$77,030,000. CITY OF TEMPE, ARIZONA REVENUE REFUNDING BONDS Consisting of:

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1 NEW ISSUE BOOK ENTRY ONLY NOT RATED In the opinion of Squire Sanders (US) LLP, Bond Counsel, under existing law (i) assuming continuing compliance with certain covenants and the accuracy of certain representations, interest on the Series 2012A Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, (ii) interest on the Taxable Series 2012B Bonds is not excluded from gross income for federal income tax purposes and (iii) interest on the Series 2012 Bonds is exempt from Arizona state income tax. Interest on the Series 2012A Bonds may be subject to certain federal taxes imposed only on certain corporations, including the corporate alternative minimum tax on a portion of that interest. For a more complete discussion of the tax aspects, see TAX MATTERS herein. $77,030,000 the INDUSTRIAL Development AUTHORITY OF THE CITY OF TEMPE, ARIZONA REVENUE REFUNDING BONDS Consisting of: $72,570,000 $4,460,000 REVENUE REFUNDING BONDS REVENUE REFUNDING BONDS (FRIENDSHIP VILLAGE OF TEMPe) (FRIENDSHIP VILLAGE OF TEMPE) SERIES 2012A taxable SERIES 2012B FINAL cusip : 87972MAD4 FINAL cusip : 87972MAT9 Maturity Dates, Interest Rates, Prices or Yields and CUSIPs are Shown on the Inside Front Cover The Industrial Development Authority of the City of Tempe, Arizona (the Authority ) is issuing its $72,570,000 Revenue Refunding Bonds (Friendship Village of Tempe) Series 2012A (the Series 2012A Bonds ) and its $4,460,000 Revenue Refunding Bonds (Friendship Village of Tempe) Taxable Series 2012B (the Taxable Series 2012B Bonds and, together with the Series 2012A Bonds, the Series 2012 Bonds ) under a Bond Indenture dated as of March 1, 2012 (the Bond Indenture ), between the Authority and Wells Fargo Bank, N.A., as bond trustee (the Bond Trustee ). The proceeds of the Series 2012 Bonds will be loaned to Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe (the Corporation ) under a Loan Agreement dated as of March 1, 2012 (the Loan Agreement ), between the Authority and the Corporation, and will be used to (i) refund the Authority s $4,898,000 outstanding principal amount Friendship Village of Tempe Refunding Revenue Bonds, Series 1993B Extendable Rate Adjustable SecuritiesSM (EXTRASSM) (the Series 1993 Bonds ), the Authority s $64,515,000 outstanding principal amount Senior Living Revenue Bonds (Friendship Village of Tempe Project), Series 2002 (the 2002 Bonds ) and the Authority s $6,910,000 outstanding principal amount Senior Living Refunding Revenue Bonds (Friendship Village of Tempe Project), Series 2004 (the Series 2004 Bonds and, together with the Series 1993 Bonds and the Series 2002 Bonds, the Prior Bonds ); (ii) fund a debt service reserve fund for the Series 2012 Bonds; and (iii) pay certain expenses incurred in connection with the issuance of the Series 2012 Bonds and the refunding of the Prior Bonds. Except as described in this Official Statement, the Series 2012A Bonds will be payable solely from and secured by a pledge of payments to be made under the Loan Agreement and Obligation No. 1 (as defined herein), and the Taxable Series 2012B Bonds will be payable solely from and secured by a pledge of payments to be made under the Loan Agreement and Obligation No. 2 (as defined herein). The Corporation shall issue Obligation No. 1 and Obligation No. 2 under a Master Trust Indenture dated as of March 1, 2012, as supplemented and amended, among the Corporation, as initial member, any future Members of the Obligated Group (as defined herein) and Wells Fargo Bank, N.A., as master trustee. The Series 2012 Bonds are subject to optional, mandatory and extraordinary redemption, in whole or in part, prior to maturity at the prices and under the circumstances described herein. See THE SERIES 2012 BONDS herein and Appendix C SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE. Investment in the Series 2012 Bonds involves a certain degree of risk related to the nature of the business of the Corporation, the regulatory environment, and the provisions of the principal documents. A prospective Bondholder is advised to read SECURITY AND SOURCE OF PAYMENTS FOR THE SERIES 2012 BONDS, SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE and BONDHOLDERS RISKS herein. THE SERIES 2012 BONDS AND THE INTEREST THEREON ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE EXCLUSIVELY FROM REVENUES, RECEIPTS AND OTHER FUNDS HELD UNDER THE BOND INDENTURE AND THE LOAN AGREEMENT. THE SERIES 2012 BONDS DO NOT CONSTITUTE A DEBT OR A LOAN OF CREDIT OR A PLEDGE OF THE FULL FAITH AND CREDIT OR TAXING POWER OF THE AUTHORITY, THE CITY OF TEMPE (THE CITY ) OR THE STATE OF ARIZONA (THE STATE ), OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY STATE CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE STATE OR THE CITY. THE SERIES 2012 BONDS SHALL NOT CONSTITUTE, DIRECTLY OR INDIRECTLY, OR CONTINGENTLY OBLIGATE OR OTHERWISE CONSTITUTE A GENERAL OBLIGATION OF OR A CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY, BUT SHALL BE SPECIAL, LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM THE SOURCES DESCRIBED IN THE BOND INDENTURE BUT NOT OTHERWISE. THE AUTHORITY HAS NO TAXING POWER. The Series 2012 Bonds, when issued, will be registered initially only in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Series 2012 Bonds. Purchasers of the Series 2012 Bonds will not receive certificates representing their interests in the Series 2012 Bonds purchased. Ownership by the Beneficial Owners of the Series 2012 Bonds will be evidenced by book-entry only. Principal of and interest on the Series 2012 Bonds will be paid by the Bond Trustee to DTC, which in turn will remit such principal and interest payments to its participants for subsequent disbursement to the Beneficial Owners of the Series 2012 Bonds. As long as Cede & Co. is the registered owner as nominee of DTC, payments on the Series 2012 Bonds will be made to such registered owner, and disbursement of such payments will be the responsibility of DTC and its participants. See Book-Entry System. This cover page contains certain information for ease of reference only. It does not constitute a summary of the Series 2012 Bonds or the security therefor. Potential investors must read this entire Official Statement, including the Appendices, to obtain information essential to the making of an informed investment decision. The Series 2012 Bonds are being offered when, as and if issued by and received by the Underwriter, subject to prior sale, withdrawal or modification of the offer without notice and to the approval of legality of the Series 2012 Bonds by Squire Sanders (US) LLP, Phoenix, Arizona, as Bond Counsel. Certain legal matters will be passed upon for the Authority by its counsel, Greenberg Traurig, LLP, Phoenix, Arizona; for the Corporation by its counsel, Douglas K. Cook, Attorney P.C., Mesa, Arizona; and for the Underwriter by its counsel, Jones Day, San Francisco, California. It is expected that the Series 2012 Bonds in definitive form will be available for delivery to the Bond Trustee on behalf of DTC by Fast Automated Securities Transfer on or about March 22, Official Statement dated March 6, 2012 Copyright American Bankers Association. CUSIP numbers herein are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers are provided for convenience and reference only.

2 $72,570,000 THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF TEMPE, ARIZONA REVENUE REFUNDING BONDS (FRIENDSHIP VILLAGE OF TEMPE) SERIES 2012A DATED: Date of Delivery DUE: December 1, as shown below The Series 2012A Bonds will be issued in fully registered form without coupons in denominations of $5,000 and integral multiples thereof. Interest on the Series 2012A Bonds will be payable on June 1 and December 1 of each year, commencing June 1, The Series 2012A Bonds will be subject to redemption prior to maturity, as more fully described herein. Maturity Principal Interest Rate Yield Price CUSIP (December 1,) Amount 2017 $410, % 4.000% MAN ,005, % 4.250% MAE ,055, % 4.520% MAF ,105, % 4.790% MAG ,165, % 5.000% MAH ,225, % 5.150% MAJ1 $7,295, % Term Bonds due December 1, 2027 Price % Yield 5.550% CUSIP : 87972MAK8 $9,755, % Term Bonds due December 1, 2032 Price % Yield 5.900% CUSIP : 87972MAL6 $30,900, % Term Bonds due December 1, 2042 Price % Yield 6.250% CUSIP : 87972MAM4 $18,655, % Term Bonds due December 1, 2046 Price % Yield 6.300% CUSIP : 87972MAD4 Yield and price calculated to December 1, 2021, the first optional redemption date. $4,460,000 THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF TEMPE, ARIZONA REVENUE REFUNDING BONDS (FRIENDSHIP VILLAGE OF TEMPE) TAXABLE SERIES 2012B DATED: Date of Delivery DUE: December 1, as shown below The Taxable Series 2012B Bonds will be issued in fully registered form without coupons in denominations of $5,000 and integral multiples thereof. Interest on the Taxable Series 2012B Bonds will be payable on June 1 and December 1 of each year, commencing June 1, The Taxable Series 2012B Bonds will be subject to redemption prior to maturity, as more fully described herein. Maturity (December 1,) Principal Amount Interest Rate Yield Price CUSIP 2012 $535, % 3.500% MAU , % 4.000% MAP , % 4.500% MAQ , % 5.125% MAR , % 5.375% MAS , % 5.625% MAT9 Copyright American Bankers Association. CUSIP numbers herein are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers are provided for convenience and reference only.

3 Independent Living, Dining, and Common Spaces

4 Health Center Assisted Living and Wellness Center

5 REGARDING USE OF THIS OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING OF THE SERIES 2012 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2012 BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No dealer, broker, salesperson or other person has been authorized by the Authority, the Corporation or the Underwriter to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be a sale of Series 2012 Bonds by any person, in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority or the Corporation since the date hereof. The information contained herein under the headings THE AUTHORITY and LITIGATION The Authority has been furnished by the Authority. The information under the heading BOOK- ENTRY SYSTEM has been obtained from The Depository Trust Company. The description of the information under the heading INDEPENDENT AUDITORS has been furnished by BKD, LLP. All other information contained herein has been obtained from the Corporation and other sources (other than the Authority) which are believed to be reliable. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The Authority has approved the use of this Official Statement. The Authority does not assume any responsibility for the accuracy or completeness of any information contained in this Official Statement, except such information relating specifically to the Authority under the headings THE AUTHORITY and LITIGATION The Authority. Wells Fargo Bank, N.A., as bond trustee and master trustee, assumes no responsibility for this Official Statement and has not reviewed or undertaken to verify any information contained in this Official Statement. THE SERIES 2012 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE BOND INDENTURE HAS NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE SERIES 2012 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF LAWS OF THE STATES IN WHICH THE SERIES 2012 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SERIES 2012 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

6 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in BONDHOLDERS RISKS and Appendix A herein. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE CORPORATION DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.

7 TABLE OF CONTENTS PAGE INTRODUCTION... 1 The Corporation... 1 The Series 2012 Bonds... 1 Bondholders Risks... 1 Use of Funds... 2 Security for the Series 2012 Bonds; the Master Indenture... 2 Security for the Series 2012 Obligations; the Deed of Trust... 3 Continuing Disclosure Agreement... 3 Book-Entry System... 3 THE CORPORATION... 4 General The Village... 4 Management of the Village... 4 THE AUTHORITY... 4 BONDHOLDERS RISKS... 5 General Impact of Market Turmoil and Recent Federal Legislation... 5 Arizona State Budget... 6 Nonprofit Healthcare Environment... 6 Internal Revenue Code Compliance... 6 Proposed Changes to Tax Treatment of Series 2012A Bonds... 8 Property Taxes; State and Local Tax Exemption... 9 Federal and State Reimbursement Regulation... 9 Regulatory Matters Development and Management General Risks of Long Term Care Facilities Failure to Achieve Sufficient Occupancy and to Maintain Turnover or Occupancy; Uncertainty of Revenues Malpractice Claims, General Liability Insurance and Litigation Nature of the Income of the Elderly Sales of Homes Certain Matters Relating to Enforceability of Security Interest in Gross Revenues Title Insurance; Limitations of Remedies under the Deed of Trust i-

8 PAGE Enforceability of Remedies; Prior Claims Rate Setting Factors that Could Affect the Validity or Value of the Lien Against the Corporation s Revenues and the Enforceability of the Loan Agreement and Legal Opinions Bankruptcy Competition and Possible Increased Competition Environmental Laws and Regulations Possible Future Changes to Accounting Policies and Procedures Additional Debt Lack of Marketability for the Series 2012 Bonds Amendments to Bond Documents Other Considerations PLAN OF FINANCE General Refunding of the Prior Bonds Other Uses ESTIMATED SOURCES AND USES OF FUNDS ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS THE SERIES 2012 BONDS General Payment of the Series 2012 Bonds Redemption of the Series 2012 Bonds Transfer and Exchange of Bonds; Persons Treated as Owners SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2012 BONDS Pledge under the Bond Indenture Bond Reserve Fund The Loan Agreement The Series 2012 Obligations under the Master Indenture Repayment SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE Joint and Several Obligations Security Interest in Gross Revenues and the Deed of Trust Rates and Charges; Debt Coverage Liquidity Covenant ii-

9 PAGE Approval of Consultants Application for Rating Supplements to the Master Indenture BOOK-ENTRY SYSTEM LITIGATION The Authority The Corporation TAX MATTERS Tax Matters Series 2012A Bonds Original Issue Discount and Original Issue Premium Series 2012A Bonds Tax Matters - Taxable Series 2012B Bonds Information Reporting and Backup Withholding Taxable Series 2012B Bonds Non-U.S. Owners Taxable Series 2012B Bonds Circular 230 Taxable Series 2012B Bonds LEGALITY INDEPENDENT AUDITORS CONTINUING DISCLOSURE AGREEMENT The Obligated Group No Continuing Disclosure From the Authority NO RATING UNDERWRITING MISCELLANEOUS APPENDIX A INFORMATION CONCERNING TEMPE LIFE CARE VILLAGE, INC... A-1 APPENDIX B AUDITED FINANCIAL STATEMENTS OF TEMPE LIFE CARE VILLAGE, INC. FOR THE YEARS ENDED DECEMBER 31, 2007, 2008, 2009 AND 2010 AND UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE PERIODS ENDED NOVEMBER 30, 2010 AND B-1 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS... C-1 APPENDIX D PROPOSED FORMS OF OPINIONS OF BOND COUNSEL... D-1 -iii-

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11 OFFICIAL STATEMENT $77,030,000 THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF TEMPE, ARIZONA REVENUE REFUNDING BONDS Consisting of: $72,570,000 REVENUE REFUNDING BONDS (FRIENDSHIP VILLAGE OF TEMPE) SERIES 2012A FINAL CUSIP : 87972MAD4 INTRODUCTION $4,460,000 REVENUE REFUNDING BONDS (FRIENDSHIP VILLAGE OF TEMPE) TAXABLE SERIES 2012B FINAL CUSIP : 87972MAT9 This Introduction is intended only to serve as a brief description of this Official Statement and is expressly qualified by reference to the Official Statement as a whole, as well as the documents summarized or described herein. All capitalized terms used in this Official Statement and not otherwise defined herein are defined in DEFINITIONS OF CERTAIN TERMS in Appendix C. The Official Statement speaks only as of its date, and the information contained herein is subject to change. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for the complete details of all terms and conditions. All statements herein regarding any such documents are qualified in their entirety by reference to such documents. The Corporation Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, an Arizona nonprofit corporation (the Corporation ), has been determined to be exempt from federal income taxation pursuant to Section 501(a) of the Internal Revenue Code of 1986, as amended (the Code ), as an organization described in Section 501(c)(3) of the Code. The Corporation owns and operates a life care retirement community in Tempe, Arizona, known as Friendship Village of Tempe. The Series 2012 Bonds This Official Statement, including the cover page and the Appendices, is provided to set forth certain information in connection with the offering by the Industrial Authority of the City of Tempe, Arizona (the Authority ) of its $72,570,000 Revenue Refunding Bonds (Friendship Village of Tempe) Series 2012A (the Series 2012A Bonds ) and its $4,460,000 Revenue Refunding Bonds (Friendship Village of Tempe) Taxable Series 2012B (the Taxable Series 2012B Bonds and, together with the Series 2012A Bonds, the Series 2012 Bonds ) under a Bond Indenture dated as of March 1, 2012 (the Bond Indenture ), between the Authority and Wells Fargo Bank, N.A., as bond trustee (the Bond Trustee ). The proceeds of the Series 2012 Bonds will be loaned to the Corporation pursuant to a Loan Agreement dated as of March 1, 2012 (the Loan Agreement ), between the Authority and the Corporation. Bondholders Risks An investment in the Series 2012 Bonds involves a certain degree of risk, including without limitation those described under the heading BONDHOLDERS RISKS herein. A prospective Bondholder is advised to read SECURITY AND SOURCE OF PAYMENTS FOR THE SERIES 2012

12 BONDS and BONDHOLDERS RISKS for a discussion of certain risk factors which should be considered in connection with an investment in the Series 2012 Bonds. Careful consideration should be given to these risks and other risks described elsewhere in this Official Statement. Among other things, careful evaluation should be made of certain factors that may adversely affect the ability of the Obligated Group to generate sufficient revenues to pay expenses of operations, including the principal of, premium, if any, and interest on the Series 2012 Bonds. Use of Funds The Corporation will use the proceeds from the sale of the Series 2012 Bonds and other available funds to (i) refund the Authority s $4,898,000 outstanding principal amount Friendship Village of Tempe Refunding Revenue Bonds, Series 1993B Extendable Rate Adjustable Securities SM (EXTRAS SM ) (the Series 1993 Bonds ), the Authority s $64,515,000 outstanding principal amount Senior Living Revenue Bonds (Friendship Village of Tempe Project), Series 2002 (the 2002 Bonds ) and the Authority s $6,910,000 outstanding principal amount Senior Living Refunding Revenue Bonds (Friendship Village of Tempe Project), Series 2004 (the Series 2004 Bonds and, together with the Series 1993 Bonds and the Series 2002 Bonds, the Prior Bonds ); (ii) fund a debt service reserve fund for the Series 2012 Bonds; and (iii) pay certain expenses incurred in connection with the issuance of the Series 2012 Bonds and the refunding of the Prior Bonds. Security for the Series 2012 Bonds; the Master Indenture The Series 2012 Bonds will be limited obligations of the Authority, payable solely from payments made by the Corporation under the Loan Agreement. The Corporation s obligations under the Loan Agreement will be secured in part by the Corporation s Direct Note Obligation No. 1 ( Obligation No. 1 ) to be issued in a principal amount equal to the aggregate principal amount of the Series 2012A Bonds, and the Corporation s Direct Note Obligation No. 2 ( Obligation No. 2 and, together with Obligation No. 1, the Series 2012 Obligations ), to be issued in a principal amount equal to the aggregate principal amount of the Taxable Series 2012B Bonds. The Authority will pledge and assign certain of its rights under the Loan Agreement and the Series 2012 Obligations to the Bond Trustee as security for the Series 2012 Bonds. The terms of the Loan Agreement will require payments by the Corporation that, together with other moneys available therefor (and interest earned thereon), will be sufficient to provide for the payment of the principal of, premium, if any, and interest on, the Series 2012 Bonds. The Corporation will issue the Series 2012 Obligations pursuant to a Master Trust Indenture dated as of March 1, 2012 (the Original Master Indenture ) among the Corporation, as initial member and as Obligated Group Representative, any future members of the Obligated Group (together with the Corporation, the Obligated Group and each member, a Member ) and Wells Fargo Bank, N.A., as Master Trustee (the Master Trustee ). In connection with the issuance of the Series 2012 Bonds, the Original Master Indenture will be supplemented and amended by the First Supplemental Master Indenture dated as of March 1, 2012 (the First Supplemental Master Indenture and, together with the Original Master Indenture, the Master Indenture ) to issue the Series 2012 Obligations. The Series 2012 Obligations will be substantially in the forms attached to the First Supplemental Master Indenture and will be repaid in the manner and amounts set forth therein. Payment of the principal of, and interest on, each series of the Series 2012 Bonds will be additionally secured by moneys deposited to the credit of the Bond Reserve Fund established under the Bond Indenture. -2-

13 Under the Bond Indenture, all amounts (including proceeds of the sale of the Series 2012 Bonds) held in any fund or account established pursuant to the Bond Indenture (but not including the Rebate Fund) are pledged to secure the full payment of the principal of, premium, if any, and interest on the Series 2012 Bonds in accordance with their terms and the provisions of the Bond Indenture. Security for the Series 2012 Obligations; the Deed of Trust The Series 2012 Obligations will entitle the Bond Trustee, as the Holder thereof, to the protection of the covenants, restrictions and other obligations imposed upon the Obligated Group by the Master Indenture. The Members of the Obligated Group are jointly and severally obligated on all Obligations, including the Series 2012 Obligations, which are issued pursuant to the Master Indenture. All Obligations issued by the Obligated Group will be equally and ratably secured by (i) all Gross Revenues (as defined herein) of the Members, and (ii) the property subject to the Deed of Trust (as defined herein), subject in each case to Permitted Encumbrances. In certain circumstances, the Corporation or any future Member may issue Additional Indebtedness under the Master Indenture that will be equally and ratably secured with the Series 2012 Obligations, or that may be entitled to the benefit of security in addition to that securing the Series 2012 Obligations, which security need not be extended to any other Obligations. The Master Indenture requires that the Obligated Group meet certain operating and financial tests prior to issuing new indebtedness or entering in certain other transactions. See SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE below. To secure the payment of all sums with respect to Obligations, including the Series 2012 Obligations, and the performance of the covenants, obligations and agreements in the Master Indenture, the Corporation is expected to grant a first lien on and security interest in its primary facilities from which the Corporation derives revenues from operations, subject to Permitted Encumbrances, in favor of the Master Trustee. The Deed of Trust and Security Agreement dated as of March 1, 2012 (the Deed of Trust ), from the Corporation is expected to be granted and recorded on or about the date of issuance of the Series 2012 Bonds. See Appendix C SUMMARY OF CERTAIN PROVISIONS OF THE DEED OF TRUST. As required by Arizona law, the Arizona Director of Insurance has a perfected lien on the real property subject to the Deed of Trust for the benefit of the residents of the Village, as defined herein (the Insurance Lien ). The Insurance Lien will be subordinated to the liens of the Deed of Trust prior to the delivery of the Series 2012 Bonds. See Appendix A REGULATION OF FACILITIES Life Care Permit. Continuing Disclosure Agreement The Corporation will covenant on behalf of the Obligated Group to provide or cause to be provided each year the financial information and operating data relating to the Obligated Group, for the benefit of the holders and Beneficial Owners of the Series 2012 Bonds, pursuant to a Continuing Disclosure Agreement to be executed and delivered by the Corporation. See the information under the caption CONTINUING DISCLOSURE AGREEMENT. Book-Entry System The Series 2012 Bonds, when issued, will be payable solely in book-entry form through The Depository Trust Company. See the information under the caption BOOK-ENTRY SYSTEM. -3-

14 THE CORPORATION General The Corporation was established in 1976 to conduct the business of owning and operating a life care facility for the elderly in a manner designed to satisfy three primary needs of the elderly: (i) the need for housing, (ii) the need for health care, and (iii) the need for financial security. The Corporation has been operating the Village (defined below) since its opening in For more information concerning the history, governance, organization, facilities, operations and financial performance of the Corporation, see Appendix A. The Corporation has been determined to be exempt from federal income taxation pursuant to Section 501(a) of the Code, as an organization described in Section 501(c)(3) of the Code. At the time of the delivery of the Series 2012 Bonds, the Corporation will be the only Obligated Group Member under the Master Indenture. The Village The Corporation owns and operates a life care retirement community more commonly known as Friendship Village of Tempe (the Village ) located in Tempe, Arizona. The Village consists of 572 residential units (the Retirement Center ), on approximately 46 acres of independent living garden homes and residential units. The Village also includes common areas with recreational facilities, a fitness center, a swimming pool, a spa and three dining venues. Additionally, the Village has a 128-bed skilled nursing facility (the Health Center ), an assisted living building with 67 apartments, an additional 24 memory care beds, and a 14-bed hospice unit. The land and facilities of the Village are subject to the liens of the hereinafter-defined Deed of Trust and the Insurance Lien. See APPENDIX A THE VILLAGE Facilities and Levels of Care. Management of the Village The Village is operated under a management contract with Life Care Services LLC, an unrelated Iowa limited liability company (in its role as manager of the Village, the Manager ). As of December 1, 2011, the Manager and its affiliates managed approximately 100 life care retirement communities similar to the Village and provided management services to several other types of retirement communities. For more information about the Manager and its role in the future management of the Village, see APPENDIX A LIFE CARE SERVICES LLC. THE AUTHORITY The Authority is a nonprofit corporation designated a political subdivision of the State of Arizona (the State or Arizona ) incorporated with the approval of the City of Tempe, Arizona (the City ), pursuant to the provisions of the Constitution of the State and the statute currently titled Industrial Development Financing, Title 35, Chapter 5, Articles 1 through 5, Arizona Revised Statutes, as amended (Sections through , inclusive) (the Act ). The Authority is governed by a Board of Directors who are appointed by the Mayor and Council of the City. The Authority does not have the power to pledge its general credit. The Authority has no taxing power. The Authority does not have the power to pledge the general credit or taxing power of the State or of any political subdivision thereof, including, but not limited to, the City. The Authority does not employ any staff to carry out its limited functions and contracts with independent third parties to do so. The Authority does not and will not in the future monitor the financial -4-

15 condition of the Corporation or otherwise monitor payment of the Series 2012 Bonds or compliance with the documents relating thereto. The responsibility for the operation of the Village will rest entirely with the Corporation. Under the financing contemplated hereby, the Authority has no obligation with respect to such financing after the issuance of the Series 2012 Bonds. The Authority has not prepared or assisted in the preparation of this Official Statement, except the statements under this caption THE AUTHORITY and the caption LITIGATION The Authority, and except as aforesaid, the Authority is not responsible for any statements made in this Official Statement. Except for the execution and delivery of documents required to effect the issuance of the Series 2012 Bonds, the Authority has not otherwise assisted in the public offer, sale or distribution of the Series 2012 Bonds. Accordingly, except as aforesaid, the Authority disclaims responsibility for the disclosures set forth in this Official Statement or otherwise made in connection with the offer, sale and distribution of the Series 2012 Bonds. BONDHOLDERS RISKS The purchase and ownership of Series 2012 Bonds involves investment risks that are discussed throughout this Official Statement. These risk factors should not be considered definitive or exhaustive. Prospective purchasers of the Series 2012 Bonds should evaluate all of the information presented in this Official Statement. This section on Bondholders Risks focuses primarily on the general risks associated with the healthcare industry and the operations of senior living facilities, whereas Appendix A describes the Corporation specifically. These should be read together. General As described herein under the caption, INTRODUCTION Security for the Series 2012 Bonds, the principal of, premium, if any, and interest on the Series 2012 Bonds, except to the extent that the Series 2012 Bonds will be payable from the proceeds thereof or investment income thereon, are payable solely from amounts payable by the Corporation under the Loan Agreement. The bondholders risks discussed below should be considered in evaluating the ability of the Corporation and any future Member to make payments in amounts sufficient to provide for the payment of the principal of, premium, if any, and interest on the Series 2012 Bonds. This discussion of risk factors is not, and is not intended to be, exhaustive. Impact of Market Turmoil and Recent Federal Legislation The economic recession that began in 2008 has had, and may continue to have, negative repercussions upon the national and global economies, including a scarcity of credit, lack of confidence in the financial sector, extreme volatility in the financial markets, increase in interest rates, falling housing prices, reduced business activity, increased consumer bankruptcies and increased business failures and bankruptcies. In response, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 on February 17, 2009 (the Recovery Act ), which provided approximately $787 billion in federal spending and tax initiatives, a portion of which is intended to provide financial relief to health care providers as further described herein. The recession has had a particularly acute impact upon the financial sector and has caused many banks and other financial institutions to seek additional capital, to merge and in some cases, to fail. -5-

