EX-99.2 3 escsslproformafinstmts.htm ESC-SSL PRO FORMA FINANCIAL STATEMENTS 6/30/07 escsslproformafinstmts.htm

Unaudited Pro Forma Consolidated
Financial Information

Introduction

The following tables present unaudited pro forma condensed consolidated financial information of Emeritus Corporation as of and for the six months ended June 30, 2007, and the year ended December 31, 2006.

The following unaudited pro forma condensed consolidated financial statements are adjusted, as described below, to give pro forma effect to the following transactions, collectively the pro forma adjustments:

1.  
The merger with Summerville Senior Living, Inc. (“Summerville”) completed on September 1, 2007, referred to as the “Summerville Acquisition.”

2.  
The issuance of 11,300,800 shares of common stock in a public offering completed in July and August 2007, referred to as the “Public Offering.”

3.  
Summerville’s acquisition of 36 communities with 3,449 units consisting of (a) the acquisition of the leasehold interests of Summerville Investors, LLC, which controlled 17 communities with 1,991 units that Summerville had previously managed, and (b) the acquisition of leasehold interests for an additional 19 communities with 1,458 units at various dates during 2006 and the first quarter of 2007.  All of these transactions are collectively referred to as the “Summerville Transactions.”

4.  
Emeritus transactions consisting of (a) the acquisition of the 101-unit Arbor Place community in July 2006 formerly managed by Emeritus; (b) the acquisition of the 24 Fretus communities in February 2007 formerly operated by Emeritus under long-term leases; (c) the acquisition of the 12 HRT communities in March 2007 formerly operated by Emeritus under long-term leases; (d) the acquisition of the 7 HCPI communities in March 2007 formerly operated by Emeritus under long-term leases; (e) the accelerated conversion of $16.12 million of 6.25% Convertible Subordinated Debentures into 732,725 shares of common stock in March 2007; and (f) the December 2006 investment in a joint venture with Blackstone Real Estate Advisors and the related management contracts for 24 communities.  All of these transactions are collectively referred to as the “Emeritus Transactions.”
 
5.  
Emeritus transactions consisting of (a) the acquisition of the 41 HCPI communities in August 2007, of which 33 were formerly operated by Emeritus and 8 were formerly operated by Summerville under long-term leases; (b)  the acquisition of 3 HC REIT communities in August 2007 formerly operated by Emeritus under long-term leases; (c) the acquisition of 9 Wegman communities in August 2007 formerly operated by Emeritus under long-term leases.  All of these transactions are collectively referred to as the “Emeritus Q3 2007 Transactions.”

The unaudited pro forma condensed consolidated balance sheet as of June 30, 2007, gives effect to the Summerville Acquisition using the purchase method of accounting, the Public Offering, and the Emeritus Q3 2007 Transactions as if they had occurred on June 30, 2007.  The unaudited pro forma condensed consolidated statements of operations for six months ended June 30, 2007, and the year ended December 31, 2006, give effect to the Summerville Acquisition, the Public Offering, the Summerville Transactions, the Emeritus Transactions and the Emeritus Q3 2007 Transactions, as if they had occurred at the beginning of the respective periods.

The unaudited pro forma merger transaction adjustments and the resulting impact on the unaudited pro forma condensed consolidated financial statements were prepared based on available information and certain assumptions and estimates described in the notes to the unaudited pro forma condensed consolidated financial information.  The estimated acquisition costs related to Summerville have been allocated to the assets acquired and liabilities assumed based on management's preliminary estimate of their respective fair values as of September 1, 2007, the date of acquisition.  Any differences between the fair value of the consideration paid and the fair value of the assets acquired and liabilities assumed is recorded as goodwill.  The amounts allocated to the acquired assets and assumed liabilities in the unaudited pro forma condensed consolidated balance sheet are based on these preliminary estimates.  Accordingly, the pro forma purchase price allocation is preliminary and is subject to revision based on a final determination of fair value.  The preliminary allocation has been made solely for the purpose of providing unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial statements do not purport to represent what our financial position or results of operations would have been had the Summerville Acquisition, the Public

1


Offering, the Summerville Transactions, the Emeritus Transactions, and the Emeritus Q3 2007 Transactions occurred on the date indicated, or to project our financial position or results of operations for any future period.  Furthermore, the unaudited pro forma condensed consolidated financial statements do not reflect changes which may occur as a result of activities after the Summerville Acquisition closes.  The unaudited pro forma condensed consolidated financial statements should be read in conjunction with Summerville’s consolidated financial statements and related notes  as of December 31, 2006, and for each of the years in the three year period ended December 31, 2006, filed as exhibits to our current report on Form 8-K on June 12, 2007, and our consolidated financial statements filed with the SEC in our annual report on Form 10-K for the year ended December 31, 2006, and our quarterly report on Form 10Q for the six months ended June 30, 2007.


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2




Unaudited Pro Forma Condensed Consolidated Balance Sheet
 
As of June 30, 2007
 
(In thousands)
 
                                     
         
Summerville
         
Emeritus
         
Emeritus and
 
         
Acquisition
   
Merger
     
Q3 2007
   
Public
   
Summerville
 
   
Emeritus
   
As Reported
   
Transaction
   
Acquisitions
   
Offering
   
Pro Forma
 
   
As Reported
   
(Reclassified)
   
Adjustments
   
Adjustments
   
Adjustments
   
Consolidated
 
   
(Condensed)
   
Note 7
   
Note 6
   
Note 5
   
Note 3
   
(Condensed)
 
                                       
ASSETS
 
Current Assets:
                                     
Cash and cash equivalents
  $
26,524
    $
8,081
    $
-
    $ (233,597 )   $
266,282
    $
67,290
 
Accounts receivable, net
   
5,099
     
1,291
     
-
     
-
     
-
     
6,390
 
Prepaid expenses and other current assets
   
32,188
     
8,850
     
-
     
715
     
-
     
41,753
 
Total current assets
   
63,811
     
18,222
     
-
      (232,882 )    
266,282
     
115,433
 
Property and equipment, net
   
835,450
     
340,236
      (252,704 )    
510,412
     
-
     
1,433,394
 
Lease and contract intangibles, net
   
22,370
     
19,691
     
44,160
      (2,518 )    
-
     
83,703
 
Goodwill
   
-
     
14,770
     
55,490
     
-
     
-
     
70,260
 
Other intangibles
   
-
     
-
     
151,495
     
911
     
-
     
152,406
 
Other assets
   
28,833
     
23,859
      (7,069 )    
4,130
     
-
     
49,753
 
Total Assets
  $
950,464
    $
416,778
    $ (8,628 )   $
280,053
    $
266,282
    $
1,904,949
 
