Exhibit 99.1
Bickford Master I, LLC.
Auditors’ Report and Consolidated Financial Statements
December 31, 2012 and 2011
Bickford Master I, LLC.
December 31, 2012 and 2011
Contents | ||||
Independent Auditors’ Report | 1 | |||
Consolidated Financial Statements | ||||
Balance Sheets | 2 | |||
Statements of Income | 3 | |||
Statements of Member’s Deficit | 4 | |||
Statements of Cash Flows | 5 | |||
Notes to Financial Statements | 6 | |||
Independent Auditors’ Report on Supplementary Information | 14 | |||
Consolidating Balance Sheet – December 31, 2012 | 15 | |||
Consolidating Statement of Income – Year Ended December 31, 2012 | 17 |
INDEPENDENT AUDITORS’ REPORT
To the Members
Bickford Master I, LLC.
We have audited the accompanying consolidated financial statements of Bickford Master I, LLC. (a Kansas limited liability company) (the Company), which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of income, member deficit, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the 2012 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bickford Master I, LLC. as of December 31, 2012, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Uncertainty Regarding Going Concern
During the years ended December 31, 2012 and 2011, the Company’s cash outflows from operations were $537,191 and $290,099, respectively. As a result, the sole member had to provide equity contributions during the years ended December 31, 2012 and 2011 totaling $1,753,935 and $807,793, respectively, to fund these operating shortfalls. In addition, accounts payable and accrued expenses at December 31, 2012 totaled $2,469,460 while cash and cash equivalents totaled $661,854. Although management intends to continue to work towards improving operating performance of the Company and may continue to receive support from the sole member, if possible, to address any operating cash shortfalls, based on the high reliance of the Company on continuing operational support from the sole member and the current economic conditions, there appears to be substantial doubt about the Company continuing to operate as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
Other Matter
The consolidated financial statements of Bickford Master I, LLC. as of December 31, 2011, were audited by other auditors whose report dated June 18, 2012, expressed an unmodified opinion on those statements.
/s/ Mayer Hoffman McCann P.C.
Leawood, Kansas
February 28, 2013
1
Bickford Master I, LLC.
Consolidated Balance Sheets
December 31, 2012 and 2011
2012 | 2011 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 661,854 | $ | 328,119 | ||||
Resident accounts receivable, net | 213,496 | 197,124 | ||||||
Prepaid expenses and other assets | 126,262 | 87,544 | ||||||
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Total current assets | 1,001,612 | 612,787 | ||||||
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Property and Equipment, net | 1,840,971 | 1,034,409 | ||||||
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Other Assets | ||||||||
Funds in escrow | 373,605 | 364,886 | ||||||
Lease security deposits | 3,171 | 3,171 | ||||||
Replacement reserves | 539,763 | 553,860 | ||||||
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Total other assets | 916,539 | 921,917 | ||||||
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Total assets | $ | 3,759,122 | $ | 2,569,113 | ||||
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Liabilities and Member’s Deficit | ||||||||
Current Liabilities | ||||||||
Accounts payable — trade | $ | 516,446 | $ | 493,168 | ||||
Deferred revenues | 1,448,241 | 1,372,028 | ||||||
Other accrued expenses | 1,953,014 | 1,946,264 | ||||||
Current maturities — capital lease obligations | 26,342 | 31,655 | ||||||
Deferred gain on sale of assets — current portion | 4,581,312 | 4,581,312 | ||||||
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Total current liabilities | 8,525,355 | 8,424,427 | ||||||
Other Liabilities | ||||||||
Lease liability | 8,061,986 | 7,277,048 | ||||||
Capital lease obligations — long-term portion | 2,112 | 27,853 | ||||||
Deferred gain on sale of assets — long-term portion | 43,522,474 | 48,103,786 | ||||||
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Total liabilities | 60,111,927 | 63,833,114 | ||||||
Member’s Deficit | (56,352,805 | ) | (61,264,001 | ) | ||||
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Total liabilities and member’s deficit | $ | 3,759,122 | $ | 2,569,113 | ||||
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See Notes to Consolidated Financial Statements
2
Bickford Master I, LLC.
Consolidated Statements of Income
Years Ended December 31, 2012 and 2011
2012 | 2011 | |||||||
Revenues | ||||||||
Resident revenues | $ | 28,567,913 | $ | 28,140,014 | ||||
Community fees | 467,946 | 875,205 | ||||||
Other revenues | 80,137 | 42,488 | ||||||
Accretion of deferred gain on sale of assets | 4,581,312 | 4,581,312 | ||||||
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Total revenues | 33,697,308 | 33,639,019 | ||||||
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Operating Expenses | ||||||||
Residence and general operating expenses | 17,238,384 | 17,264,074 | ||||||
Management fees | 1,475,087 | 1,494,250 | ||||||
Depreciation | 155,137 | 98,386 | ||||||
Building lease expense | 11,665,556 | 11,667,253 | ||||||
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Total operating expenses | 30,534,164 | 30,523,963 | ||||||
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Operating Income | 3,163,144 | 3,115,056 | ||||||
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Other Income (Expense) | ||||||||
Interest expense | (5,916 | ) | (11,143 | ) | ||||
Other | 33 | 1,458 | ||||||
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Total other expense | (5,883 | ) | (9,685 | ) | ||||
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Net Income | $ | 3,157,261 | $ | 3,105,371 | ||||
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See Notes to Consolidated Financial Statements
3
Bickford Master I, LLC.
Consolidated Statements of Member’s Deficit
Years Ended December 31, 2012 and 2011
2012 | 2011 | |||||||
Deficit, Beginning of Year | $ | (61,264,001 | ) | $ | (65,177,165 | ) | ||
Contribution from member | 1,753,935 | 807,793 | ||||||
Net income | 3,157,261 | 3,105,371 | ||||||
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Deficit, End of Year | $ | (56,352,805 | ) | $ | (61,264,001 | ) | ||
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See Notes to Consolidated Financial Statements
4
Bickford Master I, LLC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2012 and 2011
2012 | 2011 | |||||||
Operating Activities | ||||||||
Net income | $ | 3,157,261 | $ | 3,105,371 | ||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation | 155,137 | 98,386 | ||||||
Accretion of deferred gain on sale of assets | (4,581,312 | ) | (4,581,312 | ) | ||||
Change in recognition of lease liability | 784,938 | 1,465,850 | ||||||
Provision for bad debts | 99,165 | 24,111 | ||||||
Changes in operating assets and liabilities | ||||||||
Resident accounts receivable | (115,537 | ) | (37,102 | ) | ||||
Prepaid expenses and other assets | (38,718 | ) | 108,239 | |||||
Accounts payable — trade | (81,088 | ) | (494,565 | ) | ||||
Deferred revenues | 76,213 | (321,399 | ) | |||||
Other accrued expenses | 6,750 | 342,322 | ||||||
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Net cash flows from operating activities | (537,191 | ) | (290,099 | ) | ||||
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Investing Activities | ||||||||
Additions to property and equipment | (857,333 | ) | (285,918 | ) | ||||
Funds in escrow | (8,719 | ) | 14,234 | |||||
Replacement reserves | 14,097 | (101,123 | ) | |||||
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Net cash flows from investing activities | (851,955 | ) | (372,807 | ) | ||||
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Financing Activities | ||||||||
Repayments of capital lease obligations | (31,054 | ) | (26,626 | ) | ||||
Contribution from member | 1,753,935 | 807,793 | ||||||
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Net cash flows from financing activities | 1,722,881 | 781,167 | ||||||
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Net Increase in Cash and Cash Equivalents | 333,735 | 118,261 | ||||||
Cash and Cash Equivalents, Beginning of Year | 328,119 | 209,858 | ||||||
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Cash and Cash Equivalents, End of Year | $ | 661,854 | $ | 328,119 | ||||
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Supplemental Disclosure of Cash Flow and Noncash Information | ||||||||
Cash paid for interest | $ | 6,332 | $ | 10,978 | ||||
Capital expenditures in accounts payable — trade | 104,366 | 42,596 |
See Notes to Consolidated Financial Statements
5
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Bickford Master I, LLC. (the Company) was formed under Kansas law effective April 16, 2008.