16 The impact of the disruption of the credit and financial markets, including without limitation its impact on the availability of credit, personal, corporate and governmental revenues, may adversely affect future revenues and expenses and, consequently, the ability of the Corporation to make payments under the Loan Agreement. Revenues and expenses may also be adversely affected by future economic conditions, which may include an inability to control expenses in periods of inflation, and other conditions, including demand for housing and related healthcare and other support services provided by the Corporation, the availability and affordability of insurance, including without limitation casualty insurance, availability of nursing and other professional personnel, the capability of the management of the Corporation, the receipt of grants and contributions, economic and demographic developments in the United States of America, the State of Arizona and the service areas of the Corporation, and competition from other healthcare providers in such service areas, together with changes in rates, costs, third party payments and governmental regulations. These and other risks may adversely affect the Corporation and may jeopardize its ability to generate revenues, its ability to make payments under the Loan Agreement and the Series 2012 Obligations when due and, consequently, make payments on the Series 2012 Bonds. There can be no assurance that the financial condition of the Corporation, its ability to generate revenues and/or the utilization of the Corporation s facilities will not be adversely affected by any of these circumstances. Arizona State Budget Many states, including Arizona, face severe financial challenges, including erosion of tax revenues, falling real estate values, slower economic growth and higher unemployment, which may continue or worsen over the coming years. Nonprofit Healthcare Environment Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are in compliance with the regulatory requirements for nonprofit tax-exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead, in many cases, are examinations of core business practices of the health care organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, executive compensation, exemption of property from real property taxation and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the IRS ), labor unions, Congress, state legislatures, other federal and state agencies and patients and in a variety of forums, including hearings, audits and litigation. Internal Revenue Code Compliance The IRS has determined that the Corporation is a tax-exempt organization described in Section 501(c)(3) of the Code, and exempt from taxation under Section 501(a) of the Code. As a tax-exempt, charitable organization, the Corporation and its operations are subject to various requirements specified by the Code and the regulations promulgated thereunder. Compliance with those requirements is necessary to maintain the tax-exempt status of the Corporation. If the Corporation should fail to meet any of the requirements specified by the Code and regulations thereunder as necessary to maintain its taxexempt status, action could be initiated by federal or state tax authorities to attempt to subject the Corporation, its property, and its revenues to taxation. If successful, such action could cause interest on the Series 2012A Bonds to be taxable to the owners thereof. Under the Code as amended to the date of this Official Statement, the failure of the Corporation to maintain their tax-exempt status could constitute a default under the Loan Agreement. The Corporation has covenanted in the Loan Agreement that it will -6-

17 not take or omit to take any action, if such act or omission would cause the interest on the Series 2012A Bonds to be includable in the gross income of any owner for federal income tax purposes. Loss of taxexempt status by the Corporation could result in loss of tax-exemption of the Series 2012A Bonds, and defaults in covenants regarding the Series 2012A Bonds would likely be triggered. Such an event would have material adverse consequences on the financial condition of the Corporation. The tax-exempt status of interest on the Series 2012A Bonds depends, among other things, upon maintenance by the Corporation of its status as an organization described in Section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules based on the Code, regulations and judicial decisions regarding the organization and operation of tax-exempt health care organizations. The IRS interpretation of and position on these rules as they affect the organization and operation of health care organizations are constantly evolving. The IRS reserves the right to and in fact occasionally does, alter or reverse its positions concerning tax-exemption issues, even concerning longheld positions upon which tax-exempt health care organizations have relied. On July 31, 1996, the Federal Taxpayer Bill of Rights 2 (the Taxpayer Act ) was signed into law. The Taxpayer Act, and in particular Section 4958 of the Code, provides the IRS with an intermediate tax enforcement tool to combat violations by tax-exempt organizations of the private inurement prohibition of the Code. These intermediate sanctions may be imposed in situations in which a disqualified person (such as an insider ) engages in excess benefit transactions such as (i) a transaction with a tax-exempt organization on other than a fair market value basis, (ii) receipt of unreasonable compensation from a tax-exempt organization or (iii) receipt of payment in an arrangement that violates the prohibition against private inurement. A disqualified person who benefits from an excess benefit transaction will be subject to an excise tax equal to 25% of the amount of the excess benefit. Organizational managers who participate in the excess benefit transaction knowing it to be improper are subject to an excise tax equal to 10% of the amount of the excess benefit, subject to a maximum penalty of $20,000 per transaction. A second penalty, in the amount of 200% of the excess benefit, may be imposed on the disqualified person (but not upon the organizational manager) if the excess benefit is not corrected within a specified period of time. Fair market value and reasonable compensation for tax purposes typically reflect a range rather than a specific dollar amount, and the IRS does not rule in advance on whether a transaction results in more than fair market value payment or more than reasonable compensation to a disqualified person. Although it is not possible to predict what enforcement action, if any, the IRS might take related to potential excess benefit transactions, consistent with the legislative history of Section 4958, regulations issued by the IRS in March 2008 indicate that not all excess benefit transactions jeopardize exempt status. Rather, the IRS will consider all relevant facts and circumstances including: the size and scope of the organization s activities that further exempt purposes; the size, scope and frequency of any excess benefit transactions; whether the organization has implemented appropriate safeguards reasonably designed to prevent future excess benefit; and whether the organization has made good faith efforts to correct any excess benefit such as by obtaining repayment of the amount of any excess benefit. Moreover, the legislation is potentially favorable to taxpayers because it provides the IRS with a punitive option short of revocation of exempt status to deal with incidents of private inurement. However, the standards for tax exemption have not been changed, including the requirement that no part of the net earnings of an exempt entity inure to the benefit of any private individual. Consequently, although the IRS has only infrequently revoked the tax exemption of nonprofit health care corporations in the past, the risk of revocation remains and there can be no assurance that the IRS will not direct enforcement activities against the Corporation or any future Member of the Obligated Group. -7-

18 The Tax Exempt and Governmental Entities Division of the IRS is responsible for the Team Examination Program (referred to as TEP ) of the IRS which conducts audits of exempt organizations using teams of revenue agents. The TEP audit teams consider a wide range of possible issues, including the community benefit standard, private inurement and private benefit, partnerships and joint ventures, retirement plans and employee benefits, employment taxes, tax-exempt bond financing, political contributions and unrelated business income. In addition, the IRS conducts compliance checks and correspondence audits that focus initially on limited issues, such as executive compensation, unrelated business income or community benefit. Such limited scope reviews can be expanded in certain circumstances to include a variety of other issues as in a TEP audit. The Corporation and any future Member of the Obligated Group could be audited by the IRS. Management of the Corporation believes that they have properly complied with the tax laws. Nevertheless, because of the complexity of the tax laws and the presence of issues about which reasonable persons can differ, a TEP or other audit could result in additional taxes, interest and penalties. A TEP or other audit also could potentially affect the tax-exempt status of the Corporation or any future Members of the Obligated Group. IRS Form 990 is used by 501(c)(3) not-for-profit organizations to submit information required by the federal government for tax-exemption. Form 990 requires detailed public disclosure of compensation practices, corporate governance, loans to management and others, joint ventures and other types of transactions, political campaign activities and other areas the IRS deems to be compliance risk areas. Form 990 also contains a separate schedule requiring detailed reporting of information relating to taxexempt bonds, including compliance with the arbitrage rules and rules limiting private use of bondfinanced facilities, including compliance with the safe harbor guidance in connection with management contracts and research contracts. Form 990 allows for enhanced transparency as to the operations of exempt organizations. It is likely to result in enhanced enforcement, as Form 990 makes available a wealth of detailed information on compliance risk areas to the IRS and other stakeholders, including state attorneys general, unions, plaintiff s class action attorneys, public watchdog groups and others. Proposed Changes to Tax Treatment of Series 2012A Bonds Proposals to alter or eliminate the exclusion of interest on tax-exempt bonds from gross income for some or all taxpayers have been made in the past and may be made again in the future. Two recent examples are President Barack Obama s American Jobs Act of 2011 (the Jobs Act ) which he sent to Congress on September 10, 2011 and the President s draft deficit reduction bill (the Debt Reduction Act ) which he sent to the Joint Select Committee on Deficit Reduction at the end of September If enacted in its original form, the Jobs Act would, for certain individual taxpayers, tax a portion of the interest on tax-exempt bonds under the regular income tax or the alternative minimum tax, effective for taxable years beginning on or after January 1, The Jobs Act would apply not only to bonds issued on and after the effective date, but to bonds issued before the effective date, including the Series 2012A Bonds. In October 2011, the Jobs Act failed to garner sufficient votes in the U.S. Senate to proceed. Since then, the Jobs Act has been broken into several smaller derivative bills which are currently pending. The Debt Reduction Act includes a requirement that the federal Office of Management and Budget establish steadily declining annual ratios for debt as a percentage of gross domestic product beginning with fiscal year 2013 and if such ratios are not met, a sequestration mechanism would automatically impose cuts in spending and tax preferences, including interest on tax-exempt bonds such as the Series 2012A Bonds. Like the Jobs Act, the Deficit Reduction Act would also apply not only to bonds issued on and after the effective date, but to bonds issued before the effective date, including the Series 2012A Bonds. -8-

19 It is unclear whether the Jobs Act, the Debt Reduction Act or any similar legislation will be enacted as proposed or whether other legislation will be proposed or enacted affecting the tax treatment of interest on the Series 2012A Bonds. If any such legislation is retroactive and applies to tax-exempt bonds, including the Series 2012A Bonds, previously issued for the benefit of the Corporation, the adoption of any such legislation could adversely affect the marketability of and the market value for the Series 2012A Bonds and the financial condition of the Corporation. In addition, the adoption of any such legislation could increase the cost to the Corporation of financing future capital needs. See TAX MATTERS herein for further information regarding the tax status of the Series 2012A Bonds. Property Taxes; State and Local Tax Exemption Local property tax assessors take differing positions as to whether or not facilities such as those owned by the Corporation are exempt from property taxation. The Corporation s facilities are currently exempt from ad valorem property tax. The Corporation intends to follow the annual procedures required to maintain this exemption. A failure to obtain or continue exemptions or to follow annual procedures in any year could subject the Corporation to tax in that year. In addition, budgetary pressures on local government may lead to increasing pressures for state legislation to amend the property tax statutes to subject to taxation various properties owned by nonprofit organizations or to condition exemption from taxation upon the performance of specific types or level of charitable activity. In recent years, state, county, and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt organizations with respect to their property tax exemption for both real and personal property. The Corporation expects the majority of its real and personal property to be exempt from property taxes. Investigations or audits could lead to challenges of the property tax exemption with respect to facilities of the Corporation that, if successful, could adversely and materially affect the property tax exemption with respect to certain of the facilities or property of the Corporation. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of not-for-profit corporations. There can be no assurance that future changes in the laws and regulations of federal, state or local governments will not materially or adversely affect the operations and financial condition of the Corporation by requiring it to pay income or local property taxes. Federal and State Reimbursement Regulation The operations of continuing care facilities, like other health care facilities throughout the country, will be affected on a day-to-day basis by numerous legislative, regulatory and industry-imposed operational and financial requirements, which are administered by a variety of federal and state governmental agencies as well as by self-regulatory associations and commercial medical insurance reimbursement programs. It is impossible, however, to predict the effect of any such legislation and regulation on the operations or financial condition of the Corporation s continuing care facilities. Significant changes have been proposed in the Medicare and Medicaid programs, which changes could have a material adverse impact on the Corporations financial condition. In addition, legislation may be introduced in the Congress of the United States which, if enacted, could adversely affect the operations of the Corporation by, for example decreasing reimbursement by third-party payors such as Medicare and Medicaid or limiting the ability of the Corporation to maintain or increase the level of services provided to its residents and patients. -9-

20 Medicare. Medicare is the federal health insurance system under which physicians, hospitals, skilled nursing facilities and other health care providers are reimbursed or paid for services provided to eligible elderly and disabled persons or persons who qualify for the End Stage Renal Disease Program. Medicare is administered by the Centers for Medicare and Medicaid Services ( CMS ), which delegates to the states the process for certifying skilled nursing facilities to which CMS will make payment. The requirements for Medicare certification are subject to change and, therefore, it may be necessary for skilled nursing facilities to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services. CMS may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation in Medicare may be issued or other sanctions potentially could be imposed. Skilled Nursing Facility ( SNF ) services are covered by the Medicare program only if the patient spends at least three consecutive days as a hospital inpatient for a related condition prior to admission to the SNF and if the patient was admitted to the SNF within 30 days of discharge from the hospital. Medicare reimburses for such post-hospital inpatient nursing services provided by the SNF for up to 100 days for each spell of illness, subject to coinsurance and deductible payments from the patient. SNFs are paid pursuant to a prospective payment system ( PPS ) originally mandated by the Balanced Budget Act of Pursuant to this PPS, SNFs are paid a case-mix adjusted Federal per diem rate for Medicare-covered SNF services. The per diem rate is calculated to cover routine service costs, ancillary costs, and capital-related costs. The PPS rates are adjusted annually using a SNF market basket index. The rates are also adjusted by the hospital wage index to account for geographic variations in wages. In August 2003, CMS issued a final rule updating the SNF PPS and consolidated billing provisions for federal fiscal year 2004, which have been effective for services since October 1, The rule reflected a decision by CMS to, at least temporarily, retain a classification system which establishes daily payment rates to SNFs based on the needs of Medicare beneficiaries. However, there is no assurance that payments made by CMS will be sufficient to cover the facility s costs. In addition, any future Congressional action to decrease the SNF PPS per-diem rates or establishment of an alternative classification system could negatively affect the Corporation s revenues. The Deficit Reduction Act ( DRA ) of 2005 directed CMS to develop a Medicare Payment Reform Demonstration ( PRD ) that implemented and utilizes standardized patient information to examine the consistency of payment incentives for Medicare patients receiving services across acute and certain post-acute care settings including skilled nursing facilities. The demonstration provides standardized information on patient health and functional status, independent of site of care, and examines resources and outcomes associated with treatment delivered in each type of care setting. The data collected as a result of this demonstration permits CMS to assess resource use within the skilled nursing and other care settings to understand differences in patient treatment, outcomes, and current costs of care for purpose of payment reform recommendations. The PRD was expanded under the Medicare, Medicaid and SCHIP Extension Act of 2007 ( MMSEA ) to include additional providers, particularly those treating medically complex populations. There is no assurance that payment recommendations made by CMS will be sufficient to cover the facility s costs or that current revenues will increase. Quality-based purchasing (or pay-for-performance) involves the use of incentives to encourage providers including skilled nursing facilities to improve the quality of the services it provides to patients. In 2009, CMS launched the Nursing Home Value-Based Purchasing demonstration as part of its pay-forperformance initiatives in three states: Arizona, New York, and Wisconsin. This demonstration awarded points for the calculation of financial incentives to be awarded to facilities that improved both the quality and efficiency of care provided to Medicare beneficiaries. -10-

21 The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the Health Care Reform Law ) is designed to overhaul the United States health care system and regulate many aspects of and players in the health care arena including individuals, employers and health insurers. The Health Care Reform Law includes a number of initiatives that impact skilled nursing facility reimbursement. Specifically, the Health Care Reform Law instructs the Secretary of Health and Human Services to provide a report and recommendations to Congress in 2012 regarding potential payment penalties for conditions acquired during a resident s stay at a skilled nursing facility as well as a plan to expand the value-based purchasing demonstration to a national payment model. Additionally, the Health Care Reform Law implemented full market basket updates for federal fiscal years 2010 and 2011, but requires a productivity adjustment factor in federal fiscal year 2012 that will reduce the market basket adjustment for 2012 and subsequent years. There is no assurance that payments made by CMS as a result of reimbursement reform measures will be sufficient to cover the facility s costs. In addition, any future Congressional action related to value-based purchasing or adjustments to market basket updates could negatively affect the Corporation s revenues. The Corporation is certified as a provider for Medicare services. For the fiscal years ended December 31, 2009 and 2010, Medicare payments represented approximately 7.9% and 7.1%, respectively, of the Corporation s net revenues. See UTILIZATION Historical Utilization of Health Center in Appendix A to this Official Statement. Past federal budgets have contained cuts to the Medicare program budgets. While it is uncertain whether future federal budget will propose cuts to this program, changes to the reimbursement payments under the Medicare program would have an effect on the Corporation s revenues. There is no assurance that the Corporation will be paid amounts that will reflect adequately their operating costs incurred in providing skilled nursing services to Medicare beneficiaries, as well as any changes in the cost of providing health care or in the cost of health care technology being made available to Medicare beneficiaries. Medicaid. Medicaid is a jointly funded federal and state medical assistance program for qualified needy individuals and their dependents. Pursuant to federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration and scope of services; sets the payment rates for services; and administers its own programs. Payments made to health care providers under the Medicaid program are subject to change as a result of federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may be expected to occur in the future, particularly in response to federal and state budgetary constraints. The Arizona Health Care Cost Containment System ( AHCCCS ) Arizona s Medicaid program, was established in 1987 pursuant to a Section 1115 state-wide demonstration waiver. The Arizona Long Term Care System ( ALTCS ), a capitated long term care program, was established in The ALTCS program for eligible aged, blind or disabled individuals includes nursing care/institutional service benefits as well as certain home and community-based services such as personal care services and home health services, administered in approved alternative care settings such as assisted living facilities. The ALTCS is managed by ALTCS program contractors. Arizona program contractors are paid a capitation rate for each qualified enrollee and, in turn, program contractors enter into contracts with long term care providers and/or provider networks to participate in a specific ALTCS program and deliver covered services. Nursing facilities and assisted living facilities that provide services to eligible enrollees must be Medicare certified and meet the Arizona Department of Health Services rules for licensure. In addition, providers must be registered with the AHCCCS Administration and have a current provider agreement -11-

22 with a program contractor. The Corporation does not currently participate in and does not anticipate participating in the ALTCS program in the near future. Regulatory Matters General. Health and elder care facilities are subject to regulation by a number of federal, state, local and other regulatory or accrediting agencies created to oversee planning and development of health care resources and services, the governmental and private agencies, including those that administer the Medicare and Medicaid programs. The Corporation s operations are affected by legislative and regulatory requirements which are administered by a variety of federal and state governmental agencies, including but not limited to False Claims Act, Fraud Enforcement and Recovery Act, other federal and state Medicaid fraud provisions, Stark Law, and HIPAA, as well as by self-regulatory associations such as medical boards. Renewal and continuance of certain licenses, certifications and accreditations issued by these agencies are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by the management of the Corporation. These activities generally are conducted in the normal course of business. Nevertheless, an adverse result could be the cause of loss or reduction in a facility s scope of licensure, certification or accreditation, or could reduce payments received. Federal and state governments also have a range of criminal, civil and administrative sanctions available to penalize and remediate healthcare fraud and abuse, including imposing civil money penalties, suspending payments and excluding a provider from participating in federal and state healthcare programs. Future legislation and governmental policies affecting the senior living industry or healthcare industry in general could have an impact on the operations of the Corporation and any future Members of the Obligated Group. Licensure. Arizona licenses and regularly surveys assisted living and nursing facilities to ascertain compliance with Arizona rules and regulations and for federal Medicare conditions of participation standards. Failing to satisfy licensure survey standards may lead to a finding of immediate jeopardy or loss or suspension of licensure and imposition of sanctions or civil penalties. Arizona licensing requirements are subject to change, and there can be no assurance that the Corporation will continue to be able to maintain necessary licenses or that they will not incur substantial costs in doing so. Failure to comply with such requirements could result in loss of the right to payment by Medicare or AHCCCS, as well as loss of the right to conduct the business of the licensed entity. From time to time, the Corporation may receive notices from federal and state regulatory agencies relating to alleged deficiencies for failure to comply with all components of licensing or other applicable regulations. There can be no assurance that the Corporation will not be subject to sanctions and penalties in the future as a result of such actions. In addition, as part of the Arizona licensure process, modifications or expansions of assisted living and nursing facilities are subject to an architectural review to ensure compliance with building codes and other regulatory standards. The architectural review process can create delays, increase costs and result in modifications to proposed plans. The Arizona Department of Health Services is responsible for reviewing nursing institution rates and proposed rate changes. Nursing institutions must justify any proposed rate increases and must also submit rate reports annually. In certain circumstances, persons affected by a proposed rate increase may request a public hearing relating to the increase. For more information, see APPENDIX A REGULATION OF FACILITIES Health Services Licensure. The State Department of Insurance regulates the use of life care contracts. The Department of Insurance and the Superior Court of the State possess powers which may be exercised in proceedings with -12-

23 respect to a provider of life care contracts such as the Corporation. For more information see APPENDIX A REGULATION OF FACILITIES Life Care Permit. Health Care Reform. As stated above, the Health Care Reform Law is designed to overhaul the United States health care system and regulate many aspects of and players in the health care arena including individuals, employers and health insurers. On November 14, 2011, the U.S. Supreme Court granted review of a decision from the U.S. Court of Appeals for the Eleventh Circuit, which ruled that, (i) Congress exceeded its powers under the Constitution when it enacted the individual mandate, which will require certain persons to purchase health insurance coverage, under the Health Care Reform Law, (ii) the individual mandate could be decoupled from the rest of the law, and (iii) the Health Care Reform Law s requirement that states expand their Medicaid coverage for individuals and families or forfeit their Medicaid funding is not unduly coercive. The Supreme Court will consider these questions along with the issue of whether a lawsuit brought by 26 state Attorney Generals challenging the individual mandate is barred by the tax anti-injunction act, 26 U.S.C. 7421(a). The effect of such Supreme Court ruling on the Corporation cannot be determined at this time. The United States Supreme Court will hear oral arguments relating to the constitutionality of the Health Care Reform Law s individual mandate in March of 2012, with a decision expected to be handed down in June Since the November 2010 elections, certain political leaders have announced their intention to proceed with legislation to repeal or amend provisions of the Health Care Reform Law. Attempts to repeal provisions of the Health Care Reform Law are pending in Congress while the constitutionality of the Health Care Reform Law continues to be challenged in the courts. The ultimate outcomes of legislative attempts to repeal or amend the Health Care Reform Law and legal challenges to the Health Care Reform Law are unknown. The Health Care Reform Law also contains more than thirty-two sections related to health care fraud and abuse and program integrity as well as significant amendments to existing criminal, civil and administrative anti-fraud statutes. See Anti-Fraud and Abuse Laws below. Increased compliance and regulatory requirements, disclosure and transparency obligations, quality of care expectations and extraordinary enforcement provisions that could greatly increase potential legal exposure are all aspects of the Health Care Reform Law that could increase operating expenses to the Corporation. Some provisions of the Health Care Reform Law took effect immediately, while others will be phased in over time, ranging from a few months following final approval to ten years. Given the general complexity of the Health Care Reform Law, additional legislation is likely to be considered and enacted over time. The Health Care Reform Law will also require the promulgation of substantial regulations with significant effects on the health care industry and third-party payors. In response, third-party payors as well as suppliers and vendors of goods and services to health care providers are expected to impose new contractual terms and conditions. Thus, the health care industry will be subjected to significant new statutory and regulatory requirements as well as contractual terms and conditions, and consequently to structural and operational changes and challenges, for a substantial period of time. Management of the Corporation is analyzing the Health Care Reform Law and will continue to do so in order to assess the effects of the legislation and/or regulations on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation or promulgated regulations. -13-

24 Federal Privacy Laws. Title XIII of the Recovery Act, otherwise known as the Health Information Technology for Economic and Clinical Health Act (the HITECH Act ), provides for an investment of almost $20 billion in public monies for the development of a nationwide health information technology ( HIT ) infrastructure. The HIT infrastructure is intended to improve health care quality, reduce health care costs and facilitate access to necessary information. Among other things, the HITECH Act provides financial incentives (through the Medicaid and Medicare programs), as well as loans and grants to encourage practitioners and providers to adopt and use qualified electronic health records. Eventually, Medicare and Medicaid payments will be reduced for providers and practitioners who do not use electronic health records. The HITECH Act has also significantly increased fines and the scope of remedies for violations of the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) (described below) and breaches of the security of electronic health records. If certain procedures and technologies are not in place, the HITECH Act requires disclosure to affected individuals, news media and HHS in the event security of protected information is breached. Criminal penalties are enforceable against persons who obtain or disclose protected health information without authorization. In addition, a state s attorney general can bring civil actions against a person on behalf of residents adversely affected by violations of either HIPAA or the HITECH Act. The Attorney General can either seek to enjoin further violations or obtain money damages on behalf of the residents harmed. HHS is beginning to perform periodic audits of health care providers to ensure that required policies under the HITECH Act are in place. Individuals harmed by violations of HIPAA or the HITECH Act will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods to be established by HHS for this private recovery in the next few years. The HITECH Act also increases penalties for violations of HIPAA and provides for enforcement of HIPAA violations by state attorneys general. Any violation of the HITECH Act is subject to HIPAA civil and criminal penalties. The effect of the Recovery Act, including the HITECH Act, on the Corporation cannot be determined at this time. In addition, there is no guarantee that the financial incentives for adopting qualified electronic health records systems will be sufficient to offset the Corporation s costs for development and implementation of such a system. HIPAA addresses the confidentiality of individuals health information. HIPAA requires the establishment of distinct privacy and security protections for individually identifiable health information. HHS promulgated privacy regulations under HIPAA that protect patient medical records and other personal health information maintained by health care providers, hospitals, health plans, health insurers and health care clearinghouses (the Privacy Regulations ). Management of the Corporation believes that its operations and information systems comply with the Privacy Regulations. Security regulations have also been promulgated under HIPAA (the Security Regulations ). Additionally, HHS promulgated regulations to standardize the electronic transfer of information pursuant to certain enumerated transactions (the Code Set Transactions ). Management of the Corporation believes that all of its health care facilities are in substantial compliance with the Security Regulations and the Code Set Transactions. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of HIPAA and related regulations or authorized by the patient. HIPAA s privacy and security provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability. -14-