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
                                               
Trade accounts payable
  $
3,869
    $
5,539
    $
-
     $     $
-
    $
9,408
 
Current portion of long-term debt
   
57,922
     
5,235
      (2,369 )             (13,479 )    
47,309
 
Accrued employee compensation and benefits
   
22,366
     
10,484
     
-
             
-
     
32,850
 
Other accrued expenses and liabilities
   
41,451
     
18,541
     
3,658
             
-
     
63,650
 
Total current liabilities
   
125,608
     
39,799
     
1,289
     
-
      (13,479 )    
153,217
 
Long-term debt, net
   
333,568
     
21,891
     
-
     
390,180
      (48,621 )    
697,018
 
Financing and lease obligations, net
   
556,097
     
356,032
      (301,025 )     (105,747 )    
-
     
505,357
 
Convertible debentures
   
10,455
     
-
     
-
             
-
     
10,455
 
Long-term debt and interest payable to Apollo
   
-
     
149,070
      (149,070 )            
-
     
-
 
Other long-term liabilities
   
36,220
     
12,614
     
4,201
      (4,380 )     (206 )    
48,449
 
Total Liabilities
   
1,061,948
     
579,406
      (444,605 )    
280,053
      (62,306 )    
1,414,496
 
Stockholders' equity (deficit):
                                               
Common stock
   
2
     
-
     
1
             
1
     
4
 
Convertible preferred stock
   
-
     
28
      (28 )            
-
     
-
 
Additional paid-in capital
   
106,852
     
83,419
     
189,929
             
328,587
     
708,787
 
Accumulated earnings (deficit)
    (218,338 )     (246,075 )    
246,075
             
-
      (218,338 )
Total Stockholders' Equity (Deficit)
    (111,484 )     (162,628 )    
435,977
     
-
     
328,588
     
490,453
 
                                                 
Total Liabilities and Stockholders' Equity (Deficit)
  $
950,464
    $
416,778
    $ (8,628 )   $
280,053
    $
266,282
    $
1,904,949
 

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

3

 
Unaudited Pro Forma Condensed Consolidated Statement of Operations
 
For the Year Ended December 31, 2006
 
(In thousands)
 
                                           
               
Summerville
                     
Emeritus and
 
         
Emeritus
   
Acquisition
   
Summerville
   
Merger
   
Public
   
Summerville
 
   
Emeritus
   
Pro Forma
   
As Reported
   
Pro Forma
   
Transaction
   
Offering
   
Pro Forma
 
   
As Reported
   
Transactions
   
(Reclassified)
   
Transactions
   
Adjustments
   
Adjustments
   
Consolidated
 
   
(Condensed)
   
Note 5
   
Note 7
   
Note 4
   
Note 6
   
Note 3
   
(Condensed)
 
REVENUES:
                                         
Community revenues
  $
 419,978
    $
 1,453
    $
 220,859
    $
 52,151
    $
 -
    $
 -
    $
 694,441
 
Management fees
   
1,887
     
2,540
     
899
      (899 )    
-
     
-
     
4,427
 
Total revenues
   
421,865
     
3,993
     
221,758
     
51,252
     
-
     
-
     
698,868
 
OPERATING EXPENSES:
                                                       
Community operations
   
272,812
     
938
     
144,140
     
37,271
     
96
     
-
     
455,257
 
Texas lawsuit settlement
    (12,207 )    
-
     
-
     
-
     
-
     
-
      (12,207 )
General and administrative
   
38,078
     
450
     
22,745
     
-
     
-
     
-
     
61,273
 
Depreciation and amortization
   
50,478
     
19,267
     
9,833
     
-
     
36,511
     
-
     
116,089
 
Facility lease expense
   
44,545
      (31,132 )    
37,135
     
13,793
     
35,002
     
-
     
99,343
 
Total operating expenses
   
393,706
      (10,477 )    
213,853
     
51,064
     
71,609
     
-
     
719,755
 
Operating income (loss) from continuing
                                                       
operations
   
28,159
     
14,470
     
7,905
     
188
      (71,609 )    
-
      (20,887 )
                                                         
OTHER INCOME (EXPENSE):
                                                       
Interest income
   
2,893
     
-
     
487
     
-
     
-
     
-
     
3,380
 
Interest expense, debt and other
    (7,995 )     (46,171 )     (18,714 )    
-
     
17,513
     
5,426
      (49,941 )
Interest expense, capital leases
    (41,257 )    
14,227
      (21,400 )    
-
     
18,578
     
-
      (29,852 )
Other, net
   
588
      (2,474 )    
907
     
-
     
-
     
-
      (979 )
Total other income (expense)
    (45,771 )     (34,418 )     (38,720 )    
-
     
36,091
     
5,426
      (77,392 )
Income (loss) from continuing operations
                                                       
before taxes
    (17,612 )     (19,948 )     (30,815 )    
188
      (35,518 )    
5,426
      (98,279 )
                                                         
Income tax (expense) benefit
   
3,044
     
-
      (661 )    
-
     
-
     
-
     
2,383
 
                                                         
Income (loss) from continuing operations
  $  (14,568 )   $  (19,948 )   $  (31,476 )   $
 188
    $  (35,518 )   $
 5,426
    $  (95,896 )
                                                         
Basic and diluted earnings per share
  $ (0.82 )                                           $  (2.51 )
Basic and diluted weighted common
                                                       
shares outstanding
   
17,774
     
733
                     
8,393
     
11,301
     
38,201
 

 

 
 


 

4
 See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information


 
Unaudited Pro Forma Consolidated Statement of Operations
 
For the Six Months Ended June 30, 2007
 
(In thousands)
 
                                           
               
Summerville
                     
Emeritus and
 
         
Emeritus
   
Acquisition
   
Summerville
   
Merger
   
Public
   
Summerville
 
   
Emeritus
   
Pro Forma
   
As Reported
   
Pro Forma
   
Transaction
   
Offering
   
Pro Forma
 
   
As Reported
   
Transactions
   
(Reclassified)
   
Transactions
   
Adjustments
   
Adjustments
   
Consolidated
 
   
(Condensed)
   
Note 5
   
Note 7
   
Note 4
   
Note 6
   
Note 3
   
(Condensed)
 
REVENUES:
                                         
Community revenues
  $
219,345
    $
-
    $
139,808
    $
1,689
    $
-
    $
-
    $
360,842
 