Upon formation, the Company issued all of its membership interests to Eby Realty Group, LLC. (ERG) in exchange for the transfer of ERG’s ownership interest in twelve single member limited liability companies each of which own individual properties. In addition, effective September 30, 2008, ERG contributed to the Company its ownership interest in two additional single member limited liability companies each of which own individual properties. Upon completion of these transfers, the fourteen property companies became wholly-owned subsidiaries of the Company.
Because ownership of ERG and of the Company is the same, this combination was accounted for in a manner similar to a pooling of interests, using ERG’s historical book values. Consolidated operations reflect the operations of the above entities for all of fiscal 2012 and 2011.
Principle Business
The Company’s primary line of business is the operation of assisted-care, dementia-care, and independent-living residences for the elderly.
Principles of Consolidation
The accompanying consolidated financial statements reflect the consolidated financial position of the Company. The following entities make up the consolidated financial statements of the Company as of December 31, 2012 and 2011:
Legal Entity | Formation Date | Residence Locations | ||
Bickford Master I, LLC. | April 2008 | |||
Ames Bickford Cottage, LLC. | June 2000 | Ames, Iowa | ||
Bourbonnais Bickford House, LLC. | March 2000 | Bourbonnais, Illinois | ||
Burlington Bickford Cottage, LLC. | June 2000 | Burlington, Iowa | ||
Crawfordsville Bickford Cottage, LLC. | January 2001 | Crawfordsville, Indiana | ||
Ft. Dodge Bickford Cottage, LLC. | June 2000 | Ft. Dodge, Iowa | ||
Lincoln Bickford Cottage, LLC. | January 2000 | Lincoln, Nebraska | ||
Marshalltown Bickford Cottage, LLC. | June 2000 | Marshalltown, Iowa | ||
Moline Bickford Cottage, LLC. | June 2002 | Moline, Illinois | ||
Muscatine Bickford Cottage, LLC. | January 1997 | Muscatine, Iowa | ||
Omaha II Bickford Cottage, LLC. | February 2001 | Omaha, Nebraska | ||
Quincy Bickford Cottage, LLC. | December 1999 | Quincy, Illinois | ||
Rockford Bickford House, LLC. | March 2000 | Rockford, Illinois | ||
Springfield Bickford House, LLC. | March 2000 | Springfield, Illinois | ||
Urbandale Bickford Cottage, LLC. | February 2001 | Urbandale, Iowa |
All significant intercompany accounts and transactions have been eliminated in consolidation.
6
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Funds in Escrow
Funds are placed in escrow with the Company’s lessor based on the lease document requirements for real estate taxes and insurance premiums. The servicing agent for the lender pays these escrowed funds to the necessary taxing authorities when due. The agent reimburses the Company for insurance premiums after proof of payment has been presented by the Company.
Replacement Reserves
The replacement reserves represent cash required to be set aside monthly by the Company for improvements to the property. The cash required is $500 per unit per year. With a total of 643 units available for all properties, the Company is required to set aside $321,500 per year. The holder of leasehold interests will reimburse the funds for improvement costs after both a review of the improvements and obtaining documentation from the Company detailing the work that has been completed. Improvements can consist of, but are not limited to, such items as new carpet, new paint, and kitchen equipment.
Property and Equipment
Property and equipment acquisitions are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is charged to expense on the straight-line basis over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.
The estimated useful lives for each major depreciable classification of property and equipment are as follows:
Leasehold improvements | 10-20 years | |
Furniture, fixtures and equipment | 5-10 years | |
Automobiles | 5 years |
Long-lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
No asset impairment was recognized during the years ended December 31, 2012 and 2011.
7
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Accounts Receivable
Accounts receivable are stated at the amount billed to customers plus any accrued and unpaid interest. The Company provides an allowance for doubtful accounts for all accounts past due more than 90 days. Payments are due on the first of every month. Accounts that are unpaid after the 10th of each month are considered delinquent and are assessed a late fee. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Revenues
Rent revenue is collected monthly from residents and recognized as revenue in the month that it is earned. The Company collects partially refundable advance community fees from the residents of the assisted-care and dementia-care residences. The portion of the community fee that is refundable is refunded on a pro rata basis during the resident’s first 12 months at the residence. The community fees are intended to help defray the cost of training and other support services provided by the corporate office to the staff of the assisted-care and dementia-care residences. The non-refundable portion of the community fee is recognized as revenue when earned, while the refundable portion is recognized as revenue over a period of 12 months. The collection and refundability on these fees may vary based on applicable state laws and regulations.
Income Taxes
The Company is treated as a partnership for federal and state income tax purposes. Accordingly, no income tax provision has been included in the financial statements because income or loss of the Company is reported individually by the respective Member for income tax purposes. The Company is generally not subject to federal, state and local examination by tax authorities for years prior to 2009.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2012 and 2011, cash equivalents consisted primarily of money market accounts with financial institutions.
Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions. At December 31, 2012 and 2011, the Company’s cash accounts did not exceeded federally insured limits.
8
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.
Subsequent Events
Subsequent events have been evaluated through the date of the Independent Auditors’ Report, which is the date the financial statements were available to be issued.
Note 2: Property and Equipment
A summary of property and equipment as of December 31, 2012 and 2011, is as follows:
2012 | 2011 | |||||||
Buildings and building improvements | $ | 1,183,785 | $ | 488,909 | ||||
Furniture, equipment and vehicles | 1,062,556 | 795,733 | ||||||
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2,246,341 | 1,284,642 | |||||||
Less accumulated depreciation | 405,370 | 250,233 | ||||||
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Net property and equipment | $ | 1,840,971 | $ | 1,034,409 | ||||
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The Company has leased equipment at certain properties that have been treated as a capital lease and included above. As such, the net present value of the future lease payments are recorded as a capital lease obligation on the accompanying consolidated balance sheets. The payments on these obligations are amortized and treated partially as a principal reduction to the capital lease obligation and as interest expense on the capital lease obligations.
9
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note 3: Long-Term Debt
Long-term debt consists of the following capital lease obligations at December 31, 2012 and 2011:
2012 | 2011 | |||||||
Capital lease obligations | $ | 28,454 | $ | 59,508 | ||||
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The following is a schedule of maturities of capital lease obligations by year.
2013 | $ | 28,560 | ||
2014 | 2,146 | |||
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Total | 30,706 | |||
Less amount representing interest | 2,252 | |||
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Present value of future minimum lease payments | $ | 28,454 | ||
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Total property and equipment, subject to capital lease as of December 31, 2012 and 2011, is as follows:
Equipment under capital lease | $ | 183,882 | $ | 183,882 | ||||
Less accumulated depreciation | (83,185 | ) | (60,032 | ) | ||||
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Net equipment under capital lease | $ | 100,697 | $ | 123,850 | ||||
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Note 4: Member’s Equity
Equity of the Company is comprised of one class of Company membership units, with the sole member and owner of all units being ERG. Each membership unit of the Company shares equally in ownership rights of the Company. For tax purposes, all income, gains and losses of the Company are consolidated with the Federal and appropriate state returns of ERG.
