liabilities | 36,912 | 36,928 | 33,165 | ||||||
Refundable initiation deposits | 185,875 | 158,250 | 500,115 | ||||||
Deferred revenue | 964,510 | 827,750 | 757,548 | ||||||
Total current liabilities | 1,307,115 | 1,120,151 | 1,355,128 | ||||||
LONG-TERM LIABILITIES | |||||||||
Refundable initiation deposits | 1,539,625 | 1,441,750 | 755,385 | ||||||
CONTINGENCIES (See Note 6) | |||||||||
Total liabilities | 2,846,740 | 2,561,901 | 2,110,513 | ||||||
OWNER’S EQUITY | 7,670,452 | 7,165,802 | 6,709,637 | ||||||
$ | 10,517,192 | $ | 9,727,703 | $ | 8,820,150 | ||||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
STATEMENTS OF OPERATIONS AND CHANGES IN OWNER’S EQUITY
For the years ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
OPERATING REVENUES | ||||||||||||
Golf revenues | $ | 2,202,303 | $ | 2,348,150 | $ | 2,749,696 | ||||||
Food and beverage revenues | 392,949 | 531,336 | 577,178 | |||||||||
Pro shop sales | 186,796 | 247,364 | 252,433 | |||||||||
Other | 39,309 | 22,951 | 3,500 | |||||||||
Total operating revenues | 2,821,357 | 3,149,801 | 3,582,807 | |||||||||
OPERATING EXPENSES | ||||||||||||
Golf course | 3,746,250 | 3,688,376 | 3,255,900 | |||||||||
Cost of food and beverage | 153,245 | 234,287 | 234,801 | |||||||||
Cost of pro shop sales | 140,464 | 152,378 | 165,080 | |||||||||
Depreciation | 565,394 | 476,430 | 452,410 | |||||||||
Total operating expenses | 4,605,353 | 4,551,471 | 4,108,191 | |||||||||
Net operating loss | (1,783,996 | ) | (1,401,670 | ) | (525,384 | ) | ||||||
OWNER’S EQUITY | ||||||||||||
Beginning of year | 7,165,802 | 6,709,637 | 7,251,141 | |||||||||
Greenwood Development Corporation contribution (withdrawal), net | 2,288,646 | 1,857,835 | (16,120 | ) | ||||||||
End of year | $ | 7,670,452 | $ | 7,165,802 | $ | 6,709,637 | ||||||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
STATEMENTS OF CASH FLOWS
For the years ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net loss | $ | (1,783,996 | ) | $ | (1,401,670 | ) | $ | (525,384 | ) | |||
Adjustments to reconcile net loss to net cash used for (provided by) operating activities: | ||||||||||||
Loss on disposal of fixed assets | — | 12,289 | — | |||||||||
Depreciation | 565,394 | 476,430 | 452,410 | |||||||||
Changes in deferred and accrued amounts | ||||||||||||
Receivables | (132,683 | ) | (92,920 | ) | (50,904 | ) | ||||||
Inventory | 11,798 | 5,912 | (7,447 | ) | ||||||||
Prepaid expenses | 5,527 | (65,167 | ) | 51,423 | ||||||||
Accounts payable | 22,595 | 32,923 | 19,246 | |||||||||
Refundable initiation deposits | 125,500 | 344,500 | 395,500 | |||||||||
Deferred revenue | 136,760 | 70,202 | 38,012 | |||||||||
Accrued expenses and other liabilities | (16 | ) | 3,763 | 16,226 | ||||||||
Net cash provided by (used for) operating activities | (1,049,121 | ) | (613,738 | ) | 389,082 | |||||||
INVESTING ACTIVITIES | ||||||||||||
Purchase of property and equipment | (1,239,225 | ) | (1,244,097 | ) | (372,962 | ) | ||||||
Net cash used for investing activities | (1,239,225 | ) | (1,244,097 | ) | (372,962 | ) | ||||||
FINANCING ACTIVITIES | ||||||||||||
Greenwood Development Corporation contribution, net | 2,288,646 | 1,857,835 | (16,120 | ) | ||||||||
Net cash provided by (used for) financing activities | 2,288,646 | 1,857,835 | (16,120 | ) | ||||||||
Net increase in cash | 300 | — | — | |||||||||
CASH, BEGINNING OF YEAR | 900 | 900 | 900 | |||||||||
CASH, END OF YEAR | $ | 1,200 | $ | 900 | $ | 900 | ||||||
The accompanying notes are an integral part of these financial statements.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
Palmetto Hall Plantation Club (the “Club”) is a wholly owned property of Greenwood Development Corporation located in Hilton Head Island, South Carolina. It consists of two 18-hole full-length championship golf courses designed by Arthur Hills and Robert Cupp. The Club includes a full-service clubhouse, a pro shop, a golf maintenance center, two tennis courts and a swimming pool. The financial statements presented herein reflect the assets, liabilities and operations of the Club.
Effective April 27, 2006, the Club was sold to CNL Income Properties, Inc. (“CNL”). The accompanying financial statements have been prepared solely to present the historical financial results of the Club. Additionally, the financial statements include certain adjustments for the purpose of CNL complying with the Securities and Exchange Commission’s (SEC) rules and regulations regarding acquired businesses and properties, including the allocation of general and administrative expenses from Greenwood Development Corporation in the form of management fees.
The management fees, calculated based on an estimate of the amount of time allocated to the Club by management personnel, are based on determinations that Greenwood Development Corporation’s management believes to be reasonable. Management fees, for the years ended December 31, 2005, 2004 and 2003 were $66,906, $51,480 and $51,480, respectively and have been recorded under golf course expenses in the statement of operations and changes in owner’s equity. However, Management believes that the Club’s administrative and general expenses on a stand-alone basis may have been different had the Club operated as an unaffiliated entity. Greenwood Development Corporation’s management also believes that there is a derived benefit from other general and administrative expenses and services that are not directly allocated to the Club. These include marketing expenses and purchasing power.
The Club’s operations have been financed through its operating cash flows and equity advances from Greenwood Development Corporation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from golf operations, food and beverage and merchandise sales are generally recognized at the time of sale or when the service is provided. Revenues from membership dues are generally billed annually and recognized in the period earned. Club membership initiation deposits are refundable upon membership termination subject to the Club membership agreement or after 30 years and therefore only recognized as revenue if forfeited.
Receivables
Member receivables
Member receivables are member obligations due under normal trade terms. Senior management reviews the receivables on a monthly basis to determine if any receivables will potentially be uncollectible. Member receivable balances that are deemed to be uncollectible, along with a general reserve, are included in the overall allowance for doubtful accounts. After all attempts to collect a member receivable have failed, the receivable is written off against the allowance. Based on the information available, the Club believes that all outstanding member receivables at December 31, 2005, 2004 and 2003 are collectible.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Initiation deposits
Initiation deposits are member obligations paid by a member of Premier Golf at Palmetto Hall Plantation Club. The member is allowed to pay the initiation fee in three annual installments. A receivable is recorded when the member joins the Club and pays the first installment. In 2002, Palmetto Hall made the deposits refundable to the members if they resigned membership and provided a replacement member or after thirty years from the initial installment. Therefore, once an initiation deposit is made, a payable is recorded for the amount of the deposit.
Inventory
Inventory consists of pro shop merchandise and food and beverage stock items. Inventory is recorded at the lower of FIFO cost (first-in, first-out) or market.
Prepaid expenses
Prepaid expenses consist of property and employee insurance premiums that were paid in the current year but are attributable to the subsequent year.
Property and equipment
Property and equipment are stated at cost. Major renewals and betterments are capitalized, while maintenance and repairs which do not improve or extend the useful lives of the assets are charged to expense as incurred. Property and equipment assets are depreciated over their estimated useful lives of 3 to 40 years using the straight-line method.
Property and equipment assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to future undiscounted cash flows expected to be generated by the asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the assets’ carrying amount exceeds its fair value.
Deferred revenue
Deferred revenue represents annual member dues for the subsequent year that were billed in the current year. Revenue in the subsequent year will be recognized pro rata on a monthly basis.
Advertising
The Club expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2005, 2004 and 2003 were $107,783, $125,531 and $32,854, respectively.
Income taxes
As stated in Note 1, the Club is a wholly owned property of Greenwood Development Corporation and is not a separate taxable entity. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
Risk concentration
Financial instruments that potentially subject the Club to credit risk are receivables. The Club grants credit to members and consequently, its ability to collect the amounts due from its members is affected by economic fluctuations. The Club’s receivables are generally uncollateralized.
Recently issued accounting standards
Accounting standards that have been issued or proposed by the Financial Accounting Standards Board or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
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NOTE 3 - RECEIVABLES
Receivables consist of the following at December 31:
2005 | 2004 | 2003 | |||||||
Member receivables | $ | 439,683 | $ | 494,056 | $ | 514,386 | |||
Initiation deposits | 192,314 | 296,625 | 134,449 | ||||||
Accounts receivable - Other | 269,681 | — | — | ||||||
$ | 901,678 | $ | 790,681 | $ | 648,835 | ||||
Accounts receivable - Other consists of insurance proceeds due to the Club from Zurich American Insurance Co. for vandalism related damage to one of the golf courses during 2005.
NOTE 4 - INVENTORY
Inventory consists of the following at December 31:
2005 | 2004 | 2003 | |||||||
Pro shop merchandise | $ | 73,141 | $ | 87,055 | $ | 90,941 | |||
Food and beverage stock items | 20,169 | 18,053 | 20,079 | ||||||
$ | 93,310 | $ | 105,108 | $ | 111,020 | ||||
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2005 | 2004 | 2003 | |||||||
Buildings | $ | 4,582,494 | $ | 4,511,054 | $ | 3,873,933 | |||
Land and improvements | 3,488,445 | 2,841,573 | 2,755,533 | ||||||
Golf courses | 3,517,087 | 3,517,087 | 3,517,087 | ||||||
Furniture and equipment | 2,367,451 | 1,783,303 | 1,898,834 | ||||||
Vehicles | 55,910 | 338,812 | 400,198 | ||||||
Construction in progress | 180,136 | 73,350 | 29,095 | ||||||
14,191,523 | 13,065,179 | 12,474,680 | |||||||
Less accumulated depreciation | 4,890,424 | 4,437,911 | 4,602,790 | ||||||
$ | 9,301,099 | $ | 8,627,268 | $ | 7,871,890 | ||||
NOTE 6 - CONTINGENCIES
The Club is not a separate legal entity, and therefore, is not subject to lawsuits and claims. In the normal course of business, Greenwood Development Corporation is subject to lawsuits and claims that may affect the Club. In the opinion of Management, the ultimate liabilities, if any, resulting from such lawsuits and claims will not materially affect the financial condition of the Club.
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NOTE 7 - SUBSEQUENT EVENTS
On April 27, 2006, the Club was purchased by CNL Income Properties, Inc. for a purchase price of $7,600,000. On October 5, 2006, CNL Income Properties, Inc. entered into a commitment for a $16,500,000 loan with Sun Life Assurance Company of Canada. The loan will be secured in part by Palmetto Hall Plantation Club.
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(A WHOLLY OWNED PROPERTY OF GREENWOOD DEVELOPMENT CORPORATION)
SCHEDULE OF GOLF COURSE OPERATING EXPENSES
For the years ended December 31, | |||||||||
2005 | 2004 | 2003 | |||||||
Salaries and wages | $ | 1,357,493 | $ | 1,596,884 | $ | 1,375,937 | |||
Other payroll expenses | 291,055 | 339,449 | 264,269 | ||||||
Repairs and maintenance | 723,546 | 573,710 | 533,484 | ||||||
Property insurance | 109,864 | 87,989 | 112,641 | ||||||
Property taxes | 85,234 | 128,486 | 164,535 | ||||||
Utilities and telephone | 166,449 | 170,899 | 136,947 | ||||||
Security services | 24,177 | 21,096 | 3,897 | ||||||
Management fees | 66,906 | 51,480 | 51,480 | ||||||
Professional services | 201,704 | 54,043 | 130,070 | ||||||
Credit card discount | 21,800 | 30,762 | 38,395 | ||||||
Premier golf member coupons | 80,331 | 133,168 | 141,532 | ||||||
Closing incentives | 33,191 | 15,729 | — | ||||||
Operating supplies | 49,868 | 57,747 | 56,705 | ||||||
Office supplies and expense | 37,122 | 40,410 | 26,712 | ||||||
Tournament expenses | 14,266 | 12,412 | 1,660 | ||||||
Community services | 21,600 | 34,472 | 23,760 | ||||||
Advertising | 107,783 | 123,531 | 32,854 | ||||||
Travel | 24,637 | 4,330 | 12,096 | ||||||
Miscellaneous | 329,224 | 211,779 | 148,926 | ||||||
Total golf course operating expenses | $ | 3,746,250 | $ | 3,688,376 | $ | 3,255,900 | |||
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WHCC, LLC, d.b.a. Weston Hills Country Club
Balance Sheets
(unaudited)
September 30, 2006 | December 31, 2005 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,941,048 | $ | 3,451,244 | ||||
Accounts receivable | 2,184,626 | 844,641 | ||||||
Inventory | 238,991 | 222,451 | ||||||
Prepaid expenses and deposits | 481,031 | 376,545 | ||||||
Related party accounts receivable | — | 327,961 | ||||||
Total current assets | 6,845,696 | 5,222,842 | ||||||
Property and equipment, net | 22,051,754 | 22,606,178 | ||||||
Other assets, net | 370,488 | 439,098 | ||||||
Total assets | $ | 29,267,938 | $ | 28,268,118 | ||||
Liabilities and members’ capital (deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 589,142 | $ | 679,745 | ||||
Deferred revenue | 6,145,368 | 4,552,899 | ||||||
Current portion of obligation under capital leases | 185,969 | 172,601 | ||||||
Total current liabilities | 6,920,479 | 5,405,245 | ||||||
Notes payable | 20,000,000 | 20,000,000 | ||||||
Obligation under capital leases, less current portion | 336,799 | 479,610 | ||||||
Deferred revenue, less current portion | 4,402,457 | 4,210,362 | ||||||
Members’ capital | 2,324,500 | 2,324,500 | ||||||
Accumulated deficit | (4,716,297 | ) | (4,151,599 | ) | ||||
Total members’ deficit | (2,391,797 | ) | (1,827,099 | ) | ||||
Total liabilities and members’ deficit | $ | 29,267,938 | $ | 28,268,118 | ||||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Operations
(unaudited)
For the Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Course operating revenues | $ | 8,699,023 | $ | 8,620,499 | ||||
Course operating expenses | 7,076,696 | 7,143,593 | ||||||
1,622,327 | 1,476,906 | |||||||
Depreciation and amortization expense | 964,694 | 786,600 | ||||||
Operating income | 657,633 | 690,306 | ||||||
Interest income | (18,056 | ) | (11,633 | ) | ||||
Interest expense | 1,240,387 | 1,247,905 | ||||||
Net loss | $ | (564,698 | ) | $ | (545,966 | ) | ||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Members’ Capital (Deficit)
(unaudited)
Members’ Equity | Total | |||||||||||
Heritage Golf Weston, LLC | Hillwood/ Weston Club, Ltd. | |||||||||||
Balance at December 31, 2004 | $ | 39,137 | $ | 39,138 | $ | 78,275 | ||||||
Member distributions | (579,000 | ) | (579,000 | ) | (1,158,000 | ) | ||||||
Net loss | (373,687 | ) | (373,687 | ) | (747,374 | ) | ||||||
Balance at December 31, 2005 | $ | (913,550 | ) | $ | (913,549 | ) | $ | (1,827,099 | ) | |||
Net loss and comprehensive loss | (282,349 | ) | (282,349 | ) | (564,698 | ) | ||||||
Balance at September 30, 2006 | $ | (1,195,899 | ) | $ | (1,195,898 | ) | $ | (2,391,797 | ) | |||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Cash Flows
(unaudited)
For the Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Operating activities | ||||||||
Net loss | $ | (564,698 | ) | $ | (545,966 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 964,694 | 786,600 | ||||||
Amortization of financing costs | 69,662 | 69,662 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (1,339,985 | ) | (1,166,626 | ) | ||||
Inventory | (16,540 | ) | 36,473 | |||||
Prepaid expenses and other assets | (105,538 | ) | (770,826 | ) | ||||
Related party accounts receivable | 327,961 | — | ||||||
Accounts payable and accrued expenses | (90,603 | ) | 314,610 | |||||
Related party accounts payable | — | (98,271 | ) | |||||
Deferred revenue | 1,784,564 | 2,300,997 | ||||||
Net cash provided by operating activities | 1,029,517 | 926,653 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (410,270 | ) | (187,511 | ) | ||||
Net cash used in investing activities | (410,270 | ) | (187,511 | ) | ||||
Financing activities | ||||||||
Proceeds from notes payable | — | 20,000,000 | ||||||
Prepayments of notes payable | — | (17,455,398 | ) | |||||
Payment on capital leases | (129,443 | ) | (118,008 | ) | ||||
Member distributions | — | (1,158,000 | ) | |||||
Net cash used in financing activities | (129,443 | ) | 1,268,594 | |||||
Net increase in cash and cash equivalents | 489,804 | 2,007,736 | ||||||
Cash and cash equivalents at beginning of period | 3,451,244 | 2,509,416 | ||||||
Cash and cash equivalents at end of period | $ | 3,941,048 | $ | 4,517,152 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 1,226,890 | $ | 1,259,410 | ||||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to the Unaudited Financial Statements
September 30, 2006
1. | General |
The statements presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited balance sheets as of December 31, 2005 and 2004 and as of December 31, 2004 and 2003 and the related statements of operations, members’ capital (deficit) and cash flows for the years ended December 31, 2005 and 2004 and for the years ended December 31, 2004 and 2003. In the opinion of management, all adjustments that are deemed necessary have been made in order to fairly present the unaudited interim financial statements for the period and accounting policies have been consistently applied.
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FINANCIAL STATEMENTS
WHCC, LLC (d.b.a. Weston Hills Country Club)
Years Ended December 31, 2005 and 2004
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WHCC, LLC
Financial Statements
Years ended December 31, 2005 and 2004
F - 81 | ||
Audited Financial Statements | ||
F - 82 | ||
F - 83 | ||
F - 84 | ||
F - 85 | ||
F - 86 |
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Report of Independent Auditors
The Board of Directors
Weston Hills Country Club, LLC
We have audited the accompanying balance sheets of WHCC, LLC, d.b.a. Weston Hills Country Club, as of December 31, 2005 and 2004 and the related statements of operations, members’ capital (deficit) 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, and 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 WHCC, LLC at December 31, 2005 and 2004 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.