Management fees
   
1,807
     
-
     
-
     
-
     
-
     
-
     
1,807
 
Total revenues
   
221,152
     
-
     
139,808
     
1,689
     
-
     
-
     
362,649
 
OPERATING EXPENSES:
                                                       
Community operations
   
140,011
     
-
     
90,889
     
1,094
     
48
     
-
     
232,042
 
General and administrative
   
21,336
     
-
     
9,163
     
-
     
-
     
-
     
30,499
 
Depreciation and amortization
   
29,195
     
5,969
     
6,543
     
-
     
16,629
     
-
     
58,336
 
Facility lease expense
   
17,852
      (11,048 )    
21,368
     
224
     
21,021
     
-
     
49,417
 
Total operating expenses
   
208,394
      (5,079 )    
127,963
     
1,318
     
37,698
     
-
     
370,294
 
Operating income (loss) from continuing
                                                       
operations
   
12,758
     
5,079
     
11,845
     
371
      (37,698 )    
-
      (7,645 )
                                                         
OTHER INCOME (EXPENSE):
                                                       
Interest income
   
1,192
     
-
     
376
     
-
     
-
     
-
     
1,568
 
Interest expense, debt and other
    (10,911 )     (17,018 )     (10,912 )    
-
     
9,619
     
2,698
      (26,524 )
Interest expense, capital leases
    (19,649 )    
6,653
      (13,965 )    
-
     
12,551
     
-
      (14,410 )
Other, net
   
6,606
     
1,242
     
723
     
-
     
-
     
-
     
8,571
 
Total other income (expense)
    (22,762 )     (9,123 )     (23,778 )    
-
     
22,170
     
2,698
      (30,795 )
Income (loss) from continuing
                                                       
operations before taxes
    (10,004 )     (4,044 )     (11,933 )    
371
      (15,528 )    
2,698
     
(38,440
)
                                                         
Income tax (expense) benefit
    (1,320 )    
-
      (11 )    
-
     
-
     
-
      (1,331 )
                                                         
Income (loss) from continuing operations
  $ (11,324 )   $ (4,044 )   $ (11,944 )   $
371
    $ (15,528 )   $
2,698
    $ (39,771 )
                                                         
Basic and diluted earnings per share
  $ (0.61 )                                           $ (1.02 )
Basic and diluted weighted common
                                                       
shares outstanding
   
18,674
     
537
                     
8,393
     
11,301
     
38,905
 
 
 
 
 See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
 
5


NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  
Basis of Pro Forma Presentation

On March 29, 2007, Emeritus Corporation (the “Company”) announced that it entered into a definitive agreement whereby the Company will acquire all of the outstanding stock of Summerville Senior Living, Inc. (“Summerville”).  The transaction was completed effective September 1, 2007.  The Company issued 8,392,656 shares of the Company’s unregistered common stock in the transaction, a portion of which was issued in satisfaction of certain indebtedness to Summerville’s controlling shareholders, a portion to satisfy certain obligations under incentive compensation arrangements to senior management of Summerville who will be joining the Company as a result of the merger, and the balance to the shareholders of Summerville (the “Summerville Acquisition”).  After the merger, the former Summerville shareholders will hold approximately 20.2% of the Company’s common stock on a fully diluted basis.

2.  
Preliminary Summerville Purchase Price

The estimated purchase price of the Summerville Acquisition as of September 1, 2007, the date of the closing, is as follows (in thousands).  The 8,392,656 shares of common stock issued in the transaction is valued at an estimated price of $32.57 per share based on the average trading price over a five-day period, including two days before and two days after the public announcement of the merger on March 29, 2007.
 
Common stock
  $
273,349
 
Cash, including transaction costs
   
4,471
 
Total
  $
277,820
 
 
Under the purchase method of accounting, the total estimated purchase price as shown in the table above will be allocated to Summerville’s net tangible and intangible assets based on their estimated fair values as of the closing date of the proposed transaction.  Any excess of the purchase price over the estimated fair value of the net tangible and intangible assets is recorded as goodwill.

Based upon the estimated purchase price and assumptions regarding valuation of acquired assets and assumed liabilities, the preliminary purchase price allocation, is as follows (in thousands):

Net working capital deficit
   $ (16,342 )
         
Property and equipment
   
17,058
 
Assets under capital leases
   
70,474
 
   Total property and equipment
   
87,532
 
         
Below market rents
   
100,573
 
Above market rents
    (15,886 )
In-place resident contracts
   
63,851
 
Lease purchase options
   
45,022
 
Trademarks and licenses
   
5,900
 
Goodwill
   
70,260
 
   Total net intangibles
   
269,720
 
         
Other long-term assets
   
17,603
 
         
Long-term debt
    (24,757 )
Capital lease obligations
    (55,007 )
   Total long-term debt
    (79,764 )
         
Other long-term liabilities
    (929 )
         
Total
   $
277,820
 

The depreciation and amortization related to the fair value allocations are reflected as pro forma adjustments to the unaudited pro forma condensed consolidated financial statements.

6



The preliminary purchase price allocation for the Summerville Acquisition is subject to revision as a more detailed analysis is completed, including the finalization of the valuation report prepared by a valuation firm, and as additional information on the fair values of Summerville’s assets and liabilities becomes available.  Goodwill will not be amortized and will be tested for impairment on an annual basis, or whenever events or circumstances occur indicating that the goodwill may be impaired.  Any change in the fair value of the assets or liabilities of Summerville will change the amount of the purchase price allocation.  The final purchase price allocation may differ from the allocation presented here.

3.  
Public Offering

On July 3, 2007, the Company closed the public offering of 11,000,000 shares of common stock, of which 10,500,000 shares were sold by the Company and 500,000 shares were sold by certain selling shareholders.  The Company received net proceeds of $305.4 million after issuance costs.

On July 27, 2007, the Company received notice from the underwriters of the public offering discussed in the previous paragraph that they had elected to exercise, in part, the over-allotment option specified in the Underwriting Agreement.  As a result, the Company sold an additional 800,800 shares of common stock in the offering.  The exercise of the over-allotment options closed on August 2, 2007, and the Company received net proceeds of $23.2 million after issuance costs, for a total net proceeds of $328.6 million from the Public Offering.