10
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note 5: Related Party Transactions
The Company pays a 5% management fee to Bickford Senior Living Group, LLC. (BSLG), a wholly- owned subsidiary of ERG, based on total property revenues for management and oversight of the operations on all properties. Total fees paid in 2012 and 2011 were $1,475,087 and $1,494,250, respectively. The Company is dependent on BSLG for the management of its properties, and any adverse change in its relationship with BSLG could have a material, adverse impact on the Company’s operations.
Operating expenses are at times incurred by entities affiliated through common ownership. Such entities include BSLG, ERG and subsidiaries, EDP, Inc. and The Eby Group, Inc. The balance of these intercompany accounts are treated as either a distribution or contribution and included as contra-equity on the accompanying consolidated balance sheets. Total intercompany balances recorded as contributions in member’s equity amounted to $1,753,935 and $807,793 during fiscal 2012 and 2011, respectively.
Note 6: Operating Leases
The Company has non-cancelable operating leases expiring at various dates for properties used in the operations of various residences. Additionally, as a result of the sale leaseback transaction effective June 27, 2008(see Note 7), a deferred gain recorded as a result of this transaction will be recognized as income over the 15-year lease term expiring on June 28, 2023. Future minimum lease payments as of December 31, 2012, net of the future recognition of deferred gains, are summarized as follows:
Future Minimum | Recognition | |||||||||||
Lease | of Deferred | Net | ||||||||||
Obligations | Gain | Expense | ||||||||||
Years Ending December 31, | ||||||||||||
2013 | $ | 10,974,210 | $ | 4,581,312 | $ | 6,392,898 | ||||||
2014 | 11,075,038 | 4,581,312 | 6,493,726 | |||||||||
2015 | 11,406,796 | 4,581,312 | 6,825,484 | |||||||||
2016 | 11,749,108 | 4,581,312 | 7,167,796 | |||||||||
2017 | 12,101,974 | 4,581,312 | 7,520,662 | |||||||||
Thereafter | 73,114,238 | 25,197,226 | 47,917,012 | |||||||||
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$ | 130,421,364 | $ | 48,103,786 | $ | 82,317,578 | |||||||
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Property lease expense for the years ended December 31, 2012 and 2011 totaled $11,665,556 and $11,667,253, respectively.
Due to escalating lease payments throughout the lease term, the accompanying consolidated financial statements, in accordance with ASC 840,Accounting for Leases, reflects lease payments on a straight-line basis. The difference between straight-line treatment and actual lease payments are shown in the consolidated balance sheets as a liability ($8,061,986 and $7,277,048, respectively, at December 31, 2012 and 2011). The schedule shown above reflects actual future minimum lease payments for the term of the lease.
11
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
Note 7: Sale-Leaseback Transactions
On June 27, 2008, the building and related equipment of the following properties were sold for a cash price of $100,800,000 to an unrelated third party, Care YBE Subsidiary L.L.C., a Delaware Limited Liability company wholly owned by Care Investment Trust, Inc. (Care):
Legal Entity | Units | Residence Locations | ||
Ames Bickford Cottage, LLC. | 37 | Ames, Iowa | ||
Bourbonnais Bickford House, LLC. | 65 | Bourbonnais, Illinois | ||
Burlington Bickford Cottage, LLC. | 44 | Burlington, Iowa | ||
Crawfordsville Bickford Cottage, LLC. | 28 | Crawfordsville, Indiana | ||
Lincoln Bickford Cottage, LLC. | 44 | Lincoln, Nebraska | ||
Marshalltown Bickford Cottage, LLC. | 38 | Marshalltown, Iowa | ||
Moline Bickford Cottage, LLC. | 28 | Moline, Illinois | ||
Muscatine Bickford Cottage, LLC. | 45 | Muscatine, Iowa | ||
Quincy Bickford Cottage, LLC. | 46 | Quincy, Illinois | ||
Rockford Bickford House, LLC. | 65 | Rockford, Illinois | ||
Springfield Bickford House, LLC. | 67 | Springfield, Illinois | ||
Urbandale Bickford Cottage, LLC. | 61 | Urbandale, Iowa |
In conjunction with the sale, Care entered into a Master Lease Agreement (Lease) with the Company to lease the facilities from Care. The Lease requires the Company to a pay a minimum rental income on Care’s acquisition price with annual payments increasing 3% each year over the term of the lease and a portion of the minimum rental payment deferred until year four of the lease. The initial lease is a 15-year term expiring on June 28, 2023. The lease also includes four options to extend the initial term for additional ten years each. The Lease also requires the properties to meet certain financial covenants including a minimum rent coverage ratio.
The following table shows required rates of return for the monthly minimum rent payment along with the additional minimum deferred rent amount for the initial lease term:
Year | Minimum Rent Lease Rate | Additional Minimum Rent Lease Rate | ||
1-5 | 8.208% - 9.239% | .260% - .293% | ||
6-10 | 9.516% - 10.710% | .302% - .340% | ||
11-15 | 11.031% - 12.416% | .350% - .394% |
The additional minimum rent lease rate represents the deferral of additional rent during the first three years of the lease term. At the beginning of the fourth lease year, the deferred additional minimum rent becomes payable in 24 monthly equal installments during the fourth and the fifth lease years, commencing on the first day of the fourth lease year.
On September 30, 2008, the Company sold the building and related equipment of Fort Dodge Bickford Cottage, LLC. (38 units) and Omaha II Bickford Cottage, LLC. (37 units) to Care for $10,294,000. These properties were incorporated into the lease described above.
12
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
As no earn out provisions are applicable for these 14 properties, they are being treated as operating leases. As such, a sale was recognized effective on both June 27, 2008 and also on September 30, 2008. The consolidated deferred gain from these sales is being amortized over a 15-year lease term expiring on June 28, 2023. Total deferred gains of $4,581,312 were recognized in income for the years ended December 31, 2012 and 2011.
The proceeds from these transactions were primarily used to repay existing debt obligations on the property companies contributed by ERG and to fund distributions to ERG.
Note 8: Profit-sharing Plan
The Company participates in a 401(k) profit-sharing plan covering substantially all employees. The Company’s contributions to the plan are determined annually by the Board of Directors. Contributions to the plan for the years ended December 31, 2012 and 2011 were $54,687 and $54,307, respectively.
Note 9: Significant Estimates and Concentrations
Current Economic Conditions
The current protracted economic decline continues to present real estate entities with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of certain assets, declines in the volume of business, constraints on liquidity and difficulty obtaining financing. The consolidated financial statements have been prepared using values and information currently available to the Company.
Current economic and financial market conditions could adversely affect the results of operations in future periods. The current instability in the financial markets may make it difficult for certain customers to obtain financing, which may significantly impact the volume of future sales, which could have an adverse impact on the Company’s future operating results.
In addition, given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in allowances for accounts and notes receivable, net realizable value of inventory, and in other areas that could negatively impact the Company’s ability to meet covenants or maintain sufficient liquidity.
13
INDEPENDENT AUDITORS’ REPORT ON SUPPLEMENTAL INFORMATION
To the Members
Bickford Master I, LLC.
We have audited the financial statements of Bickford Master I, LLC. as of and for the year ended December 31, 2012, and have issued our report thereon dated February 28, 2013 which contained an unmodified opinion on those consolidated financial statements. Our audit was performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating balance sheet as of December 31, 2012 and the consolidating statement of income for the year then ended are presented for the purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
/s/ Mayer Hoffman McCann P.C.