/s/ Ernst & Young LLP
San Diego, California
April 21, 2006
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WHCC, LLC, d.b.a. Weston Hills Country Club
Balance Sheets
December 31, | ||||||||
2005 | 2004 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,451,244 | $ | 2,509,416 | ||||
Accounts receivable, net of allowance of $24,472 and $104,696 at December 31, 2005 and 2004, respectively | 844,641 | 839,187 | ||||||
Inventory | 222,451 | 228,842 | ||||||
Prepaid expenses and deposits | 376,545 | 248,202 | ||||||
Related party accounts receivable | 327,961 | — | ||||||
Total current assets | 5,222,842 | 3,825,647 | ||||||
Property and equipment, net | 22,606,178 | 22,945,188 | ||||||
Other assets, net | 439,098 | 232,948 | ||||||
Total assets | $ | 28,268,118 | $ | 27,003,783 | ||||
Liabilities and members’ capital (deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 679,745 | $ | 678,572 | ||||
Related party accounts payable | — | 98,271 | ||||||
Deferred revenue | 4,552,899 | 4,317,268 | ||||||
Notes payable, current portion | — | 476,570 | ||||||
Current portion of obligation under capital leases | 172,601 | 160,222 | ||||||
Total current liabilities | 5,405,245 | 5,730,903 | ||||||
Notes payable, less current portion | 20,000,000 | 16,978,828 | ||||||
Obligation under capital leases, less current portion | 479,610 | 651,175 | ||||||
Deferred revenue, less current portion | 4,210,362 | 3,564,602 | ||||||
Members’ capital | 2,324,500 | 3,482,500 | ||||||
Accumulated deficit | (4,151,599 | ) | (3,404,225 | ) | ||||
Total members’ capital (deficit) | (1,827,099 | ) | 78,275 | |||||
Total liabilities and members’ capital (deficit) | $ | 28,268,118 | $ | 27,003,783 | ||||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Operations
Years Ended December 31, | ||||||||
2005 | 2004 | |||||||
Course operating revenues | $ | 11,878,933 | $ | 11,307,179 | ||||
Course operating expenses | 9,794,587 | 10,396,898 | ||||||
2,084,346 | 910,281 | |||||||
Depreciation and amortization expenses | 1,244,894 | 1,126,681 | ||||||
Operating income (loss) | 839,452 | (216,400 | ) | |||||
Interest income | (35,800 | ) | (51,393 | ) | ||||
Interest expense | 1,622,626 | 1,274,854 | ||||||
Net loss | $ | (747,374 | ) | $ | (1,439,861 | ) | ||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Members’ Capital (Deficit)
For the Years Ended December 31, 2005 and December 31, 2004
Member’s Equity | Total | |||||||||||
Heritage Golf Weston, LLC | Hillwood/Weston Club, Ltd. | |||||||||||
Balance at December 31, 2003 | $ | 1,259,068 | $ | 1,259,068 | $ | 2,518,136 | ||||||
Member distributions | (500,000 | ) | (500,000 | ) | (1,000,000 | ) | ||||||
Net loss and comprehensive loss | (719,931 | ) | (719,930 | ) | (1,439,861 | ) | ||||||
Balance at December 31, 2004 | 39,137 | 39,138 | 78,275 | |||||||||
Member distributions | (579,000 | ) | (579,000 | ) | (1,158,000 | ) | ||||||
Net loss and comprehensive loss | (373,687 | ) | (373,687 | ) | (747,374 | ) | ||||||
Balance at December 31, 2005 | $ | (913,550 | ) | $ | (913,549 | ) | $ | (1,827,099 | ) | |||
See accompanying notes.
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WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Cash Flows
Year ended December 31, | ||||||||
2005 | 2004 | |||||||
Operating activities | ||||||||
Net loss | $ | (747,374 | ) | $ | (1,439,861 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,244,894 | 1,126,681 | ||||||
Amortization of financing costs | 84,708 | 84,708 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (5,454 | ) | 405,129 | |||||
Inventory | 6,391 | (29,119 | ) | |||||
Prepaid expenses and other assets | (343,108 | ) | (128,972 | ) | ||||
Related party accounts receivable | (327,961 | ) | — | |||||
Accounts payable and accrued expenses | (74,920 | ) | (162,836 | ) | ||||
Related party accounts payable | (98,271 | ) | (130,909 | ) | ||||
Deferred revenue | 881,391 | 1,774,521 | ||||||
Net cash provided by operating activities | 620,296 | 1,499,342 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (905,884 | ) | (427,041 | ) | ||||
Net cash used in investing activities | (905,884 | ) | (427,041 | ) | ||||
Financing activities | ||||||||
Proceeds from notes payable | 20,000,000 | — | ||||||
Repayments of notes payable | (17,455,398 | ) | (482,728 | ) | ||||
Payment on capital leases | (159,186 | ) | (69,347 | ) | ||||
Member distributions | (1,158,000 | ) | (1,000,000 | ) | ||||
Net cash provided by (used in) financing activities | 1,227,416 | (1,552,075 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 941,828 | (479,774 | ) | |||||
Cash and cash equivalents at beginning of year | 2,509,416 | 2,989,190 | ||||||
Cash and cash equivalents at end of year | $ | 3,451,244 | $ | 2,509,416 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 1,607,312 | $ | 1,292,877 | ||||
Supplemental disclosure of non-cash investing activities | ||||||||
Capital lease obligations entered into for equipment | $ | — | $ | 553,273 | ||||
See accompanying notes.
F-85
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
December 31, 2005
1. The Company and Summary of Significant Accounting Policies
The Company
WHCC, LLC (the “Company”) is a limited liability company formed in the state of Delaware on September 27, 2002. The Company owns and operates a private golf facility, in Weston, Florida. The date the LLC is scheduled to terminate is December 31, 2052, or on such date as agreed upon by the LLC members.
The Company did not own any property at the time of its inception (September 27, 2002). Two third party investors funded the Company by contributing $6,982,500 prior to acquiring the golf facility in October 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with remaining maturities of less than three months when purchased. The carrying value of these investments approximates fair value.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivables. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. The Company does not currently require collateral for initiation fees.
F-86
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
1. The Company and Summary of Significant Accounting Policies (continued)
Collectibility of Accounts Receivable
The Company evaluates the collectibility of its accounts receivables based on a combination of factors. The Company regularly analyzes its significant customer accounts, and, when it becomes aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debt to reduce the related receivable to the amount it reasonably believes is collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customer change, the Company’s estimates of the recoverability of receivables could be further adjusted or the related receivables could be written-off to the allowance as uncollectible.
Fair Value of Financial Instruments
Financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable are carried at cost, which management believes approximates the fair value.
Inventory
Inventory is stated at the lower of cost (determined on a weighted average basis) or market. Inventory consists principally of merchandise and food.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally three to thirty years) using the straight-line method.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset’s carrying value unlikely. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset and such loss would be incurred based on the fair value of the impaired assets. The Company has identified no such impairment losses to date.
F-87
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
1. The Company and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company is treated as a partnership for income tax purposes. Under provisions of the Internal Revenue Code, partnerships are not subject to federal income taxes. For income tax purposes, any income or losses realized are taxable to the individual members. Taxable income or loss is allocated to each member in accordance with the limited liability agreement.
Revenue Recognition
Revenue is generated from golf course operations (green fees, cart fees, driving range fees, food and beverage sales and pro shop sales), membership dues, and initiation fees. Revenues from golf operations are recognized at the time of sale or when the service is provided. Revenues from membership dues are billed annually and recognized ratably over the subsequent 12 month period. Revenues from initiation fees are recognized over the estimated average life of the membership using the straight-line method which is currently estimated to be seven years.
The Company provides for financing initiation fees through notes receivables. Initiation fee notes receivables are included in accounts receivable. Cash received in advance of revenue recognition for membership dues and initiation fees is included in deferred revenue.
Comprehensive Income
SFAS No. 130,Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. To date there have been no differences between the Company’s net loss and its total comprehensive loss.
F-88
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
2. Financial Statement Details
Accounts receivable consists of the following:
December 31, | ||||||||
2005 | 2004 | |||||||
Accounts receivable | $ | 680,682 | $ | 767,153 | ||||
Initiation fee notes receivable | 188,431 | 176,730 | ||||||
869,113 | 943,883 | |||||||
Provision for doubtful accounts | (24,472 | ) | (104,696 | ) | ||||
$ | 844,641 | $ | 839,187 | |||||
Property and equipment consists of the following:
December 31, | ||||||||
2005 | 2004 | |||||||
Land | $ | 17,266,296 | $ | 17,106,971 | ||||
Computers and software | 169,781 | 156,703 | ||||||
Equipment | 2,046,640 | 1,953,605 | ||||||
Furniture and fixtures | 479,415 | 461,193 | ||||||
Building and building improvements | 5,670,183 | 5,630,923 | ||||||
Construction in process | 582,964 | – | ||||||
26,215,279 | 25,309,395 | |||||||
Less accumulated depreciation | (3,609,101 | ) | (2,364,207 | ) | ||||
$ | 22,606,178 | $ | 22,945,188 | |||||
3. Membership Fee Revenue
The Company realizes a substantial portion of its revenue from the membership initiation fees received at the time a member joins one of the Company’s private golf clubs. Accounting principles generally accepted in the United States (GAAP) require that this revenue be recognized over the average life of a membership, which the Company has determined to be seven years, resulting in a deferral of a significant portion of the membership fees.
F-89
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
3. Membership Fee Revenue (continued)
The reconciliation of gross membership fees to GAAP membership fee revenue is as follows:
Year ended December 31, 2005 | Year ended December 31, 2004 | |||||||
Gross membership fees | $ | 1,762,004 | $ | 2,590,443 | ||||
Less deferred portion of current year fees | (1,619,665 | ) | (2,394,008 | ) | ||||
Plus recognition of prior year deferred revenue | 722,191 | 352,128 | ||||||
Net GAAP membership fee revenue | $ | 864,530 | $ | 548,563 | ||||
Deferred membership fee revenue as of December 31, 2005 will be amortized into revenue as follows:
2006 | $ | 973,906 | |
2007 | 973,906 | ||
2008 | 973,906 | ||
2009 | 967,319 | ||
2010 | 760,509 | ||
Thereafter | 534,722 | ||
Total | $ | 5,184,268 | |
4. Commitments
The Company leases certain equipment under operating leases. Lease expense for the years ended December 31, 2005 and 2004 was $16,503 and $118,864, respectively.
The Company leases certain equipment under capital lease obligations. Cost of assets under capital leases totaled $895,355 and $895,355 at December 31, 2005 and 2004, respectively.
Accumulated depreciation on assets under capital leases totaled $291,598 and $112,527 at December 31, 2005 and 2004, respectively. Amortization of assets recorded under capital leases is included with depreciation expense.
F-90
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
4. Commitments (continued)
At December 31, 2005, future minimum lease payments for all leases with initial terms of one year or more are as follows:
Capital | ||||
2006 | $ | 215,351 | ||
2007 | 215,351 | |||
2008 | 195,777 | |||
2009 | 116,177 | |||
2010 | — | |||
Total minimum lease payments | 742,656 | |||
Amounts representing interest | (90,445 | ) | ||
Present value of net minimum lease payments | 652,211 | |||
Less current portion of capital obligation | 172,601 | |||
Long term capital lease obligations | $ | 479,610 | ||
5. Debt
The following summarizes the Company’s long-term notes payable arrangement at:
December 31, | ||||||
2005 | 2004 | |||||
Promissory note dated October 1, 2002, interest accrues at a rate of Prime plus 2%. Principal and interest is due and payable monthly, beginning November 1, 2003 with all unpaid principal and accrued interest due October 31, 2007. Note paid in full during 2005. | $ | — | $ | 17,455,398 | ||
Promissory note dated October 1, 2005, interest accrues at a rate of LIBOR plus 2.5% (6.79% at December 31, 2005). Interest is due and payable monthly. Principal is due and payable monthly beginning October 1, 2008 with all unpaid principal and accrued interest due September 1, 2010. | $ | 20,000,000 | $ | — |
F-91
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
5. Debt (continued)
Principal maturities on the above note is as follows for the years ended December 31:
2006 | $ | — | |
2007 | — | ||
2008 | 76,887 | ||
2009 | 317,275 | ||
2010 | 19,605,838 | ||
Total | $ | 20,000,000 | |
All borrowings under the agreement are collateralized by the golf facility owned by the Company and are subject to various compliance covenants.
6. Related Party Transactions
On September 30, 2002, the Company entered into a management agreement with Heritage Golf Operator, LLC (“HGO”) to manage its country club property. HGO is a wholly owned subsidiary of a WHCC investor. HGO receives an annual management fee of 3.5% of gross revenues. For the year ending December 31, 2005 and December 31, 2004, the Company paid HGO management fees of $448,691 and $479,212, respectively.
In September of 2002, the Company entered into a consulting agreement with Hillwood Weston Club, a founder, for services related to the Company’s ownership and operations of the Weston Hills Country Club. The agreement is effective until a change in ownership or event of default, with an annual fee of $75,000 paid by the Company to Hillwood.
At December 31, 2004, the related party payable relates to reimbursement of payroll expenses and management fees to HGO.
At December 31, 2005, the related party receivable relates to expenses paid by the Company on behalf of other properties with the same ownership as the Company.
F-92
Table of Contents
FINANCIAL STATEMENTS
WHCC, LLC (d.b.a. Weston Hills Country Club)
Years ended December 31, 2004 and 2003
with Report of Independent Auditors
F-93
Table of Contents
WHCC, LLC
Financial Statements
Years ended December 31, 2004 and 2003
F - 95 | ||
Audited Financial Statements | ||
F - 96 | ||
F - 97 | ||
F - 98 | ||
F - 99 | ||
F -100 |
F-94
Table of Contents
Report of Independent Auditors
The Board of Directors
Weston Hills Country Club, LLC
We have audited the accompanying balance sheets of WHCC, LLC, d.b.a. Weston Hills Country Club, as of December 31, 2004 and 2003 and the related statements of operations, members’ capital 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, and 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 WHCC, LLC at December 31, 2004 and 2003 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.
/s/ Ernst & Young LLP
San Diego, California
April 15, 2005
F-95
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Balance Sheets
December 31, | ||||||||
2004 | 2003 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,509,416 | $ | 2,989,190 | ||||
Accounts receivable, net of allowance of $104,696 and $160,448 at December 31, 2004 and 2003, respectively | 839,187 | 1,244,316 | ||||||
Inventory | 228,842 | 199,723 | ||||||
Prepaid expenses and deposits | 248,202 | 119,230 | ||||||
Total current assets | 3,825,647 | 4,552,459 | ||||||
Property and equipment, net | 22,945,188 | 23,091,555 | ||||||
Other assets, net | 232,948 | 317,656 | ||||||
Total assets | $ | 27,003,783 | $ | 27,961,670 | ||||
Liabilities and members’ capital | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 678,572 | $ | 841,408 | ||||
Related party accounts payable | 98,271 | 229,180 | ||||||
Deferred revenue | 4,317,268 | 4,214,564 | ||||||
Notes payable, current portion | 476,570 | 482,784 | ||||||
Current portion of obligation under capital leases | 160,222 | 60,628 | ||||||
Total current liabilities | 5,730,903 | 5,828,564 | ||||||
Notes payable, less current portion | 16,978,828 | 17,455,342 | ||||||
Obligation under capital leases, less current portion | 651,175 | 266,843 | ||||||
Deferred revenue, less current portion | 3,564,602 | 1,892,785 | ||||||
Members’ capital: | ||||||||
Members’ capital | 3,482,500 | 4,482,500 | ||||||
Accumulated deficit | (3,404,225 | ) | (1,964,364 | ) | ||||
Total members’ capital | 78,275 | 2,518,136 | ||||||
Total liabilities and members’ capital | $ | 27,003,783 | $ | 27,961,670 | ||||
See accompanying notes.
F-96
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Operations
Years ended December 31, | ||||||||
2004 | 2003 | |||||||
Course operating revenues | $ | 11,307,179 | $ | 10,820,232 | ||||
Course operating expenses | 10,396,898 | 10,139,303 | ||||||
910,281 | 680,929 | |||||||
Depreciation and amortization expenses | 1,126,681 | 994,817 | ||||||
Operating loss | (216,400 | ) | (313,888 | ) | ||||
Interest income | (51,393 | ) | (29,044 | ) | ||||
Interest expense | 1,274,854 | 1,503,380 | ||||||
Net loss | $ | (1,439,861 | ) | $ | (1,788,224 | ) | ||
See accompanying notes.
F-97
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Members’ Capital
For the years ended December 31, 2004 and December 31, 2003
Member’s Equity | Total | |||||||||||
Heritage Golf Weston, LLC | Hillwood/Weston Club, Ltd. | |||||||||||
Balance at December 31, 2002 | $ | 3,403,180 | $ | 3,403,180 | $ | 6,806,360 | ||||||
Member distributions | (1,250,000 | ) | (1,250,000 | ) | (2,500,000 | ) | ||||||
Net loss and comprehensive loss | (894,112 | ) | (894,112 | ) | (1,788,224 | ) | ||||||
Balance at December 31, 2003 | 1,259,068 | 1,259,068 | 2,518,136 | |||||||||
Member distributions | (500,000 | ) | (500,000 | ) | (1,000,000 | ) | ||||||
Net loss and comprehensive loss | (719,931 | ) | (719,930 | ) | (1,439,861 | ) | ||||||
Balance at December 31, 2004 | $ | 39,137 | $ | 39,138 | $ | 78,275 | ||||||
See accompanying notes.
F-98
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Statements of Cash Flows
Year ended December 31, | ||||||||
2004 | 2003 | |||||||
Operating activities | ||||||||
Net loss | $ | (1,439,861 | ) | $ | (1,788,224 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 1,126,681 | 994,817 | ||||||
Amortization of financing costs | 84,708 | 84,709 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 405,129 | 205,288 | ||||||
Inventory | (29,119 | ) | 18,616 | |||||
Prepaid expenses and other assets | (128,972 | ) | 61,213 | |||||
Accounts payable and accrued expenses | (162,836 | ) | 347,307 | |||||
Related party payables | (130,909 | ) | 16,438 | |||||
Deferred revenue | 1,774,521 | 1,637,720 | ||||||
Net cash provided by operating activities | 1,499,342 | 1,577,884 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (427,041 | ) | (446,492 | ) | ||||
Net cash used in investing activities | (427,041 | ) | (446,492 | ) | ||||
Financing activities | ||||||||
Repayments of notes payable | (482,728 | ) | (61,874 | ) | ||||
Payment on capital leases | (69,347 | ) | (14,611 | ) | ||||
Member distributions | (1,000,000 | ) | (2,500,000 | ) | ||||
Net cash used in financing activities | (1,552,075 | ) | (2,576,485 | ) | ||||
Net decrease in cash and cash equivalents | (479,774 | ) | (1,445,093 | ) | ||||
Cash and cash equivalents at beginning of year | 2,989,190 | 4,434,283 | ||||||
Cash and cash equivalents at end of year | $ | 2,509,416 | $ | 2,989,190 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 1,292,877 | $ | 1,503,794 | ||||
Supplemental disclosure of non-cash investing activities | ||||||||
Capital lease obligations entered into for equipment | $ | 553,273 | $ | 342,082 | ||||
See accompanying notes.