The unaudited pro forma condensed consolidated balance sheet is adjusted to give pro forma effect of the Public Offering and the use of proceeds as if it had occurred as of June 30, 2007.  The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2006, and for the six months ended June 30, 2007, are adjusted to give pro forma effect of the Public Offering and use of proceeds as if it had occurred at the beginning of the respective periods.  The use of proceeds as presented herein is as follows (in thousands):
 
Total net proceeds
  $
328,588
 
Pay off long-term debt, including prepayment fees
    (62,306 )
Funding of Emeritus Q3 2007 Transactions
    (233,597 )
Balance of net proceeds
  $
32,685
 
 
The $32.7 million remaining balance of net proceeds from the Public offering will be used to retire long-term debt due in March 2008 in the amount of $21.4 million, with the balance available for general corporate purposes.  The retirement of the long-term debt due in March 2008 is not reflected in these unaudited pro forma condensed consolidated financial statements.

A portion of the proceeds were used to retire long-term debt in the amount of $62.1 million at a weighted average interest rate of approximately 9.39%, resulting in a pro forma reduction in interest expense of $5.4 million in 2006, and $2.7 million for the six months ended June 30, 2007.


4.  
Summerville Transactions

The unaudited pro forma Summerville Transactions include historical results and related pro forma adjustments for the year ended December 31, 2006, and the six months ended June 30, 2007, to include communities acquired by Summerville as if the acquisitions had occurred as of the beginning of the respective periods:

















7



Summerville Transactions
Unaudited Pro Forma Statement of Operations
For the Year Ended December 31, 2006
(In thousands)

         
Summerville
                               
   
Acquisitions
   
Investors
   
Acquisitions
   
Acquisitions
   
Acquisitions
   
Acquisitions
   
Summerville
 
   
1st Qtr 2006
   
2nd Qtr 2006
   
2nd Qtr 2006
   
3rd Qtr 2006
   
4th Qtr 2006
   
1st Qtr 2007
   
Total 2006
 
   
(a)
   
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
Pro Forma
 
REVENUES:
                                         
Community revenues
  $
255
    $
15,612
    $
2,128
    $
3,195
    $
13,868
    $
17,093
    $
52,151
 
Management fees
   
      (899 )    
     
     
     
      (899 )
Total revenues
   
255
     
14,713
     
2,128
     
3,195
     
13,868
     
17,093
     
51,252
 
                                                         
OPERATING EXPENSES:
                                                       
Community operations
   
187
     
10,585
     
2,196
     
2,553
     
9,386
     
12,364
     
37,271
 
Facility lease expense
   
65
     
4,455
     
442
     
994
     
4,319
     
3,518
     
13,793
 
Total operating expenses
   
252
     
15,040
     
2,638
     
3,547
     
13,705
     
15,882
     
51,064
 
                                                         
Operating income from continuing operations
  $
3
    $ (327 )   $ (510 )   $ (352 )   $
163
    $
1,211
    $
188
 


Summerville Transactions
Unaudited Pro Forma Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands)

   
Summerville
 
   
Total 2007
 
   
Pro Forma
 
   
(g)
 
REVENUES:
     
Community revenues
  $
1,689
 
Total revenues
   
1,689
 
         
OPERATING EXPENSES:
       
Community operations
   
1,094
 
Facility lease expense
   
224
 
Total operating expenses
   
1,318
 
         
Operating income from continuing operations
  $
371
 

The pro forma adjustments for the periods presented were derived from the pre-acquisition unaudited financial statements of these communities, adjusted for revised property-related costs based on underlying lease agreements assumed by or entered into by Summerville as part of the transactions.  These pro forma adjustments do not reflect depreciation or amortization expenses, or the impact of lease accounting treatments.  Those adjustments were incorporated into the Merger Transaction Adjustments described in Note 6 to these Unaudited Pro Forma Condensed Consolidated Financial Information.

(a)  
The first quarter 2006 acquisition consists of one community with 114 units that was acquired through a leasehold interest in February 2006.  These adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of this community for the one month period ended January 31, 2006.
(b)  
In April 2006, Summerville acquired 100% of the membership interests in Summerville Investors, LLC.  Summerville Investors, which became a wholly-owned subsidiary of Summerville, controls 17 communities with 1,991 units through leasehold interests.  Summerville had managed these properties before the acquisition.  For the three month period ended March 31, 2006, Summerville recorded $899,000 of management fee revenues associated with the 17 properties.  These adjustments reflect the unaudited pre-acquisition historical results of operations of Summerville Investors for the three

8


  
month period ended March 31, 2006, and the elimination of the management fees earned by Summerville from these communities for that same period.
(c)  
The second quarter 2006 acquisitions consist of four communities with 168 units acquired through leasehold interests.  Three of the communities were acquired effective April 1, 2006, and one effective April 20, 2006.  The adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of these four communities as if they had been acquired on January 1, 2006.
(d)  
The third quarter acquisitions consist of two communities with 186 units that were acquired through leasehold interest in August 2006.  The adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of these two communities for seven month period ended July 31, 2006.
(e)  
The fourth quarter acquisitions consist of seven communities with 587 units, six acquired in October 2006 and one in December 2006.  The adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of these seven communities as if they had been acquired on January 1, 2006.
(f)  
In the first quarter of 2007, Summerville acquired four communities with 403 units, two in January 2007 and two in March 2007, under long-term leases.  The adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of these four communities for the 12-month period ended December 31, 2006.
(g)  
The pro forma adjustments for the six months ended June 30, 2007, reflect the two communities acquired by Summerville on March 1, 2007, as discussed in item (f) above.  The adjustments to the unaudited pro forma statement of operations reflect the unaudited pre-acquisition historical results of operations of these two communities for the two-month period ended February 28, 2007.

5.  
Emeritus Transactions

The unaudited pro forma Emeritus Transactions include historical results and related pro forma adjustments for the year ended December 31, 2006, and the six months ended June 30, 2007, to include acquired communities, our investment in Blackstone and the conversion of debt by Emeritus as if the transactions had occurred as of the beginning of the respective periods:

Emeritus Transactions
Unaudited Pro Forma Statement of Operations
For the Year Ended December 31, 2006
(In thousands)

         
Blackstone
                         
   
Arbor Place
   
Joint Venture
   
Debenture
     Q1 2007      Q3 2007    
Emeritus
 
   
Acquisition
   
Investment
   
Conversion
   
Acquisitions
   
Acquisitions
   
Total 2006
 
   
(a)
   
(b)
   
(c)
   
(d)
   
(e)
   
Pro Forma
 
REVENUES:
                                       
Community revenues
  $
1,453
    $
    $
    $
    $
    $
1,453
 
Management fees
    (97 )    
2,637
     
     
     