Leawood, Kansas
February 28, 2013
14
Bickford Master I, LLC.
Consolidating Balance Sheet (Page 1 of 2)
December 31, 2012
Ames | Bourbonnais | Burlington | Crawfordsville | Ft. Dodge | Lincoln | Marshalltown | Moline | |||||||||||||||||||||||||
Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | |||||||||||||||||||||||||
Cottage, | House, | Cottage, | Cottage, | Cottage, | Cottage, | Cottage, | Cottage, | |||||||||||||||||||||||||
L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,778 | $ | — | $ | 6,046 | ||||||||||||||||
Resident accounts receivable | 26,914 | 32,459 | 4,424 | 415 | 7,216 | 4,657 | 23,963 | 7,068 | ||||||||||||||||||||||||
Prepaid expenses and other assets | 10,588 | 6,945 | 11,009 | 5,734 | 5,387 | 11,872 | 9,408 | 6,392 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total current assets | 37,502 | 39,404 | 15,433 | 6,149 | 12,603 | 18,307 | 33,371 | 19,506 | ||||||||||||||||||||||||
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| |||||||||||||||||
Property and Equipment, net | 82,167 | 271,844 | 125,792 | 19,519 | 71,664 | 247,059 | 102,836 | 47,342 | ||||||||||||||||||||||||
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| |||||||||||||||||
Other Assets | ||||||||||||||||||||||||||||||||
Funds in escrow | 29,690 | 16,784 | 42,124 | 9,100 | 21,013 | 35,130 | 45,941 | 6,287 | ||||||||||||||||||||||||
Lease security deposits | 168 | 902 | 171 | 186 | 168 | 186 | 168 | 171 | ||||||||||||||||||||||||
Replacement reserves | 31,839 | 38,127 | 35,070 | 42,582 | 31,494 | 8,641 | 23,934 | 41,076 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total other assets | 61,697 | 55,813 | 77,365 | 51,868 | 52,675 | 43,957 | 70,043 | 47,534 | ||||||||||||||||||||||||
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|
|
|
| |||||||||||||||||
Total assets | $ | 181,366 | $ | 367,061 | $ | 218,590 | $ | 77,536 | $ | 136,942 | $ | 309,323 | $ | 206,250 | $ | 114,382 | ||||||||||||||||
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|
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|
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| |||||||||||||||||
Liabilities and Member’s Equity (Deficit) | ||||||||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||||||||
Accounts payable — trade | $ | 22,905 | $ | 72,977 | $ | 81,404 | $ | 21,846 | $ | 20,197 | $ | 27,820 | $ | 23,362 | $ | 29,891 | ||||||||||||||||
Deferred revenues | 79,917 | 138,814 | 123,754 | 73,814 | 96,652 | 123,140 | 78,751 | 104,304 | ||||||||||||||||||||||||
Other accrued expenses | 116,562 | 135,468 | 182,638 | 69,914 | 116,758 | 107,510 | 131,964 | 82,585 | ||||||||||||||||||||||||
Current maturities — capital lease obligations | 1,205 | 9,684 | 975 | 1,722 | 1,205 | 1,723 | 1,205 | 975 | ||||||||||||||||||||||||
Deferred gain on sale of assets — current portion | 281,781 | 443,649 | 446,587 | 47,665 | 265,348 | 574,344 | 203,150 | 20,847 | ||||||||||||||||||||||||
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|
|
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|
|
|
|
|
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| |||||||||||||||||
Total current liabilities | 502,370 | 800,592 | 835,358 | 214,961 | 500,160 | 834,537 | 438,432 | 238,602 | ||||||||||||||||||||||||
Other Liabilities | ||||||||||||||||||||||||||||||||
Lease liability | 428,777 | 824,187 | 663,187 | 181,021 | 371,523 | 796,659 | 356,203 | 212,720 | ||||||||||||||||||||||||
Capital lease obligations — long-term | — | 2,112 | — | — | — | — | — | — | ||||||||||||||||||||||||
Deferred gain on sale of assets | 2,676,921 | 4,214,667 | 4,242,573 | 452,818 | 2,520,809 | 5,456,264 | 1,929,918 | 198,047 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total liabilities | 3,608,068 | 5,841,558 | 5,741,118 | 848,800 | 3,392,492 | 7,087,460 | 2,724,553 | 649,369 | ||||||||||||||||||||||||
Member’s equity (deficit) | (3,426,702 | ) | (5,474,497 | ) | (5,522,528 | ) | (771,264 | ) | (3,255,550 | ) | (6,778,137 | ) | (2,518,303 | ) | (534,987 | ) | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total liabilities and member’s equity (deficit) | $ | 181,366 | $ | 367,061 | $ | 218,590 | $ | 77,536 | $ | 136,942 | $ | 309,323 | $ | 206,250 | $ | 114,382 | ||||||||||||||||
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15
Bickford Master I, LLC.
Consolidating Balance Sheet (Page 2 of 2)
December 31, 2012
Muscatine | Omaha II | Quincy | Rockford | Springfield | Urbandale | |||||||||||||||||||||||||||
Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | ||||||||||||||||||||||||||
Cottage, | Cottage, | Cottage, | House, | House, | Cottage, | Master I, | ||||||||||||||||||||||||||
L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | L.L.C. | Consolidated | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,090 | $ | 647,940 | $ | 661,854 | ||||||||||||||||
Resident accounts receivable | 17,054 | 22,307 | 22,484 | 21,783 | 14,570 | 8,182 | — | 213,496 | ||||||||||||||||||||||||
Prepaid expenses and other assets | 10,287 | 6,951 | 8,689 | 12,452 | 13,003 | 7,545 | — | 126,262 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total current assets | 27,341 | 29,258 | 31,173 | 34,235 | 27,573 | 21,817 | 647,940 | 1,001,612 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Property and Equipment, net | 93,364 | 45,178 | 151,325 | 342,341 | 32,132 | 208,408 | — | 1,840,971 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other Assets | ||||||||||||||||||||||||||||||||
Funds in escrow | 26,315 | 29,241 | 18,167 | 22,678 | 42,478 | 28,657 | — | 373,605 | ||||||||||||||||||||||||
Lease security deposits | 171 | 169 | 171 | 186 | 186 | 168 | — | 3,171 | ||||||||||||||||||||||||
Replacement reserves | 65,300 | 29,441 | 50,966 | 19,203 | 88,182 | 33,908 | — | 539,763 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total other assets | 91,786 | 58,851 | 69,304 | 42,067 | 130,846 | 62,733 | — | 916,539 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total assets | $ | 212,491 | $ | 133,287 | $ | 251,802 | $ | 418,643 | $ | 190,551 | $ | 292,958 | $ | 647,940 | $ | 3,759,122 | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Liabilities and Member’s Equity (Deficit) | ||||||||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||||||||
Accounts payable — trade | $ | 21,725 | $ | 16,670 | $ | 48,532 | $ | 72,845 | $ | 31,627 | $ | 22,235 | $ | 2,410 | $ | 516,446 | ||||||||||||||||
Deferred revenues | 35,761 | 69,445 | 146,380 | 82,726 | 241,557 | 53,226 | — | 1,448,241 | ||||||||||||||||||||||||
Other accrued expenses | 119,028 | 104,718 | 121,497 | 236,843 | 245,420 | 182,109 | — | 1,953,014 | ||||||||||||||||||||||||
Current maturities — capital lease obligations | 818 | 1,205 | 975 | 1,722 | 1,723 | 1,205 | — | 26,342 | ||||||||||||||||||||||||
Deferred gain on sale of assets — current portion | 404,437 | 211,071 | 282,151 | 457,710 | 534,289 | 408,283 | — | 4,581,312 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total current liabilities | 581,769 | 403,109 | 599,535 | 851,846 | 1,054,616 | 667,058 | 2,410 | 8,525,355 | ||||||||||||||||||||||||
Other Liabilities | ||||||||||||||||||||||||||||||||
Lease liability | 643,166 | 331,247 | 585,606 | 903,436 | 1,054,381 | 709,873 | — | 8,061,986 | ||||||||||||||||||||||||
Capital lease obligations — long-term | — | — | — | — | — | — | — | 2,112 | ||||||||||||||||||||||||
Deferred gain on sale of assets | 3,842,152 | 2,005,180 | 2,680,436 | 4,348,251 | 5,075,749 | 3,878,689 | — | 43,522,474 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total liabilities | 5,067,087 | 2,739,536 | 3,865,577 | 6,103,533 | 7,184,746 | 5,255,620 | 2,410 | 60,111,927 | ||||||||||||||||||||||||
Member’s equity (deficit) | (4,854,596 | ) | (2,606,249 | ) | (3,613,775 | ) | (5,684,890 | ) | (6,994,195 | ) | (4,962,662 | ) | 645,530 | (56,352,805 | ) | |||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total liabilities and member’s equity (deficit) | $ | 212,491 | $ | 133,287 | $ | 251,802 | $ | 418,643 | $ | 190,551 | $ | 292,958 | $ | 647,940 | $ | 3,759,122 | ||||||||||||||||
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16
Bickford Master I, LLC.