F-99
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
December 31, 2004
1. The Company and Summary of Significant Accounting Policies
The Company
WHCC, LLC (the “Company”) is a limited liability company formed in the state of Delaware on September 27, 2002. The Company owns and operates a private golf facility, in Weston, Florida. The date the LLC is scheduled to terminate is December 31, 2052, or on such date as agreed upon by the LLC members.
The Company did not own any property at the time of its inception (September 27, 2002). Two third party investors funded the Company by contributing $6,982,500 prior to acquiring the golf facility in October 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with remaining maturities of less than three months when purchased. The carrying value of these investments approximates fair value.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivables. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. The Company does not currently require collateral for initiation fees.
F-100
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
1. The Company and Summary of Significant Accounting Policies (continued)
Collectibility of Accounts Receivable
The Company evaluates the collectibility of its accounts receivables based on a combination of factors. The Company regularly analyzes its significant customer accounts, and, when it becomes aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debt to reduce the related receivable to the amount it reasonably believes is collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customer change, the Company’s estimates of the recoverability of receivables could be further adjusted or the related receivables could be written-off to the allowance as uncollectible.
Fair Value of Financial Instruments
Financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable are carried at cost, which management believes approximates the fair value.
Inventory
Inventory is stated at the lower of cost (determined on a weighted average basis) or market. Inventory consists principally of merchandise and food.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally three to thirty years) using the straight-line method.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset’s carrying value unlikely. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset and such loss would be incurred based on the fair value of the impaired assets. The Company has identified no such impairment losses to date.
F-101
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
1. The Company and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company is treated as a partnership for income tax purposes. Under provisions of the Internal Revenue Code, partnerships are not subject to federal income taxes. For income tax purposes, any income or losses realized are taxable to the individual members. Taxable income or loss is allocated to each member in accordance with the limited liability agreement.
Revenue Recognition
Revenue is generated from golf course operations (green fees, cart fees, driving range fees, food and beverage sales and pro shop sales), membership dues, and initiation fees. Revenues from golf operations are recognized at the time of sale or when the service is provided. Revenues from membership dues are billed annually and recognized ratably over the subsequent 12 month period. Revenues from initiation fees are recognized over the estimated average life of the membership using the straight-line method which is currently estimated to be seven years.
The Company provides for financing initiation fees through notes receivables. Initiation fee notes receivables are included in accounts receivable. Cash received in advance of revenue recognition for membership dues and initiation fees is included in deferred revenue.
Comprehensive Income
SFAS No. 130,Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. To date there have been no differences between the Company’s net loss and its total comprehensive loss.
F-102
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
2. Financial Statement Details
Accounts receivable consists of the following:
December 31, | ||||||||
2004 | 2003 | |||||||
Accounts receivable | $ | 767,153 | $ | 872,958 | ||||
Initiation fee notes receivable | 176,730 | 532,306 | ||||||
943,883 | 1,405,264 | |||||||
Provision for doubtful accounts | (104,696 | ) | (160,948 | ) | ||||
$ | 839,187 | $ | 1,244,316 | |||||
Property and equipment consists of the following:
December 31, | ||||||||
2004 | 2003 | |||||||
Land | $ | 17,106,971 | $ | 16,770,113 | ||||
Computers and software | 156,703 | 155,388 | ||||||
Equipment | 1,953,605 | 1,342,528 | ||||||
Furniture and fixtures | 461,193 | 430,129 | ||||||
Building and building improvements | 5,630,923 | 5,630,923 | ||||||
25,309,395 | 24,329,081 | |||||||
Less accumulated depreciation | (2,364,207 | ) | (1,237,526 | ) | ||||
$ | 22,945,188 | $ | 23,091,555 | |||||
3. Membership Fee Revenue
The Company realizes a substantial portion of its revenue from the membership initiation fees received at the time a member joins one of the Company’s private golf clubs. Accounting principles generally accepted in the United States (GAAP) require that this revenue be recognized over the average life of a membership, which the Company has determined to be seven years, resulting in a deferral of a significant portion of the membership fees.
F-103
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
3. Membership Fee Revenue (continued)
The reconciliation of gross membership fees to GAAP membership fee revenue is as follows:
Year ended December 31, 2004 | Year ended December 31, 2003 | |||||||
Gross membership fees | $ | 2,590,443 | $ | 2,123,664 | ||||
Less deferred portion of current year fees | (2,394,008 | ) | (1,959,014 | ) | ||||
Plus recognition of prior year deferred revenue | 352,128 | 48,748 | ||||||
Net GAAP membership fee revenue | $ | 548,563 | $ | 213,398 | ||||
Deferred membership fee revenue as of December 31, 2004 will be amortized into revenue as follows:
2005 | $ | 722,191 | |
2006 | 722,191 | ||
2007 | 722,191 | ||
2008 | 722,191 | ||
2009 | 715,604 | ||
Thereafter | 682,426 | ||
Total | $ | 4,286,794 | |
4. Commitments
The Company leases certain equipment under operating leases. Lease expense for the years ended December 31, 2004 and 2003 was $118,864 and $131,594, respectively.
The Company leases certain equipment under capital lease obligations. Cost of assets under capital leases totaled $895,355 and $342,082 at December 31, 2004 and 2003, respectively.
Accumulated depreciation on assets under capital leases totaled $112,527 and $16,447 at December 31, 2004 and 2003, respectively. Amortization of assets recorded under capital leases is included with depreciation expense.
F-104
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
4. Commitments (continued)
At December 31, 2004, future minimum lease payments for all leases with initial terms of one year or more are as follows:
Capital | ||||
2005 | $ | 215,351 | ||
2006 | 215,351 | |||
2007 | 215,351 | |||
2008 | 196,106 | |||
2009 | 123,402 | |||
Total minimum lease payments | 965,561 | |||
Amounts representing interest | (154,164 | ) | ||
Present value of net minimum lease payments | 811,397 | |||
Less current portion of capital obligation | 160,222 | |||
Long term capital lease obligations | $ | 651,175 | ||
5. Debt
The following summarizes the Company’s long-term notes payable arrangement at:
December 31, | ||||||
2004 | 2003 | |||||
Promissory note dated October 1, 2002, interest accrues at a rate of Prime plus 2% (6.75% at December 31, 2004). Principal and interest is due and payable monthly, beginning November 1, 2003 with all unpaid principal and accrued interest due October 31, 2007. | $ | 17,455,398 | $ | 17,938,126 |
Principal maturities on the above note is as follows for the years ended December 31:
2005 | $ | 476,570 | |
2006 | 510,227 | ||
2007 | 16,468,601 | ||
Total | $ | 17,455,398 | |
All borrowings under the agreement are collateralized by the golf facility owned by the Company and are subject to various compliance covenants.
F-105
Table of Contents
WHCC, LLC, d.b.a. Weston Hills Country Club
Notes to Financial Statements
6. Related Party Transactions
On September 30, 2002, the Company entered into a management agreement with Heritage Golf Operator, LLC (“HGO”) to manage its country club property. HGO is a wholly owned subsidiary of a WHCC investor. HGO receives an annual management fee of 3.5% of gross revenues. For the year ending December 31, 2004 and December 31, 2003, the Company paid HGO management fees of $554,212 and $448,419, respectively.
In September of 2002, the Company entered into a consulting agreement with Hillwood Weston Club, a founder, for services related to the Company’s ownership and operations of the Weston Hills Country Club. The agreement is effective until a change in ownership or event of default, with an annual fee of $75,000 paid by the Company to Hillwood.
At December 31, 2004 and 2003, respectively, the related party payable relates to reimbursement of payroll expenses and management fees to HGO.
F-106
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Heritage Golf Group West Coast, Inc.
Consolidated Balance Sheet
September 30, 2006
(unaudited)
Assets | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 5,985 | ||
Accounts receivable | 768,786 | |||
Initiation fee notes receivable, current portion | 341,966 | |||
Inventory | 434,902 | |||
Prepaid expenses and deposits | 154,296 | |||
Total current assets | 1,705,935 | |||
Property and equipment, net | 29,495,363 | |||
Other assets, net | 362,844 | |||
Initiation fee notes receivable, less current portion | 51,181 | |||
Related party receivable | 26,975,256 | |||
Total assets | $ | 58,590,579 | ||
Liabilities and stockholders’ equity | ||||
Current liabilities: | ||||
Accounts payable and accrued expenses | $ | 555,478 | ||
Deferred revenue | 2,891,800 | |||
Notes payable, current portion | 478,419 | |||
Current portion of obligation under capital leases | 196,735 | |||
Total current liabilities | 4,122,432 | |||
Notes payable, less current portion | 35,395,367 | |||
Obligation under capital leases, less current portion | 375,357 | |||
Deferred revenue, less current portion | 7,826,140 | |||
Membership deposits | 1,228,531 | |||
Commitments and contingencies | ||||
Stockholders’ equity | ||||
Common stock, par value $.01; 1,000 shares authorized, issued and outstanding | 10 | |||
Additional paid in capital | 14,237,653 | |||
Accumulated deficit | (4,594,911 | ) | ||
Total stockholders’ equity | 9,642,752 | |||
Total liabilities and stockholders’ equity | $ | 58,590,579 | ||
See accompanying notes.
F-107
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Operations
(unaudited)
For the Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Course operating revenues | $ | 10,454,825 | $ | 9,418,515 | ||||
Course operating expenses | 6,773,876 | 6,390,001 | ||||||
3,680,949 | 3,028,514 | |||||||
Depreciation and amortization expenses | 1,176,381 | 1,214,508 | ||||||
Operating income | 2,504,568 | 1,814,006 | ||||||
Interest expense | (2,697,711 | ) | (2,165,328 | ) | ||||
Net loss | $ | (193,143 | ) | $ | (351,322 | ) | ||
See accompanying notes.
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Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Stockholders’ Equity
(unaudited)
Common Stock | Accumulated | Total | ||||||||||||||
Shares | Amount | Paid in Capital | ||||||||||||||
Balance at December 31, 2005 | 1,000 | $ | 10 | $ | 14,237,653 | $ | (4,401,768 | ) | $ | 9,835,895 | ||||||
Net loss and comprehensive loss | — | — | — | (193,143 | ) | (193,143 | ) | |||||||||
Balance at July 31, 2006 | 1,000 | $ | 10 | $ | 14,237,653 | $ | (4,594,911 | ) | $ | 9,642,752 | ||||||
See accompanying notes.
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Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For the Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Operating activities | ||||||||
Net loss | $ | (193,143 | ) | $ | (351,320 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,176,381 | 1,214,508 | ||||||
Amortization of financing costs | 102,851 | 102,851 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 184,950 | (190,022 | ) | |||||
Notes receivable | 121,117 | 192,768 | ||||||
Inventory | (81,842 | ) | (78,004 | ) | ||||
Prepaid expenses and deposits | 38,348 | (48,906 | ) | |||||
Other assets | (1 | ) | (22,566 | ) | ||||
Accounts payable and accrued expenses | (48,065 | ) | 68,532 | |||||
Deferred revenue | 13,468 | 1,441,288 | ||||||
Membership deposits | 249,763 | 290,084 | ||||||
Net cash provided by operating activities | 1,563,827 | 2,619,213 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (328,816 | ) | (834,299 | ) | ||||
Related party receivable | (713,191 | ) | (1,189,067 | ) | ||||
Net cash used in investing activities | (1,042,007 | ) | (2,023,366 | ) | ||||
Financing activities | ||||||||
Repayments of notes payable | (328,129 | ) | (414,120 | ) | ||||
Payment on capital leases | (193,691 | ) | (181,727 | ) | ||||
Net cash provided by financing activities | (521,820 | ) | (595,847 | ) | ||||
Net decrease in cash and cash equivalents | — | — | ||||||
Cash and cash equivalents at beginning of period | 5,985 | 6,774 | ||||||
Cash and cash equivalents at end of period | $ | 5,985 | $ | 6,774 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 2,676,055 | $ | 2,085,799 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Acquisition of equipment under capital leases | $ | 252,078 | $ | — | ||||
See accompanying notes.
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Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Unaudited Consolidated Financial Statements
1. General
The statements presented herein have been prepared in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited consolidated balance sheets as of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2005, 2004 and 2003. In the opinion of management, all adjustments that are deemed necessary have been made in order to fairly present the unaudited interim financial statements for the period and accounting policies have been consistently applied.
F-111
Table of Contents
CONSOLIDATED FINANCIAL STATEMENTS
Heritage Golf Group West Coast, Inc.
Years Ended December 31, 2005 and 2004
F-112
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Financial Statements
Years Ended December 31, 2005 and 2004
F -114 | ||
Audited Consolidated Financial Statements | ||
F -115 | ||
F -116 | ||
F -117 | ||
F -118 | ||
F -119 |
F-113
Table of Contents
Report of Independent Auditors
The Board of Directors and Shareholders
Heritage Golf Group West Coast, Inc.
We have audited the accompanying consolidated balance sheets of Heritage Golf Group West Coast, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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, and 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 Heritage Golf Group West Coast, Inc. at December 31, 2005, and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Diego, California
November 21, 2006
F-114
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Balance Sheets
December 31, | ||||||||
2005 | 2004 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,985 | $ | 6,774 | ||||
Accounts receivable, net of allowance of $65,031 and $56,660 as of December 31, 2005 and 2004, respectively | 953,736 | 668,652 | ||||||
Initiation fee notes receivable, current portion | 460,841 | 362,231 | ||||||
Inventory | 353,060 | 328,753 | ||||||
Prepaid expenses and deposits | 192,644 | 120,250 | ||||||
Total current assets | 1,966,266 | 1,486,660 | ||||||
Property and equipment, net | 30,090,850 | 30,749,193 | ||||||
Other assets, net | 465,694 | 580,263 | ||||||
Initiation fee notes receivable, less current portion | 53,423 | 685,481 | ||||||
Related party receivable | 26,262,065 | 25,029,915 | ||||||
Total assets | $ | 58,838,298 | $ | 58,531,512 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payables and accrued expenses | $ | 603,543 | $ | 489,156 | ||||
Deferred revenue | 3,024,134 | 2,308,504 | ||||||
Notes payable, current portion | 478,419 | 448,955 | ||||||
Current portion of obligations under capital leases | 199,511 | 239,973 | ||||||
Total current liabilities | 4,305,607 | 3,486,588 | ||||||
Notes payable, less current portion | 35,723,496 | 36,301,045 | ||||||
Obligation under capital leases, less current portion | 314,194 | 512,355 | ||||||
Deferred revenue, less current portion | 7,680,338 | 6,852,454 | ||||||
Membership deposits | 978,768 | 631,555 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $.01; 1,000 shares authorized, issued and outstanding | 10 | 10 | ||||||
Additional paid in capital | 14,237,653 | 14,237,653 | ||||||
Accumulated deficit | (4,401,768 | ) | (3,490,148 | ) | ||||
Total stockholders’ equity | 9,835,895 | 10,747,515 | ||||||
Total liabilities and stockholders’ equity | $ | 58,838,298 | $ | 58,531,512 | ||||
See accompanying notes.
F-115
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Operations
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Course operating revenues | $ | 12,600,999 | $ | 11,806,132 | $ | 10,863,182 | ||||||
Course operating expenses | 8,956,349 | 9,137,683 | 8,573,261 | |||||||||
3,644,650 | 2,668,449 | 2,289,921 | ||||||||||
Depreciation and amortization expenses | 1,576,616 | 1,618,851 | 1,598,882 | |||||||||
Operating income | 2,068,034 | 1,049,598 | 691,039 | |||||||||
Interest expense | (2,979,654 | ) | (2,581,619 | ) | (2,024,025 | ) | ||||||
Net loss | $ | (911,620 | ) | $ | (1,532,021 | ) | $ | (1,332,986 | ) | |||
See accompanying notes.
F-116
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2005, 2004 and 2003
Shares | Common Stock Amount | Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||
Balance at December 31, 2002 | 1,000 | $ | 10 | $ | 14,237,653 | $ | (625,141 | ) | $ | 13,612,522 | ||||||
Net loss and comprehensive loss | — | — | — | (1,332,986 | ) | (1,332,986 | ) | |||||||||
Balance at December 31, 2003 | 1,000 | 10 | 14,237,653 | (1,958,127 | ) | 12,279,536 | ||||||||||
Net loss and comprehensive loss | — | — | — | (1,532,021 | ) | (1,532,021 | ) | |||||||||
Balance at December 31, 2004 | 1,000 | 10 | 14,237,653 | (3,490,148 | ) | 10,747,515 | ||||||||||
Net loss and comprehensive loss | — | — | — | (911,620 | ) | (911,620 | ) | |||||||||
Balance at December 31, 2005 | 1,000 | $ | 10 | $ | 14,237,653 | $ | (4,401,768 | ) | $ | 9,835,895 | ||||||
See accompanying notes.
F-117
Table of Contents
Heritage Golf Group West Coast, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Operating activities | ||||||||||||
Net loss | $ | (911,620 | ) | $ | (1,532,021 | ) | $ | (1,332,986 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,576,616 | 1,618,851 | 1,598,882 | |||||||||
Amortization of financing costs | 137,134 | 255,569 | 226,238 | |||||||||
Change in operating assets and liabilities: | ||||||||||||
Accounts receivable | (285,085 | ) | (9,870 | ) | (247,264 | ) | ||||||
Notes receivable | 533,449 | 563,224 | (739,213 | ) | ||||||||
Inventory | (24,307 | ) | (33,416 | ) | (61,831 | ) | ||||||
Prepaid expenses and deposits | (72,394 | ) | 56,999 | 65,660 | ||||||||
Other assets | (22,565 | ) | (1,195 | ) | — | |||||||
Accounts payable and accrued expenses | 114,387 | 94,937 | (177,650 | ) | ||||||||
Deferred revenue | 1,543,514 | 2,899,009 | 3,394,444 | |||||||||
Membership deposits | 347,213 | 396,755 | 234,800 | |||||||||
Net cash provided by operating activities | 2,936,342 | 4,308,842 | 2,961,080 | |||||||||
Investing activities | ||||||||||||
Purchases of property and equipment | (918,273 | ) | (807,937 | ) | (150,072 | ) | ||||||
Related party receivable | (1,232,150 | ) | (14,586,685 | ) | (7,976,969 | ) | ||||||
Net cash used in investing activities | (2,150,423 | ) | (15,394,622 | ) | (8,127,041 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from notes payable | — | 25,844,855 | 15,250,000 | |||||||||
Repayments of notes payable | (548,085 | ) | (14,102,106 | ) | (9,279,158 | ) | ||||||
Payments on capital leases | (238,623 | ) | (256,910 | ) | (501,320 | ) | ||||||
Payment of financing costs | — | (400,150 | ) | (303,061 | ) | |||||||
Net cash provided by (used in) financing activities | (786,708 | ) | 11,085,689 | 5,166,461 | ||||||||
Net increase (decrease) in cash and cash equivalents | (789 | ) | (91 | ) | 500 | |||||||
Cash and cash equivalents at beginning of year | 6,774 | 6,865 | 6,365 | |||||||||
Cash and cash equivalents at end of year | $ | 5,985 | $ | 6,774 | $ | 6,865 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Interest paid | $ | 2,811,619 | $ | 2,393,663 | $ | 2,115,667 | ||||||
Supplemental schedule of non-cash investing and financing activities | ||||||||||||
Acquisition of equipment under capital leases | $ | — | $ | 237,132 | $ | 419,259 | ||||||
See accompanying notes.