25 Violations of HIPAA can result in civil monetary penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. Paired with violations of the HITECH Act, as described above, these penalties can be even higher, with civil penalties under the HITECH Act generally ranging from $100 to $50,000 per violation (with caps of $25,000 to $1.5 million for all violations of a single requirement in a calendar year) depending on the severity of the violation and the level of culpability involved. The HITECH Act also (i) extends the reach of HIPAA beyond covered entities, such as healthcare providers, plans and clearing-houses, to their business associates, (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) limits certain uses and disclosures of individually identifiable health information, (iv) restricts covered entities marketing communications and (v) permits imposition of civil monetary penalties for a HIPAA violation even if an entity did not know and would not, by exercising reasonable diligence, have known of a violation. Anti-Fraud and Abuse Laws. The federal law known as the Anti-Kickback Statute makes it a felony to knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in order to induce referrals for business that is reimbursable under any federal health care program. The Anti-Kickback Statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain or pay money for the referral of services or to induce further referrals. Violation of the Anti-Kickback Statute may result in imprisonment for up to five years and/or fines of up to $25,000 for each act. The Health Care Reform Law amended a number of provisions of the Anti-Kickback Statute. One such amendment provides that an Anti-Kickback Statute violation may be established without showing that an individual knew of the statute s proscriptions or acted with specific intent to violate the Anti-Kickback Statute. The new standard could significantly expand criminal and civil fraud exposure for transactions and arrangements where there is no intent to violate the Anti-Kickback Statute. The Health Care Reform Law further amended the Anti-Kickback Statute to explicitly provide that a violation of the statute constitutes a false or fraudulent claim under the federal False Claims Act (the FCA ). In addition to certain statutory exceptions to the Anti-Kickback Statute, the OIG has promulgated a number of regulatory safe harbors under the Anti-Kickback Statute designed to protect certain payment and business practices. The regulations do not purport to comprehensively describe all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources. While the failure to comply with a statutory exception or regulatory safe harbor does not mean that an arrangement is unlawful, such failure may increase the likelihood of a regulatory challenge or the potential for investigation. To date, a limited number of final safe harbors have been established. HIPAA created a new program operated jointly by HHS and the United States Attorney General to coordinate federal, state and local law enforcement with respect to fraud and abuse including the Anti- Kickback Statute. HIPAA also provides for minimum periods of exclusion from a federal health care program for fraud related to the federal health care programs, provides for intermediate sanctions and expands the scope of civil monetary penalties. As stated above, pursuant to amendments to the Anti- Kickback Statute in the Health Care Reform Law, an action that violates the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA, which prohibits the knowing presentation of a false, fictitious or fraudulent claim for payment to the United States government. Actions under the FCA may be brought by the United States Attorney General or as a qui tam action brought by a private individual in the name of the government. Pursuant to the mandates of HIPAA, the DRA and the HITECH Act, increased emphasis is being placed on federal investigations and prosecutions of Medicare and Medicaid fraud and abuse cases and -15-

26 increases in personnel investigating and prosecuting such cases have been reported, which will most likely result in a higher level of scrutiny of health care providers, including skilled nursing facilities. Management of the Corporation believes that the Corporation has used its best efforts to comply with the Anti-Kickback Statute. However, because of the breadth of those laws and the narrowness of the safe harbor regulations, there can be no assurance that regulatory authorities will not take a contrary position or that the Corporation will not be found to have violated the Anti-Kickback Statute. At the present time, Management of the Corporation is not aware of any pending or threatened claim, investigation or enforcement action regarding the Anti-Kickback Statute, if determined adversely to the Corporation, would have a material adverse effect on the Corporation s financial condition. Another federal law known as the Stark Law prohibits, subject to limited exceptions, a physician who has a financial relationship or whose immediate family has a financial relationship, with entities (including skilled nursing facilities) providing designated health services from referring Medicare patients to these entities for the furnishing of designated health services. The Stark Law defines designated health services as including: physical therapy services, occupational therapy services, radiology or other diagnostic services (including MRIs, CT scans and ultrasound procedures), durable medical equipment, radiation therapy services, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient prescription drugs, inpatient and outpatient hospital services and clinical laboratory services. The Stark Law also prohibits the entity receiving the referral from filing a claim or billing for the services arising out of the prohibited referral. The prohibition applies regardless of the reasons for the financial relationship and the referral; no finding of intent to violate the Stark Law is required. Sanctions for violation of the Stark Law include denial of payment for the services provided in violation of the prohibition, refunds of amounts improperly collected, a civil penalty of up to $15,000 for each service arising out of the prohibited referral, exclusion from participation in the federal health care programs and a civil penalty of up to $100,000 against parties that enter into a scheme to circumvent the Stark Law s prohibition. Under an emerging legal theory, violations of the Stark Law may also serve as the basis for liability under the FCA. The types of financial arrangements between a physician (or a physician s immediate family member) and an entity that trigger the self-referral prohibitions of the Stark Law are broad and include ownership and investment interests and compensation arrangements as well as certain disclosure obligations. Regulations promulgated under the Stark Law are subject to frequent amendment. Such amendments are likely to require the Corporation to amend or terminate certain arrangements with physicians to comply with new regulatory requirements. Although the Stark Law only applies to Medicare, a number of states (including Arizona) have passed similar statutes pursuant to which similar types of prohibitions are made applicable to all other health plans or third-party payors. Although management of the Corporation believes that its arrangements with physicians do not violate the Stark Law, as currently interpreted, there can be no assurance that regulatory authorities will not take a contrary position or that the Corporation will not be found to have violated the Stark Law. Sanctions under the Stark Law, including exclusion from the Medicare and Medicaid programs, could have a material adverse effect on the financial condition and results of operations of the Corporation, as would any significant penalties, demands for refunds or denials of payment. False Claims Laws. There are principally three federal statutes addressing the issue of false claims. First, the civil FCA imposes civil liability (including substantial monetary penalties and damages) on any person or corporation that (1) knowingly presents or causes to be presented a false or -16-

27 fraudulent claim for payment to the United States government; (2) knowingly makes, uses or causes to be made or used a false record or statement to obtain payment; or (3) engages in a conspiracy to defraud the federal government by getting a false or fraudulent claim allowed or paid. A showing of specific intent to defraud the federal government is not required to establish the requisite knowledge. Knowingly is broadly defined to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts. This statute authorizes private persons to file qui tam actions on behalf of the United States. Because qui tam lawsuits are kept under seal while the federal government evaluates whether the United States will join the lawsuit, it is impossible to determine at this time whether any such actions are pending against the Corporation and no assurances can be made that such actions will not be filed in the future. The Fraud and Enforcement and Recovery Act ( FERA ), signed into law on May 20, 2009, has the potential to expand exposure under the civil FCA for a wide range of business transactions involving federal government funds. Pursuant to FERA amendments, the civil FCA may impose liability for false claims with more remote connections to the federal government. FERA has the effect of expanding liability for the retention of money owed to the government, including overpayments by Medicare. The Health Care Reform Law requires a person who receives an overpayment to report and repay the overpayment within 60 days after the overpayment is identified or the date any corresponding cost report is due, whichever is later. The Health Care Reform Law defines overpayments as any funds that a person receives or retains under Medicare or Medicaid to which the person, after applicable reconciliation is not entitled. Failure to repay any overpayment within the deadline could lead to liability under the FCA. In addition, the Health Care Reform Law, among other changes to the civil FCA, eliminates the public disclosure bar (which previously required dismissal of a qui tam suit where the allegations were publicly disclosed in (i) a criminal, civil or administrative proceeding, (ii) a congressional, administrative or U.S. Government Accountability Office report, hearing, audit or investigation, or (iii) news media) as a jurisdictional defense to qui tam suits. In addition to the civil FCA, the Civil Monetary Penalties Law authorizes the imposition of substantial civil money penalties against an entity that engages in activities including, but not limited to, (1) knowingly presenting or causing to be presented, a claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a patient; (3) offering or giving remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary; (6) using a payment intended for a federal health care program beneficiary for another use; or (7) knowingly making or causing to be made a false statement, omission or misrepresentation of material fact in any application, bid or contract to participate in a federal health care program. The Secretary of HHS, acting through the OIG, also has both mandatory and permissive authority to exclude individuals and entities from participation in federal health care programs pursuant to this statute. In addition, pursuant to HIPAA, the commission of either one of the prohibited practices listed below may lead to civil monetary penalties: (1) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate, i.e., upcoding and (2) engaging in a practice of submitting claims for payment for medically unnecessary services. Violation of such prohibited practices could amount to civil monetary penalties of up to $10,000 for each item or service involved. Management of the Corporation does not expect that the prohibited practices provisions of HIPAA will affect the Corporation in a material respect. -17-

28 Finally, it is a criminal federal health care fraud offense to: (1) knowingly and willfully execute or attempt to execute any scheme to defraud any health care benefit program; or (2) to obtain, by means of false or fraudulent pretenses, representations or promises any money or property owned or controlled by any health care benefit program. Penalties for a violation of this federal law include fines and/or imprisonment and a forfeiture of any property derived from proceeds traceable to the offense. The DRA provides financial incentives to states that pass similar false claims statutes or amend existing false claims statutes that track the FCA more closely with regard to penalties and rewards to qui tam relators. A number of states, including Arizona, have passed similar statutes expanding the prohibition against the submission of false claims to nonfederal third-party payors. Skilled nursing facilities in many states, including Arizona, also are subject to anti-kickback state laws (similar to the federal Anti-Kickback Statute or that are generally applicable anti-kickback or fraud laws). These prohibitions are similar in public policy and scope to the federal Anti-Kickback Statute and could pose the possibility of material adverse impact for the same reasons as the federal statutes. At the present time, management of the Corporation is not aware of any pending or threatened claims, investigations or enforcement actions regarding the FCA which, if determined adversely to the members of the Corporation, taken as a whole and taking into account current reserves, would have a material adverse effect on the financial condition of the Corporation. Budget Control Act. The Budget Control Act of 2011 (the Budget Control Act ) limits the federal government s discretionary spending caps at levels necessary to reduce expenditures by $917 billion from the current federal budget baseline between federal fiscal years 2012 and The Budget Control Act also created a new Joint Select Committee on Deficit Reduction (the Supercommittee ) tasked with making recommendations to further reduce the federal deficit by $1.5 trillion. Due to the Supercommittee s failure to act within the time specified in the Budget Control Act, the debt ceiling will be automatically raised and sequestration (across the board cuts) will be triggered in an amount necessary to achieve $1.2 trillion in savings. A wide range of spending is exempted from sequestration, including: Social Security, Medicaid, Veteran s benefits and pensions, federal retirement funds, civil and military pay, child nutrition, and other programs. However, Medicare is not exempted from sequestration. Medicare payments could be reduced in part as a result of these across the board spending reductions, limited to 2% of total program costs. Absent further Congressional action prior to January 1, 2013, the effective date of sequestration, the automatic spending cuts described above will be triggered. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts that are approved may have upon the Corporation. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If Medicare spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of the Corporation. Compliance. State licensing requirements are subject to change, and there can be no assurance that the Corporation will be able to maintain all licenses needed to operate its facilities as planned or that it will not incur substantial costs in doing so. Failure to comply with State licensing or certification requirements could result in the loss by the Corporation of the right to conduct all or a portion of its business. Further, the Corporation s facilities are subject to periodic inspection by governmental and other regulatory authorities to assure continued compliance with various standards and to provide for continued licensing under State law. -18-

29 From time to time, the Corporation may receive notices from State regulatory agencies relating to alleged deficiencies for failure to comply with components of the licensure regulations. While the Corporation will endeavor to comply with all applicable regulatory requirements, it may become subject from time to time to various sanctions and penalties resulting from deficiencies alleged by State survey agencies. While a State agency might threaten to revoke licensure in certain instances, management believes that the Corporation will not suffer any material adverse effect as a result of any such threats. There can be no assurance, however, that the Corporation will not be subject to sanctions and penalties in the future as a result of such actions. Other Government Regulation. The Corporation s facilities are and will continue to be subject to rules and regulations promulgated by various agencies and bodies of federal, State and local governments which have jurisdiction over such matters as health care, employment, safety, traffic and health. The impact of such rules and regulations on the Corporation s facilities is unknown and cannot be predicted. Future orders, pursuant to existing or subsequently enacted rules or regulations, may require the expenditure by the Corporation of substantial sums to effect compliance therewith. Development and Management The successful operation of the Village is heavily dependent upon the efforts of its management. The Corporation has contracted for management services with the Manager for the day-to-day operations of the Village. For more information, see Appendix A THE CORPORATION. General Risks of Long Term Care Facilities There are many diverse factors not within the Corporation s control that have a substantial bearing on the risks generally incident to the operation of its facilities. These factors include generally imposed fiscal policies, adverse use of adjacent or neighboring real estate, the ability to maintain the facilities, community acceptance of the facilities, changes in demand for the facilities, changes in the number of competing facilities, changes in the costs of operation of the facilities, changes in the laws of the State affecting long term care programs, the limited income of the elderly, changes in the long term care and health care industries, difficulties in or restrictions on the Corporation s ability to raise rates charged, general economic conditions and the availability of working capital. In recent years, a significant number of long term care facilities throughout the United States have defaulted on various financing obligations or otherwise have failed to perform as originally expected. There can be no assurance the Corporation s facilities will not experience one or more of the adverse factors that caused other facilities to fail. Many other factors may adversely affect the operation of facilities like the Corporation s facilities and cannot be determined at this time. Failure to Achieve Sufficient Occupancy and to Maintain Turnover or Occupancy; Uncertainty of Revenues The Corporation has no assets other than the Village and is not expected to have any revenues except for those derived from the operations of the Village. As noted above, except to the extent that the Series 2012 Bonds will be payable from the proceeds thereof or investment income thereon or, under certain circumstances, proceeds of insurance, each series of the Series 2012 Bonds will be payable solely from payments or prepayments to be made by the Corporation under the Loan Agreement. The ability of the Corporation to generate sufficient revenues to make such payments, in addition to other operating and capital expenses, is dependent, among other things, upon the ability of the Corporation to attract sufficient numbers of residents to its facilities. The ability of the Corporation to achieve and then to maintain substantial occupancy depends to some extent on factors outside its control. The success of the Corporation s facilities is dependent on numerous factors including, but not limited to, the maintenance of -19-

30 high future occupancy levels at the Corporation s facilities by eligible residents who will be able to pay the fees charged, the capabilities of the management of the facilities, the availability of alternative housing opportunities in the general area and future economic and other conditions that are unpredictable. Any of these factors may affect revenues and payments on the Series 2012 Bonds. No representation or assurance can be made that revenues will be realized by the Corporation in amounts sufficient to make the required payments on the Series 2012 Bonds. Malpractice Claims, General Liability Insurance and Litigation The operations of the Corporation may be affected by increases in the incidence of malpractice lawsuits against physicians, elder care facilities and care providers in general and by increases in the dollar amount of damage recoveries. These may result in increased insurance premiums and an increased difficulty in obtaining malpractice insurance. Insurance does not provide coverage for judgments for punitive damages. The Corporation insures against malpractice claims. No assurance can be given that present levels of coverage can be maintained in ensuing years or that the price of such future coverage will not increase substantially over prior periods. Litigation may also arise from the corporate and business activities of the Corporation, including from its status as an employer. Many of these risks would be covered by insurance, but some might not be. For example, certain antitrust claims, claims arising from wrongful termination, claims arising from physical harm or assault, including sexual molestation, business disputes and workers compensation claims may not be covered by insurance or other sources and may, in whole or in part, be a liability of the Corporation if determined or settled adversely. Nature of the Income of the Elderly A large percentage of the monthly income of the residents of the Corporation s facilities will be fixed income derived from pensions and Social Security. In addition, some future residents will be liquidating assets in order to pay the monthly and other fees. If, due to inflation or otherwise, substantial increases in fees are required to cover increases in operating costs, wages, benefits and other expenses, many residents may have difficulty paying or may be unable to pay such increased fees. The Corporation s inability to collect from residents the full amount of their payment obligations may jeopardize the ability of the Corporation to pay amounts due under the Loan Agreement. Sales of Homes Prospective residents of facilities of the Corporation may encounter difficulty in selling their current homes due to national and local economic conditions impairing the sale of residential real estate and, therefore, may not have sufficient assets to pay entrance fees and monthly fees. Certain Matters Relating to Enforceability of Security Interest in Gross Revenues The enforceability, priority and perfection of the security interest in Gross Revenues created under the Master Indenture and the ability to receive and realize on the same may be limited by a number of factors, including, without limitation: (i) provisions prohibiting the direct payment of amounts due to health care providers from Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under the contracts between the Corporation and third-party payors and present or future legal prohibitions against assignment; (iii) certain judicial decisions which cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of the Corporation or a future Member of the Obligated Group, to collect and retain accounts receivable from Medicare and other governmental programs; (iv) commingling of proceeds of accounts receivable with -20-

31 other moneys of future Members of the Obligated Group, if any, not so pledged under the Master Indenture; (v) statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; (vii) constructive trusts or equitable or other rights impressed or conferred thereon by a federal or state court in the exercise of its equitable jurisdiction; (viii) federal and state laws governing fraudulent transfers; (ix) federal bankruptcy laws that may affect the enforceability of the Master Indenture or the security interest in the Gross Revenues; (x) rights of third parties in Gross Revenues converted to cash and not in the possession of the Master Trustee; and (xi) claims that might arise if appropriate financing or continuation statements or amendments of financing statements are not filed in accordance with the Uniform Commercial Code of the State, as from time to time in effect. Accounts receivable of the Members of the Obligated Group which constitute Gross Revenues and are pledged as security under the Master Indenture may be sold if such sale is in accordance with the provisions of the Master Indenture. Any lien created under the Master Indenture on such accounts receivable would terminate and be immediately released upon any such sale with respect to any such accounts receivable so sold. Title Insurance; Limitations of Remedies under the Deed of Trust The Corporation will covenant to deliver, concurrently with the issuance of the Series 2012 Bonds, endorsements to the lender s title insurance policies in the name of the Master Trustee expected to be delivered at the time the Deed of Trust are executed and delivered to the Master Trustee. The face amount of the policies will be equal to the expected aggregate principal amount of Obligations Outstanding following the issuance of the Series 2012 Bonds and the Series 2012 Obligations. The Corporation is not required to obtain an increase in the amount of the policies in connection with the issuance of any additional Obligations subsequent to the issuance of the Series 2012 Obligations, and the title insurance policies will not pay any claim which exceeds the aggregate face amount of the policies. As described in SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE Security Interest in Gross Revenues and the Deed of Trust, the Arizona Director of Insurance has a lien on the real property and facilities that will be subordinated to the Deed of Trust upon issuance of the Series 2012 Bonds. The practical realization of value from the real property subject to the Deed of Trust upon any default will depend on the exercise of the remedies specified under the Deed of Trust, principally, foreclosure. Under Arizona law, however, the remedies specified in the Deed of Trust may not be readily available or may be limited. Other statutory provisions (such as the federal bankruptcy laws) also may have the effect of delaying enforcement of the lien and security interest under the Deed of Trust in the event of a default by the Corporation. The real property subject to the Deed of Trust consists primarily of a skilled nursing facility, housing for seniors and related facilities having limited potential uses. If the Master Trustee were to take possession of the property subject to the Deed of Trust pursuant to exercise of its remedies under the Deed of Trust, the number of persons who would be interested in purchasing the property likely would be limited. As a result, the ability of the Master Trustee to realize value from such property would be limited. Accordingly, upon an Event of Default and foreclosure or similar remedy under the Deed of Trust, the Master Trustee may not be able to realize an amount sufficient to satisfy all obligations secured by the Deed of Trust. Enforceability of Remedies; Prior Claims The Series 2012 Bonds are secured by an assignment by the Authority to the Bond Trustee of certain rights under the Loan Agreement (except as provided therein). The practical realization of the -21-

32 value of the property on which the Corporation s facilities are located upon any default will depend upon the exercise of various remedies specified by the Loan Agreement and the Bond Indenture. These and other remedies may require judicial actions, which are often subject to discretion and delay. Under existing law (including, without limitation, the Bankruptcy Code), the remedies specified by the Loan Agreement may not be readily available or may be limited. The various opinions to be delivered concurrently with the delivery of the Loan Agreement will be qualified as to the enforceability of the various legal instruments by, among others, limitations imposed by state and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws affecting the enforcement of creditors rights generally. Rate Setting Future legislative proposals granting full or partial rate fixing authority to a State or federal agency could prevent the Corporation from increasing rates adequately to cover potential increases in its operating costs or other expenses. In addition, proposed legislation, if enacted, would limit the frequency of rate increases imposed by long term care facilities and the ability to assess separate charges for items and services not authorized in the initial admission agreement. Factors that Could Affect the Validity or Value of the Lien Against the Corporation s Revenues and the Enforceability of the Loan Agreement and Legal Opinions The legal right and practical ability of the Bond Trustee to enforce the rights and remedies under the Loan Agreement and of the Master Trustee to enforce the rights and remedies under the Master Indenture may be limited by laws relating to bankruptcy (see Bankruptcy directly following), insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors rights. The enforcement of such rights and remedies will also depend upon the exercise of various remedies specified by such documents which may in many instances require judicial actions that are often subject to discretion and delay or that otherwise may not be readily available or may be limited. Under Arizona law, the assets of the Corporation are subject to control by the Director of Insurance of the State of Arizona (the Director of Insurance ), which possesses powers resembling those possessed by a trustee in bankruptcy. See Bankruptcy directly below. The Director of Insurance is required to apply to the Superior Court of Arizona for an order directing him to assume management and possession of the Corporation and the Village and to rehabilitate the Corporation to enable it to perform fully its life care contracts: (i) if the Director of Insurance receives notice from the Bond Trustee that the Corporation has failed to make timely repayment of amounts withdrawn from the Bond Reserve Fund; (ii) if the Director of Insurance has reason to believe that the Corporation is in a financially unsound or unsafe condition, or that its condition is such that it may be unable to perform fully its obligations under its life care contracts; or (iii) when the Corporation fails to implement the recommendations of a management consultant s report prepared at the request of the Director of Insurance or when it is obvious to the Director of Insurance that to obtain the services of a financial consultant to prepare such report or that such report if prepared would be futile. Arizona law vests in the Superior Court and the Director of Insurance substantial rights and powers with respect to the rehabilitation of the Corporation and the Village. The powers possessed by the Director of Insurance include, without limitation, power to take possession of the Corporation s property and assets, to preserve, protect and operate the Corporation and its property, to protect the residents of the Village, to perform all duties of the Corporation, to reject executory contracts to which the Corporation is a party, and to withdraw amounts from the statutory reserve for the purpose of rehabilitating the Village. The Superior Court is authorized to issue such orders as it may deem necessary to aid the Director of Insurance in the rehabilitation of the Corporation. If the Director of Insurance determines that further efforts to rehabilitate the Corporation are useless, the Director of Insurance may apply to the Superior Court for an order of liquidation and dissolution of the -22-

33 Corporation. For a more complete discussion, see Appendix A REGULATION OF THE FACILITIES OF THE CORPORATION. In addition, there exists common law authority and authority under certain statutes for the ability of the courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court s own motion or pursuant to a petition of the state Attorney General or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see the application of their funds to their intended charitable uses. The various legal opinions to be delivered concurrently with the execution and delivery of the Series 2012 Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by State and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors rights or the enforceability of certain remedies or document provisions. Bankruptcy In the event of bankruptcy of the Corporation or any future Obligated Group Member, the rights and remedies of the holders of the Series 2012 Bonds are subject to various provisions of the federal Bankruptcy Code. If an Obligated Group Member were to file a petition in bankruptcy, payments made by the Obligated Group Member during the 90-day (or perhaps one-year) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of the Obligated Group Member s liquidation. Security interests and other liens granted to a trustee and perfected during such preference period also may be avoided as preferential transfers to the extent such security interest or other lien secures obligations that arose prior to the date of such perfection. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Obligated Group Member and its property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of a trustee. If the bankruptcy court so ordered, the property of the Obligated Group Member, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of the Obligated Group Member despite any security interest of a trustee therein. The rights of the Bond Trustee or the Master Trustee to enforce its security interests and other liens it may have could be delayed during the pendency of the rehabilitation proceeding. An Obligated Group Member could file a plan for the adjustment of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. -23-

34 Competition and Possible Increased Competition The revenues and expenses associated with the operation of the Corporation s facilities will be affected by future events and conditions relating generally to, among other things, government regulations, third-party reimbursement programs, demand for services, the ability of the Corporation to provide the services required by residents, economic developments in the affected service areas, competition, rates and costs. The Corporation s facilities are subject to substantial competition from facilities providing similar or comparable services. Such competition likely will inhibit the extent to which the Corporation will be able to raise charges and maintain or increase admissions. There can be no assurance that additional competing facilities will not be constructed in the future. Increased competition from a wide variety of potential sources, including, but not limited to, other assisted living and retirement facilities, sheltered care facilities, residential supportive living facilities, continuing care retirement communities, skilled nursing facilities, nursing homes, inpatient and outpatient health care facilities, independent living facilities, home health services and others could adversely affect the utilization and/or revenues of the Corporation. For information regarding the potential competitors of the Corporation, see Appendix A SERVICE AREA COMPETITION AND MARKETING. Existing and potential competitors may not be subject to various restrictions applicable to the Corporation, and competition may, in the future, arise from new sources not currently anticipated or prevalent. Consequently, the utilization and revenues of the Corporation could be adversely affected thereby. Environmental Laws and Regulations There are potential risks relating to liabilities for environmental hazards with respect to the ownership or long-term leasing of any real property. If hazardous substances are found to be located on property, owners of such property may be held liable for costs and other liabilities related to the removal of such substances, which costs and liabilities could exceed the value of a facility. Management of the Corporation is not aware of any other pending or threatened claim, investigation or enforcement action regarding environmental issues which, if determined adversely to the Corporation, would have material adverse consequences. In the event such enforcement actions were initiated, the Corporation could be liable for the costs of removing or otherwise treating pollutants or contaminants located at its facilities. In addition, under certain environmental statutes, in the event an enforcement action was initiated, a lien could attach to one or more of the Corporation s facilities, which would adversely affect the Corporation s ability to generate revenues from the operation of the facilities sufficient to meet the debt service requirements with respect to the Series 2012 Bonds and the obligations of the Corporation under the Loan Agreement. Possible Future Changes to Accounting Policies and Procedures From time to time, accounting policies and procedures change as accounting principles that are generally accepted in the United States change. Such changes may cause a variation in the presentation of the financial information of the Corporation. There can be no assurance that any such changes would not have a material adverse impact on the Corporation s compliance with certain covenants contained in the Master Indenture. Additional Debt The Master Indenture permits the Obligated Group to incur Additional Indebtedness that may be equally and ratably secured with the Series 2012 Obligations. Any such additional parity indebtedness -24-