Consolidating Statement of Income (Page 1 of 2)
Year Ended December 31, 2012
Ames | Bourbonnais | Burlington | Crawfordsville | Ft. Dodge | Lincoln | Marshalltown | Moline | |||||||||||||||||||||||||
Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | |||||||||||||||||||||||||
Cottage, | House, | Cottage, | Cottage, | Cottage, | Cottage, | Cottage, | Cottage, | |||||||||||||||||||||||||
LLC. | LLC. | LLC. | LLC. | LLC. | LLC. | LLC. | LLC. | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Resident revenues | $ | 1,496,284 | $ | 2,697,850 | $ | 2,098,275 | $ | 1,223,195 | $ | 1,842,371 | $ | 2,501,963 | $ | 1,649,730 | $ | 1,533,568 | ||||||||||||||||
Community fees | 20,525 | 39,002 | 42,604 | 44,122 | 38,425 | 40,946 | 34,132 | 12,044 | ||||||||||||||||||||||||
Other revenues | 3,909 | 11,031 | 4,120 | 2,102 | 6,078 | 7,136 | 3,523 | 782 | ||||||||||||||||||||||||
Accretion of deferred gain on sale of assets | 281,781 | 443,649 | 446,587 | 47,665 | 265,348 | 574,344 | 203,149 | 20,847 | ||||||||||||||||||||||||
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|
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues | 1,802,499 | 3,191,532 | 2,591,586 | 1,317,084 | 2,152,222 | 3,124,389 | 1,890,534 | 1,567,241 | ||||||||||||||||||||||||
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|
|
|
|
|
| |||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Residence and general operating expenses | 1,152,525 | 1,300,610 | 1,249,800 | 899,566 | 1,138,561 | 1,331,073 | 1,038,611 | 952,079 | ||||||||||||||||||||||||
Management fees | 76,173 | 157,767 | 107,384 | 63,103 | 94,364 | 127,019 | 84,488 | 77,191 | ||||||||||||||||||||||||
Depreciation | 8,991 | 25,561 | 14,923 | 1,584 | 7,698 | 16,192 | 9,783 | 2,673 | ||||||||||||||||||||||||
Building lease expense | 616,670 | 1,185,351 | 953,799 | 260,345 | 572,857 | 1,145,759 | 512,292 | 305,936 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total operating expenses | 1,854,359 | 2,669,289 | 2,325,906 | 1,224,598 | 1,813,480 | 2,620,043 | 1,645,174 | 1,337,879 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating Income (Loss) | (51,860 | ) | 522,243 | 265,680 | 92,486 | 338,742 | 504,346 | 245,360 | 229,362 | |||||||||||||||||||||||
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|
|
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Interest expense | (230 | ) | (1,741 | ) | (347 | ) | (448 | ) | (224 | ) | (448 | ) | (224 | ) | (347 | ) | ||||||||||||||||
Other Income (Expense) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total other income (expense) | (230 | ) | (1,741 | ) | (347 | ) | (448 | ) | (224 | ) | (448 | ) | (224 | ) | (347 | ) | ||||||||||||||||
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|
|
|
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|
|
|
|
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|
|
| |||||||||||||||||
Net Income (Loss) | $ | (52,090 | ) | $ | 520,502 | $ | 265,333 | $ | 92,038 | $ | 338,518 | $ | 503,898 | $ | 245,136 | $ | 229,015 | |||||||||||||||
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17
Bickford Master I, LLC.
Consolidating Statement of Income (Page 2 of 2)
Year Ended December 31, 2012
Muscatine | Omaha II | Quincy | Rockford | Springfield | Urbandale | |||||||||||||||||||||||||||
Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | Bickford | ||||||||||||||||||||||||||
Cottage, | Cottage, | Cottage, | House, | House, | Cottage, | Master I, | ||||||||||||||||||||||||||
LLC. | LLC. | LLC. | LLC. | LLC. | LLC. | LLC. | Consolidated | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Resident revenues | $ | 1,320,519 | $ | 1,740,862 | $ | 2,527,374 | $ | 2,633,628 | $ | 3,319,580 | $ | 1,982,714 | $ | — | $ | 28,567,913 | ||||||||||||||||
Community fees | 552 | 25,518 | 38,696 | 42,810 | 86,567 | 2,003 | — | 467,946 | ||||||||||||||||||||||||
Other revenues | 5,829 | 1,803 | 2,818 | (909 | ) | 25,773 | 6,142 | — | 80,137 | |||||||||||||||||||||||
Accretion of deferred gain on sale of assets | 404,437 | 211,071 | 282,151 | 457,711 | 534,289 | 408,283 | — | 4,581,312 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues | 1,731,337 | 1,979,254 | 2,851,039 | 3,133,240 | 3,966,209 | 2,399,142 | — | 33,697,308 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Residence and general operating expenses | 1,155,298 | 985,310 | 1,298,937 | 1,527,461 | 1,488,968 | 1,568,965 | 150,620 | 17,238,384 | ||||||||||||||||||||||||
Management fees | 66,367 | 88,057 | 128,510 | 133,026 | 172,129 | 99,509 | — | 1,475,087 | ||||||||||||||||||||||||
Depreciation | 9,295 | 5,279 | 8,942 | 27,365 | 3,133 | 13,718 | — | 155,137 | ||||||||||||||||||||||||
Building lease expense | 925,005 | 511,160 | 842,223 | 1,299,327 | 1,513,844 | 1,020,988 | — | 11,665,556 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total operating expenses | 2,155,965 | 1,589,806 | 2,278,612 | 2,987,179 | 3,178,074 | 2,703,180 | 150,620 | 30,534,164 | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating Income (Loss) | (424,628 | ) | 389,448 | 572,427 | 146,061 | 788,135 | (304,038 | ) | (150,620 | ) | 3,163,144 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Interest expense | (215 | ) | (224 | ) | (347 | ) | (448 | ) | (448 | ) | (225 | ) | — | (5,916 | ) | |||||||||||||||||
Other Income (Expense) | — | — | — | — | — | — | 33 | 33 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total other income (expense) | (215 | ) | (224 | ) | (347 | ) | (448 | ) | (448 | ) | (225 | ) | 33 | (5,883 | ) | |||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net Income (Loss) | $ | (424,843 | ) | $ | 389,224 | $ | 572,080 | $ | 145,613 | $ | 787,687 | $ | (304,263 | ) | $ | (150,587 | ) | $ | 3,157,261 | |||||||||||||
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18
Bickford Master I, LLC.