F-118
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
1. The Company and Summary of Significant Accounting Policies
The Company
Heritage Golf Group West Coast, Inc. (the “Company”) is a corporation formed in the state of Delaware on January 6, 2000. The Company owns and operates one daily fee golf facility located in San Clemente, California, Talega Golf Club, and one private golf facility in Santa Clarita, California, Valencia Country Club.
The consolidated financial statements include the accounts of Heritage Golf Group West Coast, Inc. and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
The Company was wholly-owned by Heritage Golf Group, LLC (the “Parent”). On October 16, 2006, the Parent sold all of the outstanding capital stock of the Company to CNL Income Partners LP for approximately $58,000,000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
F-119
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
1. The Company and Summary of Significant Accounting Policies (continued)
Collectibility of Accounts Receivable
The Company evaluates the collectibility of its accounts receivables based on a combination of factors. The Company regularly analyzes its significant customer accounts, and, when it becomes aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debt to reduce the related receivable to the amount it reasonably believes is collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customer change, the Company’s estimates of the recoverability of receivables could be further adjusted or the related receivables could be written-off to the allowance as uncollectible.
Inventory
Inventory is stated at the lower of cost (determined on a weighted average basis) or market. Inventory consists principally of merchandise and food.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally three to thirty years) using the straight-line method.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset’s carrying value unlikely. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset and such loss would be incurred based on the fair value of the impaired assets. The Company has identified no such impairment losses to date.
Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes, which requires the use of the “liability method” of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company files a separate income tax return.
F-120
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
1. The Company and Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenue is generated from golf course operations (green fees, cart fees, driving range fees, food and beverage sales and pro shop sales), membership dues, and initiation fees. Revenues from golf operations are recognized at the time of sale or when the service is provided. Revenues from membership dues are billed monthly and recognized in the period earned.
The majority of initiation fees are not refundable until 30 years after the date of acceptance of a member, and are expected to cover the cost of providing services to the member over the course of the individual’s membership. Revenue related to initiation fees are recognized over the average expected life of an active membership. For initiation fees, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized as membership fees and deposits revenue on a straight-line basis over the average expected life of an active membership, seven years. The present value of the refund obligation is recorded as a membership deposit liability in the consolidated balance sheet and accretes over the nonrefundable term using the effective interest method with an interest rate defined as our weighted average borrowing rate. The accretion is included in interest expense.
Comprehensive Income
SFAS No. 130,Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. To date there have been no differences between the Company’s net loss and its total comprehensive loss.
F-121
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consists of the following:
December 31, | ||||||||
2005 | 2004 | |||||||
Land | $ | 23,568,536 | $ | 22,795,297 | ||||
Computers and software | 64,159 | 71,383 | ||||||
Equipment | 1,589,412 | 1,786,484 | ||||||
Furniture and fixtures | 949,229 | 888,319 | ||||||
Building and building improvements | 10,194,469 | 10,182,268 | ||||||
Construction in process | 143,743 | 133,307 | ||||||
36,509,548 | 35,857,058 | |||||||
Less accumulated depreciation | (6,418,698 | ) | (5,107,865 | ) | ||||
$ | 30,090,850 | $ | 30,749,193 | |||||
3. Commitments and Contingencies
The Company leases certain equipment under operating leases. Lease expense for the year ended December 31, 2005, 2004 and 2003 was $92,737, $96,944 and $86,644, respectively.
The Company leases certain equipment under capital lease obligations. Cost of assets under capital leases totaled $941,457 and $1,199,209 at December 31, 2005 and 2004, respectively.
Accumulated depreciation on assets under capital leases totaled $510,878 and $603,110 at December 31, 2005 and 2004, respectively. Amortization of assets recorded under capital leases is included with depreciation expense.
F-122
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
3. Commitments and Contingencies (continued)
At December 31, 2005, future minimum lease payments for all capital leases with initial terms of one year or more are as follows:
2006 | $ | 236,304 | ||
2007 | 200,053 | |||
2008 | 119,217 | |||
2009 | 18,834 | |||
Total minimum lease payments | 574,408 | |||
Amounts representing interest | (60,703 | ) | ||
Present value of net minimum lease payments | 513,705 | |||
Less current portion of capital obligation | (199,511 | ) | ||
Long term capital lease obligations | $ | 314,194 | ||
In 2004, the Parent entered into an agreement with a lender to provide membership initiation fee financing to new members who join the Company’s membership club. As part of this agreement, the Parent agreed to purchase any loan from the lender that is in default more than 90 days. As of December 31, 2005, new members have financed $3,237,013 of notes receivable with the lender. As of December 31, 2005, the Parent has not received any notices of default from the lender.
F-123
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt
The following summarizes the Company’s long-term notes payable arrangements:
2005 | 2004 | |||||
Promissory note dated March 2003, interest accrues at a rate of LIBOR plus 4.0% with a minimum rate of 6.0% (8.29% at December 31, 2005). Principal is due and payable monthly beginning April 1, 2005, with all unpaid principal and accrued interest due on April 1, 2008. Promissory note paid in full October 2006. | $ | 12,101,906 | $ | 12,250,000 | ||
Promissory note dated December 2004, interest accrues at a rate of Prime plus 1.25% (8.5% at December 31, 2005). Principal is due and payable monthly, with all unpaid principal and accrued interest due on December 1, 2009. Promissory note paid in full October 2006. | 24,100,009 | 24,500,000 | ||||
36,201,915 | 36,750,000 | |||||
Less current portion | 478,419 | 448,955 | ||||
$ | 35,723,496 | $ | 36,301,045 | |||
F-124
Table of Contents
Heritage Golf Group West Coast, Inc.
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Significant components of the Company’s deferred tax assets at December 31, 2005 and 2004 are shown below. A valuation allowance of $2,971,000 and $2,324,000 has been recognized to offset the deferred tax assets as of December 31, 2005 and 2004 as realization of such assets is uncertain.
December 31, | ||||||||
2005 | 2004 | |||||||
Deferred income tax assets: | ||||||||
Net operating loss carryforwards | $ | 2,913,000 | $ | 1,778,000 | ||||
Deferred revenue | 783,000 | 1,279,000 | ||||||
Other, net | 56,000 | 54,000 | ||||||
Total deferred income tax assets | 3,752,000 | 3,111,000 | ||||||
Deferred income tax liabilities | ||||||||
Depreciation/Amortization | (781,000 | ) | (787,000 | ) | ||||
Valuation allowance for deferred income tax assets | (2,971,000 | ) | (2,324,000 | ) | ||||
Total deferred income tax assets | $ | — | $ | — | ||||
At December 31, 2005, the Company’s had federal and state tax net operating loss carryforwards of approximately $7,141,000 and $7,188,000, respectively. The federal and state tax loss carryfowards will expire in 2023 and 2008, respectively, unless previously utilized.
Pursuant to Internal Revenue code Section 382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period.
6. Related Party Receivable
At December 31, 2005, and 2004, respectively, the related party receivable is a receivable from the Parent and represents net proceeds from several refinancing transactions of the Company’s subsidiaries’ notes payable and net cash from operations after debt service from the Company’s two subsidiaries. The total of these funds were used to fund acquisitions and the operations of the Company’s Parent and its subsidiaries. The related party receivable does not earn interest, and accordingly no interest income has been recognized in the consolidated statement of operations for this related party receivable.
F-125
Table of Contents
CONSOLIDATED FINANCIAL STATEMENTS
Booth Creek Ski Holdings, Inc.
Nine months ended July 28, 2006 and July 29, 2005 (unaudited)
F-126
Table of Contents
Booth Creek Ski Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
July 28, 2006 | October 28, 2005 | July 29, 2005 | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash | $ | 2,061 | $ | 79 | $ | 744 | ||||||
Accounts receivable, net of allowance of $63, $40 and $65, respectively | 1,941 | 1,600 | 1,361 | |||||||||
Inventories, net | 1,620 | 2,382 | 1,334 | |||||||||
Prepaid expenses and other current assets | 794 | 4,915 | 755 | |||||||||
Total current assets | 6,416 | 8,976 | 4,194 | |||||||||
Property and equipment, net | 113,585 | 109,380 | 108,012 | |||||||||
Real estate held for development and sale | 7,513 | 7,053 | 7,147 | |||||||||
Deferred financing costs, net of accumulated amortization of $1,112, $392, and $160, respectively | 4,756 | 5,043 | 5,269 | |||||||||
Timber rights and other assets | 7,436 | 6,446 | 5,689 | |||||||||
Goodwill | 23,143 | 23,143 | 23,143 | |||||||||
Total assets | $ | 162,849 | $ | 160,041 | $ | 153,454 | ||||||
LIABILITIES AND SHAREHOLDER’S DEFICIT | ||||||||||||
Current liabilities: | ||||||||||||
Revolving credit facility in default as of October 27, 2006 | $ | 7,400 | $ | 11,500 | $ | 5,650 | ||||||
Long-term debt in default as of October 27, 2006 | 80,950 | — | — | |||||||||
Current portion of long-term debt | 2,341 | 2,031 | 1,947 | |||||||||
Accounts payable and accrued liabilities | 15,312 | 20,211 | 16,432 | |||||||||
Unearned revenue and deposits – resort operations | 5,976 | 15,150 | 9,662 | |||||||||
Unearned revenue – real estate operations | 3,236 | — | — | |||||||||
Total current liabilities | 115,215 | 48,892 | 33,691 | |||||||||
Long-term debt | 51,734 | 128,348 | 128,496 | |||||||||
Other long-term liabilities | 1,194 | 876 | 841 | |||||||||
Commitments and contingencies | ||||||||||||
Shareholder’s deficit: | ||||||||||||
Common stock, $.01 par value; 1,000 shares authorized, issued and outstanding | — | — | — | |||||||||
Additional paid-in capital | 79,500 | 72,000 | 72,000 | |||||||||
Accumulated deficit | (84,794 | ) | (90,075 | ) | (81,574 | ) | ||||||
Total shareholder’s deficit | (5,294 | ) | (18,075 | ) | (9,574 | ) | ||||||
Total liabilities and shareholder’s deficit | $ | 162,849 | $ | 160,041 | $ | 153,454 | ||||||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Operations
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
July 28, 2006 | July 29, 2005 | |||||||
Revenue: | ||||||||
Resort operations | $ | 110,667 | $ | 95,702 | ||||
Real estate and other | 1,572 | 133 | ||||||
Total revenue | 112,239 | 95,835 | ||||||
Operating expenses: | ||||||||
Cost of sales - resort operations | 66,036 | 57,105 | ||||||
Cost of sales - real estate and other | 861 | 158 | ||||||
Depreciation and depletion expense | 11,360 | 10,708 | ||||||
Selling, general and administrative expense | 19,303 | 19,871 | ||||||
Total operating expenses | 97,560 | 87,842 | ||||||
Operating income | 14,679 | 7,993 | ||||||
Other income (expense): | ||||||||
Interest expense | (10,827 | ) | (9,668 | ) | ||||
Amortization of deferred financing costs | (720 | ) | (2,423 | ) | ||||
Loss on early retirement of debt | — | (889 | ) | |||||
Gain on interest rate swap arrangement | 955 | — | ||||||
Gain on disposals of property and equipment | 1,155 | 29 | ||||||
Other income | 39 | 13 | ||||||
Other income (expense), net | (9,398 | ) | (12,938 | ) | ||||
Net income (loss) | $ | 5,281 | $ | (4,945 | ) | |||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
July 28, 2006 | July 29, 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 5,281 | $ | (4,945 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and depletion expense | 11,360 | 10,708 | ||||||
Noncash cost of real estate sales | 639 | — | ||||||
Amortization of deferred financing costs | 720 | 2,423 | ||||||
Loss on early retirement of debt | — | 889 | ||||||
Gain on interest rate swap arrangement | (955 | ) | — | |||||
Gain on disposals of property and equipment | (1,155 | ) | (29 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (341 | ) | 590 | |||||
Inventories | 762 | 1,021 | ||||||
Prepaid expenses and other current assets | 4,121 | 795 | ||||||
Accounts payable and accrued liabilities | (4,899 | ) | (1,618 | ) | ||||
Unearned revenue and deposits – resort operations | (9,174 | ) | (4,940 | ) | ||||
Unearned revenue – real estate operations | 3,236 | — | ||||||
Other long-term liabilities | 318 | (33 | ) | |||||
Net cash provided by operating activities | 9,913 | 4,861 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures for property and equipment | (14,087 | ) | (6,056 | ) | ||||
Proceeds from disposals of property and equipment | 1,529 | — | ||||||
Capital expenditures for real estate held for development and sale | (1,099 | ) | (1,058 | ) | ||||
Other assets | (100 | ) | 56 | |||||
Net cash used in investing activities | (13,757 | ) | (7,058 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under revolving credit facilities | 37,200 | 46,800 | ||||||
Repayments under revolving credit facilities | (41,300 | ) | (58,400 | ) | ||||
Proceeds on long-term debt | 5,000 | 127,500 | ||||||
Principal payments of long-term debt | (2,141 | ) | (107,734 | ) | ||||
Deferred financing costs | (433 | ) | (6,071 | ) | ||||
Capital contributions | 7,500 | — | ||||||
Net cash provided by financing activities | 5,826 | 2,095 | ||||||
Increase (decrease) in cash | 1,982 | (102 | ) | |||||
Cash at beginning of period | 79 | 846 | ||||||
Cash at end of period | $ | 2,061 | $ | 744 | ||||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)
Nine Months Ended | |||||||
July 28, 2006 | July 29, 2005 | ||||||
Noncash investing and financing transactions: | |||||||
Property and equipment acquired through capital leases | $ | 1,787 | $ | 3,048 | |||
Interim financing arrangements for lift projects | $ | — | $ | 5,420 | |||
Derecognition of interim financing arrangements upon origination of permanent operating lease arrangements for lift projects | $ | — | $ | (7,109 | ) | ||
See accompanying notes
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Booth Creek Ski Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
July 28, 2006
1. | General |
The accompanying consolidated financial statements as of July 28, 2006 and July 29, 2005 and for the nine month periods then ended are unaudited, but include all adjustments (consisting only of normal and recurring adjustments) which, in the opinion of management of Booth Creek Ski Holdings, Inc. (the “Company”), are considered necessary for a fair presentation of the Company’s financial position at July 28, 2006 and July 29, 2005, and its operating results and cash flows for the nine month periods then ended. Due to the highly seasonal nature of the Company’s business, the results for the interim periods are not indicative of results for the entire year. The unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and accompanying notes as of October 28, 2005 and October 29, 2004 and for each of the three years in the period ended October 28, 2005.
The Company is a wholly-owned subsidiary of Booth Creek Ski Group, Inc. (“Parent”).
2. | Business Segments |
The Company currently operates in two business segments, resort operations and real estate and other. The Company’s resort operations segment is currently comprised of six ski resort complexes, which provide lift access, snow school lessons, retail, equipment rental, food and beverage offerings, lodging and property management services and ancillary products and services. The real estate and other segment is primarily engaged in the development and sale of real estate at Northstar and Loon Mountain and the harvesting of timber rights. Given the distinctive nature of their respective products, these segments are managed separately. Data by segment is as follows:
Nine Months Ended | ||||||||
July 28, 2006 | July 29, 2005 | |||||||
(In thousands) | ||||||||
Revenue: | ||||||||
Resort operations | $ | 110,667 | $ | 95,702 | ||||
Real estate and other | 1,572 | 133 | ||||||
$ | 112,239 | $ | 95,835 | |||||
Depreciation, depletion and noncash cost of real estate sales: | ||||||||
Resort operations | $ | 11,295 | $ | 10,651 | ||||
Real estate and other | 704 | 57 | ||||||
$ | 11,999 | $ | 10,708 | |||||
Selling, general and administrative expense: | ||||||||
Resort operations | $ | 18,398 | $ | 18,337 | ||||
Real estate and other | 905 | 1,534 | ||||||
$ | 19,303 | $ | 19,871 | |||||
Operating income (loss): | ||||||||
Resort operations | $ | 14,938 | $ | 9,609 | ||||
Real estate and other | (259 | ) | (1,616 | ) | ||||
$ | 14,679 | $ | 7,993 | |||||
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Booth Creek Ski Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements (continued)
2. | Business Segments (continued) |
A reconciliation of combined operating income for resort operations and real estate and other to consolidated net income (loss) is as follows:
Nine Months Ended | ||||||||
July 28, 2006 | July 29, 2005 | |||||||
(In thousands) | ||||||||
Operating income for reportable segments | $ | 14,679 | $ | 7,993 | ||||
Interest expense | (10,827 | ) | (9,668 | ) | ||||
Amortization of deferred financing costs | (720 | ) | (2,423 | ) | ||||
Loss on early retirement of debt | — | (889 | ) | |||||
Gain on interest rate swap agreement | 955 | — | ||||||
Gain on disposals of property and equipment | 1,155 | 29 | ||||||
Other income | 39 | 13 | ||||||
Net income (loss) | $ | 5,281 | $ | (4,945 | ) | |||
Capital expenditures by segment and segment assets were as follows:
Nine Months Ended | ||||||
July 28, 2006 | July 29, 2005 | |||||
(In thousands) | ||||||
Capital expenditures: | ||||||
Resort operations | $ | 14,087 | $ | 6,056 | ||
Real estate and other | 1,099 | 1,058 | ||||
$ | 15,186 | $ | 7,114 | |||
July 28, 2006 | July 29, 2005 | |||||
(In thousands) | ||||||
Segment assets: | ||||||
Resort operations | $ | 139,873 | $ | 133,591 | ||
Real estate and other | 10,974 | 10,790 | ||||
Corporate and other nonidentifiable assets | 12,002 | 9,073 | ||||
$ | 162,849 | $ | 153,454 | |||
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Booth Creek Ski Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements (continued)
3. | Changes in Capitalization |
During the first part of the 2005/06 ski season, the Company experienced certain adverse weather conditions at its resorts, including heavy rains and flooding at its Lake Tahoe resorts over the Christmas/New Year’s holiday period and rain and high winds at its New Hampshire resorts during the Martin Luther King weekend. These weather conditions during key holiday periods negatively impacted the Company’s operating results for the first fiscal quarter of 2006. As a result, the Company did not achieve the minimum EBITDA requirement under the First Lien Credit Agreement (the “Credit Agreement”) and Second Lien Note Purchase Agreement (the “Note Purchase Agreement”) for the first fiscal quarter of 2006. On May 10, 2006, the Company entered into a First Amendment and Waiver (the “First Amendment and Waiver”) with the agents and lenders under each of the Credit Agreement and the Note Purchase Agreement which (i) waived the breach of covenant and event of default resulting from the Company’s failure to achieve the minimum EBITDA requirement for the first fiscal quarter of 2006, (ii) modified the level of minimum EBITDA covenant for certain periods following the first fiscal quarter of 2006, (iii) required a capital contribution of $3,500,000 into the Company, which was made concurrently with the First Amendment and Waiver, and (iv) modified certain other terms and conditions of the Credit Agreement and Note Purchase Agreement. The Company was in compliance with the terms, conditions and covenants under the Credit Agreement and Note Purchase Agreement for the second and third fiscal quarters of 2006.