35 would be entitled to share ratably in security interest with the owners of the Series 2012 Obligations. Any moneys realized from the exercise of remedies in the event of a default by the Obligated Group could reduce the Historical Debt Service Coverage Ratio and could impair the ability of the Obligated Group to maintain its compliance with certain covenants described in Appendix C under the caption SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Rates and Charges; Debt Coverage. There is no assurance that, despite compliance with the conditions upon which Additional Indebtedness may be incurred at the time such debt is created, the ability of the Obligated Group to make the necessary payments to repay the Series 2012 Obligations may not be materially adversely affected upon the incurrence of Additional Indebtedness. See SECURITY FOR SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE. Lack of Marketability for the Series 2012 Bonds Although the Underwriter intends, but is not obligated, to make a market for the Series 2012 Bonds, there can be no assurance that there will be a secondary market for the Series 2012 Bonds, and the absence of such a market for the Series 2012 Bonds could result in investors not being able to resell the Series 2012 Bonds should they need to or wish to do so. Amendments to Bond Documents Certain amendments to the bond documents may be made without the consent of the owners of the Series 2012 Bonds and other amendments may be made with the consent of the owners of a majority in an aggregate principal amount of all outstanding Series 2012 Bonds. Such amendments could affect the security for the Series 2012 Bonds. Certain amendments may be made without the consent of the owners of the Series 2012 Bonds if the amendment does not materially adversely affect the interest of the owners of the Series 2012 Bonds. See Appendix C hereto. Other Considerations Reduced Demand. The reduced need for senior living services arising from future scientific advances, preventive medicine, home healthcare services, alternative delivery systems, changes in demographics, or a decline in the population or the economic condition of the service area of the Corporation s facilities may adversely affect the Corporation s revenues. Cost Increases. Cost increases without corresponding increases in revenues would result from, among other factors, increases in insurance premiums, increases in the salaries, wages and fringe benefits of employees, increases in costs associated with advances in medical technology or with inflation and future legislation which would prevent or limit the ability of the Corporation to increase revenues from operating its facilities or providing services. In addition, it is possible that the State of Arizona will pass legislation requiring certain tax-exempt organizations, such as the Corporation, to pay certain fees for municipal services, which may in turn increase the Corporation s operating costs. At present, many charitable organizations similar to the Corporation are not required to pay fees for municipal services in respect of such real property unless the fees represent user fees of general application. Furthermore, the Code places certain limitations on the ability to finance certain projects, invest bond proceeds and advance refund prior tax-exempt bond issues. These limitations may increase the interest costs for future borrowings by the Corporation. Governmental Approvals. The possible inability to obtain future governmental approvals to undertake projects necessary to remain competitive both as to rates and charges as well as quality and scope of care could adversely affect the operations of the Corporation. -25-

36 Natural Disasters. The occurrence of natural disasters, including earthquakes, floods, hurricanes and tornadoes, may damage the facilities operated by the Corporation or interrupt utility service to the facilities, otherwise impair the operations of the facilities, or the generation of revenues from the facilities. The Corporation may not be able to obtain insurance against all such hazards at commercially reasonable rates. Adverse Relations. Adverse community relations or publicity involving the Corporation s facilities could affect the demand for the services provided by the facilities, or the generation of revenues from the facilities. Other Legislation. Certain retirement communities, such as the Corporation s facilities, are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations that address, among other things, operations of facilities and properties owned or operated by nursing facilities. The Tax Relief and Health Care Act of 2006 (the TRHCA ) focuses on quality of care. Among the types of regulatory requirements faced by assisted living facilities are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos; requirements related to polychlorinated biphenyls and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the nursing facility; requirements for training employees in the proper handling and management of hazardous materials and wastes; and other requirements. The Corporation may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off of the property. Typical operations of senior living facilities include, to some extent, and in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. For this reason, operations of assisted living facilities are susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations or increase their cost or both; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other government agency actions. There can be no assurance that the Corporation will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Corporation. Other Factors. The occurrence of any of the following events, or other unanticipated events, could affect adversely the operations of the Corporation: (a) (b) (c) (d) (e) (f) (g) shortages of personnel rendering services at senior living facilities and nursing facilities; shortages in nursing staff; reinstatement or establishment of mandatory wage or price controls; increases in the cost or limitations on the availability of insurance; expansion of programs paying or increasing payments for in-home care; employee strikes, other adverse labor actions or disputes with members of the professional staff; a decline in the population, a change in the age composition of the population or a decline in the economic conditions of the market area; or -26-

37 (h) increases in the cost of public utilities, including electricity, natural gas, water and sewer services. PLAN OF FINANCE General The Corporation will use the proceeds from the sale of the Series 2012 Bonds and other available funds to (i) refund the Prior Bonds, (ii) fund a debt service reserve fund for the Series 2012 Bonds, and (iii) pay certain expenses incurred in connection with the issuance of the Series 2012 Bonds and the refunding of the Prior Bonds. See ESTIMATED SOURCES AND USES OF FUNDS herein. Refunding of the Prior Bonds The Prior Bonds were issued primarily to finance and refinance an expansion of the Village that involved the construction of the Health Center to replace the previously existing skilled nursing facility, and the development of various areas of the campus. This expansion was completed in For a complete description of the expanded Village and the replacement Health Center, see Appendix A THE VILLAGE. Proceeds of the Series 2012 Bonds will be used to redeem the Prior Bonds. The proceeds of the Series 2012 Bonds will be deposited into one or more escrow accounts created under an Escrow Deposit Agreement dated as of March 1, 2012, between Wells Fargo Bank, N.A., as escrow agent and as bond trustee for the Prior Bonds (the Prior Bonds Trustee ), and the Corporation. Such funds will be held in cash or invested in direct obligations of the United States of America in accordance with the bond indenture under which the Prior Bonds were issued. The principal and interest on the funds in the escrow account(s) will be sufficient to pay the principal of and interest on the each series of the Prior Bonds when due or when tendered on or prior to the redemption date and to redeem the Prior Bonds on such date at the redemption price specified in the Escrow Deposit Agreement. Note 15 to the unaudited interim financial statements for the period ended November 30, 2011, attached as Appendix B, discusses the status of the letter of credit that supports a portion of the Prior Bonds (the $48,055,000 outstanding principal amount of the Authority s Senior Living Revenue Bonds (Friendship Village of Tempe Project), Series 2002C (the Series 2002C Bonds )). That letter of credit expires on July 2, The Series 2002C Bonds are expected to be redeemed on the closing date in accordance with the Escrow Deposit Agreement described in the prior paragraph. For further information, see MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS Refunding of the Prior Bonds and Expiration of the Letter of Credit in Appendix A hereto. Other Uses A portion of the proceeds of the Series 2012 Bonds will be used to fund the Bond Reserve Fund established under the Bond Indenture. See SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2012 BONDS Bond Reserve Fund herein. In addition, a portion of the proceeds of the Series 2012 Bonds will be used to pay costs of issuing the Series 2012 Bonds and costs of refunding the Prior Bonds. -27-

38 ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds, not including investment earnings, are as follows: Sources of Funds Principal amount of the Series 2012A Bonds $72,570,000 Principal amount of the Taxable Series 2012B Bonds 4,460,000 Net Original Issue Premium 356,983 Released funds from Prior Bonds 7,455,641 Total Sources of Funds $84,842,624 Uses of Funds Remit to Prior Bonds Trustee $77,597,814 Deposit to Bond Reserve Fund 5,416,563 Costs of Issuance (1) 1,828,247 Total Uses of Funds $84,842,624 (1) Includes underwriter s discount, legal, accounting, administrative and miscellaneous fees and expenses. -28-

39 ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS The following table sets forth the amounts required for the payment of principal of (including deposits to the Bond Sinking Fund) and interest on the Series 2012 Bonds for each Bond Year ending December 1. Bond Year Ending Series 2012A Bonds Taxable Series 2012B Bonds Total Debt December 1, Principal Interest Principal Interest Service $3,062,419 $535,000 $145,821 $3,743, ,427, , ,100 5,409, ,427, , ,500 5,413, ,427, , ,375 5,410, ,427, ,000 79,300 5,411, $410,000 4,427, ,000 30,656 5,413, ,005,000 4,411,194 5,416, ,055,000 4,360,944 5,415, ,105,000 4,308,194 5,413, ,165,000 4,250,181 5,415, ,225,000 4,187,563 5,412, ,295,000 4,120,188 5,415, ,370,000 4,042,488 5,412, ,455,000 3,960,288 5,415, ,540,000 3,872,988 5,412, ,635,000 3,780,588 5,415, ,730,000 3,682,488 5,412, ,835,000 3,578,688 5,413, ,945,000 3,468,588 5,413, ,060,000 3,351,888 5,411, ,185,000 3,228,288 5,413, ,315,000 3,097,188 5,412, ,460,000 2,952,500 5,412, ,615,000 2,798,750 5,413, ,780,000 2,635,313 5,415, ,955,000 2,461,563 5,416, ,135,000 2,276,875 5,411, ,335,000 2,080,938 5,415, ,540,000 1,872,500 5,412, ,765,000 1,651,250 5,416, ,000,000 1,415,938 5,415, ,250,000 1,165,938 5,415, ,515, ,313 5,415, ,795, ,125 5,413, ,095, ,438 5,413,438 Total $72,570,000 $110,050,563 $4,460,000 $731,752 $187,812,

40 THE SERIES 2012 BONDS General The Series 2012 Bonds will be issued pursuant to the Bond Indenture. The Series 2012 Bonds shall be issued as fully registered bonds in denominations of $5,000 and integral multiples thereof. Interest on the Series 2012 Bonds shall be calculated on a 360-day year basis of twelve 30-day months. The Series 2012 Bonds shall initially be dated the date of initial issuance of the Series 2012 Bonds, and interest thereon shall be payable on each Interest Payment Date. The Series 2012 Bonds will be subject to redemption prior to maturity, as more fully described herein. The proceeds of the Series 2012 Bonds will be loaned to the Corporation pursuant to the Loan Agreement. Payment of the Series 2012 Bonds The Series 2012 Bonds will be initially issued in single fully registered form and, when issued, will be registered in the name of Cede & Co., as nominee of the The Depository Trust Company, New York, New York ( DTC ). Individual purchases of interests in the Series 2012 Bonds will be made in book-entry form only, in authorized denominations. Purchasers of such interests will not receive certificates representing their interest in the Series 2012 Bonds except in the event that use of the bookentry system for the Series 2012 Bonds is discontinued as described below. So long as any Series 2012 Bond is registered in the name of Cede & Co., as nominee of DTC, or any successor thereto, the Bond Trustee will pay such principal of, premium, if any, and redemption price, if any, and interest on the Series 2012 Bonds to DTC, which will remit such principal, premium, if any, redemption price, if any, and interest to the beneficial owners of the Series 2012 Bonds, as described under the caption BOOK- ENTRY SYSTEM herein. In the event the book-entry system is discontinued, the Series 2012 Bonds shall no longer be restricted to being registered in the Bond Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Bondholders transferring or exchanging Series 2012 Bonds shall designate, subject to the limitations of the Bond Indenture. The principal of, premium, if any, and interest on the Series 2012 Bonds shall be payable in lawful money of the United States of America. Payment of the interest on any Series 2012 Bond shall be made on each Interest Payment Date to the registered owner thereof appearing on the Bond Register as of the close of business of the Bond Registrar on the Record Date by check or draft mailed on the Interest Payment Date to such registered owner at the address of such owner as it appears on the Bond Register or at such other address furnished in writing by such registered owner to the Bond Trustee, or by wire transfer sent on the Interest Payment Date to the registered owner upon written notice to the Bond Trustee from the registered owner containing the wire transfer address to which the registered owner wishes to have such wire directed which written notice is received not later than the Record Date prior to the Interest Payment Date. Redemption of the Series 2012 Bonds Optional Redemption. The Series 2012A Bonds are subject to redemption prior to maturity on or after December 1, 2021, at the option of the Authority upon direction of the Corporation out of amounts prepaid on Obligation No. 1 and deposited in the Optional Redemption Fund, in whole or in part at any time, and if in part by maturities or portions thereof designated by the Corporation (and if less than all of a single maturity is being redeemed, selected in such random manner as the Bond Trustee shall deem -30-

41 appropriate), at a redemption price equal to 100% of the principal amount of the Series 2012A Bonds to be redeemed plus accrued interest thereon to the date of redemption, without premium. The Taxable Series 2012B Bonds are subject to redemption prior to maturity on or after December 1, 2014, at the option of the Authority upon direction of the Corporation out of amounts prepaid on Obligation No. 2 and deposited in the Optional Redemption Fund, in whole or in part at any time, and if in part by maturities or portions thereof designated by the Corporation (and if less than all of a single maturity is being redeemed, selected in such random manner as the Bond Trustee shall deem appropriate), at a redemption price equal to 100% of the principal amount of the Taxable Series 2012B Bonds to be redeemed plus accrued interest thereon to the date of redemption, without premium. Extraordinary Redemption. In the event of damage to or destruction of the Property of any Member or any part thereof, or of condemnation or sale consummated under threat of condemnation to the Property of any Member or any part thereof, the Series 2012 Bonds are subject to redemption prior to their respective stated maturities by the Authority upon direction of the Corporation at any time, in whole or in part, and if in part by maturities or portions thereof designated by the Corporation (and if less than all of a single maturity is being redeemed, selected in such random manner as the Bond Trustee shall deem appropriate), at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date, without premium, from the proceeds of the insurance, condemnation or sale received in connection therewith, so long as such proceeds exceed $1,000,000 or three percent of the Obligated Group s assets, whichever is greater. Bond Sinking Fund Redemption. Subject to the terms and conditions set forth in the Bond Indenture, the Series 2012A Bonds maturing on December 1, 2027, are subject to redemption in part prior to their stated maturity by application of moneys on deposit in the Bond Sinking Fund, at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, without premium, in the amounts, and at the times, that follow: Series 2012A Bonds Maturing December 1, 2027 Redemption Date (December 1) Principal Amount 2023 $1,295, ,370, ,455, ,540, ,635,000 Maturity. Subject to the terms and conditions set forth in the Bond Indenture, the Series 2012A Bonds maturing on December 1, 2032, are subject to redemption in part prior to their stated maturity by application of moneys on deposit in the Bond Sinking Fund, at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, without premium, in the amounts, and at the times, that follow: -31-

42 Series 2012A Bonds Maturing December 1, 2032 Redemption Date (December 1) Principal Amount 2028 $1,730, ,835, ,945, ,060, ,185,000 Maturity. Subject to the terms and conditions set forth in the Bond Indenture, the Series 2012A Bonds maturing on December 1, 2042, are subject to redemption in part prior to their stated maturity by application of moneys on deposit in the Bond Sinking Fund, at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, without premium, in the amounts, and at the times, that follow: Series 2012A Bonds Maturing December 1, 2042 Redemption Date (December 1) Principal Amount 2033 $2,315, ,460, ,615, ,780, ,955, ,135, ,335, ,540, ,765, ,000,000 Maturity. Subject to the terms and conditions set forth in the Bond Indenture, the Series 2012A Bonds maturing on December 1, 2046, are subject to redemption in part prior to their stated maturity by application of moneys on deposit in the Bond Sinking Fund, at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, without premium, in the amounts, and at the times, that follow: Series 2012A Bonds Maturing December 1, 2046 Redemption Date (December 1) Principal Amount 2043 $4,250, ,515, ,795, ,095,000 Maturity. -32-

43 The foregoing payments shall be reduced (a) by the amount of Series 2012A Bonds acquired and delivered in accordance with the Bond Indenture in satisfaction of such Bond Sinking Fund requirements, and (b) in connection with a partial redemption of the Series 2012A Bonds if the Corporation elects to reduce mandatory Bond Sinking Fund redemptions in the manner provided in the Bond Indenture. In lieu of such mandatory Bond Sinking Fund redemption, the Bond Trustee may, at the request of the Corporation, purchase an equal principal amount of Series 2012A Bonds in the open market at prices not exceeding the principal amount of the Series 2012A Bonds being purchased plus accrued interest. In addition, the amount of Series 2012A Bonds to be redeemed on any date pursuant to the mandatory Bond Sinking Fund redemption schedule shall be reduced by the principal amount of Series 2012A Bonds assigned to such mandatory Bond Sinking Fund redemption date or to the period during which such Bond Sinking Fund redemption date occurs which are acquired by the Corporation and delivered to the Bond Trustee for cancellation. Mandatory Purchase in Lieu of Redemption. The Authority and each Bondholder, by purchase and acceptance of any Series 2012 Bond, irrevocably grants to the Corporation and its assigns the option to purchase such Series 2012 Bond at any time such Series 2012 Bond is subject to optional or extraordinary redemption as described above, at a purchase price equal to the then applicable redemption price of such Series 2012 Bond. No purchase of any Series 2012 Bond in lieu of redemption shall operate to extinguish the indebtedness of the Corporation evidenced by such Series 2012 Bond. No Bondholder may elect to retain a Series 2012 Bond subject to mandatory purchase in lieu of redemption. Notice of Redemption. Notice of redemption shall be given by electronic means and by firstclass mail by the Bond Trustee, not less than 30 days and not more than 60 days prior to the redemption date, to the registered owners of all Series 2012 Bonds designated for redemption at their addresses appearing on the bond registration books of the Bond Trustee. Each notice of redemption shall state the redemption date, the redemption price, the place and manner of payment and that from the redemption date interest will cease to accrued on the Series 2012 Bonds which are the subject of such notice. If any Series 2012 Bonds are to be redeemed pursuant to extraordinary or optional redemption as described above, the notice of redemption may specify that the redemption is contingent on the deposit of moneys with the Bond Trustee in an amount sufficient to pay the redemption price of the Series 2012 Bonds being redeemed on that date. Failure by the Bond Trustee to give notice as prescribed above, or the insufficiency of any such notice, shall not affect the validity of the proceedings for redemption for any Series 2012 Bond with respect to which notice was properly given. Effect of Redemption. Notice of redemption having been duly given as aforesaid, and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Series 2012 Bonds (or portions thereof) so called for redemption being held by the Bond Trustee, on the redemption date designated in such notice, the Series 2012 Bonds (or portions thereof) so called for redemption shall become due and payable at the redemption price specified in such notice and interest accrued thereon to the redemption date, interest on the Series 2012 Bonds (or portions thereof) so called for redemption shall cease to accrue, said Series 2012 Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Bond Indenture, and the holders of said Series 2012 Bonds shall have no rights in respect thereof except to receive payment of said redemption price and interest accrued to the date fixed for redemption from funds held by the Bond Trustee for such payment. Transfer and Exchange of Bonds; Persons Treated as Owners The Authority, at the direction and in reliance upon the Corporation, shall cause the Bond Register to be kept by the Bond Trustee at the designated corporate trust office of the Bond Trustee. Upon surrender for transfer of any Series 2012 Bond at designated corporate trust office of the Bond -33-

44 Trustee, the Authority shall execute and the Bond Trustee shall authenticate and deliver in the name of the transferee or transferees a new Series 2012 Bond of the same series in Authorized Denominations, for the same aggregate principal amount and of like tenor. Any Series 2012 Bond may be exchanged at said office of the Bond Trustee for a like aggregate principal amount of Series 2012 Bond of other Authorized Denominations of the same series and of like tenor. The execution by the Authority of any Series 2012 Bond shall constitute full and due authorization of such Series 2012 Bond, and the Bond Trustee shall thereby be authorized to authenticate, date and deliver such Series 2012 Bond. The Authority and the Bond Trustee may charge each Bondholder requesting an exchange, change in registration or registration of transfer a sum not exceeding the actual cost of any tax, fee or other governmental charge required to be paid with respect to such exchange, registration or transfer, except in the case of the issuance of a definitive Series 2012 Bond for a temporary Series 2012 Bond and except in the case of the issuance of a Series 2012 Bond for the unredeemed portion of a Series 2012 Bond surrendered for redemption or tendered for purchase pursuant to the provisions of the Bond Indenture governing payment by the Authority of the entire indebtedness of all Series 2012 Bonds outstanding. The Person in whose name any Series 2012 Bond shall be registered shall be deemed and regarded as the absolute owner thereof for the purpose of receiving payment of or on account of principal thereof and premium, if any, thereon and interest due thereon and for all other purposes, and payment of or on account of the principal of, premium, if any, and interest thereon, and neither the Authority nor the Bond Trustee shall be affected by any notice to the contrary, but such registration may be changed as herein provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Series 2012 Bond to the extent of the sum or sums so paid. SECURITY AND SOURCE OF PAYMENT FOR THE SERIES 2012 BONDS Pledge under the Bond Indenture The Series 2012 Bonds are limited obligations of the Authority, payable by the Bond Trustee from the amounts pledged under the Bond Indenture for such payment. Under the Bond Indenture, and subject to and for the purposes of and under the terms and conditions set forth therein, all amounts (including proceeds of the sale of the Series 2012 Bonds) held in any fund or account established pursuant to the Bond Indenture (but not including the Rebate Fund) are pledged to secure the full payment of the principal of, premium, if any, and interest on the Series 2012 Bonds in accordance with their terms and the provisions of the Bond Indenture. Under the Bond Indenture, the Authority will assign its right, title and interest in the Loan Agreement and the Series 2012 Obligations to the Bond Trustee. Bond Reserve Fund Pursuant to the Bond Indenture, a Bond Reserve Fund shall be established and held by the Bond Trustee for the benefit of the Series 2012 Bonds. At the time of issuance of the Series 2012 Bonds, approximately $5,416,563 will be deposited into the Bond Reserve Fund from proceeds of the Series 2012 Bonds. The Corporation shall maintain in the Bond Reserve Fund at all times an amount equal to the Bond Reserve Fund Requirement, which is defined in the Bond Indenture as the lowest of (i) Maximum Annual Bond Service on the Series 2012 Bonds, (ii) 125% of average annual debt services on the Series 2012 Bonds, and (iii) 10% of the sale proceeds of the Series 2012 Bonds. Moneys in the Bond Reserve Fund shall be invested in Qualified Investments maturing on or prior to the date or dates that -34-

45 moneys therefrom are anticipated to be required. Qualified Investments in the Bond Reserve Fund shall be valued by the Bond Trustee on the basis of fair market value, exclusive of accrued interest, on the first Business Day of each Fiscal Year (the Valuation Date ). If on any Valuation Date the amount on deposit in the Bond Reserve Fund is less than 90% of the Bond Reserve Fund Requirement as a result of a decline in the market value of investments on deposit in the Bond Reserve Fund, the Loan Agreement requires the Corporation to deposit in the Bond Reserve Fund the amount necessary to restore the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement within 120 days following the date on which the Corporation receives notice of such deficiency. If at any time the amount on deposit in the Bond Reserve Fund is less than 100% of the Bond Reserve Fund Requirement as a result of the Bond Reserve Fund having been drawn upon, the Loan Agreement requires the Corporation to restore the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement by the deposit with the Bond Trustee of an amount equal to such deficiency in not more than 12 substantially equal monthly installments beginning with the first day of the seventh month after the month in which such draw occurred. The Bond Reserve Fund will serve as the statutorily-required fund for purposes of the Arizona Director of Insurance. See Appendix A REGULATION OF THE FACILITIES OF THE CORPORATION. For more information concerning the Bond Reserve Fund, see SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE Funds and Investment of Funds in Appendix C. The Loan Agreement The Loan Agreement provides that the Authority shall loan the proceeds of the Series 2012 Bonds to the Corporation and that the Corporation shall repay such loan by making payments to the Bond Trustee in amounts sufficient to pay the principal of, premium, if any, and interest on the Series 2012 Bonds when due. The Authority will pledge and assign certain of its rights under the Loan Agreement to the Bond Trustee as security for the Series 2012 Bonds. For more information on the Loan Agreement, see SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT in Appendix C hereto. The Series 2012 Obligations under the Master Indenture The Corporation, on behalf of itself and the other Members, will deliver to the Bond Trustee the Series 2012 Obligations to secure the Corporation s obligations to pay the principal and interest on the Series 2012 Bonds under the Loan Agreement. The Series 2012 Obligations will be issued pursuant to the First Supplemental Master Indenture. For further information concerning the security for the Series 2012 Obligations, see the information under the caption SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE below. Repayment THE SERIES 2012 BONDS AND THE INTEREST THEREON ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE EXCLUSIVELY FROM REVENUES, RECEIPTS AND OTHER FUNDS HELD UNDER THE BOND INDENTURE AND THE LOAN AGREEMENT. THE SERIES 2012 BONDS DO NOT CONSTITUTE A DEBT OR A LOAN OF CREDIT OR A PLEDGE OF THE FULL FAITH AND CREDIT OR TAXING POWER OF THE AUTHORITY, THE CITY OF TEMPE OR THE STATE, OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN -35-

46 THE MEANING OF ANY STATE CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE STATE OR THE CITY. THE SERIES 2012 BONDS SHALL NOT CONSTITUTE, DIRECTLY OR INDIRECTLY, OR CONTINGENTLY OBLIGATE OR OTHERWISE CONSTITUTE A GENERAL OBLIGATION OF OR A CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY, BUT SHALL BE SPECIAL, LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM THE SOURCES DESCRIBED IN THE BOND INDENTURE BUT NOT OTHERWISE. THE AUTHORITY HAS NO TAXING POWER. SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE Joint and Several Obligations Under the Master Indenture, Obligations may be issued subject to the terms, conditions and limitations established in the Master Indenture and any Supplemental Master Indenture. The Obligated Group Members will be jointly and severally liable with respect to the payment of each Obligation incurred under the Master Indenture. The Series 2012 Obligations will be issued by the Corporation, as the Obligated Group Representative, under the Master Indenture and pursuant to the First Supplemental Master Indenture. All Obligated Group Members are required to make payments on Obligation No. 1 in an amount sufficient to pay the principal of or premium, if any, and interest on the Series 2012A Bonds, and on Obligation No. 2 in an amount sufficient to pay the principal of or premium, if any, and interest on the Taxable Series 2012B Bonds. The Corporation will be the sole Obligated Group Member upon issuance of the Series 2012 Bonds. For a discussion of entry into or withdrawal from the Obligated Group, see Appendix C SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE MEMBERSHIP IN THE OBLIGATED GROUP and WITHDRAWAL FROM THE OBLIGATED GROUP. Additional Indebtedness; Additional Obligations Subject to compliance with the provisions of the Master Indenture, the Members of the Obligated Group may in the future incur Indebtedness (including Guaranties) which may, but need not, be evidenced or secured by an additional Obligation issued under the Master Indenture. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Limitations on Additional Indebtedness. Any such additional Obligation shall, except as described herein, be equally and ratably secured on a parity with the Obligations then outstanding under the Master Indenture, including the Series 2012 Obligations. Subject to certain conditions set forth in the Master Indenture, such additional Obligations and other Additional Indebtedness may be secured by security in addition to that provided for the Series 2012 Obligations, including Liens on the Property of the Obligated Group, which additional security or Liens need not be extended to any other Indebtedness (including, without limitation, the Series 2012 Obligations). See the information set forth under the captions DEFINITIONS OF CERTAIN TERMS Permitted Encumbrances and SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE LIMITATIONS ON ENCUMBRANCES, Sale, Lease or Other Disposition of Property in APPENDIX C. The restrictions on the creation of Liens on Property and the transfer of Property imposed on the Obligated Group under the Master Indenture are not applicable to Excluded Property. See DEFINITIONS OF CERTAIN TERMS EXCLUDED PROPERTY in APPENDIX C. -36-