     
2,540
 
Total revenues
   
1,356
     
2,637
     
     
     
     
3,993
 
OPERATING EXPENSES:
                                               
Community operations
   
938
     
     
     
     
     
938
 
General and administrative
   
     
450
     
     
     
     
450
 
Depreciation and amortization
   
429
     
     
     
5,196
     
13,642
     
19,267
 
Facility lease expense
   
     
     
      (15,056 )     (16,076 )     (31,132 )
Total operating expenses
   
1,367
     
450
     
      (9,860 )     (2,434 )     (10,477 )
Operating income (loss) from continuing
                                               
operations
    (11 )    
2,187
     
     
9,860
     
2,434
     
14,470
 
                                                 
OTHER INCOME (EXPENSE):
                                               
Interest expense, debt and other
    (305 )            
1,008
      (20,823 )     (26,051 )     (46,171 )
Interest expense, capital and financing leases
   
     
     
     
2,050
     
12,177
     
14,227
 
Other, net
   
      (2,360 )    
              (114 )     (2,474 )
Total other income (expense)
    (305 )     (2,360 )    
1,008
      (18,773 )     (13,988 )     (34,418 )
Income (loss) from continuing operations
                                               
before taxes
  $ (316 )   $ (173 )   $
1,008
    $ (8,913 )   $ (11,554 )   $ (19,948 )


9



Emeritus Transactions
Unaudited Pro Forma Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands)


   
Debenture
   
 Q1 2007
   
 Q3 2007
   
Emeritus
 
   
Conversion
   
Acquisitions
   
Acquisitions
   
Total 2007
 
   
(c)
   
(d)
   
(e)
   
Pro Forma
 
OPERATING EXPENSES:
                           
Depreciation and amortization
 
 $
     $ (869 )    $
6,838
     $
5,969
 
Facility lease expense
   
      (2,936 )     (8,112 )     (11,048 )
Total operating expenses
   
      (3,805 )     (1,274 )     (5,079 )
Operating income (loss) from continuing
                               
operations
   
     
3,805
     
1,274
     
5,079
 
                                 
OTHER INCOME (EXPENSE):
                               
Interest expense, debt and other
   
182
      (4,175 )     (13,025 )     (17,018 )
Interest expense, capital and financing leases
   
     
459
     
6,194
     
6,653
 
Other, net
   
1,329
              (87 )    
1,242
 
Total other income (expense)
   
1,511
      (3,716 )     (6,918 )     (9,123 )
Income (loss) from continuing operations
                               
before taxes
  $
1,511
    $
89
    $ (5,644 )   $ (4,044 )

The acquisition and investment pro forma adjustments for the periods presented were derived from pre-acquisition unaudited financial statements for these communities, adjusted for revised property-related costs based on the various underlying agreements entered into by Emeritus as part of the transactions, or in the case of the debenture conversion, from the terms of the debenture conversion agreement.

(a)  
The Arbor Place community was managed by Emeritus prior to the acquisition in July 2006.  These adjustments reflect the unaudited pre-acquisition historical results of operations for the six-month period ended June 30, 2006, and the elimination of management fees earned by Emeritus from this community for the same period, as if the Company had owned Arbor Place as of January 1, 2006.
(b)  
The Company entered into a joint venture agreement with Blackstone Real Estate Advisors in December 2006.  Emeritus owns a 19% interest in the joint venture and manages 24 of the 25 communities owned and operated by the Blackstone joint venture.  The Company accounts for this investment using the equity method of accounting.  These adjustments reflect unaudited management fees, equity losses of the joint venture, and general and administrative expenses for the 11 months ended November 30, 2006, as if the joint venture was effective on January 1, 2006.
(c)  
$16.12 million face amount of the Company’s convertible debentures were converted into 732,725 shares of common stock effective March 8, 2007.  Interest was paid on these debentures through the maturity date of July 1, 2008, as an incentive for early conversion.  The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the incentive payment and the conversion as if it happened at the beginning of the respective periods.  The weighed average shares outstanding was adjusted for year ended December 31, 2006, and the six months ended June 30, 2007, to reflect the issuance of these shares as if they were outstanding from the beginning of the respective periods.
(d)  
The first quarter 2007 acquisitions include the following:
·  
The Fretus communities were operated by Emeritus under long-term leases prior to the acquisition on February 22, 2007. The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the 24 Fretus communities as if the Company had owned them since the beginning of the respective periods.
·  
The HRT communities were operated by Emeritus under long-term leases prior to the acquisition on March 15, 2007.  The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the 12 HRT communities as if the Company had owned them since the beginning of the respective periods.
·  
The HCPI communities were operated by Emeritus under long-term leases prior to the acquisition on March 26, 2007. The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the seven HCPI communities as if the Company had owned them since the beginning of the respective periods.

10



(e)  
The third quarter 2007 acquisitions include the following:
·  
The HC REIT communities were operated by Emeritus under long-term leases prior to the acquisition on August 6, 2007. The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the three HC REIT communities as if the Company had owned them since the beginning of the respective periods.
·  
The HCPI communities were operated by Emeritus under long-term leases prior to the acquisition on August 15, 2007. The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the 41 HCPI communities as if the Company had owned them since the beginning of the respective periods.
·  
The Wegman communities were operated by Emeritus under long-term leases prior to the acquisition on August 31, 2007. The adjustment to the unaudited pro forma statement of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, reflect the unaudited results of the seven HCPI communities as if the Company had owned them since the beginning of the respective periods.

The Emeritus Q3 2007 acquisitions included 53 communities formerly operated by the Company under long-term leases.  The total gross purchase price, including transaction costs, was approximately $618.9 million, of which $618.0 million was allocated to property and equipment and $911,000 to intangible assets.  Several of these leased communities were formerly accounted for as capital or financing leases with a net book value of approximately $75.0 million as of the acquisition date.  In addition, upon termination of the leases, approximately $32.6 was offset against the purchase price relating to gains from termination of the capital and financing leases, deferred rents from straight-line lease expense on operating leases, and lease acquisitions costs associated with the terminated leases, resulting in a net change in property and equipment of $510.4 million.

The acquisitions were financed with long-term debt of  $390.2 million.  In addition, capital and financing lease obligations of $105.7 million related to the acquired leases were removed.  Financing costs of $4.1 million were incurred and capitalized as loan fees and included in other assets on the balance sheet.

Cash proceeds of  $232.5 million from the Public Offering were used to partially fund the Emeritus Q3 2007 acquisitions, including the purchase price of $618.9 million, loan fees of $4.1 million, offset by funding of long-term debt of $390.2 million and a net refund of $300,000 from cash escrows held by our landlords.