On July 5, 2006, the Company borrowed $5,000,000 under the Credit Agreement pursuant to the terms of a delayed draw feature (the “CapEx A Term Loan”). The proceeds of the CapEx A Term Loan, together with capital contributions of Parent of $4,000,000 and $1,000,000 made on July 14, 2006 and August 18, 2006, respectively, will be utilized by the Company to fund certain expansion capital projects at Northstar-at-Tahoe (“Northstar”).
4. | Subsequent Events |
Amendments to Centex Agreement and Operating Agreement and Sale of Second Phase Property at Loon Mountain
On April 18, 2005, Loon Mountain Recreation Corporation (“LMRC”) and Loon Realty Corp. (“Loon Realty”, together with LMRC, “Seller”), wholly–owned subsidiaries of the Company, entered into a Real Estate Purchase and Sale Contract (the “Centex Agreement”) with Centex Homes (“Purchaser”) for the purchase and sale of certain development real estate (the “Property”) located proximate to the Loon Mountain ski area (the “Loon Mountain Ski Area”). The first phase of the sale of the property under the Centex Agreement was consummated on October 3, 2005. Purchaser and Seller also entered into an Operating Agreement dated October 3, 2005 (the “Operating Agreement”) which, among other things, provided for certain obligations of Seller to construct certain ski infrastructure on South Mountain (the “South Mountain Expansion”).
In anticipation of the sale of the second phase (“Second Phase”) property at Loon Mountain, Seller and Purchaser entered into amendments to the Centex Agreement and Operating Agreement which principally provided for (i) a $5,000,000 reduction in the purchase price for the Second Phase property from $21,259,000 to $16,259,000, (ii) a new obligation of Purchaser to make a payment (the “Centex Ski Infrastructure Payment”) on or before April 2, 2007 in the amount of $5,000,000 plus interest at a rate of 8% per annum from the Second Phase closing to defray a portion of the costs to be incurred by LMRC in connection with certain components of the South Mountain Expansion, and (iii) the condition that LMRC’s obligations for certain portions of the South Mountain Expansion are contingent upon LMRC’s receipt of the Centex Ski Infrastructure Payment. The Company also obtained amendments to the Credit Agreement and Note Purchase Agreement which permitted the amendments to the Centex Agreement and Operating Agreement and provided for a mandatory prepayment of the term facility under the Credit Agreement in the amount of $8,600,000 from the net proceeds of the sale of the Second Phase property. On
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Booth Creek Ski Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements (continued)
4. | Subsequent Events (continued) |
August 25, 2006, Seller and Purchaser consummated the sale and transfer of the Second Phase property in accordance with the amended terms of the Centex Agreement and the related amendments to the Credit Agreement and Note Purchase Agreement.
Minimum EBITDA Covenant Violation Under the Credit Agreement for the Trailing Twelve Month Period Ended October 27, 2006
Due principally to temporary disruption from significant real estate infrastructure development at Northstar, which negatively impacted customer visitation and related lodging, retail, food and beverage, golf and mountain biking operations at the resort during the summer season of 2006, the Company determined that it will not achieve the minimum EBITDA covenant under the Credit Agreement for the trailing twelve month period ended October 27, 2006. The Company determined that it will satisfy the minimum EBITDA covenant for such period under the Note Purchase Agreement. However, in the event amounts due under the Credit Agreement are called by the lenders, the amounts due under the Note Purchase Agreement would also become callable by the lenders under cross default provisions in the Note Purchase Agreement. The Credit Agreement permits the Company to cure a breach of the minimum EBITDA covenant for this period through a capital contribution from its Parent in an amount sufficient to alleviate the EBITDA shortfall. Alternatively, the Company could potentially pursue another form of cure or waiver of the covenant breach from the lenders under the Credit Agreement. The Company is presently evaluating its options in this regard. However, no assurances can be given with respect to the outcome of this matter. In light of the uncertainty regarding the resolution of the potential minimum EBITDA covenant violation, the Company has classified amounts outstanding under the Credit Agreement as current liabilities labeled as “in default as of October 27, 2006” in the accompanying consolidated balance sheet as of July 28, 2006.
As discussed below, the Company’s Parent is pursuing a strategic transaction which, if consummated, would result in the extinguishment of all amounts outstanding under the Credit Agreement and Note Purchase Agreement.
Pending Strategic Transactions
On December 1, 2006, Parent and the Company entered into a Securities Purchase Agreement (the “SPA”) with Booth Creek Resort Properties LLC (“BCRP”), a newly formed entity owned and controlled by the Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer of Parent and the Company and one other investor. Pursuant to the SPA, it is contemplated that BCRP would acquire the stock of the Company and the stock and membership interests of certain other entities owned by Parent. Parent will retain its interest in Trimont Land Holdings, Inc. (“TLH”) and certain unsold single family lots at Northstar generally known as the Retreat subdivision. The purchase price under the SPA is $180,000,000 plus the assumption of indebtedness of approximately $5,600,000, and is subject to certain purchase price adjustments relating to (i) working capital and unearned revenue balances at the closing, (ii) the extent of capital expenditures funded by the Company prior to closing, (iii) holdbacks for remaining infrastructure for certain real estate projects, and (iv) reimbursement to Parent of the EBITDA losses of the divested entities and certain interest costs for the period from October 28, 2006 to closing. In connection with the closing under the SPA, a portion of the proceeds of the sale will be used to retire all amounts outstanding under the Credit Agreement and Note Purchase Agreement, as well as to retire certain capital lease obligations and operating lease commitments.
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Booth Creek Ski Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements (continued)
4. | Subsequent Events (continued) |
Concurrently with the execution of the SPA, BCRP, certain subsidiaries of the Company and an affiliate of CNL Income Properties, Inc. (“CNL”) entered into an Asset Purchase Agreement (the “APA”) for the sale of substantially all of the resort operating assets of Northstar, Sierra, Loon Mountain and the Summit (the “Acquired Properties”) to CNL for a purchase price of $170,000,000, subject to certain purchase price adjustments. CNL has also committed to provide loans in the aggregate amount of $12,000,000 secured by certain other assets BCRP will be acquiring under the SPA, including (i) the Waterville Valley ski resort, (ii) the Mount Cranmore ski resort and related development real estate, and (iii) certain single family development real estate at Northstar generally known as the Porcupine Hill Estates subdivision.
In connection with CNL’s purchase of the Acquired Properties from BCRP, it is anticipated that CNL will lease such resort operating assets on a long-term, triple net basis to tenant subsidiaries of BCRP and the Company. Also as part of the transactions described above, CNL has committed to (i) provide funding for future capital expenditures primarily at Northstar and Loon Mountain in the aggregate amount of $28,700,000 and (ii) to take assignment of TLH’s obligation to acquire certain commercial real estate at Northstar, and to lease such real estate to an affiliate of the Company on a long-term triple net basis.
The parties to the SPA and APA presently expect to consummate the transactions described above on or prior to December 20, 2006. However, all of these transactions are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be consummated.
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CONSOLIDATED FINANCIAL STATEMENTS
Booth Creek Ski Holdings, Inc.
Years ended October 28, 2005, October 29, 2004 and October 31, 2003
With Report of Independent Auditors
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Report of Independent Auditors
The Board of Directors and Shareholder of Booth Creek Ski Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Booth Creek Ski Holdings, Inc. as of October 28, 2005 and October 29, 2004, and the related consolidated statements of operations, shareholder’s equity (deficit), and cash flows for each of the three years in the period ended October 28, 2005. 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, and 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 Booth Creek Ski Holdings, Inc. at October 28, 2005 and October 29, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 28, 2005 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Sacramento, California
December 22, 2005,
except for the first paragraph of Note 11 as to which the date is May 10, 2006,
the second paragraph of Note 11 as to which the date is August 18, 2006,
the third paragraph of Note 11 as to which the date is August 25, 2006,
the fourth paragraph of Note 11 as to which the date is October 27, 2006,
and the remaining four paragraphs of Note 11 as to which the date is December 1, 2006
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Booth Creek Ski Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
October 28, 2005 | October 29, 2004 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 79 | $ | 846 | ||||
Accounts receivable, net of allowance of $40 and $39, respectively | 1,600 | 1,951 | ||||||
Inventories | 2,382 | 2,355 | ||||||
Prepaid expenses and other current assets | 4,915 | 1,550 | ||||||
Total current assets | 8,976 | 6,702 | ||||||
Property and equipment, net | 109,380 | 111,219 | ||||||
Real estate held for development and sale | 7,053 | 6,089 | ||||||
Deferred financing costs, net of accumulated amortization of $392 and $6,430, respectively | 5,043 | 2,510 | ||||||
Timber rights and other assets | 6,446 | 5,802 | ||||||
Goodwill | 23,143 | 23,143 | ||||||
Total assets | $ | 160,041 | $ | 155,465 | ||||
Liabilities and shareholder’s deficit | ||||||||
Current liabilities: | ||||||||
Revolving credit facilities | $ | 11,500 | $ | 17,250 | ||||
Current portion of long-term debt | 2,031 | 28,233 | ||||||
Accounts payable and accrued liabilities | 20,211 | 18,050 | ||||||
Unearned revenue and deposits – resort operations | 15,150 | 14,602 | ||||||
Total current liabilities | 48,892 | 78,135 | ||||||
Long-term debt | 128,348 | 81,085 | ||||||
Other long-term liabilities | 876 | 874 | ||||||
Commitments and contingencies | ||||||||
Shareholder’s deficit: | ||||||||
Common stock, $.01 par value; 1,000 shares authorized, issued and outstanding | — | — | ||||||
Additional paid-in capital | 72,000 | 72,000 | ||||||
Accumulated deficit | (90,075 | ) | (76,629 | ) | ||||
Total shareholder’s deficit | (18,075 | ) | (4,629 | ) | ||||
Total liabilities and shareholder’s deficit | $ | 160,041 | $ | 155,465 | ||||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Operations
(In thousands)
Year ended | ||||||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | ||||||||||
Revenue: | ||||||||||||
Resort operations | $ | 99,445 | $ | 105,377 | $ | 104,963 | ||||||
Real estate and other (including revenues from related parties of $5,610 and $646 for the years ended October 29, 2004 and October 31, 2003, respectively) | 7,522 | 10,033 | 10,084 | |||||||||
Total revenue | 106,967 | 115,410 | 115,047 | |||||||||
Operating expenses: | ||||||||||||
Cost of sales - resort operations | 63,571 | 63,977 | 63,969 | |||||||||
Cost of sales - real estate and other | 2,039 | 2,861 | 5,444 | |||||||||
Depreciation and depletion | 14,502 | 13,944 | 15,766 | |||||||||
Selling, general and administrative expense | 24,878 | 23,191 | 22,063 | |||||||||
Total operating expenses | 104,990 | 103,973 | 107,242 | |||||||||
Operating income | 1,977 | 11,437 | 7,805 | |||||||||
Other income (expense): | ||||||||||||
Interest expense | (12,779 | ) | (12,071 | ) | (12,492 | ) | ||||||
Amortization of deferred financing costs | (2,655 | ) | (1,195 | ) | (1,140 | ) | ||||||
Gain (loss) on early retirement of debt | (889 | ) | — | 506 | ||||||||
Gain on interest rate swap arrangement | 779 | — | — | |||||||||
Other income (expense) | 121 | (2 | ) | (40 | ) | |||||||
Other income (expense), net | (15,423 | ) | (13,268 | ) | (13,166 | ) | ||||||
Net loss | $ | (13,446 | ) | $ | (1,831 | ) | $ | (5,361 | ) | |||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Shareholder’s Equity (Deficit)
(In thousands, except shares)
Common Stock | Additional Capital | Accumulated Deficit | ||||||||||||||
Shares | Amount | Total | ||||||||||||||
Balance at November 1, 2002 | 1,000 | $ | — | $ | 72,000 | $ | (69,437 | ) | $ | 2,563 | ||||||
Net loss | — | — | — | (5,361 | ) | (5,361 | ) | |||||||||
Balance at October 31, 2003 | 1,000 | — | 72,000 | (74,798 | ) | (2,798 | ) | |||||||||
Net loss | — | — | — | (1,831 | ) | (1,831 | ) | |||||||||
Balance at October 29, 2004 | 1,000 | — | 72,000 | (76,629 | ) | (4,629 | ) | |||||||||
Net loss | — | — | — | (13,446 | ) | (13,446 | ) | |||||||||
Balance at October 28, 2005 | 1,000 | $ | — | $ | 72,000 | $ | (90,075 | ) | $ | (18,075 | ) | |||||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended | ||||||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (13,446 | ) | $ | (1,831 | ) | $ | (5,361 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation and depletion | 14,502 | 13,944 | 15,766 | |||||||||
Asset impairment charge | — | — | 350 | |||||||||
Noncash cost of real estate sales | 1,187 | 2,292 | 4,484 | |||||||||
Amortization of deferred financing costs | 2,655 | 1,195 | 1,140 | |||||||||
(Gain) loss on early retirement of debt | 889 | — | (506 | ) | ||||||||
Gain on interest rate swap arrangement | (779 | ) | — | — | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 351 | (124 | ) | 137 | ||||||||
Insurance proceeds receivable | — | — | 800 | |||||||||
Inventories | (27 | ) | (170 | ) | (92 | ) | ||||||
Prepaid expenses and other current assets | (3,365 | ) | (268 | ) | 143 | |||||||
Accounts payable and accrued liabilities | 1,964 | 4,037 | (2,669 | ) | ||||||||
Unearned revenue and deposits – resort operations | 548 | (137 | ) | (493 | ) | |||||||
Unearned deposits from related party – real estate operations | — | (5,610 | ) | — | ||||||||
Other long-term liabilities | 2 | 133 | (15 | ) | ||||||||
Net cash provided by operating activities | 4,481 | 13,461 | 13,684 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures for property and equipment | (11,151 | ) | (11,013 | ) | (6,445 | ) | ||||||
Capital expenditures for real estate held for development and sale | (1,754 | ) | (1,754 | ) | (2,745 | ) | ||||||
Other assets | (40 | ) | (357 | ) | 403 | |||||||
Net cash used in investing activities | (12,945 | ) | (13,124 | ) | (8,787 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Borrowings under revolving credit facilities | 60,650 | 38,045 | 60,595 | |||||||||
Repayments under revolving credit facilities | (66,400 | ) | (38,545 | ) | (44,090 | ) | ||||||
Proceeds of long-term debt | 127,500 | 7,000 | — | |||||||||
Principal payments of long-term debt | (107,976 | ) | (5,864 | ) | (21,071 | ) | ||||||
Deferred financing costs | (6,077 | ) | (936 | ) | (186 | ) | ||||||
Net cash provided by (used in) financing activities | 7,697 | (300 | ) | (4,752 | ) | |||||||
Increase (decrease) in cash | (767 | ) | 37 | 145 | ||||||||
Cash at beginning of year | 846 | 809 | 664 | |||||||||
Cash at end of year | $ | 79 | $ | 846 | $ | 809 | ||||||
See accompanying notes.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements
October 28, 2005
1. | Organization, Basis of Presentation and Summary of Significant Accounting Policies |
Booth Creek Ski Holdings, Inc. (“Booth Creek”) was organized on October 8, 1996 in the State of Delaware for the purpose of acquiring and operating various ski resorts, including Northstar-at-Tahoe (“Northstar”), Sierra-at-Tahoe (“Sierra”), Waterville Valley, Mt. Cranmore, Loon Mountain and the Summit at Snoqualmie (the “Summit”). Booth Creek also conducts certain real estate development activities, primarily at Northstar and Loon Mountain.
The consolidated financial statements include the accounts of Booth Creek and its subsidiaries (collectively referred to as the “Company”), all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated.
Booth Creek is a wholly-owned subsidiary of Booth Creek Ski Group, Inc. (“Parent”).
Reporting Periods
The Company’s fiscal year ends on the Friday closest to October 31 of each year. Fiscal 2005, 2004 and 2003 were 52 week years.
Business and Principal Markets
Northstar is a year-round destination resort including ski and golf facilities. Sierra is a regional ski area which attracts both day and destination skiers. Both Northstar and Sierra are located near Lake Tahoe, California. Waterville Valley, Mt. Cranmore and Loon Mountain are regional ski resorts attracting both day and destination skiers, and are located in New Hampshire. The Summit is located in Northwest Washington and is a day ski resort.
Operations are highly seasonal at all locations with the majority of revenues realized during the ski season from late November through early April. The length of the ski season and the profitability of operations are significantly impacted by weather conditions. Although Northstar, Waterville Valley, Mt. Cranmore and Loon Mountain have snowmaking capacity to mitigate some of the effects of adverse weather conditions, abnormally warm weather, lack of adequate snowfall or other adverse weather conditions can materially affect revenues. Sierra and the Summit lack significant snowmaking capabilities but generally experience higher annual snowfall.