Accountants’ Report and Consolidated Financial Statements
December 31, 2011 and 2010
Bickford Master I, LLC.
December 31, 2011 and 2010
Contents
Independent Accountants’ Report | 1 | |||
Consolidated Financial Statements | ||||
Balance Sheets | 2 | |||
Statements of Income | 3 | |||
Statements of Member’s Equity (Deficit) | 4 | |||
Statements of Cash Flows | 5 | |||
Notes to Financial Statements | 6 |
Independent Accountants’ Report
The Member
Bickford Master I, LLC.
Olathe, Kansas
We have audited the accompanying consolidated balance sheets of Bickford Master I, LLC. (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of income, members’ equity (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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bickford Master I, LLC. as of December 31, 2011 and 2010, 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.
Kansas City, Missouri
June 18, 2012
Bickford Master I, LLC.
Consolidated Balance Sheets
December 31, 2011 and 2010
Assets
2011 | 2010 | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 328,119 | $ | 209,858 | ||||
Resident and insurance accounts receivable | 197,124 | 184,133 | ||||||
Prepaid expenses and other assets | 87,544 | 165,945 | ||||||
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|
|
| |||||
Total current assets | 612,787 | 559,936 | ||||||
|
|
|
| |||||
Property and Equipment, Net | 1,034,409 | 804,281 | ||||||
|
|
|
| |||||
Other Assets | ||||||||
Funds in escrow | 364,886 | 379,120 | ||||||
Lease security deposits | 3,171 | 3,171 | ||||||
Replacement reserves | 553,860 | 452,737 | ||||||
|
|
|
| |||||
921,917 | 835,028 | |||||||
|
|
|
| |||||
Total assets | $ | 2,569,113 | $ | 2,199,245 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements
Liabilities and Member’s Equity (Deficit)
2011 | 2010 | |||||||
Current Liabilities | ||||||||
Accounts payable - trade | $ | 493,168 | $ | 835,473 | ||||
Deferred revenues | 1,372,028 | 1,693,427 | ||||||
Other accrued expenses | 1,946,264 | 1,683,768 | ||||||
Current maturities - capital lease obligations | 31,655 | 26,965 | ||||||
Deferred gain on sale of assets - current portion | 4,581,312 | 4,581,312 | ||||||
|
|
|
| |||||
Total current liabilities | 8,424,427 | 8,820,945 | ||||||
Lease liability | 7,277,048 | 5,811,198 | ||||||
Capital lease obligations | 27,853 | 59,169 | ||||||
Deferred gain on sale of assets - long-term portion | 48,103,786 | 52,685,098 | ||||||
|
|
|
| |||||
63,833,114 | 67,376,410 | |||||||
|
|
|
| |||||
Member’s Equity (Deficit) | (61,264,001 | ) | (65,177,165 | ) | ||||
|
|
|
| |||||
Total liabilities and member’s equity (deficit) | $ | 2,569,113 | $ | 2,199,245 | ||||
|
|
|
|
2
Bickford Master I, LLC.
Consolidated Statements of Income
Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Revenues | ||||||||
Resident revenues | $ | 28,140,014 | $ | 28,696,302 | ||||
Community fees | 875,205 | 656,069 | ||||||
Other revenues | 42,488 | 81,927 | ||||||
Accretion of deferred gain on sale of assets | 4,581,312 | 4,581,312 | ||||||
|
|
|
| |||||
Total revenues | 33,639,019 | 34,015,610 | ||||||
|
|
|
| |||||
Operating Expenses | ||||||||
Residence and general operating expenses | 17,264,074 | 16,942,699 | ||||||
Management fees | 1,494,250 | 1,523,369 | ||||||
Depreciation | 98,386 | 69,536 | ||||||
Building lease expense | 11,667,253 | 11,668,611 | ||||||
Loss on disposal of property and equipment | — | 51,226 | ||||||
|
|
|
| |||||
Total operating expenses | 30,523,963 | 30,255,441 | ||||||
|
|
|
| |||||
Operating Income | 3,115,056 | 3,760,169 | ||||||
|
|
|
| |||||
Other Income (Expense) | ||||||||
Interest expense | (11,143 | ) | (10,667 | ) | ||||
Other | 1,458 | 2,336 | ||||||
|
|
|
| |||||
(9,685 | ) | (8,331 | ) | |||||
|
|
|
| |||||
Net Income | $ | 3,105,371 | $ | 3,751,838 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements | 3 |
Bickford Master I, LLC.
Consolidated Statements of Member’s Equity (Deficit)
Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Deficit, Beginning of Year | $ | (65,177,165 | ) | $ | (67,153,363 | ) | ||
Contribution from member | 807,793 | — | ||||||
Distribution to member | — | (1,363,950 | ) | |||||
Noncash member contribution of property and equipment | — | 17,465 | ||||||
Noncash distribution of property and equipment | — | (429,155 | ) | |||||
Net income | 3,105,371 | 3,751,838 | ||||||
|
|
|
| |||||
Deficit, End of Year | $ | (61,264,001 | ) | $ | (65,177,165 | ) | ||
|
|
|
|
See Notes to Consolidated Financial Statements | 4 |
Bickford Master I, LLC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Operating Activities | ||||||||
Net income | $ | 3,105,371 | $ | 3,751,838 | ||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 98,386 | 69,536 | ||||||
Accretion of deferred gain on sale of assets | (4,581,312 | ) | (4,581,312 | ) | ||||
Loss on sale of property and equipment | — | 51,226 | ||||||
Change in recognition of lease liability | 1,465,850 | 2,134,742 | ||||||
Provision for bad debts | 24,111 | (10,141 | ) | |||||
Changes in operating assets and liabilities | ||||||||
Resident accounts receivable | (37,102 | ) | 68,010 | |||||
Prepaid expenses and other assets | 108,239 | 27,150 | ||||||
Accounts payable - trade | (494,565 | ) | (102,082 | ) | ||||
Deferred revenues | (321,399 | ) | (198,015 | ) | ||||
Other accrued expenses | 342,322 | 229,601 | ||||||
|
|
|
| |||||
Net cash provided by (used in) operating activities | (290,099 | ) | 1,440,553 | |||||
|
|
|
| |||||
Investing Activities | ||||||||
Additions to property and equipment | (285,918 | ) | (289,541 | ) | ||||
Funds in escrow | 14,234 | (45,010 | ) | |||||
Replacement reserve fund | (101,123 | ) | (179,248 | ) | ||||
|
|
|
| |||||
Net cash used in investing activities | (372,807 | ) | (513,799 | ) | ||||
|
|
|
| |||||
Financing Activities | ||||||||
Repayments of capital lease obligations | (26,626 | ) | (59,408 | ) | ||||
Lease security deposits | — | 2,097 | ||||||
Contribution from member | 807,793 | — | ||||||
Distribution to member | — | (1,363,950 | ) | |||||
|
|
|
| |||||
Net cash provided by (used in) financing activities | 781,167 | (1,421,261 | ) | |||||
|
|
|
| |||||
Net Increase (Decrease) in Cash and Cash Equivalents | 118,261 | (494,507 | ) | |||||
Cash and Cash Equivalents, Beginning of Year | 209,858 | 704,365 | ||||||
|
|
|
| |||||
Cash and Cash Equivalents, End of Year | $ | 328,119 | $ | 209,858 | ||||
|
|
|
| |||||
Supplemental Disclosure of Cash Flow and Noncash Information | ||||||||
Cash paid for interest (net of capitalized interest) | $ | 10,978 | $ | 10,101 | ||||
Capital expenditures in accounts payable | 42,596 | 30,390 | ||||||
Capital expenditures financed with capital lease obligation | — | 69,894 | ||||||
Contribution of property and equipment from affiliate | — | 17,465 | ||||||
Distribution of property and equipment | — | 429,155 |
See Notes to Consolidated Financial Statements | 5 |
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 1: | Nature of Operations and Summary of Significant Accounting Policies |
Nature of Operations
Bickford Master I, LLC. (the Company) was formed under Kansas law effective April 16, 2008.