47 Security Interest in Gross Revenues and the Deed of Trust The Series 2012 Obligations will be secured by (i) a security interest in the Gross Revenues of the Obligated Group granted pursuant to the Master Indenture and (ii) a lien and security interest in the Trust Property pursuant to the Deed of Trust. The Trust Property consists of the facilities owned by the Corporation, including the Village, and the real estate on which it is located. The total book value of the Trust Property constitutes approximately 100% of the book value of all property, plant and equipment of the Corporation as of February 1, There can be no assurance that the book value of the Trust Property would be realized upon its disposition or at foreclosure. In the future, the value of the Trust Property could be substantially less than the principal amount of Obligations outstanding under the Master Indenture. Upon the issuance of the Series 2012 Bonds, the Obligated Group will deliver title insurance policies with respect to the Trust Property for the benefit of the Master Trustee. See SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Pledge of Gross Revenues, and SUMMARY OF CERTAIN PROVISIONS OF THE DEED OF TRUST in APPENDIX C and BONDHOLDERS RISKS Title Insurance; Limitations of Remedies under the Deed of Trust herein. As required by Arizona law, the Director of Insurance has perfected the Insurance Lien for the benefit of all residents of the Village to secure performance of the Corporation s obligation to residents under the Residency Agreements. The Insurance Lien is for the benefit of the residents and for an amount equal to the reasonable value of services to be performed under the Residency Agreements and may be foreclosed by civil action. In the event of foreclosure, any property subject to the Insurance Lien is required to be sold to satisfy the judgment. The Corporation would need prior approval of the Director of Insurance to increase the amount secured. As permitted by Arizona law, the Insurance Lien will be subordinated to the lien of the Deed of Trust prior to the delivery of the Series 2012 Bonds. See Appendix A REGULATION OF FACILITIES OF THE CORPORATION. The Series 2012 Obligations will be issued pursuant to the Master Indenture and will be general obligations of the Corporation and each future Obligated Group Member, if any, under the Master Indenture and secured by a security interest in the Gross Revenues of the Obligated Group pursuant to the Master Indenture. Gross Revenues are defined as all receipts, revenues, income and other money received by or on behalf of any Member of the Obligated Group from any source whatsoever, including, but not limited to, (a) revenues derived from the operation and possession of each Member s facilities, including accounts receivable, (b) gifts, bequests, grants, donations and contributions, exclusive of any gifts, bequests, grants, donations or contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Required Payments or for the payment of operating expenses, and (c) revenues derived from (1) condemnation proceeds, (2) inventory and other tangible and intangible property, (3) private and governmental health care reimbursement programs and agreements, (4) insurance proceeds, (5) contract rights and other rights now or hereafter owned by each Member, and (6) realized investment earnings. The pledge of Gross Revenues will be perfected to the extent and only to the extent that such security interest may be perfected by control as provided in the Uniform Commercial Code of the State of Arizona. It may not be possible to perfect a security interest in any manner whatsoever in certain types of Gross Revenues (e.g., gifts, donations, certain insurance proceeds and Medicare payments) prior to actual receipt by the Corporation for deposit into the Gross Revenue Fund. Notwithstanding such security interest in the Obligated Group s Gross Revenues, the Members of the Obligated Group may sell or otherwise transfer Gross Revenues and create Permitted Encumbrances -37-

48 thereon, in accordance with the provisions of the Master Indenture. See APPENDIX C DEFINITIONS OF CERTAIN TERMS Permitted Encumbrances. Also see BONDHOLDERS RISKS Certain Matters Relating to Enforceability of Security Interest in Gross Revenues. Rates and Charges; Debt Coverage Each Obligated Group Member covenants in the Master Indenture to fix, charge and collect rates for the use of its facilities and for the services furnished so that the Long-Term Debt Service Coverage Ratio of the Obligated Group as a whole meets the standards set forth in the Master Indenture and summarized herein. The Members covenant and agree that the Obligated Group Representative shall compute the Long-Term Debt Service Coverage Ratio and promptly furnish to the Required Information Recipients a Certificate setting forth the results of such computation. If the Long-Term Debt Service Coverage Ratio of the Obligated Group is less than 1.20:1, the Master Trustee shall require the Obligated Group to retain an Independent Consultant to make recommendations with respect to the rates, fees and charges of the Obligated Group and the Obligated Group s methods of operation and other factors affecting its financial condition in order to increase such Long-Term Debt Service Coverage Ratio to at least 1.20:1 for the following Fiscal Year. A copy of the Independent Consultant s report and recommendations, if any, shall be filed with the Required Information Recipients within 60 days of retaining such Independent Consultant. Each Member shall follow each recommendation of the Independent Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law. This provision of the Master Indenture shall not be construed to prohibit any Member from serving indigent patients or residents to the extent required for such Member to continue its qualification as a Tax-Exempt Organization or from serving any other class or classes of patients or residents without charge or at reduced rates so long as such service does not prevent the Obligated Group from satisfying the requirements of the Master Indenture. The foregoing notwithstanding, failure of the Obligated Group to achieve the required Long- Term Debt Service Coverage Ratio for any Fiscal Year shall not constitute an Event of Default under the Master Indenture if the Obligated Group takes all action necessary to comply with the procedures set forth above for preparing a report and adopting a plan and follows each recommendation contained in such report or plan to the extent feasible (as determined by the Governing Body of the Obligated Group Representative) and permitted by law; provided, however, that it shall be an Event of Default under the Master Indenture if the Obligated Group fails to achieve a Long-Term Debt Service Coverage Ratio of at least 1.00:1. See SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Rates and Charges; Debt Coverage in APPENDIX C. Liquidity Covenant The Obligated Group covenants that it will calculate the Days Cash on Hand of the Obligated Group as of June 30 and December 31 of each fiscal year (each such date being a Testing Date ). The Obligated Group shall include such calculations in the Officer s Certificates delivered pursuant to the Master Indenture. Each Obligated Member are required to conduct their business so that on each Testing Date the Obligated Group shall have not less than 150 Days Cash on Hand for each Testing Date. -38-

49 If the amount of Days Cash on Hand as of any Testing Date is less than 150, the Obligated Group Representative shall, within 30 days after receipt of the Officer s Certificate disclosing such deficiency, deliver an Officer s Certificate approved by a resolution of the Governing Body of the Obligated Group Representative to the Master Trustee setting forth in reasonable detail the reasons for such deficiency and adopting a specific plan setting forth steps to be taken designed to achieve the required level of Days Cash on Hand for future periods. If the Obligated Group has not achieved 150 Days Cash on Hand by the next Testing Date following delivery of the Officer s Certificate required in the preceding paragraph, the Obligated Group Representative shall, within 30 days after receipt of the Officer s Certificate disclosing such deficiency, retain an Independent Consultant to make recommendations with respect to the rates, fees and charges of the Obligated Group and the Obligated Group s methods of operation and other factors affecting its financial condition in order to increase the Days Cash on Hand to the required level for future periods. A copy of the Independent Consultant s report and recommendations, if any, shall be filed with each of the Required Information Recipients within 60 days of the date such Independent Consultant is retained. Each Member of the Obligated Group shall follow each recommendation of the Independent Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of the Member) and permitted by law. Notwithstanding any other provision of the Master Indenture, failure of the Obligated Group to achieve the required liquidity covenant for any fiscal year shall not constitute an Event of Default under the Master Indenture if the Obligated Group takes all action necessary to comply with the procedures set forth above for preparing a report and adopting a plan and follows each recommendation contained in such report to the extent feasible (as determined by the Governing Body of the Obligated Group Representative) and permitted by law. See SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Liquidity Covenant in APPENDIX C. Approval of Consultants If at any time the Obligated Group Representative is required to engage an Independent Consultant under the Master Indenture relating to the Rate Covenant or Liquidity Covenant, the Independent Consultant shall be engaged in the manner set forth below. Upon selecting an Independent Consultant as required under this Master Indenture, the Obligated Group Representative will notify the Master Trustee of the selection. The Master Trustee shall, as soon as practicable but in no case longer than five Business Days after receipt of notice, notify the owners of the Obligations Outstanding of such selection. Such notice shall (i) include the name and a brief description of the Independent Consultant, (ii) state the reason that the Independent Consultant is being engaged including a description of the covenant(s) of the Master Indenture that require the Independent Consultant to be engaged, and (iii) state that each owner of an Obligation will be deemed to have consented to the selection of the Independent Consultant named in such notice unless such owner submits an objection to the selected Independent Consultant in writing (in a manner acceptable to the Master Trustee) to the Master Trustee within 15 days of the date that the notice is sent to the owners. No later than two Business Days after the end of 15-day objection period, the Master Trustee shall notify the Obligated Group Representative of the number of objections. If two-thirds or more in aggregate principal amount of the owners of the Outstanding Master Notes have been deemed to have consented to the selection of the Independent Consultant, the Obligated Group Representative shall engage the Independent Consultant within five days of receiving notice of that consent. If more than one-third in aggregate principal amount of the owners of the Obligations Outstanding have objected to the -39-

50 Independent Consultant selected, the Obligated Group Representative shall select another Independent Consultant within 14 days after receiving notice of such objection, which Independent Consultant may be engaged upon compliance with the procedures of the Master Indenture. All Independent Consultant reports required under the Master Indenture shall be prepared in accordance with then-effective industry-appropriate standards. See SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Approval of Consultants in APPENDIX C. Application for Rating Pursuant to the First Supplemental Master Indenture, not later than 150 days after receipt by the Obligated Group Representative of the audited financial statements of the Obligated Group for each Fiscal Year, the Obligated Group is required to approach any Rating Agency and seek to obtain a credit rating of BBB- or an equivalent rating (an Investment Grade Credit Rating ). Notwithstanding the foregoing, (a) the requirement to annually approach a Rating Agency shall terminate when the Obligated Group obtains an Investment Grade Credit Rating; and (b) the Obligated Group shall not be required to approach a Rating Agency to obtain a credit rating if the Obligated Group Representative reasonably believes that the Obligated Group will not meet the criteria of any Rating Agency for an Investment Grade Credit Rating based on the then-existing published rating criteria of the Rating Agencies. See SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Application for Rating in APPENDIX C. Supplements to the Master Indenture The Master Indenture may be supplemented in certain circumstances without the consent of the Holders of Obligations and also in certain circumstances upon consent of the Holders of Obligations of not less than a majority in aggregate principal amount of the Outstanding Obligations. See Appendix C SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE Supplements and Amendments. BOOK-ENTRY SYSTEM The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Series 2012 Bonds. The Series 2012 Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series 2012 Bond certificate will be issued for each maturity of the Series 2012 Bonds, each in the aggregate principal amount of the Series 2012 Bonds of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of -40-

51 securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants and together with the Direct Participants, the Participants ). DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of the Series 2012 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2012 Bonds on DTC s records. The ownership interest of each actual purchaser of Series 2012 Bonds ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2012 Bonds are to be accomplished by entries made on the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2012 Bonds, except in the event that use of the book-entry system for the Series 2012 Bonds is discontinued. To facilitate subsequent transfers, all Series 2012 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2012 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2012 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2012 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2012 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Series 2012 Bond documents. For example, Beneficial Owners may wish to ascertain that the nominee holding the Series 2012 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Series 2012 Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2012 Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the Record Date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to -41-

52 those Direct Participants to whose accounts the Series 2012 Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Series 2012 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Bond Trustee or the Authority, on the date payable in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Bond Trustee, the Authority or the Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Bond Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Series 2012 Bonds purchased or tendered, through its Participant, to the Tender Agent, and shall effect delivery of such Series 2012 Bonds by causing the Direct Participant to transfer the Participant s interest in the Series 2012 Bonds, on DTC s records, to the Tender Agent. The requirement for physical delivery of Series 2012 Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Series 2012 Bonds are transferred by Direct Participants on DTC s records and followed by a bookentry credit of tendered Series 2012 Bonds to the Tender Agent s DTC account DTC may discontinue providing its services as securities depository with respect to the Series 2012 Bonds at any time by giving reasonable notice to the Authority or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series 2012 Bond certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event, Series 2012 Bond certificates will be printed and delivered. THE INFORMATION PROVIDED ABOVE HAS BEEN PROVIDED BY DTC. NO REPRESENTATION IS MADE BY THE AUTHORITY, THE CORPORATION OR THE UNDERWRITER AS TO THE ACCURACY OR ADEQUACY OF SUCH INFORMATION PROVIDED BY DTC OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE HEREOF. The Authority LITIGATION To the knowledge of the Authority, there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending against the Authority seeking to restrain or enjoin the sale or issuance of the Series 2012 Bonds, or in any way contesting or affecting any proceedings of the Authority taken concerning the sale thereof, the pledge or application of any moneys or security provided for the payment of the Series 2012 Bonds, the validity or enforceability of the documents executed by the Authority in connection with the Series 2012 Bonds, the -42-

53 completeness or accuracy of the Official Statement, or the existence or powers of the Authority relating to the sale of the Series 2012 Bonds. The Corporation There is no controversy or litigation of any nature now pending against the Corporation, or to the knowledge of its officers, threatened which seeks to restrain or enjoin the sale, execution or delivery of the Series 2012 Bonds, or in any way contests or affects the validity of the Series 2012 Bonds or any proceedings of the Corporation taken with respect to the execution, sale and delivery thereof, the pledge or application of any moneys or security provided for the payment of the Series 2012 Bonds or the use of the Series 2012 Bond proceeds. Other than as described in the next paragraph, there is no litigation or proceedings pending or, to the knowledge of the Corporation, threatened except (a) litigation involving claims against the Corporation for professional, general or employment practices liability in which the probable recoveries and estimated costs and expenses of defense, in the opinion of the Corporation s risk management staff and legal counsel, will be within applicable insurance policy limits, subject to deductibles (for claims covered by third party insurers) or insurance reserves (for claims that are self-insured), and (b) other litigation and proceedings, which if adversely determined, would not, in the judgment of the management of the Corporation, have a material adverse effect on the financial condition or operations of the Corporation. For information regarding the insurance coverage of the Corporation, please refer to OTHER Insurance in Appendix A hereto. The Corporation and Lehman Brothers Special Financing, Inc. have settled the dispute over two derivative financial instruments described in Note 7 to the unaudited financial statements attached as Appendix B hereto. For further information, please see MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS Swap Dispute in Appendix A hereto. Tax Matters Series 2012A Bonds TAX MATTERS In the opinion of Squire Sanders (US) LLP, Bond Counsel, under existing law: (i) interest on the Series 2012A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code of 1986, and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; and (ii) interest on the Series 2012A Bonds is exempt from Arizona state income tax. Bond Counsel expresses no opinion as to any other tax consequences regarding the Series 2012A Bonds. The opinion on tax matters will be based on and will assume the accuracy of certain representations and certifications, and continuing compliance with certain covenants, of the Authority and the Corporation contained in the transcript of proceedings and that are intended to evidence and assure the foregoing, including that the Series 2012A Bonds are and will remain obligations the interest on which is excluded from gross income for federal income tax purposes. In addition, Bond Counsel has relied on, among other things, the opinion of Douglas K. Cook, Attorney P.C., counsel to the Corporation, regarding the current status of the Corporation as an organization described in Section 501(c)(3) of the Code, which opinion is subject to a number of qualifications and limitations. Failure of the Corporation to maintain its status as an organization described in Section 501(c)(3) of the Code, or to operate the facilities financed or refinanced by the Series 2012A Bonds in a manner that is substantially related to the Corporation s charitable purpose under Section 513(a) of the Code, may cause interest on the Series 2012A Bonds to be included in gross income retroactively to the date of the issuance of the Series 2012A -43-

54 Bonds. Bond Counsel will not independently verify the accuracy of the Authority s and the Corporation s certifications and representations or the continuing compliance with the Authority s and the Corporation s covenants and will not independently verify the accuracy of the opinion of the Corporation s counsel. The opinion of Bond Counsel is based on current legal authority and covers certain matters not directly addressed by such authority. It represents Bond Counsel s legal judgment as to exclusion of interest on the Series 2012A Bonds from gross income for federal income tax purposes but is not a guaranty of that conclusion. The opinion is not binding on the IRS or any court. Bond Counsel expresses no opinion about (i) the effect of future changes in the Code and the applicable regulations under the Code or (ii) the interpretation and the enforcement of the Code or those regulations by the IRS. The Code prescribes a number of qualifications and conditions for the interest on state and local government obligations to be and to remain excluded from gross income for federal income tax purposes, some of which require future or continued compliance after issuance of the obligations. Noncompliance with these requirements by the Authority or the Corporation may cause loss of such status and result in the interest on the Series 2012A Bonds being included in gross income for federal income tax purposes retroactively to the date of issuance of the Series 2012A Bonds. The Corporation and, subject to certain limitations, the Authority have each covenanted to take the actions required of it for the interest on the Series 2012A Bonds to be and to remain excluded from gross income for federal income tax purposes, and not to take any actions that would adversely affect that exclusion. After the date of issuance of the Series 2012A Bonds, Bond Counsel will not undertake to determine (or to so inform any person) whether any actions taken or not taken, or any events occurring or not occurring, or any other matters coming to Bond Counsel s attention, may adversely affect the exclusion from gross income for federal income tax purposes of interest on the Series 2012A Bonds or the market value of the Series 2012A Bonds. A portion of the interest on the Series 2012A Bonds earned by certain corporations may be subject to a federal corporate alternative minimum tax. In addition, interest on the Series 2012A Bonds may be subject to a federal branch profits tax imposed on certain foreign corporations doing business in the United States and to a federal tax imposed on excess net passive income of certain S corporations. Under the Code, the exclusion of interest from gross income for federal income tax purposes may have certain adverse federal income tax consequences on items of income, deduction or credit for certain taxpayers, including financial institutions, certain insurance companies, recipients of Social Security and Railroad Retirement benefits, those that are deemed to incur or continue indebtedness to acquire or carry tax-exempt obligations, and individuals otherwise eligible for the earned income tax credit. The applicability and extent of these and other tax consequences will depend upon the particular tax status or other tax items of the owner of the Series 2012A Bonds. Bond Counsel will express no opinion regarding those consequences. Payments of interest on tax-exempt obligations, including the Series 2012A Bonds, are generally subject to IRS Form 1099-INT information reporting requirements. If a Series 2012A Bond owner is subject to backup withholding under those requirements, then payments of interest will also be subject to backup withholding. Those requirements do not affect the exclusion of such interest from gross income for federal income tax purposes. Legislation affecting tax-exempt obligations is regularly considered by the United States Congress and may also be considered by the State legislature. Court proceedings may also be filed, the outcome of which could modify the tax treatment of obligations such as the Series 2012A Bonds. There can be no assurance that legislation enacted or proposed, or actions by a court, after the date of issuance of the Series 2012A Bonds will not have an adverse effect on the tax status of interest on the Series 2012A Bonds or the market value or marketability of the Series 2012A Bonds. These adverse effects -44-

55 could result, for example, from changes to federal or state income tax rates, changes in the structure of federal or state income taxes (including replacement with another type of tax), or repeal (or reduction in the benefit) of the exclusion of interest on the Series 2012A Bonds from gross income for federal or state income tax purposes for all or certain taxpayers. For example, both the American Jobs Act of 2011 proposed by President Obama on September 12, 2011, and introduced into the Senate on September 13, 2011, and the federal budget for fiscal year 2013 as proposed by President Obama on February 13, 2012, contain provisions that could, among other things, result in additional federal income tax for tax years beginning after 2012 on taxpayers that own tax-exempt obligations, including the Series 2012A Bonds, if they have incomes above certain thresholds. Prospective purchasers of the Series 2012A Bonds should consult their own tax advisers regarding pending or proposed federal and state tax legislation and court proceedings, and prospective purchasers of the Series 2012A Bonds at other than their original issuance at the respective prices indicated on the inside cover of this Official Statement should also consult their own tax advisers regarding other tax considerations such as the consequences of market discount, as to all of which Bond Counsel expresses no opinion. Bond Counsel s engagement with respect to the Series 2012A Bonds ends with the issuance of the Series 2012A Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the Corporation or the owners of the Series 2012A Bonds regarding the tax status of interest thereon in the event of an audit examination by the IRS. The IRS has a program to audit tax-exempt obligations to determine whether the interest thereon is includible in gross income for federal income tax purposes. If the IRS does audit the Series 2012A Bonds, under current IRS procedures, the IRS will treat the Authority as the taxpayer and the beneficial owners of the Series 2012A Bonds will have only limited rights, if any, to obtain and participate in judicial review of such audit. Any action of the IRS, including but not limited to selection of the Series 2012A Bonds for audit, or the course or result of such audit, or an audit of other obligations presenting similar tax issues, may affect the market value of the Series 2012A Bonds. Original Issue Discount and Original Issue Premium Series 2012A Bonds Certain of the Series 2012A Bonds ( Discount Bonds ) as indicated on the cover of this Official Statement may be offered and sold to the public at an original issue discount ( OID ). OID is the excess of the stated redemption price at maturity (the principal amount) over the issue price of a Discount Bond. The issue price of a Discount Bond is the initial offering price to the public (other than to bond houses, brokers or similar persons acting in the capacity of underwriters or wholesalers) at which a substantial amount of the Discount Bonds of the same maturity is sold pursuant to that offering. For federal income tax purposes, OID accrues to the owner of a Discount Bond over the period to maturity based on the constant yield method, compounded semiannually (or over a shorter permitted compounding interval selected by the owner). The portion of OID that accrues during the period of ownership of a Discount Bond (i) is interest excluded from the owner s gross income for federal income tax purposes to the same extent, and subject to the same considerations discussed above, as other interest on the Series 2012A Bonds, and (ii) is added to the owner s tax basis for purposes of determining gain or loss on the maturity, redemption, prior sale or other disposition of that Discount Bond. The amount of OID that accrues each year to a corporate owner of a Discount Bond is taken into account in computing the corporation s liability for federal alternative minimum tax. A purchaser of a Discount Bond in the initial public offering at the price for that Discount Bond stated on the cover of this Official Statement who holds that Discount Bond to maturity will realize no gain or loss upon the retirement of that Discount Bond. -45-

56 Certain of the Series 2012A Bonds ( Premium Bonds ) as indicated on the cover of this Official Statement may be offered and sold to the public at a price in excess of their stated redemption price at maturity (the principal amount). That excess constitutes bond premium. For federal income tax purposes, bond premium is amortized over the period to maturity of a Premium Bond, based on the yield to maturity of that Premium Bond (or, in the case of a Premium Bond callable prior to its stated maturity, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on that Premium Bond), compounded semiannually. No portion of that bond premium is deductible by the owner of a Premium Bond. For purposes of determining the owner s gain or loss on the sale, redemption (including redemption at maturity) or other disposition of a Premium Bond, the owner s tax basis in the Premium Bond is reduced by the amount of bond premium that is amortized during the period of ownership. As a result, an owner may realize taxable gain for federal income tax purposes from the sale or other disposition of a Premium Bond for an amount equal to or less than the amount paid by the owner for that Premium Bond. A purchaser of a Premium Bond in the initial public offering at the price for that Premium Bond stated on the cover of this Official Statement who holds that Premium Bond to maturity (or, in the case of a callable Premium Bond, to its earlier call date that results in the lowest yield on that Premium Bond) will realize no gain or loss upon the retirement of that Premium Bond. Owners of Discount and Premium Bonds should consult their own tax advisers as to the determination for federal income tax purposes of the amount of OID or bond premium properly accruable or amortizable in any period with respect to the Discount or Premium Bonds and as to other federal tax consequences and the treatment of OID and bond premium for purposes of state and local taxes on, or based on, income. Tax Matters Taxable Series 2012B Bonds In the opinion of Squire Sanders (US) LLP, Bond Counsel, interest on the Taxable Series 2012B Bonds is exempt from Arizona state income tax. Bond Counsel expresses no opinion as to any other tax consequences regarding the Taxable Series 2012B Bonds. INTEREST ON THE TAXABLE SERIES 2012B BONDS IS NOT EXCLUDED FROM GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES. THE LEGAL DEFEASANCE OF THE TAXABLE SERIES 2012B BONDS MAY RESULT IN A DEEMED SALE OR EXCHANGE OF THE TAXABLE SERIES 2012B BONDS UNDER CERTAIN CIRCUMSTANCES; AND OWNERS OF THE TAXABLE SERIES 2012B BONDS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL INCOME TAX CONSEQUENCES OF SUCH AN EVENT. PROSPECTIVE PURCHASERS OF THE TAXABLE SERIES 2012B BONDS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THEIR ACQUISITION, OWNERSHIP AND DISPOSITION OF THE TAXABLE SERIES 2012B BONDS. The following discussion is generally limited to U.S. owners, meaning beneficial owners of Taxable Series 2012B Bonds that for United States federal income tax purposes are individual citizens or residents of the United States, corporations or other entities taxable as corporations created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), and certain estates or trusts with specific connections to the United States. Partnerships holding Taxable Series 2012B Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the Taxable Series 2012B Bonds (including their status as U.S. owners). -46-

57 Information Reporting and Backup Withholding Taxable Series 2012B Bonds General information reporting requirements will apply to payments of principal and interest made on a Taxable Series 2012B Bond and the proceeds of the sale of a Taxable Series 2012B Bond to noncorporate holders of the Taxable Series 2012B Bonds, and backup withholding at a rate of 28% will apply to such payments if the owner fails to provide an accurate taxpayer identification number in the manner required or fails to report all interest required to be shown on its federal income tax returns. A beneficial owner of a Taxable Series 2012B Bond that is a U.S. owner generally can obtain complete exemption from backup withholding by providing a properly completed IRS Form W-9 (Request for Taxpayer Identification Number and Certification). Non-U.S. Owners Taxable Series 2012B Bonds Under the Code, interest on any Taxable Series 2012B Bond whose beneficial owner is not a U.S. owner are generally not subject to United States income tax or withholding tax (including backup withholding) if the non-u.s. owner provides the payor of interest on the Taxable Series 2012B Bonds with an appropriate statement as to its status as a non-u.s. owner. This statement can be made on IRS Form W-8BEN or a successor form. If, however, the non-u.s. owner conducts a trade or business in the United States and the interest on the Taxable Series 2012B Bonds held by the non-u.s. owner is effectively connected with such trade or business, that interest will be subject to United States income tax but will generally not be subject to United States withholding tax (including backup withholding). The foregoing is a brief summary of certain federal income tax consequences to a non-u.s. owner. Non-U.S. owners should consult their own tax advisors regarding the tax consequences of an investment in the Taxable Series 2012B Bonds. Circular 230 Taxable Series 2012B Bonds THE FOREGOING DISCUSSION IN TAX MATTERS WAS NOT INTENDED OR WRITTEN BY BOND COUNSEL TO BE USED, AND IT CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON AN OWNER OF THE TAXABLE SERIES 2012B BONDS. THE FOREGOING DISCUSSION IN TAX MATTERS WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TAXABLE SERIES 2012B BONDS. EACH PROSPECTIVE PURCHASER OF THE TAXABLE SERIES 2012B BONDS SHOULD SEEK ADVICE BASED ON THE PROSPECTIVE PURCHASER S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. LEGALITY The validity of the Series 2012 Bonds and certain other legal matters are subject to the approving opinion of Squire Sanders (US) LLP, Phoenix, Arizona, Bond Counsel. Complete copies of the proposed forms of opinions of Bond Counsel are contained in Appendix D hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Authority by its counsel, Greenberg Traurig, LLP, Phoenix, Arizona; for the Corporation by its counsel, Douglas K. Cook, Attorney P.C., Mesa, Arizona; and for the Underwriter by its counsel, Jones Day, San Francisco, California. INDEPENDENT AUDITORS The financial statements of the Corporation as of and for the fiscal years ended December 31, 2007, 2008, 2009 and 2010 have been audited by BKD, LLP, independent auditors, as stated in their reports appearing in Appendix B hereto. The unaudited interim financial statements of the Corporation as -47-