Other operational risks and uncertainties that face the Company include competitive pressures affecting the number of skier visits and ticket prices; the success of marketing efforts to maintain and increase skier visits; the possibility of equipment failure; and continued availability and cost of water supplies and energy sources for snowmaking and other operations.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
1. | Organization, Basis of Presentation and Summary of Significant Accounting Policies (continued) |
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market. The components of inventories are as follows:
October 28, 2005 | October 29, 2004 | |||||
(In thousands) | ||||||
Retail products | $ | 1,929 | $ | 1,776 | ||
Supplies | 285 | 375 | ||||
Food and beverage | 168 | 204 | ||||
$ | 2,382 | $ | 2,355 | |||
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the straight-line method based upon the estimated service lives or capital lease terms, which are as follows:
Land improvements | 20 years | |
Buildings and improvements | 20 years | |
Lift equipment | 15 years | |
Other machinery and equipment | 3 to 15 years |
Amortization of assets recorded under capital leases is included in depreciation expense.
Real Estate Activities
The Company capitalizes as real estate held for development and sale the original acquisition cost, direct construction and development costs, and other related costs. Property taxes, insurance and interest incurred on costs related to real estate under development are capitalized during periods in which activities necessary to prepare the property for its intended use are in progress. Land costs and other common costs incurred prior to construction are allocated to each land parcel benefited. Construction-related costs are allocated to individual units in each development phase using the relative sales value method. Selling expenses are charged against income in the period incurred. Interest capitalized on real estate development projects for the years ended October 28, 2005, October 29, 2004 and October 31, 2003 was $116,000, $18,000 and $135,000, respectively.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
1. | Organization, Basis of Presentation and Summary of Significant Accounting Policies (continued) |
Real Estate Activities (continued)
Sales and profits on real estate sales are recognized using the full accrual method at the point that the Company’s receivables from land sales are deemed collectible and the Company has no significant remaining obligations for construction or development, which typically occurs upon transfer of title. If such conditions are not met, the recognition of all or part of the sales and profit is postponed. The Company thoroughly evaluates the contractual agreements and underlying facts and circumstances relating to its real estate transactions, including the involvement of related parties, to determine the appropriate revenue recognition treatment of such transactions in accordance with Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate,” and related pronouncements.
Long-Lived Assets
The Company evaluates potential impairment of its long-lived assets, including property and equipment and real estate held for development and sale, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Pursuant to SFAS No. 144, the Company periodically evaluates whether there are facts and circumstances that indicate potential impairment of its long-lived assets. If impairment indicators are present, the Company reviews the carrying value of its long-lived assets for recoverability. If the carrying amount of a long-lived asset exceeds its estimated future undiscounted net cash flows, an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. During the year ended October 31, 2003, the Company recognized a noncash impairment charge of $350,000 for certain capitalized planning and design costs that were impaired. The $350,000 asset impairment charge is included in cost of sales - resort operations in the accompanying statement of operations for the year ended October 31, 2003. As of October 28, 2005 and October 29, 2004, the Company believes that there has not been any impairment of its long-lived assets.
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Table of Contents
Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
1. | Organization, Basis of Presentation and Summary of Significant Accounting Policies (continued) |
Goodwill
Pursuant to the requirements of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” the Company performs annual impairment tests for recorded goodwill. Based on the Company’s annual impairment tests, the Company did not identify any impairment of goodwill as of October 28, 2005 and October 29, 2004.
Fair Value of Financial Instruments
The fair value of amounts outstanding under the Company’s Credit Agreement and Note Purchase Agreement (Note 4) approximate book value, as the interest rate on such debt generally varies with changes in market interest rates.
Revenue Recognition – Resort Operations
Revenues from resort operations are generated from a wide variety of sources, including lift ticket sales, snow school lessons, equipment rentals, retail product sales, food and beverage operations, lodging and property management services and other recreational activities, and are recognized as services are provided and products are sold, and collectibility is assured. Sales of season passes are initially deferred in unearned revenue and recognized ratably over the expected ski season.
Contingencies and Related Accrual Estimates
The Company’s operations are affected by various contingencies, including commercial litigation, personal injury claims relating principally to snow sports activities, self-insured workers’ compensation matters and self-insured employee health and welfare arrangements. The Company performs periodic evaluations of these contingencies, and based on information provided by third-party claims administrators and other pertinent information, provides accruals for its best estimate of the eventual outcome of these matters in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” These estimated liabilities are reviewed and appropriately adjusted as the facts and circumstances related to these contingencies change.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
1. | Organization, Basis of Presentation and Summary of Significant Accounting Policies (continued) |
Amortization
Deferred financing costs are being amortized over the estimated lives of the related obligations using the effective interest method.
Advertising Costs
The production cost of advertisements is expensed when the advertisement is initially released. The cost of professional services for advertisements, sales campaigns and promotions is expensed when the services are rendered. The cost of brochures and other winter marketing collateral is expensed over the ski season. Advertising expenses for the years ended October 28, 2005, October 29, 2004 and October 31, 2003 were $3,009,000, $3,501,000 and $3,737,000, respectively.
Income Taxes
Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company is included in the federal and state tax returns of Parent. The provision for federal and state income tax is computed as if the Company filed separate consolidated income tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the accompanying consolidated financial statements for prior years to conform to the presentation for the year ended October 28, 2005.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
2. | Property and Equipment |
Property and equipment consist of the following:
October 28, 2005 | October 29, 2004 | |||||
(In thousands) | ||||||
Land and improvements | $ | 35,396 | $ | 32,699 | ||
Buildings and improvements | 51,903 | 50,866 | ||||
Lift equipment | 46,050 | 45,464 | ||||
Other machinery and equipment | 66,092 | 61,761 | ||||
Construction in progress | 17,527 | 18,216 | ||||
216,968 | 209,006 | |||||
Less accumulated depreciation and amortization | 107,588 | 97,787 | ||||
$ | 109,380 | $ | 111,219 | |||
3. | Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities consist of the following:
October 28, 2005 | October 29, 2004 | |||||
(In thousands) | ||||||
Accounts payable | $ | 8,996 | $ | 7,226 | ||
Accrued compensation and benefits | 3,952 | 3,279 | ||||
Taxes other than income taxes | 722 | 966 | ||||
Interest | 664 | 1,514 | ||||
Other | 5,877 | 5,065 | ||||
$ | 20,211 | $ | 18,050 | |||
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. | Financing Arrangements |
Long-Term Debt
Long-term debt consists of the following, which are described herein:
October 28, 2005 | October 29, 2004 | |||||
(In thousands) | ||||||
First Lien Term Facility | $ | 77,306 | $ | — | ||
Second Lien Term Facility | 50,000 | — | ||||
Capital leases and other debt | 3,073 | 4,143 | ||||
Term Facility | — | 25,000 | ||||
Senior Notes | — | 80,175 | ||||
Total long-term debt | 130,379 | 109,318 | ||||
Less current portion | 2,031 | 28,233 | ||||
Long-term debt | $ | 128,348 | $ | 81,085 | ||
2005 Refinancing
On June 2, 2005, the Company entered into (i) a $107,500,000 First Lien Credit Agreement (the “Credit Agreement”) with certain lenders and General Electric Capital Corporation, as administrative agent and collateral agent, and (ii) a $50,000,000 Second Lien Note Purchase Agreement (the “Note Purchase Agreement”) with certain lenders and the Bank of New York, as administrative agent and collateral agent.
The Credit Agreement provides for (a) a $20,000,000 revolving credit facility (the “Revolving Facility”), (b) a $77,500,000 term loan facility (the “First Lien Term Facility”), (c) a $5,000,000 delayed draw term loan for certain planned capital expenditures at Northstar, which commitment is available to the Company between the closing date and December 31, 2006, and (d) a $5,000,000 delayed draw term loan for certain planned capital expenditures at Loon Mountain, which commitment is available to the Company between March 1, 2007 and December 31, 2007. Advances under the delayed draw term loans are each subject to certain conditions precedent. Subject to the terms of the Credit Agreement, the Company may, from time to time, borrow, repay and reborrow under the Revolving Facility. The Credit Agreement requires that the Company not have any borrowings under the Revolving Facility for a period of 30 consecutive days during the period from January 1 to April 30 of each year. The Credit Agreement permits the issuance of letters of credit in an amount not to exceed $5,000,000. The balance of outstanding letters of credit reduces the available borrowing capacity under the Revolving Facility. The First Lien Term Facility and the delayed draw term
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. | Financing Arrangements (continued) |
2005 Refinancing (continued)
loans require principal payments of 1% per annum of the original balance of such loans, payable quarterly in arrears on the last day of each of January, April, July and October, commencing on July 31, 2005. Borrowings under the Credit Agreement are also subject to certain mandatory prepayment provisions relating to (x) certain specified real estate sales, (y) certain asset sales and casualty proceeds and (z) cumulative resort free cash flow (as defined in the Credit Agreement). The final maturity date of the Credit Agreement is May 31, 2011. Borrowings under the Credit Agreement bear interest, at the Company’s option, at either an adjusted Eurodollar rate or at an alternative base rate, plus an applicable margin. Under the terms of the Credit Agreement, the applicable margin is equal to 4.5% per annum for Eurodollar rate loans and 3.5% per annum for alternative base rate loans. Borrowings outstanding under the Revolving Facility and First Lien Term Facility as of October 28, 2005 bore interest at weighted average annual rates of 8.87% and 8.63%, respectively, pursuant to elections under both the Eurodollar and alternative base rate options.
The indebtedness of the Company under the Credit Agreement is guaranteed by all of its subsidiaries, except for a newly formed subsidiary of the Company (“Northstar Village Sub”) which is permitted to undertake the acquisition and operation of certain commercial space in the new village at Northstar. Booth Creek’s and the guarantors’ obligations under the Credit Agreement are secured by a first-priority security interest in substantially all of the assets of the Company and such guarantors.
The Note Purchase Agreement provides for a $50,000,000 second lien term facility (the “Second Lien Term Facility”), which matures on May 31, 2012. There are no scheduled principal payments under the Second Lien Term Facility. Borrowings under the Note Purchase Agreement bear interest, at the Company’s option, at either an adjusted Eurodollar rate or at an alternative base rate, plus an applicable margin. Under the terms of the Note Purchase Agreement, the applicable margin is equal to 8.5% per annum for Eurodollar rate loans and 7.5% per annum for alternative base rate loans. The Note Purchase Agreement also permits the Company to pay up to 50% of the accrued interest under the Second Lien Term Facility in kind during the period from the closing date through the three year and six month anniversary of the closing date. In such case, the applicable margin is equal to 14% per annum for Eurodollar rate loans and 13% per annum for alternative base rate loans. Borrowings outstanding under the Second Lien Term Facility as of October 28, 2005 bore interest at 12.62% pursuant to an election under the Eurodollar option.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. | Financing Arrangements (continued) |
2005 Refinancing (continued)
The indebtedness of the Company under the Note Purchase Agreement is guaranteed by all of its subsidiaries, except for Northstar Village Sub. The Company’s and the guarantors’ obligations under the Note Purchase Agreement are secured by a second-priority security interest in substantially all of the assets of the Company and such guarantors. Collateral matters between the lenders under the Credit Agreement and the lenders under the Note Purchase Agreement are governed by an intercreditor agreement.
The Credit Agreement and Note Purchase Agreement contain affirmative and negative covenants customary for such types of facilities, including maintaining a minimum level of EBITDA; maintaining a minimum level of asset value; limitations on indebtedness, capital expenditures, investments and spending on real estate projects; limitations on dividends and other distributions; and other restrictive covenants pertaining to the operation and management of the Company and its subsidiaries. The agreements also contain events of default customary for such financings, including but not limited to nonpayment of principal, interest, fees or other amounts when due; breach of representations or warranties in any material respect when made; breach of covenants; cross default and cross acceleration of other indebtedness; dissolution, insolvency and bankruptcy events; certain ERISA events; material judgments; actual or asserted invalidity of the guarantees, security documents or intercreditor agreement; changes in control; and loss of material licenses, approvals or permits. The Company was in compliance with the covenants and other terms and conditions under the Credit Agreement and Note Purchase Agreement as of October 28, 2005.
Borrowings of $77,500,000 and $50,000,000 under the First Lien Term Facility and Second Lien Term Facility, together with closing date advances of $500,000 under the Revolving Facility, were utilized (i) to retire outstanding principal of $16,000,000 in revolver borrowings under the Company’s Amended and Restated Credit Agreement dated March 15, 2002 (the “Senior Credit Facility”), (ii) to retire outstanding principal of $23,750,000 in term borrowings (the “Term Facility”) under the Senior Credit Facility, (iii) to pay accrued interest, fees and expenses of $400,000 under the Senior credit Facility, (iv) to retire outstanding principal of $80,175,000 under the Company’s 12.5% senior notes due March 15, 2007 (the “Senior Notes”), together with accrued interest of $2,171,000, (v) to pay fees and expenses associated with the refinancing transaction, and (vi) for other general corporate purposes. In connection with the retirement of the Senior Notes, the Company recognized a loss on early retirement of debt of $889,000 due principally to the write-off of unamortized deferred financing costs.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. | Financing Arrangements (continued) |
Capital Leases and Other Debt
During the year ended October 29, 2004, the Company entered into purchase commitments for the construction of detachable quad chairlifts at Northstar and Loon Mountain for a total cost of $7,109,000. The Company also obtained a commitment to finance the lifts under operating lease arrangements. During the years ended October 28, 2005 and October 29, 2004, lift construction progress payments of $5,420,000 and $1,689,000, respectively, were funded by the leasing company pursuant to interim financing arrangements entered into in contemplation of the intended operating lease financing. Under generally accepted accounting principles, the interim fundings were initially reflected as a component of property and equipment and current portion of long-term debt in the Company’s consolidated balance sheets. In December 2004, the capital expenditures and debt associated with the interim fundings were removed from the Company’s consolidated balance sheet in conjunction with the origination of the permanent operating lease financing transactions for the two lifts.
Other debt of $3,073,000 and $4,143,000 at October 28, 2005 and October 29, 2004, respectively, consists of various capital lease obligations, notes payable and amounts owed under interim financing arrangements for the lift projects at Northstar and Loon Mountain.
For the years ended October 28, 2005, October 29, 2004 and October 31, 2003, the Company entered into long-term debt and capital lease obligations of $3,226,000, $3,371,000 and $890,000, respectively, for the purchase of equipment.
During the years ended October 28, 2005, October 29, 2004 and October 31, 2003, the Company paid cash for interest costs of $13,629,000, $11,912,000 and $12,784,000, respectively, net of amounts capitalized of $379,000, $18,000 and $135,000, respectively.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. | Financing Arrangements (continued) |
Capital Leases and Other Debt (continued)
As of October 28, 2005, the maturities of long-term debt were as follows:
Year ending October | (In thousands) | ||
2006 | $ | 2,031 | |
2007 | 1,872 | ||
2008 | 1,495 | ||
2009 | 775 | ||
2010 | 775 | ||
Thereafter | 123,431 | ||
Total long-term debt | 130,379 | ||
Less current portion | 2,031 | ||
Long-term debt | $ | 128,348 | |
Interest Rate Swap Arrangement
On September 2, 2005, the Company entered into an interest rate swap arrangement with a bank. Pursuant to the arrangement, the Company will receive payments at the rate of three month LIBOR in exchange for the obligation to pay a fixed rate of interest at 4.43%. The notional principal amount for the interest rate swap arrangement is $65,000,000 through the term of the arrangement, which expires on October 31, 2009. The interest rate swap arrangement is designed to partially limit the Company’s exposure to the effects of rising interest rates with respect to borrowings outstanding under the First Lien Term Facility and Second Lien Term Facility. This arrangement is accounted for at fair value, with fluctuations recorded through the statement of operations. As of October 28, 2005, the fair value of the arrangement was $779,000, which has been reflected as a component of other assets and gain on interest rate swap arrangement in the accompanying consolidated financial statements.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
5. | Commitments and Contingencies |
Lease Commitments
The Company leases certain machinery, equipment and facilities under operating leases. Aggregate future minimum lease payments as of October 28, 2005 were as follows:
Year ending October | (In thousands) | ||
2006 | $ | 2,159 | |
2007 | 1,792 | ||
2008 | 1,639 | ||
2009 | 1,592 | ||
2010 | 1,586 | ||
Thereafter | 2,956 | ||
$ | 11,724 | ||
Total rent expense for all operating leases amounted to $2,770,000, $1,795,000 and $1,669,000 for the years ended October 28, 2005, October 29, 2004 and October 31, 2003, respectively.
The Company leases certain machinery and equipment under capital leases. Aggregate future minimum lease payments as of October 28, 2005 for the years ending October 2006, October 2007 and October 2008 were $1,414,000, $1,181,000 and $740,000, respectively. The cost of equipment recorded under capital leases at October 28, 2005 and October 29, 2004 was $4,375,000 and $4,949,000, respectively, and the related accumulated depreciation at such dates was $1,548,000 and $2,852,000, respectively.
In addition, the Company leases property from the United States Forest Service under Term Special Use Permits for all or certain portions of the operations of Sierra, Waterville Valley, Loon Mountain and the Summit. These leases are effective through 2039, 2034, 2042 and 2032, respectively. Lease payments are based on a percentage of revenues, and were $1,001,000, $1,117,000 and $1,053,000 for the years ended October 28, 2005, October 29, 2004 and October 31, 2003, respectively.
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Table of Contents
Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
5. | Commitments and Contingencies (continued) |
Other Commitments
Firm commitments for future capital expenditures, which include commitments resulting from firm purchase orders, contracts and other formal agreements, totaled approximately $14,900,000 at October 28, 2005.
In connection with certain single family real estate development projects at Northstar and certain other aspects of its operations, the Company has arranged for surety bonds from third-party surety bonding companies or letters of credit from financial institutions. The aggregate amount of surety bonds and letters of credit in place at October 28, 2005 were $1,343,000 and $184,000, respectively. Under the terms of the Credit Agreement, the letters of credit in the amount of $184,000 reduce the Company’s borrowing capacity under the Revolving Facility.
Litigation
The nature of the ski industry includes the risk of skier injuries. Generally, the Company has insurance to cover potential claims; in some cases the amounts of the claims may be substantial. The Company is also involved in a number of other claims arising from its operations.
Management, in consultation with legal counsel, believes resolution of these claims will not have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.