6.  
Merger Transaction Adjustments

Pro forma merger adjustments are necessary to reflect the allocation of the estimated purchase price to Summerville’s assets and liabilities based on a preliminary estimate of their fair market values, to record the effect of lease accounting treatments as of the merger date, and to reflect any other transaction adjustments directly related to the proposed transaction.

The accompanying unaudited pro forma transaction adjustments reflected in the unaudited pro forma condensed consolidated financial statements are as follows:


11




Merger Transaction Adjustments
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 2007
(In thousands)

   
Summerville
   
Transaction
       
Lease
   
Purchase
   
Total
       
   
Reclassified
   
Adjustments
       
Accounting
   
Accounting
   
Transaction
   
Summerville
 
   
Note 7
   
(a)
       
(b)
   
(c)
   
Adjustments
   
Pro Forma
 
ASSETS
 
Current Assets:
                                       
Cash and cash equivalents
  $
8,081
    $
        $
    $
    $
    $
8,081
 
Accounts receivable, net
   
1,291
     
         
     
     
     
1,291
 
Prepaid expenses and other current assets
   
8,850
     
         
     
     
     
8,850
 
Total current assets
   
18,222
     
         
     
     
     
18,222
 
                                                     
Property and equipment, net
   
340,236
      (340,236 ) (1 )(2)    
70,474
     
17,058
      (252,704 )    
87,532
 
Net asset/liability assumed
   
     
20,444
          (15,467 )     (4,977 )    
     
 
Lease and contract intangibles, net
   
19,691
      (19,691 )        
     
63,851
     
44,160
     
63,851
 
Goodwill
   
14,770
      (14,770 ) (3 )    
     
70,260
     
55,490
     
70,260
 
Other intangibles
   
     
                 
151,495
     
151,495
     
151,495
 
Other assets
   
23,859
      (3,067 ) (1 )    
      (4,002 )     (7,069 )    
16,790
 
Total Assets
  $
416,778
    $ (357,320 )       $
55,007
    $
293,685
    $ (8,628 )   $
408,150
 
                                                     
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
                                                   
Trade accounts payable
  $
5,539
    $
        $
    $
    $
    $
5,539
 
Current portion of long-term debt and lease obligations
   
5,235
      (2,369 ) (2 )    
     
      (2,369 )    
2,866
 
Accrued employee compensation and benefits
   
10,484
     
         
     
     
     
10,484
 
Other accrued expenses and liabilities
   
18,541
     
         
     
3,658
     
3,658
     
22,199
 
Total current liabilities
   
39,799
      (2,369 )        
     
3,658
     
1,289
     
41,088
 
                                                     
Long-term debt, net
   
21,891
     
                 
     
     
21,891
 
Financing and lease obligations, net
   
356,032
      (356,032 ) (1 )(2)    
55,007
     
      (301,025 )    
55,007
 
Long-term debt and interest payable to Apollo
   
149,070
      (149,070 ) (4 )    
     
      (149,070 )    
 
Other long-term liabilities
   
12,614
      (12,477 ) (2 )    
     
16,678
     
4,201
     
16,815
 
Total Liabilities
   
579,406
      (519,948 )        
55,007
     
20,336
      (444,605 )    
134,801
 
Stockholders' equity (deficit):
                                                   
Common stock
   
     
         
     
1
     
1
     
1
 
Convertible preferred stock
   
28
      (28 ) (5 )    
     
      (28 )    
 
Additional paid-in capital
   
83,419
      (83,419 ) (5 )    
     
273,348
     
189,929
     
273,348
 
Accumulated earnings (deficit)
    (246,075 )    
246,075
  (5 )    
     
     
246,075
     
 
Total Stockholders' Equity (Deficit)
    (162,628 )    
162,628
         
     
273,349
     
435,977
     
273,349
 
                                                 
 
 
Total Liabilities and Stockholders' Equity (Deficit)
  $
416,778
    $ (357,320 )       $
55,007
    $
293,685
    $ (8,628 )   $
408,150
 


12


Merger Transaction Adjustments
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2006
(In thousands)

   
Summerville
   
Transaction
       
Lease
   
Purchase
   
Total
       
   
Reclassified
   
Adjustments
       
Accounting
   
Accounting
   
Transaction
   
Summerville
 
   
Note 7
   
(a)
       
(b)
   
(c)
   
Adjustments
   
Pro Forma
 
REVENUES:
                                       
Community revenue
  $
220,859
    $
        $
    $
    $
    $
220,859
 
Management fees
   
899
     
         
     
     
     
899
 
Total revenues
   
221,758
     
         
     
     
     
221,758
 
OPERATING EXPENSES:
                                                   
Community operations
   
144,140
     
         
     
96
     
96
     
144,236
 
General and administrative
   
22,745
     
         
     
     
     
22,745
 
Depreciation and amortization
   
9,833
      (9,833 ) (1 )(2)    
3,648
     
42,696
     
36,511
     
46,344
 
Facility lease expense
   
37,135
     
17,156
  (1 )(2)    
7,526
     
10,320
     
35,002
     
72,137
 
Total operating expenses
   
213,853
     
7,323
         
11,174
     
53,112
     
71,609
     
285,462
 
Operating income (loss) from continuing operations
   
7,905
      (7,323 )         (11,174 )     (53,112 )     (71,609 )     (63,704 )
                                                     
OTHER INCOME (EXPENSE):
                                                   
Interest income
   
487
     
         
     
     
     
487
 
Interest expense, debt and other
    (18,714 )    
17,729
  (4 )    
      (216 )    
17,513
      (1,201 )
Interest expense, capital and financing lease obligations
    (21,400 )    
21,400
  (1 )(2)     (2,822 )    
     
18,578
      (2,822 )
Other, net
   
907
     
         
     
     
     
907
 
Total other income (expense), net
    (38,720 )    
39,129
          (2,822 )     (216 )    
36,091
      (2,629 )
                                                     
Income (loss) from continuing operations before taxes
    (30,815 )    
31,806
          (13,996 )     (53,328 )     (35,518 )     (66,333 )
Income tax (expense) benefit
    (661 )    
         
     
     
      (661 )
Income (loss) from continuing operations
  $ (31,476 )   $
31,806
        $ (13,996 )   $ (53,328 )   $ (35,518 )   $ (66,994 )


Merger Transaction Adjustments
Unaudited Pro Forma Consolidated Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands)