58 of and for the eleven-month periods ended November 30, 2010 and 2011 were prepared by management of the Corporation and reviewed by BKD, LLP, independent auditors, as stated in their report appearing in Appendix B hereto. The Obligated Group CONTINUING DISCLOSURE AGREEMENT Offerings of most municipal securities are subject to Rule 15c2-12 (the Rule ) under the Securities Exchange Act of 1934, as amended. The Corporation will covenant on behalf of the Obligated Group for the benefit of the holders and Beneficial Owners of the Series 2012 Bonds pursuant to a Continuing Disclosure Agreement (the Continuing Disclosure Agreement ) to be executed and delivered by the Corporation, to provide or cause to be provided each year the financial information and operating data relating to the Obligated Group described below. (a) As soon as practicable after they are available but in no event more than 45 days after the completion of the first three fiscal quarters or, in no event more than 60 days after the completion of the final fiscal quarter, quarterly management-prepared financial statements, including a consolidated or consolidating statement of revenues and expenses and statement of cash flows of the Obligated Group for the year-to-date period, a consolidated or consolidating balance sheet as of the end of each such fiscal quarter and occupancy levels of all of the facilities operated by the Obligated Group by level of care as of the end of each such quarter, including payor mix for nursing care beds, all prepared in reasonable detail and certified, subject to year-end adjustment, by an officer of the Obligated Group Representative, together with an Officer s Certificate (i) stating that the Obligated Group is in compliance with all of the terms, provisions and conditions of the Master Indenture or if not, specify all such defaults and the nature thereof, (ii) calculating and certifying the Long-Term Debt Service Coverage Ratio, and (iii) calculating and certifying the Days Cash on as of the last day of such fiscal quarter. (b) As soon as practicable after they are available but in no event more than 120 days after the completion of each Fiscal Year, an annual audited financial report of the Obligated Group prepared by a firm of certified public accountants including a consolidated and an unaudited consolidating balance sheet as of the end of such Fiscal Year and a consolidated and an unaudited consolidating statement of changes in fund balances for such Fiscal Year and a consolidated and an unaudited consolidating statement of revenues and expenses and statement of cash flows of the Obligated Group for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year, together with (i) a separate written statement of the accountants preparing such report that such accountants have no knowledge of any default under the Master Indenture, or if such accountants shall have obtained knowledge of any such default or defaults, they shall disclose in such statement the default or defaults and the nature thereof and (ii) an Officer s Certificate (A) stating that the Obligated Group is in compliance with all of the terms, provisions and conditions of the Master Indenture or if not, specify all such defaults and the nature thereof, (B) calculating and certifying the Long-Term Debt Service Coverage Ratio, and (C) calculating and certifying the Days Cash on Hand as of the last day of such fiscal year. These financial statements may include any entities that are not Members of the Obligated Group if they contain as supplemental information a combining or consolidating schedule from which financial information solely relating to the Obligated Group Members may be derived. If such audited financial statements are not available by the deadline for filing the Annual Report, it shall be provided when and if available, and unaudited financial statements shall be included in the annual report. (c) Summary of the board-approved annual budget. -48-

59 (d) If the Debt Service Coverage Ratio of the Obligated Group for any Fiscal Year is less than 1.00:1 for any Testing Date as provided in the Master Indenture, the Obligated Group will deliver the financial information and the calculations described in paragraph (a) above, excluding the occupancy levels of all of the facilities operated by the Obligated Group, on a monthly basis, with the Debt Service Coverage Ratio calculated on a year-to-date basis each month, within 45 days of the end of each month until the Debt Service Coverage Ratio of the Obligated Group is at least 1.00:1. (e) A copy of each Consultant s report or counsel s opinion required to be prepared under the terms of the Master Indenture, a copy of which has been provided to any requesting Bondholder. The quarterly and annual reports described above will be filed by or on behalf of the Obligated Group with the Electronic Municipal Market Access system, or EMMA ( of the Municipal Securities Rulemaking Board (the MSRB ), and with each Beneficial Owner of $500,000 or more in Series 2012 Bonds who requests such information. In addition, under the Continuing Disclosure Agreement, the Corporation has covenanted, on behalf of the Obligated Group, to provide, or cause to be provided, notice of the occurrence of any of the following events (the Listed Events ) with respect to the Series 2012 Bonds to EMMA in a timely manner and in accordance with the Rule: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults, if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series 2012 Bonds, or other material events affecting the tax status of the Series 2012 Bonds; 7. Modifications to rights of security holders of the Series 2012 Bonds, if material; 8. Bond calls (other than scheduled mandatory redemptions), if material, and tender offers; 9. Defeasances of the Series 2012 Bonds or any portion thereof; 10. Release, substitution or sale of property securing repayment of the Series 2012 Bonds, if material; 11. Rating changes; 12. Bankruptcy, insolvency, receivership or similar event of an Obligated Group Member; 13. Consummation of a merger, consolidation or acquisition involving an Obligated Group Member or the sale of all of substantially all of the assets of an Obligated Group Member, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and -49-

60 14. Appointment of a successor or additional trustee or a change of name of a trustee, if material. If a Listed Event occurs and the Corporation determines that such Listed Event is material, or if there is no materiality requirement for such Listed Event, the Corporation shall file a notice of such occurrence with EMMA within 10 business days. Notice of optional or unscheduled redemption of any Series 2012 Bonds or defeasance of any Series 2012 Bonds need not be given any earlier than the notice (if any) of the underlying event is given to affected Bondholders if it is required pursuant to the Bond Indenture. If the Corporation determines that it failed to give notice as required under the Continuing Disclosure Agreement, it is required to promptly file a notice of such determination in the same manner. Any or all of the items listed above may be included by specific reference to other documents which previously have been provided to each of the Nationally Recognized Municipal Securities Information Repositories (all of which were replaced by EMMA on July 1, 2009) or filed with EMMA, the MSRB or the Securities and Exchange Commission (the SEC ). If the document included by reference is a final official statement, it must be available from the MSRB. The Corporation shall clearly identify each such other document as included by reference. In the event of a failure of the Corporation to comply with any provision of the Continuing Disclosure Agreement, any holder or Beneficial Owner of Series 2012 Bonds may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Corporation to comply with the obligations under the Continuing Disclosure Agreement. A failure to comply with the Continuing Disclosure Agreement shall not be deemed an Event of Default under the Master Indenture, the Bond Indenture or the Loan Agreement. The sole remedy under the Continuing Disclosure Agreement in the event of any failure of the Corporation to comply with the Continuing Disclosure Agreement shall be an action to compel performance, and no person or entity shall be entitled to recover monetary damage thereunder under any circumstances. No Continuing Disclosure From the Authority Inasmuch as the Series 2012 Bonds are limited obligations of the Authority, no financial or operating data concerning it is material to any decision to purchase, hold or sell the Series 2012 Bonds, and, accordingly, the Authority will not provide any such information. NO RATING THE SERIES 2012 BONDS ARE NOT RATED AND NEITHER THE AUTHORITY NOR THE CORPORATION HAS APPLIED TO ANY RATING SERVICE FOR A RATING OF THE SERIES 2012 BONDS. UNDERWRITING Pursuant to a purchase contract for the Series 2012 Bonds by and between the Authority, the Company, and B.C. Ziegler and Company (the Underwriter ), the Underwriter will purchase the Series 2012 Bonds at a purchase price of $76,178,200.75, which reflects $1,208, of underwriter s discount and $356, of net original issue premium. The purchase contract will provide that the Underwriter will purchase all of the Series 2012 Bonds if any are purchased. The Underwriter reserves the right to join with dealers and other underwriters in offering the Series 2012 Bonds to the public. The purchase contract will provide for the Corporation to indemnify the -50-

61 Underwriter and the Authority against certain liabilities. The obligation of the Underwriter to accept delivery of the Series 2012 Bonds will be subject to various conditions of the purchase contract. In connection with this financing, the Corporation will establish a debt service reserve fund and such other account with the Bond Trustee that will hold net bond proceeds. Under the terms of the Bond Indenture and the Master Indenture, the Borrower may direct the Bond Trustee and/or the Master Trustee, respectively, to invest some or all of the funds within the investment parameters established in the Bond Indenture, as applicable. It is possible that the Corporation will elect to hire Ziegler Lotsoff Capital Management LLC ( ZLCM ), an affiliate of the Underwriter, to direct the investment of these funds. If that occurs, ZLCM will receive a fee for managing those assets. At this time, no relationship has been formally established with respect to proceeds of the Series 2012 Bonds. The Corporation has used ZLCM for investment advice in the past. MISCELLANEOUS The references herein to the Bond Indenture, the Loan Agreement, the Deed of Trust, the Master Indenture and the Continuing Disclosure Agreement are brief summaries of certain provisions thereof. Such summaries do not purport to be complete, and for full and complete statements of the provisions thereof reference is made to the Bond Indenture, the Loan Agreement, the Deed of Trust, the Master Indenture and the Continuing Disclosure Agreement. Copies of such documents are on file at the office of the Authority and following the delivery of the Series 2012 Bonds will be on file at the office of the Bond Trustee. All estimates and other statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. It is anticipated that CUSIP identification numbers will be printed on the Series 2012 Bonds, but neither the failure to print such numbers on any Series 2012 Bond nor any error in the printing of such numbers shall constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for any Series 2012 Bonds. The attached Appendices are integral parts of this Official Statement and must be read together with all of the foregoing statements. The Corporation has reviewed the information contained herein that relates to it, its Property and operations, and has approved all such information for use within this Official Statement. -51-

62 This Official Statement is not to be construed as a contract or agreement between the Authority or the Corporation and the holders of any of the Series 2012 Bonds. TEMPE LIFE CARE VILLAGE, INC. By: /s/ Don J. Cassano, President -52-

63 APPENDIX A INFORMATION CONCERNING TEMPE LIFE CARE VILLAGE, INC. The information contained herein has been provided by Tempe Life Care Village, Inc. and from other sources believed to be reliable.

64 [THIS PAGE INTENTIONALLY LEFT BLANK]

65 TABLE OF CONTENTS Page THE CORPORATION... A-1 HISTORY AND BACKGROUND... A-1 History..... A-1 Management Team... A-1 GOVERNANCE AND MANAGEMENT... A-2 Corporation Board of Directors... A-2 Executive Management of the Village... A-3 THE VILLAGE... A-4 General.... A-4 Facilities and Levels of Care... A-4 RESIDENCY AGREEMENTS... A-9 Admissions Criteria... A-9 Apartment Leases... A-9 Resident Insurance Coverage; Medical Cost Containment... A-9 Entrance Fees, Monthly Service Fees and Deposits... A-9 Refunds of Entrance Fees... A-10 Termination of Residency Agreements... A-11 Services Available to Non-Residents on a Fee-For Service Basis... A-11 UTILIZATION... A-12 MARKETING AND COMPETITION... A-13 Marketing... A-13 Competition... A-13 REGULATION OF THE FACILITIES OF THE CORPORATION... A-14 FINANCIAL INFORMATION... A-16 Summary Unrestricted Statement of Operations of the Corporation... A-16 Summary Balance Sheet of the Corporation... A-18 Debt Service Coverage Ratios... A-20 Liquidity... A-21 MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS... A-22 Results of the Corporation s Unrestricted Operations for the Eleven -Month Period Ended November 30, 2010 Compared to the Eleven-Month Period Ended November 30, A-22 i

66 Results of the Unrestricted Operations of the Corporation for the Year Ended December 31, 2009 Compared to the Year Ended December 31, A-24 Refunding of the Prior Bonds and Expiration of the Letter of Credit... A-25 Swap Dispute... A-25 INSURANCE... A-26 LICENSURE AND ACCREDITATION... A-26 Health Services Licensure... A-26 Memberships... A-26 EMPLOYEES... A-26 THE MANAGER... A-27 Life Care Services LLC... A-27 Executive Management of the Manager... A-27 Manager and CRSA Communities... A-28 Management Agreement... A-31 A-ii

67 THE CORPORATION Tempe Life Care Village, Inc. (the Corporation ), a nonprofit corporation organized and existing under the laws of the State of Arizona, owns and operates a life care retirement commonly known as Friendship Village of Tempe (the Village ) located in Tempe, Arizona. The Village consists of a retirement center, which includes garden homes and residential apartments (the Retirement Center ); a skilled nursing facility (the Health Center ), an assisted living building, memory care beds, a hospice unit, and common areas that include recreational facilities, a fitness center, a swimming pool, a spa and three dining venues. For a description of the facilities and operations of the Corporation, see FACILITIES OF THE CORPORATION and LIFE CARE SERVICES LLC below. As of the date of issuance of the Series 2012 Bonds, the Corporation will be the sole Member of the Obligated Group under the Master Indenture. As described under SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS, the Obligated Group Members are obligated to make payments on the Series 2012 Obligations securing the payment of principal interest on the Series 2012 Bonds. The Corporation has received a determination letter from the Internal Revenue Service that it is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986 (the Code ) as an organization described in Section 501(c)(3) of the Code, and confirming its public charity status pursuant to Section 509(a)(1) and 170(b)(1)(A)(iii) of the Code. The Corporation is committed to satisfying three primary needs of the elderly: (i) the need for housing, (ii) the need for health care, and (iii) the need for financial security. History HISTORY AND BACKGROUND The Corporation was incorporated on December 23, 1976, and has operated the Village since Life Care Services LLC, an Iowa limited liability company (the Manager ) has managed the operations of the Village since 1980 pursuant to a management agreement, as more fully described in LIFE CARE SERVICES LLC Management Agreement herein. Assisted living was first added to the Village s continuum of care in 1997, financed through donations and operating cash flow. The Village issued bonds in 2002 to finance a new replacement Health Center, an extensive common area renovation and an independent living expansion. The new Health Center includes a special memory care unit and a hospice program, two levels of service not previously available on the Village campus. For a more complete description of the Village s facilities, see THE VILLAGE Facilities and Levels of Care herein. Management Team The Corporation contracts with the Manager under a management agreement that expires June 30, 2012 (the Management Agreement ) for the management, development and marketing of the operations of the Village. The Corporation expects to renew the Management Agreement with a term ending on June 30, The Manager is recognized as a leading marketer and manager of full service retirement communities. For more information about the Manager, see LIFE CARE SERVICES LLC The Manager herein. The management team of the Village is made up of a mix of personnel of the Manager and the Corporation. The Board of Directors of the Corporation retains ultimate control over the retention of the Manager and evaluates its performance. For more information about the executives of the Manager and the Corporation that manage the Village, see GOVERNANCE AND MANAGEMENT Executive Management of the Village and the Corporation herein. The fees of the Manager under the Management A-1

68 Agreement are subordinate to the payments required to be made by the Corporation under the Prior Bond documents, and the fees of the Manager under the renewed Management Agreement will be subordinate to the payments required to be made by the Corporation under the Loan Agreement and the Series 2012 Obligations. For more information about the Management Agreement, see LIFE CARE SERVICES LLC Management Agreement herein. Corporation Board of Directors GOVERNANCE AND MANAGEMENT The management of the Corporation is vested in its Board of Directors (the Corporation Board ). The Corporation Board meets monthly and is composed of no fewer than nine nor more than 15 Directors. Currently, there are eleven voting Directors on the Corporation Board. The Directors serve staggered three-year terms and are elected by the Directors. Directors may be re-elected without limitation. There are no members of the Corporation. The Directors on the Corporation Board, the dates on which their respective terms expire, their term of years on the Corporation Board and their principal occupations are set forth in the following table. Corporation Board of Directors Name Board Role Profession Don J. Cassano President Intergovernmental Affairs Manager, Arizona Dept. of Transportation Jane A Tews, Rev., Vice President First Methodist Church Dr. Central East District Superintendent; Attorney John C. Benedict Treasurer Retired-Vice President and Manager, Downtown Mesa Office, Wells Fargo Bank Mary Killeen, R.N., Ph.D. Secretary Retired-Associate Dean, Arizona State University, Undergraduate Programs and Extended Education College of Nursing Current Term Ends December Years of 31, Service James D. Beaton, Director President, James D. Beaton, C.P.A. P.C. Ellen Cavanaugh Director Registered Nurse Robert G. Eubanks Director Managing Member, Eubanks Consulting LLC Matt Hassett Director Arizona State University Professor, retired Marc Pulsifer Director Blake and Pulsifer, P.C Attorney Gary L. Richardson Director Insurance Agent Frank White, Rev. Director Retired Minister A-2

69 Executive Management of the Village Cole Marvin, Executive Director. Mr. Marvin is an employee of the Manager under the Management Agreement. Mr. Marvin joined the Manager in 1998 upon earning his Bachelor of Science degree from Ohio University s long-term health care administration program. Mr. Marvin moved to Hawaii to be the administrator at One Kalakaua Senior Living, a condominium-based continuing care retirement community (a CCRC ) in Honolulu, where he ran day-to-day operations and performed several short-term assignments at other CCRCs on the mainland. While in Hawaii, he earned a Masters in Business Administration from the University of Hawaii. Mr. Marvin moved to Arizona in 2007 to work as the Assistant Executive Director of the Village. He was promoted to the position of Executive Director in Mr. Marvin has served since 2008 as a board member of LeadingAge Arizona, a trade association dedicated to not-for-profit senior housing providers (formerly Aging Services of Arizona), and is the organization s current Treasurer. Lynda F. Kaser, CNHA, Health Services Administrator. Ms. Kaser, an employee of the Corporation since 1992, has spent 30 years working in the long term care industry. She has filled positions ranging from licensed practical nurse to licensed nursing home administrator, is certified as a preceptor for nursing home administration and an assisted living facility manager, and she has received certification for nursing home administration from the American College of Health Care Administrators. With training in managing Alzheimer s and dementia, she has set up several dementia programs in social and medical environments, including Memory Care Assisted Living and Advanced Dementia, Genesis Neighborhood, at the Village. Ms. Kaser has introduced an employee and resident wellness program and LEAP (Learn, Empower Achieve and Produce), a Person Centered Individualized Care Program, to the Village. She is past President of the Arizona Chapter of ACHCA and serves on the national board for the Professional Certification Committee. Ms. Kaser was appointed by the Governor of Arizona to serve on the Board of Examiner of Nursing Care Institution Administrators and Assisted Living Facility Managers. She served as Vice President of that Board for two terms. Ms. Kaser also received the Award of Honor as most distinguished Administrator in 2007 given by LeadingAge Arizona. Julie Bindl, Administrator of Resident Services. Ms. Bindl is an employee of the Manager under the Management Agreement. Ms. Bindl graduated cum laude from University of Wisconsin Eau Claire in 2006 with a Bachelor of Science in Health Care Administration and a minor in Business Administration. She has worked at facilities managed by the Manager since she began her career in 2006 at Edgewood Retirement Community in North Andover, Massachusetts. She next worked as the Administrator at Sandhill Cove in Palm City, Florida, followed by a position as the Executive Director of Country Crest in Oroville, California, prior to relocating to Arizona to work with the Village. As the Administrator of Resident Services, Ms. Bindl manages the operations of the independent residents services, which includes Environmental Services, Maintenance, Grounds, IT, Security, Transportation, Housekeeping, the Front Office and Purchasing. In addition, she works closely with the Village residents, Resident Council Committees, families, and staff to maintain the quality of the Village s level of service. Teresa (Terry) Belles, Director of Finance. Ms. Belles has spent over 25 years in the long-term care field and has been an employee of the Corporation since September Her responsibilities have included resident billing, payroll, accounts receivable and payable, and preparation of the financial statements. In 1997, Ms. Belles was promoted to Director of Finance, becoming responsible for all of Friendship Village s financial operations, including bond compliance and the annual budgeting process. A-3

70 Ms. Belles has over 30 years experience in finance and accounting. She attended the University of Cincinnati and Arizona State University, majoring in Business and Finance. Ms. Belles has also assisted other communities of the Manager during times of financial transition. She is a member of the Institute of Management Accountants. Susan Vosdoganes, Director of Marketing. Ms. Vosdoganes began her employment with the Corporation in 1999 while completing her Bachelor of Science in Applied Management and Human Resources from Grand Canyon University. In 2003, while working as a Human Resources Specialist for the Village, Ms. Vosdoganes earned a Masters of Arts in Organizational Management from the University of Phoenix. In 2006, Ms. Vosdoganes transferred to the Marketing Department. She worked in the positions of Move-In Coordinator and Marketing Representative concurrently, and was promoted to Director of Marketing in General THE VILLAGE The Village is a life care retirement community that includes independent living, assisted living and skilled nursing facilities, as well as certain common areas with recreational and dining facilities, as more fully described below under the heading Facilities and Levels of Care. As a life care community, the Village presents an alternative to traditional retirement living by providing each of its residents with an apartment or garden home for use as a residence and by offering supervised activities. If a resident can no longer live independently, the Village also provides non-hospital skilled nursing care at a cost not exceeding the rate that the resident would pay in his or her apartment or garden home. The Village campus occupies approximately 46 acres, bounded on the north by Southern Avenue and on the east by Tempe Canal. The apartment buildings, commons buildings and the Healthcare Center are masonry construction finished with stucco, while the garden homes are single-story wood frame construction with stucco. All of the real estate and facilities of the Village are subject to the liens of the Deed of Trust and the Insurance Lien, as more fully described under the caption SECURITY FOR THE SERIES 2012 OBLIGATIONS UNDER THE MASTER INDENTURE Security Interest in Gross Revenues and the Deed of Trust in the front part of this Official Statement. Transportation throughout the Village grounds is facilitated by private roadways for vehicular traffic and sidewalks through landscaped areas among the garden homes. Residents may use their own automobiles, golf carts, walk or use trams operated by the Village. Underground parking and covered parking are available for personal vehicles. Facilities and Levels of Care The Retirement Center (Independent Living). The Retirement Center consists of 572 rentable residential units on the Village campus. Of these units, 295 are garden homes and 277 are residential units in an apartment building. In addition, the Village maintains six guest rental units and one marketing unit. For a breakdown of the types of apartments and garden homes by number of units, square feet, and fees, see the chart under the heading Residential Center Unit Mix below. Residents of the Retirement Center must be functionally capable of independent apartment living. They require minimal assistance, if any. Basic services provided include the apartment accommodations (containing a kitchen equipped with a stove, refrigerator and dishwasher, and in larger units, a washer and dryer), utilities, interior and exterior maintenance, regular housekeeping and linen services, one to three A-4

71 meals per day, scheduled activities, clinic services, transportation, security and the use of common areas. Residents supply their own furniture. Nunnenkamp Center (Assisted Living). The Nunnenkamp Center, the Village s assisted living building, contains 67 apartments for residents receiving assisted living care. Residents who are generally ambulatory but require ongoing assistance with services such as bathing, dressing, or administering medications may elect to transfer to the assisted living units at the Nunnenkamp Center. Assistance with daily activities is provided at the same Monthly Service Fee as if the resident were continuing to live in his or her independent living unit, plus charges for one additional meal per day, medication, breakfast, personal laundry and other specific services. There are no temporary assignments in the Nunnenkamp Center. Assisted living care is not eligible for Medicare reimbursement. The Health Center (Skilled Nursing). The Health Center houses the Village s Medicarecertified skilled nursing facility, which has 128 beds. This level of care is for residents who require the daily attention of a professional nursing staff on duty 24 hours a day. Health Center services are available to all residents of the Village. Residents may be admitted directly to the Health Center from their living units. Residents who are able are encouraged to return to independent or assisted living as soon as possible, and residents who are unable are assigned permanently to the Health Center. If a resident requires temporary nursing care in the Health Center, nursing care is provided at the same Monthly Service Fee as if the resident were continuing to live in his or her apartment, plus charges for two additional meals per day, medication, physical therapy and other specific services. If a resident requires a permanent transfer to the Health Center, the Village then has the right to assign the resident s living unit for occupancy by others. If the Village subsequently determines that a resident can resume occupancy in accommodations equivalent to those he or she previously occupied, the resident is required to relocate to such accommodations as soon as they are available. The Health Center is used primarily by residents of the Village, but outside patients are accepted when beds are available. See RESIDENCY AGREEMENTS Services Available to Non-Residents on a Fee-For Service Basis below. Memory Care Units. The Health Center houses 24 memory care rooms. Memory care is for residents who require the attention of specially-trained staff for the treatment of dementia or cognitive impairment. Memory care programs provide assistance with daily living, including three meals a day. Staff is trained to meet the needs of residents in the dementia care areas. Staffing is more concentrated in the memory care portion of the Health Center than in the non-special needs areas. Hospice Unit. The Health Center includes a 14-bed hospice unit, which is leased to and operated by a third party. Common Areas. The common areas, which are open to all residents of the Village, include recreational facilities, a fitness center, a swimming pool, a spa and three dining venues. A-5

72 Residential Center Unit Mix The table below shows the current mix and cost of units in the Residential Center as of January 1, The last increase in Entrance Fees was in January 2011, and the last increase in Monthly Service Fees was in January Apartments Number of Units (1) Square Feet Standard Entrance Fee (2) Monthly service fee (3) Studios & Alcoves $ 71, ,800 $ 1,760 2,645 One-bedroom , ,200 2,185 2,625 Two-bedroom , , ,400 2,405 3,700 Three-bedroom 6 1, ,700 2,805 Total Number of Apartments 277 Second Person Fees $10,000 $1,090 Garden Homes One-bedroom $144, ,400 $2,405 2,515 Two-bedroom , , ,500 2,575 3,770 Total Number of Garden Homes 295 Second Person Fees $10,000 $1,135 Total Number of Units 572 Source: The Corporation. (1) Apartment units do not include six guest rental units and one apartment used for marketing activities. (2) These Entrance Fees are for the Standard Agreement. Entrance Fees under the Return of Capital Agreement carry an 85% premium. See below under the caption RESIDENCY AGREEMENTS Refunds of Entrance Fees for a description of the terms of the Standard Agreement and the Return of Capital Agreement. (3) Monthly service fees vary according to the size of the residential unit selected. A-6