Pledge of Stock
As of October 28, 2005, the stock of the Company was pledged to secure approximately $148,700,000 of indebtedness of Parent.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
6. | Income Taxes |
The difference between the statutory federal income tax rate and the effective tax rate is attributable to the following:
Year ended | ||||||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | ||||||||||
(In thousands) | ||||||||||||
Tax benefit computed at federal statutory rate of 35% of pre-tax loss | $ | 4,706 | $ | 641 | $ | 1,876 | ||||||
Net change in valuation allowance | (6,027 | ) | (606 | ) | (2,090 | ) | ||||||
Other, net | 1,321 | (35 | ) | 214 | ||||||||
$ | — | $ | — | $ | — | |||||||
Significant components of the Company’s deferred tax assets and liabilities are as follows:
October 28, 2005 | October 29, 2004 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Accruals | $ | 1,014 | $ | 1,067 | ||||
Alternative minimum tax credit carryforwards | 352 | 352 | ||||||
Net operating loss carryforwards | 47,556 | 43,361 | ||||||
Total deferred tax assets | 48,922 | 44,780 | ||||||
Deferred tax liabilities: | ||||||||
Property and equipment | (14,450 | ) | (16,919 | ) | ||||
Goodwill | (2,264 | ) | (1,680 | ) | ||||
Total deferred tax liabilities | (16,714 | ) | (18,599 | ) | ||||
Net deferred tax assets | 32,208 | 26,181 | ||||||
Valuation allowance | (32,208 | ) | (26,181 | ) | ||||
Net deferred tax assets reflected in the accompanying consolidated balance sheets | $ | — | $ | — | ||||
At October 28, 2005, the Company has net operating loss carryforwards of approximately $130,000,000 for federal income tax reporting purposes, which expire between 2012 and 2025.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
7. | Real Estate Transactions |
Sale of South Mountain Real Estate at Loon Mountain
On April 18, 2005, Loon Mountain Recreation Corporation (“LMRC”) and Loon Realty Corp. (“Loon Realty”, and together with LMRC, “Seller”), wholly-owned subsidiaries of the Company, entered into a Real Estate Purchase and Sale Contract (the “Centex Agreement”) with Centex Homes (“Purchaser”) for the purchase and sale of certain development real estate (the “Property”) located proximate to the Loon Mountain ski area (the “Loon Mountain Ski Area”). The Property consists of approximately 338 acres of land and related development rights, which is anticipated to be sold in two phases.
The first phase (“First Phase”) consists of approximately 48 acres of land and related development rights, which are intended to be developed into a minimum of 65 single-family lots and associated subdivision improvements. The second phase (“Second Phase”) consists of approximately 290 acres of land and related development rights, which are intended to be developed into approximately 835 multi-family units and/or single-family lots, 45,000 square feet of commercial and retail space, certain community amenities serving the First Phase and Second Phase and associated subdivision improvements.
On October 3, 2005, Purchaser and Seller consummated the sale of the First Phase property. In connection therewith, the Company recognized real estate revenues of $7,047,000, which consisted of (i) the non-refundable cash purchase price for the First Phase of $6,741,000, and (ii) other consideration in the amount of $306,000 representing Purchaser’s obligation to reimburse LMRC for certain future expenditures. The Company also recognized cost of sales of $1,408,000, which consisted of existing land basis and development costs, brokers’ commissions and other customary closing costs and expenses.
The purchase price for the Second Phase is $21,259,000 plus interest at a rate of 8% per annum from July 15, 2005 to the date of the Second Phase closing, less brokers’ commissions of $1,025,000 to be paid by Seller and other typical closing costs. The closing for the Second Phase, which is expected to occur on or before July 15, 2006, is subject to various closing conditions, including (i) approval of a planned phased development consistent with the intended use of the Second Phase, (ii) receipt of state and local site specific permits and approvals for at least 250 multi-family and/or single-family housing units, (iii) receipt of utility “will serve” letters for the Second Phase, (iv) the delivery by Seller of security in form and substance reasonably satisfactory to Purchaser which guarantees or otherwise provides reasonable assurance of the completion of the South Mountain Expansion as described below, and (v) other customary closing conditions.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
7. | Real Estate Transactions (continued) |
Sale of South Mountain Real Estate at Loon Mountain (continued)
Purchaser and Seller have entered into an Operating Agreement dated October 3, 2005 (the “Operating Agreement”) which addresses various aspects of the mutual development of the Property and the Loon Mountain Ski Area and associated operational matters. A key aspect of the Operating Agreement is the requirement of Seller, conditioned upon the closing of the Second Phase and certain other matters, to construct and install, on or before certain specified dates commencing in 2007, certain ski lifts, trails and related snowmaking infrastructure on South Mountain (the “South Mountain Expansion”), which is adjacent to the existing Loon Mountain Ski Area and the Property. The preliminary estimate of the capital expenditures associated with such improvements is approximately $10,000,000, a meaningful portion of which the Company may intend to finance under delayed draw term loan commitments under the Credit Agreement.
See Note 11 herein for a discussion of the status of the sale of the Second Phase and certain amendments to the Centex Agreement and Operating Agreement during 2006.
Sale of Non-strategic Development Parcels at Loon Mountain
During the years ended October 28, 2005 and October 29, 2004, the Company sold certain non-strategic development parcels and single family lots at Loon Mountain in several transactions for aggregate cash sales prices of $85,000 and $1,436,000, respectively, which have been reflected as real estate revenues for such periods.
Sale of Unit 7A Single Family Lots
In March 2003, Trimont Land Company (“TLC”), the owner and operator of Northstar and a wholly-owned subsidiary of the Company, launched the sale of the Unit 7A subdivision at Northstar, which consists of 15 ski-in/ski-out single family lots. As of October 31, 2003, TLC closed escrow on 12 of the lots and recognized real estate revenues of $9,184,000 during the year ended October 31, 2003. TLC closed escrow on the three remaining lots in December 2003 for an aggregate sales price of $2,798,000, which is reflected as real estate revenues in the year ended October 29, 2004.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
7. | Real Estate Transactions (continued) |
Sale of Development Real Estate to a Related Party
On September 22, 2000, TLC and Trimont Land Holdings, Inc. (“TLH”), a wholly-owned subsidiary of Parent and affiliate of the Company, entered into an Agreement for Purchase and Sale of Real Property (the “Northstar Real Estate Agreement”) pursuant to which TLC agreed to sell to TLH certain development real estate consisting of approximately 550 acres of land located at Northstar (the “Development Real Estate”) for a total purchase price of $27,600,000, of which 85% was payable in cash and 15% was payable in the form of convertible secured subordinated promissory notes. The purchase price was based on an appraisal obtained from an independent third party appraiser. Concurrently therewith, TLC and TLH consummated the sale of the initial land parcels contemplated by the Northstar Real Estate Agreement, and TLC transferred the bulk of the Development Real Estate to TLH for a total purchase price of $21,000,000, of which $17,850,000, or 85%, was paid in cash and $3,150,000, or 15%, was paid in the form of a convertible secured subordinated promissory note (the “Convertible Secured Note”).
In connection with the execution of the Northstar Real Estate Agreement, TLH and an unrelated third party entered into a joint venture agreement (the “East West Joint Venture”) providing for the development of the property purchased by TLH and subsequently transferred to the East West Joint Venture.
In accordance with accounting principles generally accepted in the United States for real estate transactions, during 2000 the Company recorded revenues for the sale of the initial land parcels to the extent of cash received by TLC. The Company obtained an opinion from an independent firm qualified and experienced in the subject matter of the transaction that the terms of the sale of Development Real Estate were fair and reasonable to the Company and TLC and at least as favorable as the terms which could have been obtained in a comparable transaction made on an arms-length basis between unaffiliated parties.
During the year ended November 1, 2002, TLH paid $5,610,000 to TLC, which represented the cash portion of the $6,600,000 purchase price for the remaining Development Real Estate subject to the Northstar Real Estate Agreement. The $5,610,000 payment had been deferred as a deposit liability as of October 31, 2003 pending the consummation of the sale of the remaining Development Real Estate under the Northstar Real Estate Agreement. In December 2003, TLC completed the subdivision of the remaining Development Real Estate and transferred such real estate to TLH. Accordingly, TLC relieved the existing $5,610,000 deposit liability and recognized real estate revenues of $5,610,000 for this transaction during the year ended October 29, 2004. Additionally, the Convertible Secured Note was increased by $990,000 for the 15% noncash portion of the consideration for the remaining Development Real Estate.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
7. | Real Estate Transactions (continued) |
Sale of Development Real Estate to a Related Party (continued)
In June 2005, TLC and TLH agreed, as permitted by the Credit Agreement and Note Purchase Agreement, to cancel the Convertible Secured Note. The cancellation of the Convertible Secured Note had no effect on the financial statements of TLC or the Company, as the Company was intending to recognize revenues, profits and interest on the portion of the sales price represented by the Convertible Secured Note as collections were made, and the balance of the Convertible Secured Note was fully offset by deferred revenue prior to its cancellation.
As part of the East West Joint Venture’s development activities within the village at Northstar, certain existing facilities of TLC were dismantled during the year ended October 29, 2004 in order to permit the construction of the planned village expansion. The East West Joint Venture is obligated to provide TLC with replacement space for the facilities which were dismantled. As this transaction constitutes an exchange of a productive asset not held for sale in the ordinary course of business for an equivalent interest in a similar productive asset, no gain or loss was recognized for this exchange. Under generally accepted accounting principles, the carrying value of the existing facilities of $2,343,000 will become the accounting basis for the replacement space to be provided. The estimated fair value of the replacement space to be provided by the East West Joint Venture is approximately $2,700,000. In addition, as of October 29, 2004, the Company had a receivable from the East West Joint Venture of $800,000 for certain reimbursable costs and expenses, which was collected in March 2005.
8. | Management Agreement with Related Party |
On May 26, 2000, the Company and Parent entered into an Amended and Restated Management Agreement (the “Management Agreement”) with Booth Creek Management Corporation (the “Management Company”) pursuant to which the Management Company agreed to provide Parent, Booth Creek and its subsidiaries with management advice with respect to, among other things, (i) formulation and implementation of financial, marketing and operating strategies, (ii) development of business plans and policies, (iii) corporate finance matters, including acquisitions, divestitures, debt and equity financings and capital expenditures, (iv) administrative and operating matters, including unified management of the Company’s ski resorts, (v) research, marketing and promotion, and (vi) other general business matters. The Company’s Chairman and Chief Executive Officer is the sole shareholder, sole director and Chief Executive Officer of the Management Company.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
8. | Management Agreement with Related Party (continued) |
Under the terms of the Management Agreement, Parent and the Company provide customary indemnification, reimburse certain costs and pay the Management Company an annual management fee of $100,000, plus a discretionary operating bonus. Management fees and reimbursable expenses incurred by the Company during the years ended October 28, 2005, October 29, 2004 and October 31, 2003 were $75,000 per year.
9. | Employee Benefit Plan |
The Company maintains a defined contribution retirement plan (the “Plan”), qualified under Section 401(k) of the Internal Revenue Code, for certain eligible employees. Pursuant to the Plan, eligible employees may contribute a portion of their compensation, subject to a maximum amount per year as specified by law. The Company provides a matching contribution based on specified percentages of amounts contributed by participants. The Company’s contribution expense for the years ended October 28, 2005, October 29, 2004 and October 31, 2003 was $658,000, $661,000 and $607,000, respectively.
10. | Business Segments |
The Company currently operates in two business segments, resort operations and real estate and other. The Company’s resort operations segment is currently comprised of six ski resort complexes, which provide lift access, snow school lessons, retail, equipment rental, food and beverage offerings, lodging and property management services and ancillary products and services. The real estate and other segment is primarily engaged in the development and sale of real estate at Northstar and Loon Mountain and the harvesting of timber rights. Given the distinctive nature of their respective products, these segments are managed separately. Data by segment is as follows:
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
10. | Business Segments (continued) |
Year ended | ||||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | ||||||||
(In thousands) | ||||||||||
Revenue: | ||||||||||
Resort operations | $ | 99,445 | $ | 105,377 | $ | 104,963 | ||||
Real estate and other | 7,522 | 10,033 | 10,084 | |||||||
$ | 106,967 | $ | 115,410 | $ | 115,047 | |||||
Depreciation, depletion and noncash cost of real estate sales: | ||||||||||
Resort operations | $ | 14,327 | $ | 13,848 | $ | 15,639 | ||||
Real estate and other | 1,362 | 2,388 | 4,611 | |||||||
$ | 15,689 | $ | 16,236 | $ | 20,250 | |||||
Selling, general and administrative expense: | ||||||||||
Resort operations | $ | 23,144 | $ | 22,149 | $ | 20,692 | ||||
Real estate and other | 1,734 | 1,042 | 1,371 | |||||||
$ | 24,878 | $ | 23,191 | $ | 22,063 | |||||
Operating income (loss): | ||||||||||
Resort operations | $ | (1,597 | ) | $ | 5,403 | $ | 4,663 | |||
Real estate and other | 3,574 | 6,034 | 3,142 | |||||||
$ | 1,977 | $ | 11,437 | $ | 7,805 | |||||
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
10. | Business Segments (continued) |
A reconciliation of combined operating income for resort operations and real estate and other to consolidated net loss is as follows:
Year ended | ||||||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | ||||||||||
(In thousands) | ||||||||||||
Operating income for reportable segments | $ | 1,977 | $ | 11,437 | $ | 7,805 | ||||||
Interest expense | (12,779 | ) | (12,071 | ) | (12,492 | ) | ||||||
Amortization of deferred financing costs | (2,655 | ) | (1,195 | ) | (1,140 | ) | ||||||
Gain (loss) on early retirement of debt | (889 | ) | — | 506 | ||||||||
Gain on interest rate swap arrangement | 779 | — | — | |||||||||
Other income (expense) | 121 | (2 | ) | (40 | ) | |||||||
Net loss | $ | (13,446 | ) | $ | (1,831 | ) | $ | (5,361 | ) | |||
Capital expenditures by segment and segment assets were as follows:
Year ended | |||||||||
October 28, 2005 | October 29, 2004 | October 31, 2003 | |||||||
(In thousands) | |||||||||
Capital expenditures: | |||||||||
Resort operations | $ | 11,151 | $ | 11,013 | $ | 6,445 | |||
Real estate and other | 1,754 | 1,754 | 2,745 | ||||||
$ | 12,905 | $ | 12,767 | $ | 9,190 | ||||
October 28, 2005 | October 29, 2004 | ||||||||
Segment assets: | |||||||||
Resort operations | $ | 138,267 | $ | 139,686 | |||||
Real estate and other | 10,578 | 9,789 | |||||||
Corporate and other nonidentifiable assets | 11,196 | 5,990 | |||||||
$ | 160,041 | $ | 155,465 | ||||||
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
11. | Subsequent Events |
May 2006 Credit Agreement and Note Purchase Agreement Amendment and Waiver
During the first part of the 2005/06 ski season, the Company experienced certain adverse weather conditions at its resorts, including heavy rains and flooding at its Lake Tahoe resorts over the Christmas/New Year’s holiday period and rain and high winds at its New Hampshire resorts during the Martin Luther King weekend. These weather conditions during key holiday periods negatively impacted the Company’s operating results for the first fiscal quarter of 2006. As a result, the Company did not achieve the minimum EBITDA requirement under the Credit Agreement and Note Purchase Agreement for the first fiscal quarter of 2006. On May 10, 2006, the Company entered into a First Amendment and Waiver (the “First Amendment and Waiver”) with the agents and lenders under each of the Credit Agreement and the Note Purchase Agreement which (i) waived the breach of covenant and event of default resulting from the Company’s failure to achieve the minimum EBITDA requirement for the first fiscal quarter of 2006, (ii) modified the level of the minimum EBITDA covenant for certain periods following the first fiscal quarter of 2006, (iii) required a capital contribution of $3,500,000 into the Company, which was made concurrently with the First Amendment and Waiver, and (iv) modified certain other terms and conditions of the Credit Agreement and Note Purchase Agreement. The Company was in compliance with the terms, conditions and covenants under the Credit Agreement and Note Purchase Agreement for the second and third fiscal quarters of 2006.
Other Changes in Capitalization
On July 5, 2006, the Company borrowed $5,000,000 under the Credit Agreement pursuant to the terms of a delayed draw feature (the “CapEx A Term Loan”). The proceeds of the CapEx A Term Loan, together with capital contributions of Parent of $4,000,000 and $1,000,000 made on July 14, 2006 and August 18, 2006, respectively, will be utilized by the Company to fund certain expansion capital projects at Northstar.
Amendments to Centex Agreement and Operating Agreement and Sale of Second Phase Property at Loon Mountain
In anticipation of the sale of the Second Phase property at Loon Mountain (Note 7), Seller and Purchaser entered into amendments to the Centex Agreement and Operating Agreement which principally provided for (i) a $5,000,000 reduction in the purchase price for the Second Phase property from $21,259,000 to $16,259,000, (ii) a new obligation of Purchaser to make a payment (the “Centex Ski Infrastructure Payment”) on or before April 2, 2007 in the amount of $5,000,000 plus interest at a rate of 8% per annum from the Second Phase closing to defray a portion of the costs to be
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
11. | Subsequent Events (continued) |
Amendments to Centex Agreement and Operating Agreement and Sale of Second Phase Property at Loon Mountain (continued)
incurred by LMRC in connection with certain components of the South Mountain Expansion, and (iii) the condition that LMRC’s obligations for certain portions of the South Mountain Expansion are contingent upon LMRC’s receipt of the Centex Ski Infrastructure Payment. The Company also obtained amendments to the Credit Agreement and Note Purchase Agreement which permitted the amendments to the Centex Agreement and Operating Agreement and provided for a mandatory prepayment of the First Lien Term Facility in the amount of $8,600,000 from the net proceeds of the sale of the Second Phase property. On August 25, 2006, Seller and Purchaser consummated the sale and transfer of the Second Phase property in accordance with the amended terms of the Centex Agreement and the related amendments to the Credit Agreement and Note Purchase Agreement.
Minimum EBITDA Covenant Violation Under the Credit Agreement for the Trailing Twelve Month Period Ended October 27, 2006
Due principally to temporary disruption from significant real estate infrastructure development at Northstar, which negatively impacted customer visitation and related lodging, retail, food and beverage, golf and mountain biking operations at the resort during the summer season of 2006, the Company determined that it will not achieve the minimum EBITDA covenant under the Credit Agreement for the trailing twelve month period ended October 27, 2006. The Company determined that it will satisfy the minimum EBITDA covenant for such period under the Note Purchase Agreement. However, in the event amounts due under the Credit Agreement are called by the lenders, the amounts due under the Note Purchase Agreement would also become callable by the lenders under cross default provisions in the Note Purchase Agreement. The Credit Agreement permits the Company to cure a breach of the minimum EBITDA covenant for this period through a capital contribution from its Parent in an amount sufficient to alleviate the EBITDA shortfall. Alternatively, the Company could potentially pursue another form of cure or waiver of the covenant breach from the lenders under the Credit Agreement. The Company is presently evaluating its options in this regard. However, no assurances can be given with respect to the outcome of this matter. Further, as discussed below, the Company’s Parent is pursuing a strategic transaction which, if consummated, would result in the extinguishment of all amounts outstanding under the Credit Agreement and Note Purchase Agreement.