Upon formation, the Company issued all of its membership interests to Eby Realty Group, LLC. (ERG) in exchange for the transfer of ERG’s ownership interest in twelve single member limited liability companies each of which own individual properties. In addition, effective September 30, 2008, ERG contributed to the Company its ownership interest in two additional single member limited liability companies each of which own individual properties. Upon completion of these transfers, the fourteen property companies became wholly-owned subsidiaries of the Company.
Because ownership of ERG and of the Company is the same, this combination was accounted for in a manner similar to a pooling of interests, using ERG’s historical book values. Consolidated operations reflect the operations of the above entities for all of fiscal 2011 and 2010.
Principle Business
The Company’s primary line of business is the operation of assisted-care, dementia-care, and independent-living residences for the elderly.
Principles of Consolidation
The accompanying consolidated financial statements reflect the consolidated financial position of the Company. The following entities make up the consolidated financial statements of the Company as of December 31, 2011 and 2010:
Legal Entity | Formation Date | Residence Locations | ||
Bickford Master I, LLC. | April 2008 | |||
Ames Bickford Cottage, LLC. | June 2000 | Ames, Iowa | ||
Bourbonnais Bickford House, LLC. | March 2000 | Bourbonnais, Illinois | ||
Burlington Bickford Cottage, LLC. | June 2000 | Burlington, Iowa | ||
Crawfordsville Bickford Cottage, LLC. | January 2001 | Crawfordsville, Indiana | ||
Ft. Dodge Bickford Cottage, LLC. | June 2000 | Ft. Dodge, Iowa | ||
Lincoln Bickford Cottage, LLC. | January 2000 | Lincoln, Nebraska | ||
Marshalltown Bickford Cottage, LLC. | June 2000 | Marshalltown, Iowa | ||
Moline Bickford Cottage, LLC. | June 2002 | Moline, Illinois | ||
Muscatine Bickford Cottage, LLC. | January 1997 | Muscatine, Iowa | ||
Omaha II Bickford Cottage, LLC. | February 2001 | Omaha, Nebraska | ||
Quincy Bickford Cottage, LLC. | December 1999 | Quincy, Illinois | ||
Rockford Bickford House, LLC. | March 2000 | Rockford, Illinois | ||
Springfield Bickford House, LLC. | March 2000 | Springfield, Illinois | ||
Urbandale Bickford Cottage, LLC. | February 2001 | Urbandale, Iowa |
All significant intercompany accounts and transactions have been eliminated in consolidation.
6
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Funds in Escrow
Funds are placed in escrow with the Company’s lessor based on the lease document requirements for real estate taxes and insurance premiums. The servicing agent for the lender pays these escrowed funds to the necessary taxing authorities when due. The agent reimburses the Company for insurance premiums after proof of payment has been presented by the Company.
Replacement Reserves
The replacement reserves represent cash required to be set aside monthly by the Company for improvements to properties. The cash required to be set aside is $500 per unit per year. With a total of 643 units available for all properties, the Company is required to set aside $321,500 per year. The holder of leasehold interests will reimburse the funds for improvement costs after both a review of the improvements and obtaining documentation from the Company detailing the work that has been completed. Improvements can consist of, but are not limited to, such items as new carpet, new paint, and kitchen equipment.
Property and Equipment
Property and equipment acquisitions are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is charged to expense on the straight-line basis over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.
The estimated useful lives for each major depreciable classification of property and equipment are as follows:
Leasehold improvements | 10-30 years | |||
Furniture, fixtures and equipment | 5-10 years | |||
Automobiles | 5 years |
Long-lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
No asset impairment was recognized during the years ended December 31, 2011 and 2010.
7
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Accounts Receivable
Accounts receivable are stated at the amount billed to customers plus any accrued and unpaid interest. The Company provides an allowance for doubtful accounts for all accounts past due more than 90 days. Payments are due on the first of every month. Accounts that are unpaid after the 10th of each month are considered delinquent and are assessed a late fee. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Revenues
Rent revenue is collected monthly from residents and recognized as revenue in the month that it is earned. The Company collects partially refundable advance community fees from the residents of the assisted- and dementia-living residences. The portion of the community fee that is refundable is refunded on a pro rata basis during the resident’s first 12 months at the residence. The community fees are intended to help defray the cost of training and other support services provided by the corporate office to the staff of the assisted- and dementia-living residences. Through December 31, 2010, the community fee was recognized as revenue over a period of 24 months. Effective January 1, 2011, the Company prospectively elected to recognize 50% of the fee upfront and recognize the remaining 50% of the fee over 12 months. The overall impact of the change is deemed immaterial to the consolidated financial statements. The collection and refundability on these fees may vary based on applicable state laws and regulations.
Income Taxes
The Company is treated as a partnership for federal and state income tax purposes. Accordingly, no income tax provision has been included in the financial statements because income or loss of the Company is reported individually by the respective Members for income tax purposes. The Company is generally not subject to federal, state and local examination by tax authorities for years prior to 2008.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2011 and 2010, cash equivalents consisted primarily of money market accounts with financial institutions.
Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000. At December 31, 2011 and 2010, the Company’s cash accounts did not exceed federally insured limits.
Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions.
8
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.
Subsequent Events
Subsequent events have been evaluated through the date of the Independent Accountants’ Report, which is the date the financial statements were available to be issued.
Note 2: | Property and Equipment |
A summary of property and equipment as of December 31, 2011 and 2010, is as follows:
2011 | 2010 | |||||||
Buildings and building improvements | $ | 488,909 | $ | 337,783 | ||||
Furniture, equipment and vehicles | 795,733 | 661,478 | ||||||
|
|
|
| |||||
1,284,642 | 999,261 | |||||||
Less accumulated depreciation | 250,233 | 194,980 | ||||||
|
|
|
| |||||
Net property and equipment | $ | 1,034,409 | $ | 804,281 | ||||
|
|
|
|
The Company has leased equipment at certain properties that have been treated as a capital lease and included above. As such, the net present value of the future lease payments are recorded as a capital lease obligation on the accompanying consolidated balance sheets. The payments on these obligations are amortized and treated partially as a principal reduction to the capital lease obligation and as interest expense on the capital lease obligations.
9
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 3: | Long-Term Debt |
Long-term debt consists of the following capital lease obligations at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Capital lease obligations | $ | 59,508 | $ | 86,134 | ||||
|
|
|
|
The following is a schedule of maturities of capital lease obligations by year.