   
Summerville
   
Transaction
       
Lease
   
Purchase
   
Total
       
   
Reclassified
   
Adjustments
       
Accounting
   
Accounting
   
Transaction
   
Summerville
 
   
Note 7
   
(a)
       
(b)
   
(c)
   
Adjustments
   
Pro Forma
 
REVENUES:
                                       
Community revenues
  $
139,808
    $
        $
    $
    $
    $
139,808
 
Management fees
   
     
         
     
     
     
 
Total revenues
   
139,808
     
         
     
     
     
139,808
 
OPERATING EXPENSES:
                                                   
Community operations
   
90,889
     
         
     
48
     
48
     
90,937
 
General and administrative
   
9,163
     
         
     
     
     
9,163
 
Depreciation and amortization
   
6,543
      (6,543 ) (1 )(2)    
1,824
     
21,348
     
16,629
     
23,172
 
Facility lease expense
   
21,368
     
12,778
  (1 )(2)    
3,083
     
5,160
     
21,021
     
42,389
 
Total operating expenses
   
127,963
     
6,235
         
4,907
     
26,556
     
37,698
     
165,661
 
Operating income (loss) from continuing operations
   
11,845
      (6,235 )         (4,907 )     (26,556 )     (37,698 )     (25,853 )
                                                     
OTHER INCOME (EXPENSE):
                                                   
Interest income
   
376
     
         
     
     
     
376
 
Interest expense, debt and other
    (10,912 )    
9,727
  (4 )    
      (108 )    
9,619
      (1,293 )
Interest expense, capital and financing lease obligations
    (13,965 )    
13,965
  (1 )(2)     (1,414 )    
     
12,551
      (1,414 )
Other, net
   
723
     
         
     
     
     
723
 
Total other income (expense), net
    (23,778 )    
23,692
          (1,414 )     (108 )    
22,170
      (1,608 )
Income (loss) from continuing operations before taxes
    (11,933 )    
17,457
          (6,321 )     (26,664 )     (15,528 )     (27,461 )
Income tax (expense) benefit
   
 
     
 
         
 
     
 
     
     
 
Income (loss) from continuing operations
  $ (11,933 )   $
17,457
        $ (6,321 )   $ (26,664 )   $ (15,528 )   $ (27,461 )


13



(a)  These pro forma adjustments eliminate those assets and liabilities that will not be carried forward into the combined
       organization, or that will be restated at fair market value as of the date of merger, and the related impact to the statements
       of operations for the periods presented, as follows:
(1)  The assets and liabilities related to sale-leaseback transactions entered into by Summerville prior to the merger, which
       were accounted for as refinancing transactions by Summerville, and property and equipment are eliminated.
(2)  The assets and liabilities related to leases accounted for as capital leases by Summerville, as well as deferred rent on
       operating leases recorded as the result of straight-line rent accounting, are eliminated.
(3)  
Goodwill recorded by Summerville from business acquisitions completed prior to the merger is eliminated.
(4)  
Long-term debt and interest payable to certain funds affiliated with Apollo Real Estate Advisors, which owned a significant majority of Summerville’s capital stock, were satisfied through the issuance of Emeritus common stock in the merger transaction and is eliminated.
(5)  
The equity accounts of Summerville as of the merger date are eliminated.

(b) These pro forma adjustments estimate the fair market value of capital lease assets acquired and liabilities assumed as of the
      merger date, and the related adjustments for facility lease expense, depreciation and amortization expense, and interest expense
      for the periods presented.

(c) These pro forma adjustments reflect the issuance of 8,392,656 shares of Emeritus common stock ($273,349), cash payments
      of ($2,902) and related transaction costs ($1,569) incurred in the merger transaction, the preliminary allocation of the purchase
      price to the identifiable tangible and intangible net assets (exclusive of capital leases allocated in (b) above), and the related
      unaudited impact on the statements of operations for the periods presented.  See Note 2 for detail of the preliminary purchase
      price allocation.

      Depreciation and amortization on the purchase price allocation to record the Summerville assets at fair market value is
      calculated using the straight-line method over estimated useful lives and is summarized as follows (in thousands):

                 
Year Ended
     
Six Months
   
   
Summerville
   
Estimated
     
December 31,
     
June 30,
   
   
Fair Value
   
Life
     
2006
     
2007
   
Leasehold improvements
  $
11,354
   
9.7 years
 
(y)
  $
1,176
      $
588
   
Capital lease assets
   
70,474
   
19.3 years
 
(y)
   
3,648
       
1,824
   
Furniture, fixtures & equipment
   
3,814
   
4.8 years
 
(y)
   
792
       
396
   
Goodwill
   
70,260
     N/A        
-
       
-
   
Lease intangibles (z)
   
63,851
   
19 months
 
(z)
   
40,332
       
20,166
   
Purchase options (v)
   
45,022
     N/A        
-
       
-
   
Above/below market rents, net (w)
   
84,687
   
8.2 years
 
(y)
   
10,320
       
5,160
   
Trademarks and licenses (x)
   
5,900
   
11.9 years
 
(y)
   
396
       
198
   
    $
355,362
              $
56,664
 
(u)
  $
28,332
 
(u)
 
(u)  Comprised of $46.4 million of depreciation and amortization and $10.3 million in facility lease expense adjustments for the
       year ended December 31, 2006, and $23.2 million of depreciation and amortization and $5.1 million in facility lease expense
       adjustments for the six months ended June 30, 2007.
(v)  Represents the estimated fair market value of purchase options contained in the Summerville leases
(w) Represents the net estimated fair market value of favorable lease rates of $100.6 million, offset by estimated unfavorable lease
       rates of $15.9 million contained in the Summerville leases, amortized over the remaining term of the respective leases.
(x)  Reflects estimated fair market value of Summerville trademarks of $4.7 million and operating licenses of $1.2 million.  The
      operating licenses are amortized over the 12 years as a component of operating expenses.
(y)  Represents the weighted average remaining useful life or lease term for each asset category.
(z)  The lease intangibles represent the estimated fair value of in-place tenant leases with an estimated life of 19 months based on
       Summerville’s average resident length of stay.