73 PAINT SHED H H GATE HOUSE H NORTH 2007 Health Care Center EVERGREEN RD. A-7 EHRHARDT PARK CITY OF TEMPE GATE GATE (6) RECREATION CENTER (3) Phase NUNNENKAMP CENTER NUNNENKAMP CENTER GRNDS MAINT CART CORRAL GRNDS POOL FITNESS CTR BUS BUS BUS BUS BUS TRAM RCVG LOAD ZONE ADMINISTRATION MARKETING HUMAN RESOURCES VILLAGE CENTER APARTMENT BUILDING Phase 1 CART CORRAL M ENV. SERVICES APT. BUILDING AUDITORIUM H H H H H H H H H H APT. BUILDING APT. BUILDING APT. BUILDING WALK-IN GATE APT. BUILDING APT. BUILDING H H GATE 44 GATE FENCE & GATE BUS STOP SOUTHERN AVE. Phase 3 TEMPE CANAL

74 Recreation Center YE OLDE WOOD SHOPPE A-165 A-166 A-167 N STORAGE MECH ROOM BATH ACTIVITY OFFICE KITCHEN MEN'S ROOM WOMEN'S ROOM JANT ART GALLERY LOBBY ENTRY A-155 A-157 A-159 A-161 T COCONINO LOUNGE A-163 A-158 A-160 A-162 A-164 LAUNDRY RESIDENT STORAGE A-170 A-169 A-172 A-171 T A-173 A-174 A-176 A-177 A-133 A-130 A-132 A-129 RESIDENT STORAGE A-128 A-127 A-125 A-8 MAIN HALL Activities Director Ceramics and Pottery Concerned Friends Lapidary Sewing Weaving Woodshop SEWING ROOM WORK ROOM LAPIDARY LOCKERS CONCERNED FRIENDS CERAMICS & POTTERY WEAVING A-154 A-151 A-153 A-149 A-152 SKIRM AUDITORIUM T A-150 A-147 A-148 A-145 A-146 A-144 A-142 GUEST APT ANDES LIBRARY BILLIARD ROOM A-139 A-141 EQT EQT TELCO ROOM A-137 T A-140 A-103 A-135 ELEV A-138 A-136 A-134 A-105 RESIDENT LIBRARY ANNEX STORAGE A-107 A-106 T A-126 A-109 A-108 A-124 COCHISE LOUNGE A-118 A-120 A-116 LAUNDRY A-110 A-122 A-115 A-119 A-117 A-114 A-112 BEAUTY SALON ELEV Courtyard and Main Street Apartments LOBBY MAIN ENTRY MEN EMBERS LOUNGE WOMEN MAIL BANK ELEV ELEV MAIN LOBBY COURTYARD APARTMENTS 1st Floor: Cochise Lounge - next to A-124 Coconino Lounge - next to A-158 2nd Floor: Maricopa Lounge - next to A-224 Navajo Lounge - next to A-258 3rd Floor: Pima Lounge - next to A-324 Pinal Lounge - next to A-358 MAIN STREET APARTMENTS 1st Floor: Administrative Offices Alcove - reservation book Andes Library Bank Beauty Shop Embers Cocktail Lounge Fireside Fine Dining Mail Room Skirm Auditorium 3rd through 6th Floors: Club Room - next to elevator lobby MARKETING ADMIN OFCS LOBBY ENTRY VILLAGE CAFE PRIVATE DINING THE FIRESIDE COURTYARD BUFFET EMPLOYEE DINING KITCHEN LOCKERS RAMP TO AND FROM GARAGE PURCH. ES SUPPLY E.S. PARTS ROOM

75 RESIDENCY AGREEMENTS Admissions Criteria The Village accepts as residents persons at least 62 years of age who are able to care for themselves and can demonstrate sufficient financial resources to meet the Village s fee requirements. In the case of a couple, the second person must be at least 55. Each resident must execute a Life Care Contract (a Residency Agreement ) governing the services and related fees to be provided by the Village. At the time of the execution of the Residency Agreement, it is expected that the resident s health will permit him or her to live independently. Each resident is also expected to provide personal financial statements demonstrating that he or she has assets sufficient to pay the Entrance Fee and income sufficient to permit payment of the Monthly Service Fee, plus other personal expenses that may be reasonably expected. The resident s income must also be sufficient to meet anticipated increases in the cost of living. Apartment Leases The Village campus includes a number of smaller apartments that can be leased to residents that do not qualify for a life-care contract due to financial or health reasons. Residents on a lease contract are considered private pay residents if they need to transfer to Assisted Living or the Health Center. Resident Insurance Coverage; Medical Cost Containment To assist the resident in preserving personal assets, each resident is required to maintain a minimum level of medical and supplemental insurance. Each resident is required to enroll in Medicare (Part A, B, or C as applicable) and supplemental insurance or to make other arrangements acceptable to the Village which ensure his or her ability to meet major medical expenses. In order to reduce costs of nursing care and to keep costs of services to all residents to a minimum, residents are required, in cooperation with the Village, to take every step possible through federal, state, municipal or private plans or programs of medical, supplemental and/or hospitalization insurance to reimburse each the Village for services to the extent the resident s stated insurance plans or government programs provide. Entrance Fees, Monthly Service Fees and Deposits Under the terms of the Residency Agreement, the resident agrees to pay a one-time Entrance Fee and a Monthly Service Fee. The Monthly Service Fee entitles the resident to the following services: paid utilities, semi-monthly housekeeping service, weekly flat laundry service, one daily meal, services of a social director and planned activities, services of a chaplain, scheduled transportation services, and emergency nursing service. Entrance fees and Monthly Service Fees are based on the size of the residential unit. The Monthly Service Fees are also based on single or double occupancy. Entrance fees are usually adjusted annually to reflect such factors as the market environment and the anticipated costs of continuing care. Monthly service fees are adjusted annually based on cost of living factors such as projected costs, prior year capital costs and economic indicators. While the adjusted Monthly Service Fees affect all residents A-9

76 under contract, the adjusted Entrance Fees affect new residents only. The Monthly Service Fees for 2012 are 5% higher than the fees in effect during At the time a Residency Agreement is signed, the resident is obligated to pay a deposit equal to 10% of the total Entrance Fee for the type of unit selected. Refunds of Entrance Fees The Village currently offers two different Residency Agreements, both types of which are available to its prospective residents. The agreements differ in their approach to refunding the Entrance Fee. Each type of Residency Agreement is summarized below. Standard Agreement. Upon a resident s voluntary withdrawal and following reoccupancy by another resident, the withdrawing resident is entitled to a refund of the Entrance Fee, less the greater of 22% of his or her original Entrance Fee or 1% per month of residency. Any resident who withdraws must also pay for any medical expenses incurred during the term of residency as well as any monthly fees or other sums owing to the Village. The Village does not refund the Entrance Fee upon the death of the resident. Return of Capital Agreement. The Entrance Fee due under the Return of Capital Agreement is equal to 185% of the Entrance Fee required under the Standard Agreement. Following a resident s death or voluntary withdrawal, upon the sooner of re-occupancy of his or her unit or two years, the resident or the resident s estate is entitled to a refund of 80% his or her original Entrance Fee. Prior Agreements. The Corporation previously offered a Return of Capital Agreement that entitled the resident or the resident s estate to a refund of 90% his or her original Entrance Fee. The Corporation ceased to offer this type of Return of Capital Agreement on January 1, 2006, but some residents of the Village are beneficiaries of these prior agreements. Lease Agreements. There are currently 12 apartment leases. Residents sign a twelve-month lease and pay the first and last month s lease payments in advance. Following the first twelve months, such residents lease apartments on a month-to-month basis. They are entitled to all Village services but must pay separately for care from Assisted Living and the Health Center. The table below summarizes the distribution of apartments and garden homes by type of Residency Agreement based on the 521 units sold or leased as of November 30, A-10

77 Type of Unit Distribution of Residents by Residency Agreement Number of Units Type of Residency Agreement Units Sold at November 30, 2011 Return of Standard (%) Capital (1) (%) Leases (%) Garden homes Apartments Apartment Leases Total 521 (1) Includes 80% Return of Capital Agreements and remaining 90% Return of Capital Agreements referred to above under the heading Refunds of Entrance Fees Prior Agreements. Source: The Corporation. Termination of Residency Agreements The Residency Agreement may be rescinded by the resident without penalty within seven days from the date of execution. Upon such rescission, the resident s deposit is returned without interest. The Residency Agreement may also be terminated upon written notice to the Village after the initial sevenday period and before the resident moves in. In this case, however, the resident may forfeit the lesser of 2% of the Entrance Fee or $2,500. Under an Addendum to the Residency Agreement, if a resident terminates the contract and moves out of the Village for any reason except death within 12 months of moving into the Village, the Corporation will refund 100% of the Entrance Fee less only outstanding medical expenses, health care discount or monthly fees owed and unpaid. The Corporation reserves the right to discontinue use of this Addendum and to otherwise modify the terms of any new Residency Agreement. Services Available to Non-Residents on a Fee-For Service Basis In addition to providing Health Center and Assisted Living services to residents, the Village admits non-residents to the Health Center and Assisted Living areas when beds are available on a fee-forservice basis. A-11

78 Year ended December 31, Beginning Number of Residential Units Occupied UTILIZATION Historical Utilization of Residential Units Residential Units Released Due To Transfer to Health Center/ Assisted Death Living Withdrawal Newly Occupied Residential Units Ending Number of Residential Units Occupied Ending Occupancy % % % % % Through November 30, % Source: The Corporation. Year ended December 31 Historical Utilization of Health Center Average Number of Occupied Beds Retirement Center Private Residents Medicare Pay Total Average Occupancy (1) % months ended November 30, % 95% 91% (1) Average occupancy based on 128 beds available. Source: The Corporation. A-12

79 Historical Utilization of Assisted Living Units and Memory Care Units Year Average Units Occupied Average Occupancy (1) % % % Through November 64 70% 30, 2011 (1) Average occupancy based on 67 Assisted Living and 24 Memory Care Units. Source: The Corporation. Marketing MARKETING AND COMPETITION The Corporation s marketing strategy primarily emphasizes building relationships with prospective residents. The marketing staff of the Corporation generates inquiries through referrals from professionals, residents, prospective residents and their family and friends. Additional inquiries come from direct mail, on-site events, the Internet, Yellow Pages, newspapers and general knowledge of the Village. Competition Tempe is the fifth largest city in Arizona with a population of approximately 160,000 residents. Directly adjacent to the city of Phoenix, Tempe is part of the Phoenix metropolitan area. The Corporation s primary market area consists of the Southeast Phoenix metropolitan area, which includes Tempe, Mesa, Chandler, Gilbert, a portion of Scottsdale and the portion of Phoenix known as Ahwatukee. A senior living community is considered by the Corporation s management to be competitive with the Village if it is an accredited continuing care retirement community or a community offering similar continuing care services, such as independent living accommodations with congregate meal services in combination with assisted living and/or nursing care services, and is located within the Village s primary market service area. Several types of CCRCs compete with the Village, including CCRCs with life care, fee-forservice and rental fee arrangements. The primary distinction between fee-for-service and life care communities is in the fees for health care services: while life care community residents pay fixed fees regardless of whether they require health care services, fee-for-service communities adjust fees charged according to amount of health care services consumed. Friendship Village of Tempe is the only life care community in the Mesa, Chandler and Tempe area. The closest life care communities are located in Scottsdale. Some of the key competitive advantages of the Village, in the opinion of the management of the Corporation, are the following: Unlike its life care competition in Scottsdale and its local fee-for-service competition, the Village offers a 100% Satisfaction Guarantee for the first year of occupancy through the Addendum to the Residency Agreement, as well as the option of an 80% Return of Capital Residency Agreement. A-13

80 The Village is currently the largest fully-operational CCRC in the Phoenix metropolitan area. 40% of the Village s 480 employees have been with the organization over five years. Management of the corporation believes that long-term employees provide the benefit of consistent service from familiar faces. REGULATION OF THE FACILITIES OF THE CORPORATION The Village is subject to a variety of state and federal regulations applicable to life care facilities, skilled nursing facilities, and assisted living facilities. For a discussion of the regulatory environment facing the Village s facilities and services, see BONDHOLDERS RISKS Federal and State Reimbursement Regulation and Regulatory Matters in the front part of this Official Statement. Under Arizona law, the Residency Agreement between the Corporation and residents of the Village is a life care contract. The Director of Insurance has issued to the Corporation a nontransferable permit that allows the Corporation to enter into life care contracts with respect to the Village. The permit continues in full force provided certain statutory conditions (described below) are satisfied. The issuance of the permit to the Corporation does not constitute an approval, recommendation or endorsement of the Corporation or the Village by the Arizona Department of Insurance or the Director of Insurance. Arizona law requires that an Entrance Fee received prior to the date the resident is permitted to occupy the resident s reserved residential unit be placed in an escrow account, except for any amount paid as a nonrefundable application fee. The escrow must be held by a financial institution acceptable to the Director of Insurance for the benefit of the persons who have paid Entrance Fees. The Entrance Fees may be released from the escrow account upon satisfaction of the following conditions: (a) If the Entrance Fee applies to a previously occupied residential unit, such as residential units at the Village, at such time as the residential unit becomes available for occupancy by a new resident; or (b) If the Entrance Fee applies to a residential unit in a new facility, at such time as the Director of Insurance is satisfied that: (i) construction of the facility has been substantially completed and the occupancy permit for the residential unit has been issued; (ii) a commitment has been received by the provider for any permanent mortgage loan or other long-term financing and conditions of the commitment prior to disbursement of funds thereunder have been substantially satisfied; and (iii) aggregate Entrance Fees received or receivable, together with proceeds of other long-term financing, are not less than 90.0% of the aggregate cost of constructing and equipping the facility, plus 90.0% of the funds estimated to be required to fund start-up losses and to assure performance of the life care contract. As required by Arizona law, the Director of Insurance has perfected a lien on the real property portions of the Village (the Insurance Lien ) for the benefit of all residents of the Village to secure performance of the Corporation s obligation to residents under the Residency Agreements. The Insurance Lien is for the benefit of the residents and for an amount equal to the reasonable value of services to be performed under the Residency Agreements and may be foreclosed by civil action. In the event of foreclosure, any property subject to the Insurance Lien is required to be sold to satisfy the judgment. As permitted by Arizona law, the Insurance Lien will be subordinated to the lien of the Deed of Trust prior to the delivery of the Series 2012 Bonds. The Corporation would need prior approval of the Director of Insurance to increase the amount secured. A-14

81 The Corporation is required by law to maintain on a current basis, in an escrow with an escrow agent approved by the Director of Insurance, a reserve (the statutory reserve ) which equals the aggregate principal and interest payments due during the next 12 months on any long-term financing. The maintenance of the statutory reserve is a condition to the continuance of the Corporation s permit to enter into life care contracts. Under Arizona law, earnings on the statutory reserve may be paid and applied for the benefit of the Corporation. The Corporation may withdraw up to one-sixth of the statutory reserve upon notice to the Director of Insurance. The Corporation must repay amounts withdrawn from the statutory reserve within two years from the time of release. If the Corporation fails to repay the amount withdrawn from the statutory reserve within two years from release, the escrow agent must provide immediate written notice to the Director of Insurance. The statutory reserve for the Village will consist of the Interest Fund, the Bond Sinking Fund and the Bond Reserve Fund and will be held by the Bond Trustee. The Director of Insurance is required to apply to the Superior Court of Arizona for an order directing him to assume management and possession of the Corporation and the Village and to rehabilitate the Corporation to enable it to perform fully its life care contracts: (i) if the Director of Insurance receives notice from the escrow agent that the Corporation has failed to make timely repayment of amounts withdrawn from the statutory reserve; (ii) if the Director of Insurance has reason to believe that the Corporation is in a financially unsound or unsafe condition, or that its condition is such that it may be unable to perform fully its obligations under its life care contracts; or (iii) when the Corporation fails to implement the recommendations of a management consultant s report prepared at the request of the Director of Insurance or when it is obvious to the Director of Insurance that to obtain the services of a financial consultant to prepare such report or that such report if prepared would be futile. Arizona law vests in the Superior Court and the Director of Insurance substantial rights and powers with respect to the rehabilitation of the Corporation and the Village. The powers possessed by the Director of Insurance resemble the powers possessed by a trustee in bankruptcy including, without limitation, power to take possession of the Corporation s property and assets, to preserve, protect and operate the Corporation and its property, to protect the residents of the Village, to perform all duties of the Corporation, to reject executory contracts to which the Corporation is a party, and to withdraw amounts from the statutory reserve for the purpose of rehabilitating the Village. The Superior Court is authorized to issue such orders as it may deem necessary to aid the Director of Insurance in the rehabilitation of the Corporation. If the Director of Insurance determines that further efforts to rehabilitate the Corporation are useless, the Director of Insurance may apply to the Superior Court for an order of liquidation and dissolution of the Corporation. The scope and extent of the powers granted by law to the Superior Court and to the Director of Insurance to rehabilitate a provider of life care contracts have not been interpreted by any court. Such law may affect the ability of the Bond Trustee and the Master Trustee to exercise rights on behalf of the holders of the Series 2012 Bonds under the Bond Indenture and the Holders of the 2012 Obligations under the Master Indenture, respectively. The affairs of the Corporation are subject to examination by the Department of Insurance. The Corporation is required by law to file an annual report with the Department of Insurance. The annual report includes a comprehensive description of the Corporation s operations and its management. The Corporation is required by law to amend its annual report if an amendment is necessary to prevent the annual report from containing a material misstatement of fact or omitting to state a material fact required to be stated. The Corporation is also required by law to file with the Department of Insurance, at least once every three years, an actuarial study prepared by a qualified actuary to be submitted with a feasibility study demonstrating that the Corporation has sufficient revenues and funds, including reserves, for the Corporation to continue as a viable operating concern. The actuarial study is required to include, among other things, a cash flow projection, an evaluation of the adequacy of the current pricing structures and an analysis of the long-term relationship between the Corporation s assets and liabilities. The Corporation is currently in compliance with these requirements. The Arizona statutes regulating life care A-15

82 providers require that the Corporation have at all times assets in an amount sufficient to assure full performance of the Corporation s obligations pursuant to its life care contracts, including any reserve fund escrow required by the Director. Management of the Corporation believes that the Corporation is presently in compliance with this requirement. The Corporation is required by law to deliver to a person with whom a life care contract is entered into a copy of a disclosure statement containing the Corporation s certified financial statements and feasibility study prepared in compliance with Arizona law and any other information required by the director of the Department of Insurance, on or before the time the life care contract is executed. A prospective resident has the right prior to the execution of the contract to rescind the life care contract without penalty or further obligation. FINANCIAL INFORMATION The following financial information for the Corporation is provided for each of the three fiscal years ended December 31, 2008, 2009 and 2010 and for the 11-month periods ending November 30, 2010 and The financial statements as of December 31, 2007, 2008, 2009 and 2010, and for the years then ended, included in this official statement have been audited by BKD, LLP, independent auditors, as stated in the reports appearing in Appendix B hereto. The unaudited interim financial statements as of and for the periods ended November 30, 2011 and 2010 included in this official statement have been reviewed by BKD, LLP, independent auditors, as stated in their reports appearing in Appendix B hereto. The following information should be read in conjunction with the financial statements and related notes that are included in Appendix B to this Official Statement. Summary Unrestricted Statement of Operations of the Corporation The following table is a summary of the unrestricted statement of operations of the Corporation for the three fiscal years ended December 31, 2008, 2009 and 2010 and a summary for the 11-month periods ending November 30, 2010 and A-16

83 Unrestricted Statement of Operations of the Corporation (in thousands) Fiscal Year Ended December 31, Unaudited 11 Months Ended November 30, Revenues, Gains and Other Support Resident services, including amortization of entrance $25,399 $27,118 $27,396 $25,069 $26,180 fees Net patient service revenue and resident fees 6,021 5,705 4,997 4,707 4,493 Contributions Other revenue Total revenues, gains and other support 32,259 33,511 33,328 30,560 31,904 Expenses and Losses Salaries and wages 13,025 13,252 13,507 12,322 12,716 Employee benefits 2,927 2,816 2,990 2,644 2,858 Professional services 1,621 1,422 1,381 1,559 1,581 Supplies and other 7,805 8,012 8,109 7,232 7,483 Depreciation and amortization 5,065 5,395 5,517 5,059 5,050 Interest 4,055 3,704 3,420 3,239 3,348 Provision for uncollectible accounts Loss on disposal of property and equipment Total expense and losses 34,752 34,786 35,113 32,203 33,134 Operating Loss (2,493) (1,275) (1,785) (1,643) (1,230) Other Income (Expense) Investment return (2,245) 3,778 2,312 1, Actuarial change in split-interest agreements (29) (13) (36) (32) (39) Change in fair value of interest rate swap agreements (1,362) 2, Excess (Deficiency) of Revenues Over Expenses (6,129) 4, (149) (932) Investment return change in unrealized losses other than trading securities (1,153) (939) Net assets released from restriction used for purchase of property and equipment Increase (Decrease) in Unrestricted Net Assets (7,276) 4, (131) (786) Unrestricted Net Assets, Beginning of Year (17,637) (24,913) (20,857) (20,857) (20,347) Unrestricted Net Assets, End of Year (24,913) (20,857) (20,347) (20,988) (21,133) A-17

84 Summary Balance Sheet of the Corporation The following table is a summary balance sheet of the Obligated Group as of December 31, 2008, 2009 and 2010 and as of November 30, 2010 and Corporation Balance Sheet (in thousands) As of December 31, Unaudited As of November 30, Assets Current Assets $2,392 $2,310 $1,358 $1,287 $1,194 Short-term investments Assets limited as to use current ,945 9,969 Patient accounts receivable, net of allowance 1,346 1,273 1,375 1,364 1,359 Notes receivable Supplies Prepaid expenses Accrued interest ,609 4,839 4,212 6,763 13,632 Assets Limited As To Use Under indenture agreement, held by trustee 7,485 7,538 7,763 10,230 10,469 Externally restricted by donor ,898 7,932 8,235 10,652 10,812 Less amount required to meet current obligations (666) (438) (477) (2,945) (9,969) 7,232 7,494 7,758 7, Investments 15,860 16,997 18,532 17,664 18,268 Property and Equipment, At Cost Land and improvements 6,505 6,766 6,790 6,782 6,729 Buildings and improvements 129, , , , ,568 Equipment 9,355 9,840 9,860 9,770 10, , , , , ,732 Less accumulated depreciation (42,940) (47,974) (52,774) (52,331) (57,519) 102,696 99,578 95,869 96,196 93,213 Deferred financing costs, net of amortization 2,104 1,970 1,836 1,847 1,713 Total assets 133,501 $130, , , ,669 Liabilities and Net Assets Current Liabilities Current portion of long-term debt $6,589 $16,967 $30,765 $32,231 $50,440 Liabilities under split-interest agreements Accounts payable 1, Accrued expenses 1,398 1,319 1,405 2,046 2,060 Refunds in process 2,397 2, Deposits and advance payments ,461 22,207 34,083 36,117 54,495 Long-Term Debt 76,156 63,725 47,783 48,476 28,123 A-18

85 (in thousands) As of December 31, Unaudited As of November 30, Interest Rate Swap Agreements 2, Liabilities Under Split-Interest Agreements Deferred Revenue, Life Tenancy Agreements 66,553 65,045 65,806 65,690 65,462 Total liabilities 158, , , , ,544 Net Assets Unrestricted (24,913) (20,857) (20,347) (20,988) (21,133) Temporarily restricted Total Net Assets (24,653) (20,611) (20,022) (20,717) (20,875) Total liabilities and net assets 133,501 $130,878 $128,207 $130,177 $127,669 A-19

86 Debt Service Coverage Ratios The following table presents coverage of historical annual debt service of the Corporation for the three fiscal years ended December 31, 2008, 2009 and 2010 and for the 11-month periods ended November 30, 2010 and It also shows coverage of pro forma annual debt service assuming issuance of the Series 2012 Bonds and the refunding of the Prior Bonds. Historical and Pro Forma Coverage of Annual Debt Service (in thousands) Fiscal Year Ended December 31, Unaudited 11 Months Ended November 30, Gross Revenues Total Unrestricted Revenue (1) 32,486 34,726 34,892 31,983 32,822 Plus Net Entry Fees 5,713 5,358 5,132 4,526 6,620 Less Earned Entry Fees (5,912) (6,348) (6,444) (5,887) (6,892) (A) Total Gross Revenues $32,287 $33,736 $33,580 $30,622 $32,550 Operating Expenses Total Operating Expenses $34,752 $34,786 $35,113 $32,203 $33,134 Less Depreciation and Amortization (5,065) (5,395) (5,517) (5,059) (5,050) Less Provision for Uncollectible Accounts (125) (107) (90) (49) (51) Less Loss on Sale of Property/Equipment (129) (78) (99) (99) (47) Less Interest Expense (4,055) (3,704) (3,420) (3,239) (3,348) (B) Total Operating Expenses $25,378 $25,502 $25,987 $23,757 $24,638 (C) Income Available for Debt Service (A)-(B) $6,909 $8,234 $7,593 $6,865 $7,912 Total Debt Service Principal $2,065 $2,070 $2,160 $1,980 $2,186 Interest Expense 4,055 3,704 3,420 3,239 3,348 (D) Total Debt Service $6,120 $5,774 $5,580 $5,219 $5,534 Debt Service Coverage Ratio (C)/(D) 1.13x 1.43x 1.36x 1.32x 1.43x (E) Pro Forma Maximum Annual Debt Service (2) $5,417 $5,417 $5,417 $4,965 $4,965 Pro Forma Debt Service Coverage (C)/(E) 1.28x 1.52x 1.40x 1.38x 1.59x Minimum Debt Service Coverage Ratio Required by the Proposed Master Indenture 1.20x 1.20x 1.20x 1.20x 1.20x (1) Excludes unrealized gains and losses on investments; 2008 excludes impairment of equity securities deemed other than temporary. (2) Post issuance of the Series 2012 Bonds and the refunding of the Prior Bonds.. A-20

87 Liquidity The following table is a summary of the Days Cash on Hand of the Corporation as of December 31, 2008, 2009 and 2010 and as of November 30, 2010 and Corporation Days Cash On Hand (in thousands) As of December 31, Unaudited As of November 30, Unrestricted Cash and Investments Cash $2,392 $2,310 $1,358 $1,287 $1,194 Investments 16,139 17,226 18,950 18,211 18,741 (A) Total Unrestricted Cash and Investments $18,531 $19,536 $20,308 $19,498 $19,935 Cash Operating Expenses Total Operating Expenses $34,752 $34,786 $35,113 $32,203 $33,134 Less Depreciation and Amortization (5,065) (5,395) (5,517) (5,059) (5,050) Less Provision for Uncollectible Accounts (125) (107) (90) (49) (51) Less Loss on Sale of Property/Equipment (129) (78) (99) (99) (47) (B) Total Cash Operating Expenses $29,433 $29,206 $29,407 $26,996 $27,986 (C) Number of Days in Year (D) Daily Cash Expenses (B)/(C) $80 $80 $81 $81 $84 Days Cash-on-Hand (A)/(D) Minimum Days Cash on Hand Required by Prior Bond Documents Minimum Days Cash on Hand Required by Proposed Master Indenture A-21