2012 | $ | 38,398 | ||
2013 | 27,548 | |||
2014 | 2,146 | |||
|
| |||
Total | 68,092 | |||
Less amount representing interest | 8,584 | |||
|
| |||
Present value of future minimum lease payments | $ | 59,508 | ||
|
|
Total property and equipment, subject to capital lease as of December 31, 2011 and 2010, is as follows:
2011 | 2010 | |||||||
Equipment under capital lease | $ | 183,882 | $ | 183,882 | ||||
Less accumulated depreciation | (60,032 | ) | (36,878 | ) | ||||
|
|
|
| |||||
Net equipment under capital lease | $ | 123,850 | $ | 147,004 | ||||
|
|
|
|
Note 4: | Member’s Equity |
Equity of the Company is comprised of one class of Company membership units, with the sole member and owner of all units being ERG. Each membership unit of the Company shares equally in ownership rights of the Company. For tax purposes, all income, gains and losses of the Company are consolidated with the federal and appropriate state returns of ERG.
10
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 5: | Related Party Transactions |
The Company pays a 5% management fee to Bickford Senior Living Group, LLC. (BSLG), a wholly-owned subsidiary of ERG, based on total property revenues for management and oversight of the operations on all properties. Total fees paid in 2011 and 2010 were $1,494,250 and $1,523,369, respectively. The Company is dependent on BSLG for the management of its properties, and any adverse change in its relationship with BSLG could have a material, adverse impact on the Company’s operations.
Operating expenses are at times incurred by entities affiliated through common ownership. Such entities include BSLG, ERG and subsidiaries, EDP, Inc. and The Eby Group, Inc. The balance of these intercompany accounts are treated as either a distribution or contribution and included as contra-equity on the accompanying consolidated balance sheets. Total intercompany balances recorded as distributions in member’s equity amounted to $1,775,640 during fiscal 2010 and a contribution of $807,793 during fiscal 2011.
Note 6: | Operating Leases |
The Company has non-cancelable operating leases expiring at various dates for properties used in the operations of various assisted and dementia living residences. Additionally, as a result of the sale leaseback transaction effective June 27, 2008(see Note 7), a deferred gain recorded as a result of this transaction will be recognized as income over the 15-year lease term expiring on June 28, 2023. Future minimum lease payments as of December 31, 2011, net of the future recognition of deferred gains, are summarized as follows:
Future Minimum | Recognition | |||||||||||
Lease | of Deferred | Net | ||||||||||
Year Ending December 31 | Obligations | Gain | Expense | |||||||||
2012 | $ | 10,886,311 | $ | 4,581,312 | $ | 6,304,999 | ||||||
2013 | 10,976,046 | 4,581,312 | 6,394,734 | |||||||||
2014 | 11,075,038 | 4,581,312 | 6,493,726 | |||||||||
2015 | 11,406,796 | 4,581,312 | 6,825,484 | |||||||||
2016 | 11,749,108 | 4,581,312 | 7,167,796 | |||||||||
Thereafter | 85,216,212 | 29,778,538 | 55,437,674 | |||||||||
|
|
|
|
|
| |||||||
$ | 141,309,511 | $ | 52,685,098 | $ | 88,624,413 | |||||||
|
|
|
|
|
|
Property lease expense for the years ended December 31, 2011 and 2010, totaled $11,667,253 and $11,668,611, respectively.
11
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Due to escalating lease payments throughout the lease term, the accompanying consolidated financial statements, in accordance with ASC 840,Accounting for Leases, reflects lease payments on a straight-line basis. The difference between straight-line treatment and actual lease payments are shown in the consolidated balance sheets as a liability ($7,277,048 and $5,811,198, respectively, at December 31, 2011 and 2010). The schedule shown above reflects actual future minimum lease payments for the term of the lease.
Note 7: | Sale-Leaseback Transactions |
On June 27, 2008, the building and related equipment of the following properties were sold for a cash price of $100.8 million to an unrelated third party, Care YBE Subsidiary LLC., a Delaware Limited Liability company wholly owned by Care Investment Trust, Inc. (Care):
Legal Entity | Units | Residence Locations | ||
Ames Bickford Cottage, L.L.C. | 37 | Ames, Iowa | ||
Bourbonnais Bickford House, L.L.C. | 65 | Bourbonnais, Illinois | ||
Burlington Bickford Cottage, L.L.C. | 44 | Burlington, Iowa | ||
Crawfordsville Bickford Cottage, L.L.C. | 28 | Crawfordsville, Indiana | ||
Lincoln Bickford Cottage, L.L.C. | 44 | Lincoln, Nebraska | ||
Marshalltown Bickford Cottage, L.L.C. | 38 | Marshalltown, Iowa | ||
Moline Bickford Cottage, L.L.C. | 28 | Moline, Illinois | ||
Muscatine Bickford Cottage, L.L.C. | 45 | Muscatine, Iowa | ||
Quincy Bickford Cottage, L.L.C. | 47 | Quincy, Illinois | ||
Rockford Bickford House, L.L.C. | 65 | Rockford, Illinois | ||
Springfield Bickford House, L.L.C. | 67 | Springfield, Illinois | ||
Urbandale Bickford Cottage, L.L.C. | 61 | Urbandale, Iowa |
In conjunction with the sale, Care entered into a Master Lease Agreement (Lease) with the Company, to lease the facilities from Care. The lease requires the Company to a pay a minimum rental income on Care’s acquisition price with annual payments increasing 3% each year over the term of the lease and a portion of the minimum rental payment deferred until year four of the lease. The initial lease is a 15-year term expiring on June 28, 2023. The lease also includes four options to extend the initial term for additional ten years each. The Lease also requires the properties to meet certain financial covenants including a minimum rent coverage ratio.
The following table shows required rates of return for the monthly minimum rent payment along with the additional minimum deferred rent amount for the initial lease term:
Minimum Rent | Additional Minimum | |||
Year | Lease Rate | Rent Lease Rate | ||
1-5 | 8.208% - 9.239% | .260% - .293% | ||
6-10 | 9.516% - 10.710% | .302% - .340% | ||
11-15 | 11.031% - 12.416% | .350% - .394% |
12
Bickford Master I, LLC.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The additional minimum rent lease rate represents the deferral of additional rent during the first three years of the lease term. At the beginning of the fourth accounting year, the deferred additional minimum rent becomes payable in 24 monthly equal installments during the fourth and the fifth accounting years, commencing on the first day of the fourth accounting year.
On September 30, 2008, the Company sold the Building and related equipment of Fort Dodge Bickford Cottage, LLC. and Omaha II Bickford Cottage, LLC. to Care for $10.3 million. These properties were incorporated into the master lease agreement described above.
As no earnout provisions are applicable for these 14 properties, they are being treated as operating leases. As such, a sale was recognized effective on both June 27, 2008 and also on September 30, 2008. The consolidated deferred gain from these sales is being amortized over a 15-year lease term expiring on June 28, 2023. Total deferred gains of $4,581,312 were recognized in income for the years ended December 31, 2011 and 2010, respectively.
The proceeds from these transactions were primarily used to repay existing debt obligations on the property companies contributed by ERG and to fund distributions to ERG.
Note 8: | Profit-sharing Plan |
The Company participates in a 401(k) profit-sharing plan covering substantially all employees. The Company’s contributions to the plan are determined annually by the Board of Directors. Contributions to the plan for fiscal 2011 and 2010 were $54,307 and $55,604, respectively.
Note 9: | Significant Estimates and Concentrations |
Current Economic Conditions
The current protracted economic decline continues to present entities that own and operate assisted living facilities with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of certain assets, declines in the volume of business, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Company.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in allowances for accounts receivable and in other areas that could negatively impact the Company’s ability to meet debt covenants or maintain sufficient liquidity.
13