14



7.           Reclassifications

The Summerville consolidated financial statements (“As Reported Summerville”) were reclassified to conform to Emeritus financial statement presentations.  Those reclassifications are presented in the table below (in thousands):

Summerville Senior Living, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Year Ended December 31, 2006
(In thousands)

   
Summerville
         
Summerville
 
   
As Reported
   
Reclassifications
   
Reclassified
 
REVENUES:
                 
Community revenue
  $
-
    $
220,859
    $
220,859
 
Management fees
   
899
     
-
     
899
 
Rental and other resident service revenue
   
221,684
      (221,684 )    
-
 
Other
   
540
      (540 )    
-
 
Total revenues
   
223,123
      (1,365 )    
221,758
 
OPERATING EXPENSES:
                       
Community operations
   
-
     
144,140
     
144,140
 
General and administrative
   
54,276
      (31,531 )    
22,745
 
Depreciation and amortization
   
-
     
9,833
     
9,833
 
Facility lease expense
   
37,135
     
-
     
37,135
 
Salary and benefits
   
105,368
      (105,368 )    
-
 
Consultants and professional fees
   
7,691
      (7,691 )    
-
 
Loss on disposal of property and equipment
   
8
      (8 )    
-
 
Total operating expenses
   
204,478
     
9,375
     
213,853
 
Operating income from continuing operations
   
18,645
      (10,740 )    
7,905
 
OTHER INCOME (EXPENSE):
                       
Interest income
   
487
     
-
     
487
 
Interest expense, debt and other
    (18,470 )     (244 )     (18,714 )
Interest expense, capital and financing lease obligations
    (21,400 )    
-
      (21,400 )
Other, net
   
-
     
907
     
907
 
Depreciation and amortization
    (10,077 )    
10,077
     
-
 
Total other expense, net
    (49,460 )    
10,740
      (38,720 )
Loss from continuing operations before taxes
    (30,815 )    
-
      (30,815 )
Income tax (expense) benefit
    (661 )    
-
      (661 )
Loss from continuing operations
  $ (31,476 )   $
-
    $ (31,476 )


15


Summerville Senior Living, Inc. and Subsidiaries
Unaudited Consolidated Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands)


   
Summerville
         
Summerville
 
   
As Reported
   
Reclassifications
   
Reclassified
 
REVENUES:
                 
Community revenue
  $
-
    $
139,808
    $
139,808
 
Management fees
   
-
     
-
     
-
 
Rental and other resident service revenue
   
140,467
      (140,467 )    
-
 
Other
   
64
      (64 )    
-
 
Total revenues
   
140,531
      (723 )    
139,808
 
OPERATING EXPENSES:
                       
Community operations
   
-
     
90,889
     
90,889
 
General and administrative
   
32,119
      (22,956 )    
9,163
 
Depreciation and amortization
   
-
     
6,543
     
6,543
 
Facility lease expense
   
21,368
     
-
     
21,368
 
Salary and benefits
   
64,966
      (64,966 )    
-
 
Consultants and professional fees
   
2,967
      (2,967 )    
-
 
Loss on disposal of property and equipment
   
-
     
-
     
-
 
Total operating expenses
   
121,420
     
6,543
     
127,963
 
Operating income from continuing operations
   
19,111
      (7,266 )    
11,845
 
OTHER INCOME (EXPENSE):
                       
Interest income
   
376
     
-
     
376
 
Interest expense, debt and other
    (10,774 )     (138 )     (10,912 )
Interest expense, capital and financing lease obligations
    (13,965 )    
-
      (13,965 )
Other, net
   
-
     
723
     
723
 
Depreciation and amortization
    (6,681 )    
6,681
     
-
 
Total other expense, net
    (31,044 )    
7,266
      (23,778 )
Loss from continuing operations before taxes
    (11,933 )    
-
      (11,933 )
Income tax (expense) benefit
    (11 )    
-
      (11 )
Loss from continuing operations
  $ (11,944 )   $
-
    $ (11,944 )

(1) Reclassification of miscellaneous non-operating revenues to other income (expense).
(2) Reclassification of general and administrative expenses at local communities to community operations expenses.  The
      balance in general and administrative expenses represents corporate and regional overhead expenses.
(3) Reclassification of depreciation and amortization from non-operating to operating expenses, with loan fee amortization
      included as a component of interest expense.
(4) Reclassification of salary and benefits, and consultants and professional fees to community operations expenses or general and
      administrative expenses, as appropriate.

16


Summerville Senior Living, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
As of June 30, 2007
(In thousands)



   
Summerville
         
Summerville
 
   
As Reported
   
Reclassifications
   
Reclassified
 
ASSETS
                 
Current Assets:
                 
Cash and cash equivalents
  $
8,081
    $
-
    $
8,081
 
Trade accounts receivable, net
   
1,291
     
-
     
1,291
 
Prepaid expenses and other current assets
   
8,850
     
-
     
8,850
 
Total current assets
   
18,222
     
-
     
18,222
 
Restricted cash
   
8,689
      (8,689 )    
-
 
Notes receivable
   
1,251
      (1,251 )    
-
 
Property and equipment, net
   
340,236
             
340,236
 
Deferred financing costs, net
   
2,964
      (2,964 )    
-
 
Leasehold acquisition costs, net
   
19,691
             
19,691
 
Goodwill
   
14,770
             
14,770
 
Deposits and other assets
   
10,955
     
12,904
     
23,859
 
Total Assets
  $
416,778
    $
-
    $
416,778
 
                         
LIABILITIES AND STOCKHOLDERS' DEFICIT
                       
Current liabilities:
                       
Trade accounts payable and other accrued expenses
  $
34,564
      (29,025 )   $
5,539
 
Current portion of long-term debt
   
5,235
             
5,235
 
Accrued employee compensation
   
-
     
10,484
     
10,484
 
Other accrued expenses and liabilities
   
-
     
18,541
     
18,541
 
Total current liabilities
   
39,799
     
-
     
39,799
 
Long-term debt, net
   
101,431
      (79,540 )    
21,891
 
Financing obligations, net
   
308,878
     
47,154
     
356,032
 
Long-term debt payable to Apollo
   
69,530
     
79,540
     
149,070
 
Capital lease obligations, net
   
47,154
      (47,154 )    
-
 
Deferred rent
   
12,477
      (12,477 )    
-
 
Other long-term liabilities
   
137
     
12,477
     
12,614
 
Total Liabilities
   
579,406
     
-
     
579,406
 
Stockholders' deficit:
                       
Common stock
   
-
     
-
     
-
 
Convertible preferred stock
   
28
     
-
     
28
 
Additional paid-in capital
   
83,419
     
-
     
83,419
 
Accumulated deficit
    (246,075 )    
-
      (246,075 )
Total Stockholders' Deficit
    (162,628 )    
-
      (162,628 )
Total Liabilities and Stockholders' Deficit
  $
416,778
    $
-
    $
416,778
 




17