Pending Strategic Transactions
On December 1, 2006, Parent and the Company entered into a Securities Purchase Agreement (the “SPA”) with Booth Creek Resort Properties LLC (“BCRP”), a newly formed entity owned and controlled by the Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer of Parent and the Company and one other investor. Pursuant to the SPA, it is contemplated that BCRP would acquire the stock of the Company and the stock and membership interests of certain other entities owned by Parent. Parent will retain its interest in TLH and certain unsold single family lots at Northstar generally known as the Retreat subdivision. The purchase price under the SPA is $180,000,000 plus the assumption of indebtedness of approximately $5,600,000, and is subject to certain purchase price adjustments relating to (i) working capital and unearned revenue balances at the closing, (ii) the extent of capital expenditures funded by the Company prior to closing, (iii) holdbacks for remaining infrastructure for certain real estate projects, and (iv) reimbursement to Parent of the EBITDA losses of the divested entities and certain interest costs for the period from October 28, 2006 to closing. In connection with the closing under the SPA, a portion of the proceeds of the sale will be used to retire all amounts outstanding under the Credit Agreement and Note Purchase Agreement, as well as to retire certain capital lease obligations and operating lease commitments.
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Booth Creek Ski Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
11. | Subsequent Events (continued) |
Concurrently with the execution of the SPA, BCRP, certain subsidiaries of the Company and an affiliate of CNL Income Properties, Inc. (“CNL”) entered into an Asset Purchase Agreement (the “APA”) for the sale of substantially all of the resort operating assets of Northstar, Sierra, Loon Mountain and the Summit (the “Acquired Properties”) to CNL for a purchase price of $170,000,000, subject to certain purchase price adjustments. CNL has also committed to provide loans in the aggregate amount of $12,000,000 secured by certain other assets BCRP will be acquiring under the SPA, including (i) the Waterville Valley ski resort, (ii) the Mount Cranmore ski resort and related development real estate, and (iii) certain single family development real estate at Northstar generally known as the Porcupine Hill Estates subdivision.
In connection with CNL’s purchase of the Acquired Properties from BCRP, it is anticipated that CNL will lease such resort operating assets on a long-term, triple net basis to tenant subsidiaries of BCRP and the Company. Also as part of the transactions described above, CNL has committed to (i) provide funding for future capital expenditures primarily at Northstar and Loon Mountain in the aggregate amount of $28,700,000 and (ii) to take assignment of TLH’s obligation to acquire certain commercial real estate at Northstar, and to lease such real estate to an affiliate of the Company on a long-term triple net basis.
The parties to the SPA and APA presently expect to consummate the transactions described above on or prior to December 20, 2006. However, all of these transactions are subject to the fulfillment of certain conditions. There can be no assurance that any or all of these conditions will be satisfied and that these transactions will ultimately be consummated.
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Summarized Financial Information
The following summarized unaudited financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of the Bretton Woods Mountain Resort.
Balance Sheet Data:
March 31, 2006 | December 31, 2005 | |||||
(unaudited) | ||||||
Current assets | $ | 3,784,403 | $ | 4,129,450 | ||
Noncurrent assets | 29,915,142 | 30,287,745 | ||||
Current liabilities | 7,472,837 | 9,573,897 | ||||
Noncurrent liabilities | 16,938,165 | 16,640,090 | ||||
Partner’s capital | 9,288,543 | 8,203,208 |
Statement of Operations Data:
Quarter ended March 31, 2006 | Year Ended December 31, 2005 | ||||||
(unaudited) | |||||||
Revenues | $ | 9,909,829 | $ | 30,056,892 | |||
Gross Profit | $ | 4,907,163 | $ | 13,499,123 | |||
Net income (loss) | $ | 307,778 | $ | (1,204,363 | ) |
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Summarized Financial Information (Unaudited)
The following unaudited combined summarized financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of eleven family entertainment center properties from Trancas Capital, LLC:
Combined Balance Sheet Data:
September 30, 2006 | December 31, 2005 | |||||
Current assets | $ | 24,376 | $ | 1,304,470 | ||
Noncurrent assets | 33,426,452 | 34,329,046 | ||||
Current liabilities | 2,387,929 | 648,885 | ||||
Noncurrent liabilities | 1,791,863 | 973,233 | ||||
Equity | 29,271,036 | 34,011,398 |
Combined Statement of Operations Data:
Nine Months Ended September 30, 2006 | Year Ended December 31, 2005 | |||||||
Revenues | $ | 8,054,343 | $ | 3,539,788 | ||||
Gross profit | $ | 6,811,086 | $ | 3,213,169 | ||||
Net income (loss) | $ | (1,619,369 | ) | $ | (187,752 | ) |
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Summarized Financial Information (unaudited)
The following unaudited combined summarized financial information is filed as a part of this Prospectus Supplement as a result of the Company’s acquisition of seven golf properties from Evergreen Alliance Golf Limited, LP and Westbrook Fund IV EAGL Parent LLC:
Combined Balance Sheet Data:
September 24, 2006 | December 25, 2005 | |||||
Current assets | $ | 2,995,382 | $ | 2,693,765 | ||
Noncurrent assets (1) | 29,480,444 | 30,958,409 | ||||
Current liabilities | 3,912,533 | 3,445,568 | ||||
Noncurrent liabilities | 21,782,807 | 22,065,343 | ||||
Partner’s capital | 6,780,485 | 8,141,263 |
Combined Statement of Operations Data:
Nine Months Ended September 24, 2006 | Year Ended December 25, 2005 | |||||||
Revenues | $ | 14,887,778 | $ | 18,234,613 | ||||
Gross profit | $ | 2,799,611 | $ | 3,369,410 | ||||
Net income (loss) from continuing operations | $ | (1,516,642 | ) | $ | (2,177,353 | ) | ||
Net income (loss) | $ | (1,516,642 | ) | $ | (2,177,353 | ) |
FOOTNOTES:
(1) | Includes the carrying value of $1,988,451 and $2,340,535 as of September 24, 2006 and December 25, 2005, respectively, representing a 47.5% partnership interest in the Cowboys Golf Club. |
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APPENDIX B
Prior Performance Tables
Table of Contents
APPENDIX B
PRIOR PERFORMANCE TABLES
The following information updates the corresponding information in Tables I, II and III of Appendix B to the prospectus:
Table I – Experience in Raising and Investing Funds
FOOTNOTES:
Note 5: | The amounts shown represent the combined results of the Retirement Properties REIT’s Initial Offering, 2000 Offering, 2002 Offering and 2003 Offering only, due to the fact that the 2004 Offering was not yet fully subscribed at December 31, 2005. |
Table II – Compensation To Sponsor
CNL Hotels & Resorts, Inc.
Dollar amount of cash generated from (used in) operations before deducting payments to sponsor: | ||
2005 (Note 3) | 202,196,000 |
Table III – Operating Results of Prior Programs
CNL Hotels & Resorts, Inc.
2004 (Note 1&2) | |||
Less: | |||
Depreciation and amortization | (145,872,000 | ) |
Past performance is not necessarily indicative of future performance.
Table of Contents
The following table updates and replaces the corresponding table of Appendix B to the prospectus.
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
CNL RETIREMENT PROPERTIES, INC.
2001 (Note 2) | 2002 (Note 3) | 2003 (Note 4) | 2004 (Note 5) | 2005 (Note 5) | ||||||||||||||||
Gross revenue | $ | 1,764,217 | $ | 15,571,000 | $ | 90,300,000 | $ | 259,818,000 | $ | 381,074,000 | ||||||||||
Interest and other income | 135,402 | 1,909,000 | 1,625,000 | 4,771,000 | 2,970,000 | |||||||||||||||
Equity in earnings of unconsolidated entity | — | 6,000 | 11,000 | 178,000 | 227,000 | |||||||||||||||
Less: Operating expenses | (343,472 | ) | (2,118,000 | ) | (9,797,000 | ) | (39,964,000 | ) | (66,335,000 | ) | ||||||||||
Interest and loan cost amortization expense | (105,056 | ) | (1,534,000 | ) | (9,588,000 | ) | (42,783,000 | ) | (76,171,000 | ) | ||||||||||
Provision for doubtful accounts | — | — | — | (3,900,000 | ) | (3,082,000 | ) | |||||||||||||
Depreciation and amortization | (535,126 | ) | (3,190,000 | ) | (17,277,000 | ) | (62,512,000 | ) | (98,446,000 | ) | ||||||||||
Organizational costs | — | — | — | — | — | |||||||||||||||
Minority interests in income of consolidated subsidiaries | — | (433,000 | ) | — | (93,000 | ) | (706,000 | ) | ||||||||||||
Income (loss) from continuing operations - GAAP basis | 915,965 | 10,211,000 | 55,274,000 | 115,515,000 | 139,531,000 | |||||||||||||||
Income (loss) from discontinued operations - GAAP basis | — | 1,161,000 | 3,186,000 | 2,403,000 | (3,950,000 | ) | ||||||||||||||
Net income (loss) - GAAP basis | 915,965 | 11,372,000 | 58,460,000 | 117,918,000 | 135,581,000 | |||||||||||||||
Taxable income | ||||||||||||||||||||
- from operations (Note 9) | 600,447 | 7,792,000 | 27,477,000 | 56,155,000 | 81,871,000 | |||||||||||||||
Cash generated from operations (Note 6) | 2,173,379 | 16,976,000 | 60,807,000 | 139,573,000 | 188,309,000 | |||||||||||||||
Less: Cash distributions to investors (Note 10) | ||||||||||||||||||||
- from operating cash flow | (1,507,322 | ) | (14,379,000 | ) | (59,784,000 | ) | (139,573,000 | ) | (175,958,000 | ) | ||||||||||
- from sale of properties | — | — | — | — | — | |||||||||||||||
- from cash flow from prior period | — | — | — | (4,842,000 | ) | — | ||||||||||||||
- from return of capital (Note 11) | — | — | — | (2,723,000 | ) | — | ||||||||||||||
Cash generated (deficiency) after cash Distributions | 666,057 | 2,597,000 | 1,023,000 | (7,565,000 | ) | 12,351,000 | ||||||||||||||
Special items (not including sales of real Estate and refinancing): | ||||||||||||||||||||
Subscriptions received from stockholders | 59,519,751 | 371,135,000 | 1,059,981,000 | 880,268,000 | 215,397,000 | |||||||||||||||
Stock issuance costs | (6,903,096 | ) | (40,232,000 | ) | (99,309,000 | ) | (89,039,000 | ) | (17,254,000 | ) | ||||||||||
Acquisition of land, building and equipment on operating leases | (20,269,138 | ) | (193,176,000 | ) | (661,946,000 | ) | (921,698,000 | ) | (371,026,000 | ) | ||||||||||
Investment in direct financing leases | — | (128,065,000 | ) | (263,330,000 | ) | (50,230,000 | ) | (278,000 | ) | |||||||||||
Investment in lease intangibles | — | (8,408,000 | ) | (23,220,000 | ) | (50,064,000 | ) | (15,044,000 | ) | |||||||||||
DASCO acquisition | — | — | — | (204,441,000 | ) | — | ||||||||||||||
Investment in notes receivable | — | (2,000,000 | ) | — | — | (16,000,000 | ) | |||||||||||||
Proceeds from notes receivable | — | — | 2,000,000 | — | — | |||||||||||||||
Investment in unconsolidated subsidiary | — | (350,000 | ) | — | — | — | ||||||||||||||
Contributions from minority interests | — | — | — | 997,000 | 3,093,000 | |||||||||||||||
Distributions to minority interests | — | (509,000 | ) | — | (45,000 | ) | (459,000 | ) | ||||||||||||
Payment of acquisition fees and costs | (2,644,534 | ) | (16,132,000 | ) | (53,126,000 | ) | (73,124,000 | ) | (20,575,000 | ) | ||||||||||
Payment of deferred leasing costs | — | — | — | (864,000 | ) | (1,039,000 | ) | |||||||||||||
Increase in restricted cash | (17,797 | ) | (1,650,000 | ) | (13,127,000 | ) | (9,448,000 | ) | 6,082,000 | |||||||||||
Proceeds from borrowings on line of credit | — | — | 71,370,000 | — | 115,000,000 | |||||||||||||||
Repayments on line of credit | (3,795,000 | ) | — | (51,370,000 | ) | — | (60,000,000 | ) | ||||||||||||
Proceeds from borrowings on mortgages payable | — | 32,620,000 | 170,800,000 | 315,045,000 | 305,485,000 | |||||||||||||||
Principal payments on mortgages payable | — | (268,000 | ) | (13,832,000 | ) | (28,964,000 | ) | (66,219,000 | ) | |||||||||||
Proceeds from construction loans payable | — | — | 7,402,000 | 73,618,000 | 63,367,000 | |||||||||||||||
Repayments of construction loans payable | — | — | — | — | (1,315,000 | ) | ||||||||||||||
Proceeds from term loan | — | — | — | 60,000,000 | — | |||||||||||||||
Repayment of term loan | — | — | — | — | (60,000,000 | ) | ||||||||||||||
Proceeds from issuance of bonds payable | — | — | 8,203,000 | 12,063,000 | 12,622,000 | |||||||||||||||
Retirement of bonds payable | — | — | (6,589,000 | ) | (7,736,000 | ) | (9,057,000 | ) | ||||||||||||
Payment of loan costs | — | (1,309,000 | ) | (7,523,000 | ) | (10,149,000 | ) | (11,707,000 | ) | |||||||||||
Retirement of shares of common stock | (13,020 | ) | (174,000 | ) | (1,117,000 | ) | (3,933,000 | ) | (40,303,000 | ) | ||||||||||
Cash generated (deficiency) after cash distributions and special items | 26,543,223 | 14,079,000 | 126,290,000 | (115,309,000 | ) | 43,121,000 | ||||||||||||||
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED (Note 8) | ||||||||||||||||||||
Federal income tax results: | ||||||||||||||||||||
Ordinary income (Note 10) | ||||||||||||||||||||
- from operations (Note 9) | 41 | 42 | 48 | 42 | 48 | |||||||||||||||
- from recapture | — | — | — | — | — | |||||||||||||||
Capital gain (Note 10) | — | — | — | — | — | |||||||||||||||
Past performance is not necessarily indicative of future performance.
Table of Contents
2001 (Note 2) | 2002 (Note 3) | 2003 (Note 4) | 2004 (Note 5) | 2005 (Note 5) | |||||||||||
Cash distributions to investors Source (on GAAP basis) | |||||||||||||||
- from investment income | 38 | 52 | 66 | 56 | 55 | ||||||||||
- from capital gain | — | — | — | — | — | ||||||||||
- from investment income from prior period | — | — | — | — | — | ||||||||||
- from return of capital (Note 11) | 25 | 13 | 1 | 14 | 16 | ||||||||||
Total distributions on GAAP basis (Note 12) | 63 | 65 | 67 | 70 | 71 | ||||||||||
Source (on cash basis) | |||||||||||||||
- from sales | — | — | — | — | — | ||||||||||
- from refinancing | — | — | — | — | — | ||||||||||
- from operations (Note 6) | 63 | 65 | 67 | 66 | 71 | ||||||||||
- from cash flow from prior period | — | — | — | 2 | — | ||||||||||
- from return of capital (Note 11) | — | — | — | 2 | — | ||||||||||
Total distributions on cash basis (Note 12) | 63 | 65 | 67 | 70 | 71 | ||||||||||
Total cash distributions as a percentage of original $1,000 investment (Note 8) | 7.0 | % | 7.0 | % | 7.1 | % | 7.1 | % | 7.1 | % | |||||
Total cumulative cash distributions per $1,000 investment from inception | 134 | 199 | 266 | 336 | 407 | ||||||||||
Amount (in percentage terms) remaining invested in program properties at the end of each year presented (original total acquisition cost of properties retained, divided by original total acquisition cost of all properties in program) | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
FOOTNOTES:
Note 1: | CNL Retirement Properties, Inc. (the “Retirement Properties REIT”) offered securities for sale in five public offerings since 1998. Of the funds raised as of December 31, 2005, $106,527,910 was raised pursuant to its reinvestment plan. | |
Note 2: | The amounts shown represent the combined results of the Initial Offering and the 2000 Offering. | |
Note 3: | The amounts shown represent the combined results of the Initial Offering, the 2000 Offering and the 2002 Offering. | |
Note 4: | The amounts shown represent the combined results of the Initial Offering, the 2000 Offering, the 2002 Offering and the 2003 Offering. | |
Note 5: | The amounts shown represent the combined results of the Initial Offering, the 2000 Offering, the 2002 Offering, the 2003 Offering and the 2004 Offering. | |
Note 6: | Cash generated from operations includes cash received from tenants, interest and other income, less cash paid for operating expenses. | |
Note 7: | Cash generated from operations per this table agrees to cash generated from operations per the statement of cash flows included in the consolidated financial statements of the Retirement Properties REIT. | |
Note 8: | Total cash distributions as a percentage of original $1,000 investment are calculated based on actual distributions declared for the period. | |
Note 9: | Taxable income presented is before the dividends paid deduction. | |
Note 10: | For the years ended December 31, 2005, 2004, 2003, 2002 and 2001, approximately 67%, 60%, 71%, 65% and 65%, respectively, of the distributions received by stockholders were considered to be ordinary income for federal income tax purposes. For the years ended December 31, 2005, 2004, 2003, 2002 and 2001, approximately 33%, 40%, 29%, 35% and 35%, respectively, of distributions received by stockholders were considered a return of capital for federal income tax purposes. No amounts distributed to stockholders for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, are required to be or have been treated by the company as a return of capital for purposes of calculating the stockholders’ return on their invested capital. | |
Note 11: | Cash distributions presented above as a return of capital on a GAAP basis represent the amount of cash distributions in excess of accumulated net income on a GAAP basis. Accumulated net income includes deductions for depreciation and amortization expense and income from certain non-cash items. In addition, cash distributions presented as a return of capital on a cash basis represents the amount of cash distributions in excess of cash generated from operating cash flow and excess cash flows from prior periods. These amounts have not been treated as a return of capital for purposes of calculating the amount of stockholders’ invested capital. |
Past performance is not necessarily indicative of future performance.
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TABLE III – CNL RETIREMENT PROPERTIES, INC. – CONTINUED
Note 12: | Tax and distribution data and total distributions on GAAP basis were computed based on the weighted average shares outstanding during each period presented. The taxability of distributions of a REIT is based on the annual earnings and profits split of the REIT. Therefore, federal income tax results per $1,000 invested presented above has been calculated using the annual earnings and profits split as described in Note 10. | |
Note 13: | Certain data for columns representing less than 12 months have been annualized. |
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Past performance is not necessarily indicative of future performance.