88 MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATIONS The information below is an analysis of the results of operations of the Corporation. See the financial statements of the Corporation attached as Appendix B to this Official Statement. Results of the Corporation s Unrestricted Operations for the Eleven-Month Period Ended November 30, 2010 Compared to the Eleven-Month Period Ended November 30, 2011 Total revenues, gains and other support for the eleven months ended November 30, 2011, were $31,904,000 compared to $30,560,000 for the eleven months ended November 30, A breakdown of revenue components follows. Resident service fees were $14,878,000 for the period ended November 30, 2011, compared to $14,839,000 for the period ended November 30, 2010, an increase of 0.3%. This increase was due to a 2.0% rate increase on independent living units effective January 1, The Corporation raised the rate on independent living units effective January 1, 2012 by 5%. There were 506 average occupied independent living units through November 30, 2011 (88.5% average occupancy), compared to 498 average occupied independent living units through November 30, 2010 (87.1% average occupancy). The majority of residents at Friendship Village chooses the Standard Agreement; while 6.7% choose the Return of Capital Residency Agreement, which returns 80.0% of the Entrance Fees to the resident or the resident s estate. Also, 9.0% of current residents have a 90.0% Return of Capital contract, which has been discontinued. See RESIDENCY AGREEMENTS Refunds of Entrance Fees Prior Agreements herein for a discussion of these two types of Residency Agreements. The Corporation experienced turnover of 42 independents units during the first eleven months of 2011, as compared to turnover of 35 independent living units during the first 11 months of For the eleven months ended November 30, 2011, Entrance Fees from resold units totaled $8,467,000, less $1,846,000 paid in refunds on vacated units. The comparable figures for the eleven months ended November 30, 2010 are $7,949,000 in Entrance Fees from resold units less $3,423,000 in total refunds paid. Historically, the majority of the refunds are paid to residents on the Return of Capital Contract. Assisted Living and Assisted Living Memory Care revenues decreased from $2,659,000 for the period ended November 30, 2010 to $2,529,000 for the period ended November 30, Occupancy decreased from 74 residents as of November 30, 2010 to 63 as of November 30, Assisted living service fees increased 2.0% on January 1, Health Center revenue for the 11 months through November 30, 2011, was $6,663,000, essentially unchanged from the comparable 2010 period. There were no significant Medicare Cost report settlements for Medicare per day PPS rates for 2011 are entirely based on the federal rate. A higher census through November 30, 2011, resulted in an increase in Medicare reimbursement revenues compared to the same period in Overall there was a 5.0% effective increase in Health Center revenue per patient day, and reimbursements continue to be more than expenses. Occupancy remains stable at an average of 91.0%. As of November 30, 2011, there were 82 life care residents, 21 private pay, 12 Medicare, 6 HMO and 6 hospice residents in the Health Center. This compares to 85 life care, 24 private pay, 9 Medicare, and zero HMO residents as of November 30, The Village has 13 Medicare certified beds. A-22

89 Unrestricted gift income totaled $853,000 for the 11-month period ended November 30, 2011, compared with $429,000 for the 11-month period ended November 30, The Village has two Charitable Remainder Annuity Trusts with net assets of $163,000 and thirty Gift Annuities with net assets of $1,367,000 as of November 30, Interest and dividend income through November 30, 2011, was $645,000 compared to $534,000 through November 30, The increase in interest and dividend income was largely due to equity market conditions. Other revenues through November 30, 2011, totaled $378,000 compared to $355,000 through November 30, This revenue is not material to operations, and consists primarily of miscellaneous income from space rentals, the coffee shop, guest meals and catering. Expenses and losses for the eleven-month period ended November 30, 2011, totaled $33,134,000 compared to $32,203,000 for the eleven-month period ended November 30, 2010, an increase of 2.9% generally offset by monthly fee increases. Health Center expenses remained steady from November 30, 2010, through November 30, Dining Services expense was $5,131,000 in 2011 compared to $4,973,000 in The increase in this area was due primarily to increased wages and raw food costs. Assisted Living expenses through November 30, 2011, were $1,095,000 compared to $1,081,000 through November 30, This slight increase was due primarily to increased staffing. Assisted Living Memory Care expenses decreased through November 30, 2011, to $510,000 from $537,000 for the same period in Facility operations expense through November 30, 2011, was $6,480,000 compared to $6,266,000 through November 30, Resident Services expense increased $14,000 from $1,141,000 through November 30, 2010, to $1,155,000 through November 30, Resident Services includes bus drivers, activities personnel, social services, chaplain, fitness center staff and the assistance-in-living staff. General and administrative expense for the period ended November 30, 2011, increased from $2,868,000 for the period ended November 30, 2010, to $3,074,000. The increase was due primarily to the higher cost of staffing, legal and professional fees and insurance costs. The cumulative effect of income and expense trends, noted in part above, was a decline in Deficiency of Revenues over Expenses from a loss of $149,000 to a loss of $932,000 for the period ended November 30, 2011, a difference of $783,000. This was primarily due to reduced private pay occupancy in the Health Care Center and Assisted Living areas. The Corporation held investments valued at $18,741,000 as of November 30, 2011, with approximately 66.0% concentrated in common stocks and the remainder in fixed income and cash equivalents. These investments experienced net realized gains of $137,000 through November 30, 2011, compared to net realized gains of $834,000 through November 30, A-23

90 Results of the Unrestricted Operations of the Corporation for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2010 For the fiscal year ended December 31, 2010 ( FY 2010 ), total revenues, gains and other support amounted to $33,328,000 versus the $33,511,000 of operating revenues in FY A breakdown of revenue components follows. Resident service fees were $16,206,000 for FY 2010, compared to $16,226,000 for the fiscal year ended December 31, 2009 ( FY 2009 ), a decrease of 0.1%. The decrease was attributable to a slight decrease in second person occupancy. There were 496 average occupied independent living units through December 31, 2010 (86.6% average occupancy), versus 493 average occupied independent living units at December 31, 2009 (85.6% average occupancy). During 2010, 37 independent units turned over, while 42 turned over in For FY 2010, Entrance Fees from resold units totaled $8,698, 000 less $3,566,000 paid in refunds on vacated units. The comparable figures for FY 2009 are $7,664,000 in Entrance Fees from resold units less $2,306,000 in total refunds paid. Historically, the majority of the refunds are paid to residents on the Return of Capital Residency Agreement. Assisted Living and Assisted Living Memory Care revenues decreased from $2,977,000 for the FY 2009 to $2,888,150 for FY Occupancy decreased from 87 residents as of December 31, 2009, to 77 as of December 31, Assisted Living service fees were increased 2.0% on January 1, Health Center revenue for FY 2010 was $7,269,000 compared to $7,676,000 in FY There were no significant Medicare Cost Report settlements for Medicare per day PPS rates for 2010 were entirely based on the federal rate. A lower census through December 31, 2010, resulted in a decrease in Medicare reimbursement revenues compared to the same period in Overall, there was a 7.2% effective decrease in Health Center revenue per patient day, however, reimbursements continued to be more than expenses. As of December 31, 2010, there were 81 life care residents, 24 private pay, 10 Medicare, and three HMO residents in the Health Center. This compares to 79 life care, 30 private pay, 10 Medicare, and two HMO residents as of December 31, Unrestricted gift income totaled $527,000 for the period ended December 31, 2010, compared with $287,000 for the period ended December 31, The Village had three Charitable Remainder Annuity Trusts with net assets of $264,000 and 28 Gift Annuities with net assets of $1,398,000 as of December 31, Interest and dividend income through December 31, 2010, was $598,000 compared to $709,000 through December 31, This decrease was mainly due to volatility in the equity markets. Other revenues through December 31, 2010, totaled $408,000 compared to $401,000 through December 31, This revenue is not material to operations, and consists primarily of income from space rentals, the coffee shop, guest meals, and catering. Expenses and losses for FY 2010 totaled $35,113,000, compared to $34,786,000 for FY 2009, an increase of 0.9% generally offset by monthly fee increases. Health Center expenses increased by $87,000 from $6,868,000 through December 31, 2009, to $6,955,000 through December 31, Registry expenses increased from $1,000 through December 31, 2009, to $14,000 through December 31, A-24

91 Dining Service expense was $5,485,000 in 2010 compared to $5,426,000 in The increase in Dining Service expense was due primarily to increased wages and raw food costs. Assisted Living expenses through December 31, 2010, were $1,185,000, compared to $1,149,000 through December 31, This increase was due primarily to an increase in licensing fees. Assisted Living Memory Care expenses increased through December 31, 2010, to $581,000 from $529,000 for the same period in 2009, mainly due to a staffing change. Facility operations expense through December 31, 2010, was $6,944,000, compared to $6,767,000 through December 31, This increase was due primarily to increased staffing and utility costs. Resident Services expense decreased $12,000 from $1,299,000 through December 31, 2009, to $1,287,000 through December 31, Resident Services includes bus drivers, activities personnel, social services, chaplain, fitness center staff and the assistance-in-living staff. General and administrative expense for the period ended December 31, 2010, increased from $3,000,000 for the period ended December 31, 2009, to $3,181,000. The cumulative effect of income and expense trends, noted in part above, was a decline in Excess of Revenues over Expenses from $4,956,000 to $491,000 in FY This was primarily due to reduced investment returns and lower private pay revenues in the Health Center and Assisted Living. The Corporation held investments valued at $18,951,000 as of December 31, 2010, with approximately 65.0% concentrated in common stocks and the remainder in fixed income and cash equivalents. These investments experienced net realized gains of $921,000 through December 31, 2010, compared to net realized gains of $495,000 through December 31, Refunding of the Prior Bonds and Expiration of the Letter of Credit As discussed in Notes 6(E) and 15 to the unaudited interim financial statements for the period ended November 30, 2011, those financial statements were prepared assuming the Corporation will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business, but point out that the letter of credit supporting a portion of the Prior Bonds (the $48,055,000 outstanding principal amount of the Authority s Senior Living Revenue Bonds (Friendship Village of Tempe Project), Series 2002C) expires by its terms on July 2, The Prior Bonds are being refunded with the proceeds of the Series 2012 Bonds, and will be redeemed before July 2, See Plan of Finance in the forepart of this Official Statement for the mechanics of the redemption of the Prior Bonds. Swap Dispute In December 2006, the Corporation entered into two interest rate swaps with Lehman Brothers Special Financing, Inc. ( LBSF ), as counterparty. One agreement provided for the Corporation to receive interest from LBSF at a rate equal to the SIFMA Municipal Swap Index and to pay interest to LBSF at a fixed rate of 4.077% on the notional amount of $10,000,000. This agreement expired on December 1, The second agreement provides for the Corporation to receive interest from LBSF at a rate equal to the product of 67% and the USD-LIBOR-BBA (with a one-month designated maturity) and to pay interest to LBSF at a fixed rate of 3.889% on the notional amount of $10,000,000. This agreement was due to expire December 1, A-25

92 In October 2008, LBSF filed for bankruptcy protection. A new counterparty had not been determined for the Corporation s swap agreement. In August 2009, the Corporation provided LBSF with a notice designating an early termination date for both of the interest rate swap agreements and paid LBSF an initial payment of $625,562 for all unpaid amounts under the agreement. LBSF responded by reserving the right to dispute the validity of the termination notice. On February 10, 2011, the Corporation filed an Adversary Proceeding in the United States Bankruptcy Court for the Southern District of New York against Debtor LBSF. The Corporation and LBSF subsequently entered into mediation of the dispute. On March 5, 2012, the parties reached a settlement, agreeing to release each party from liability under the swap agreements in exchange for the Corporation s payment of $1,580,000. The Corporation s Adversary Proceeding is in the process of being dismissed. INSURANCE The Corporation is a member of the Life Care Services Advantage Insurance Program, which provides consistency and continuity at a reasonable cost. The Corporation maintains insurance coverage for a variety of risks, including replacement of real and personal property, commercial general liability, professional liability, business interruption, crime, auto, Directors and Officers Liability, and Employment Practices Liability. Commercial general and professional liability limits are $1,000,000 per incident and $3,000,000 aggregate. Directors and Officers Liability and Employment Practices Liability have policy limits of $7,500,000 and, in addition, the Corporation maintains an Umbrella Liability policy of $10,000,000. The Workers Compensation policy contains statutory limits of $500,000. Health Services Licensure LICENSURE AND ACCREDITATION The Corporation is required to maintain a number of operating licenses and permits relating to its health care operations. The Health Center and the Village s assisted living facility are required to be licensed by the State of Arizona Department of Health Services ( DHS ) and by the federal Centers for Medicine and Medicaid Services ( CMS ) in order to provide Medicare services. Arizona law also requires that the nursing facility be under the supervision of an Arizona licensed nursing home administrator. The Corporation holds the required licenses and employs one or more licensed administrators at all times. The Corporation is required to file its schedule of initial rates and any revised rates with respect to the Village s Health Center with the State Department of Health Services and the authorized local agency designated under State law. At this time there are no substantive procedures provided to enforce those rates approved by the State Department of Health Services and the local agency, although Medicare will not reimburse the Corporation for nursing services in an amount in excess of the rates so approved. Memberships The Corporation is a member of the LeadingAge Arizona, a state-wide not-for-profit organization representing long term care facilities, senior retirement housing campuses and community service organizations. EMPLOYEES As of December 31, 2011, the Corporation employed 481 employees representing approximately 417 full-time equivalents. The Corporation s employees do not participate in unions or union activity. A-26

93 THE MANAGER Life Care Services LLC The Corporation contracts with Life Care Services LLC, an Iowa limited liability company (the Manager ) for management of the operations of the Village. The Manager is recognized as a leader in the marketing and management of full service retirement communities. The Manager and its sister company, Co-Operative Retirement Services of America, a Delaware corporation ( CRSA ), currently manage 100 retirement communities serving over 29,000 residents in 31 states and the District of Columbia. LCS Holdings, Inc., an Iowa corporation ( LCS ) and the parent company of Life Care Companies LLC ( Life Care Companies ) and through it the Manager and CRSA, developed 23 and owns 12 of these communities (two of each are in Connecticut, Maryland and Virginia, and one of each is in Arizona, Florida, Michigan, North Carolina, Tennessee and Washington). The Manager provides management services from its home office in Des Moines, Iowa and from regional offices in Charlotte, North Carolina; Old Saybrook, Connecticut; Indianapolis, Indiana; Delray Beach, Florida; San Diego, California; and St. Louis, Missouri. As of December 31, 2011, the Manager and CRSA managed approximately 80 life care or continuing care retirement communities and 20 free-standing nursing, assisted living, or independent living retirement communities. The Manager serves as the property manager of the Village and, in connection therewith, recommends and regularly evaluates policies and goals of the Corporation, implements the policies, budgets, directives and goals for the Village established by the Corporation, markets the Village, manages the day-to-day operations of the Village in accordance with the Corporation policies, directives and goals, provides the Corporation with relevant information as to past operations, and makes recommendations as to the future operation of the Village. The Manager hires, trains, and supervises the Executive Director and the Administrator of Resident Services of the Village, who are employees of the Manager. The Manager recommends personnel policies and procedures for the Corporation s employees, recommends appropriate employee compensation and benefit plans, as necessary or appropriate, recruits employees to be employed by the Corporation, and utilizing personnel policies, procedures and guidelines adopted by the Corporation, implements the recruitment, hiring, training, retention and termination of the Village staff members. The Manager maintains a system of financial controls for the Village and provides the Corporation with monthly financial statements and annual budgets for operating revenue and expense, capital expenditures and cash flow projections for the Village, and recommends a schedule of resident Entrance Fees, monthly services fees and other charges. The Corporation Board retains ultimate control over the retention of the Manager. The Corporation Board also evaluates the performance and monitors the operating costs, wages, salaries, expenses and overall fiscal viability of the Village. Executive Management of the Manager Ed Kenny, President and Chief Executive Officer. Mr. Kenny has been the Chief Executive Officer of the Manager since He is a graduate of Providence College with a Bachelor of Science degree in health services administration. Since joining the Manager in 1979, Mr. Kenny has provided onsite leadership at several communities managed by the Manager. In 1985, Mr. Kenny added regional responsibilities, and was named a Vice President in In 1990, he became Senior Vice President of Operations Management, and in 2001, he became Executive Vice President of Operations Management. Mr. Kenny serves as the Chair of the Board of Directors of LCS and Chair of the Board of Managers of A-27

94 Life Care Companies. He also is the Chairman of the American Seniors Housing Association and an invited member of the National Investment Center (NIC), where he serves on the NIC Operator Advisory Board. Diane Bridgewater, Executive Vice President/Chief Financial and Administrative Officer. Mrs. Bridgewater joined the organization in 2006 after filling several executive level positions with Pioneer Hi-Bred International, a DuPont Company. In her years with Pioneer, she held a number of operational and financial roles including Chief Financial Officer, Vice President and Business Director for North America, Director of Customer and Sales Services for Seed and Crop Protection, Worldwide Finance Director, and other roles. Mrs. Bridgewater started her career with KPMG after earning her undergraduate degrees in Accounting and French from the University of Northern Iowa and her CPA certification in Mrs. Bridgewater currently serves on the Board of Directors of LCS, the Board of Managers for Life Care Companies, Casey s General Stores, and Bankers Trust. Rick Exline, Executive Vice President of Operations. Mr. Exline first joined the Manager in 1978, serving in Administrator and/or Executive Director positions at several communities managed by the Manager until taking on regional management responsibilities in Prior to serving as Executive Vice President of Operations, Mr. Exline was the Senior Vice President/Senior Director of Operations Management. Today, Mr. Exline manages the relationships between communities managed by the Manager. In this role, he actively reviews community financial performance, resident satisfaction levels, occupancy levels, quality of care and risk management. Mr. Exline is a member of the LCS Board of Directors and the Board of Managers for Life Care Companies. Mr. Exline, a graduate of Simpson College, holds bachelor s degrees in business administration and health care administration from Oklahoma Baptist University. In 1987, he graduated from the Executive Institute at the University of North Carolina at Chapel Hill. Joel Nelson, Executive Vice President/Chief Development Officer. Mr. Nelson began his employment with the Manager in 1986 at Friendship Village South County in St. Louis, Missouri. Mr. Nelson has served in several capacities with the Manager over the past 20 years, including Executive Director of multiple CCRC campuses, Regional Marketing Specialist, Director of Operations Management and, prior to his current position, Executive Vice President of Operations Management. Mr. Nelson is the Secretary of the Board of Directors of LCS and serves on the Board of Managers of Life Care Companies. He has been a presenter at several national conferences including AAHSA (now LeadingAge Arizona), Alabama Governors Conference, and the Indiana Association for Homes and Services for the Aging. Mr. Nelson has a BA degree from Simpson College with a double major in Health Care Administration and Business Management. Manager and CRSA Communities As of December 31, 2011, the Manager and CRSA or its subsidiaries were managing, developing or constructing the following retirement communities: Living Units Nursing Beds Personal Care* Retirement Communities Developed and Managed by Life Care Services LLC (18) Arizona, Tempe (Phoenix) - Friendship Village Arizona, Phoenix Sagewood Connecticut, Essex - Essex Meadows Connecticut, Mystic StoneRidge Connecticut, Southbury Pomperaug Woods Florida, Stuart - Sandhill Cove Maryland, Baltimore - North Oaks A-28

95 Maryland, Towson Blakehurst Massachusetts, N. Andover Edgewood Michigan, Kalamazoo - Friendship Village Missouri, Sunset Hills (St. Louis) - Friendship Village of Sunset Hills Missouri, Chesterfield (St. Louis) - Friendship Village of Chesterfield New Jersey, Lakewood Harrogate North Carolina, Wilmington - Plantation Village Ohio, Columbus Friendship Village Ohio, Dublin - Friendship Village of Dublin Tennessee, Brentwood Heritage at Brentwood Washington, Isaaquah Timber Ridge at Talus (*) Personal Care is also sometimes referred to as assisted living, residential care, domiciliary care, boarding care and board and care. Living Units Nursing Beds Personal Care* Retirement Communities Continuing Care Retirement Communities Currently Under Development and/or Construction (1) Minnesota, Plymouth (Minneapolis) Trillium Woods Assisted Living Facilities Developed and Managed by Life Care Services LLC (3) Florida, St. Petersburg Bon Secours Place at St. Petersburg Virginia, Norfolk - Province Place at Depaul Virginia, Portsmouth Province Place of Maryview Retirement Communities Managed by Life Care Services LLC (73) Arizona, Peoria (Phoenix) - Sierra Winds Arkansas, Blytheville Westminster Village of the Mid South Alabama, Hoover Danberry at Inverness California, Carlsbad La Costa Glen California, Castro Valley Baywood Court California, Fullerton - Morningside of Fullerton and Park Vista at Morningside California, Oakland Mercy Retirement and Care Center California, Oakland Salem Lutheran Home California, Oroville Country Crest California, San Diego Casa de las Campanas California, San Rafael Aldersly California, Thousand Oaks University Village Colorado, Aurora St. Andrews Village Connecticut, Chester - Chester Village West Connecticut, Redding Meadow Ridge DC, Washington Residences at Thomas Circle Florida, Miami East Ridge Retirement Village Georgia, Columbus Spring Harbor Georgia, Savannah Marshes of Skidaway Georgia, Stone Mountain Park Springs Georgia, Peachtree City - Towne Club at Peachtree City Illinois, Bartlett Clare Oaks A-29

96 Retirement Communities Living Units Nursing Beds Personal Care* Illinois, Godfrey United Methodist Village Illinois, Lincolnshire Sedgebrook Illinois, Naperville Monarch Landing Illinois, Plainfield Cedarlake Village Illinois, Wheaton Wyndemere Indiana, Franklin Indiana Masonic Homes Indiana, Greenwood (Indianapolis) - Greenwood Village South Indiana, Indianapolis Marquette Indiana, North Manchester Peabody Indiana, Terre Haute - Westminster Village of Terre Haute Indiana West Lafayette Westminster Village West Lafayette Iowa, Ames Green Hills Iowa, Cedar Rapids Cottage Grove Place Louisiana, Covington Christwood Maine, Portland Piper Shores Maryland, Annapolis Baywoods of Annapolis Maryland, Columbia Vantage House Maryland, Timonium Mercy Ridge Michigan, Battle Creek Northpointe Woods Michigan, Dearborn Henry Ford Village Michigan, Jackson - Vista Grande Villa Michigan, Waterford Canterbury on the Lake Missouri, Ellisville (St. Louis) - Gambrill Gardens Missouri, Higginsville - John Knox Village East Missouri, Kansas City Kingwood Missouri, Marionville Ozarks Methodist Manor North Carolina, Arden Ardenwoods at Avery s Creek North Carolina, Chapel Hill The Cedars of Chapel Hill North Carolina, Charlotte The Cypress of Charlotte North Carolina, Durham Croasdaile Village North Carolina, Fayetteville Heritage Place North Carolina, Greensboro WhiteStone North Carolina, Greenville Cypress Glen North Carolina, Lumberton Wesley Pines North Carolina, Pinehurst Quail Haven North Carolina, Pittsboro Galloway Ridge North Carolina, Raleigh Cypress of Raleigh South Carolina, Sumter Covenant Place South Carolina, West Columbia Laurel Crest Ohio, Akron Sumner on Ridgewood Oklahoma, Bartlesville Green Country Village Oregon, Dallas Dallas Retirement Village Oregon, Salem Capital Manor Pennsylvania, Reading Heritage of Green Hills South Carolina, Greenville - Rolling Green Village South Carolina, Hilton Head Island - The Cypress of Hilton Head Tennessee, Germantown Village at Germantown Texas, Austin - Westminster Manor Texas, Austin Longhorn Village Texas, Lubbock Carillon Texas, Wichita Falls Rolling Meadows (*) Personal Care is also sometimes referred to as assisted living, residential care, domiciliary care, boarding care and board and care. A-30

97 Assisted Living Facilities Managed by Life Care Services LLC (4) Personal Care California, Camarillo Alma Via Camarillo 82 California, San Francisco Alma Via of San Francisco 135 California, Union City Alma Via of Union City 95 California, San Rafael Alma Via of San Rafael 137 Health Centers (Stand Alone) Managed by Life Care Services LLC (2) Nursing Beds Hawaii, Honolulu - Hale Ola Kino 32 Kansas, Atchison - Dooley Center 50 Assisted Living Facilities Managed by the Manager Living Units Approximately Nursing Beds Personal Care California, San Francisco - Rhoda Goldman Plaza New York, Rockville Center - Maple Point at Rockville Center Virginia, Richmond - Bon Secours Place at Ironbridge (*) Personal Care is also sometimes referred to as assisted living, residential care, domiciliary care, boarding care and board and care. Health Centers (Stand Alone) Managed by the Manager Nursing Beds Hawaii, Honolulu - Hale Ola Kino 32 Kansas, Atchison - Dooley Center 58 Management Agreement The Manager was engaged by the Corporation to provide management services for the Village. The current Management Agreement, which commenced on December 31, 2006, and expires on June 30, 2012, provides that the Manager will receive compensation for its ongoing management services equivalent to 2.5% of the Corporation s annual Operating Revenues. The Corporation also reimburses the Manager for the salaries and benefits of the Executive Director and Administrator of Resident Services. The Manager s compensation is subordinated to the payments required to be made by the Corporation under the Loan Agreement. The Management Agreement may be terminated without cause and without penalty by the Manager or by the Corporation at any time upon three months prior notice. It may also be sooner terminated in the event of the insolvency of either party. The Corporation expects to renew the Management Agreement with a term ending on June 30, The Manager s responsibilities include recruiting, employing and training the Executive Director and the Administrator of Resident Services of the Village, supervising the licensing, equipping, staffing and operation of the Village, preparing annual budgets, and establishing and operating a system of financial controls for the Village. A-31

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99 APPENDIX B AUDITED FINANCIAL STATEMENTS OF TEMPE LIFE CARE VILLAGE, INC. FOR THE YEARS ENDED DECEMBER 31, 2007, 2008, 2009 AND 2010 AND UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE PERIODS ENDED NOVEMBER 30, 2010 AND 2011

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101 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Accountants' Report and Financial Statements December 31, 2008 and 2007

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103 BKD", CPAs & Advisors 910 E. St. Louis Street, Suite 200 P.O. Box 1190 Springfield, MO Fax Independent Accountants' Report Board of Directors Tempe Life Care Village, Inc_ d/b/a Friendship Village of Tempe Tempe, Arizona We have audited the accompanying balance sheets of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2008 and 2007, and the related statements of operations and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Village'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 [mancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the [mancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2008 and 2007, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 14, in 2008 the Village changed its method of accounting for fair value measurements in accordance with Statement of Financial Accounting Standards No March 11, 2010 experience BKD Praxiix ; MEMBER GLOBAL ALLIANCE OF INDEPENDENT FIRMS

104 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Balance Sheets December 31, 2008 and 2007 Assets Current Assets Cash and cash equivalents $ 2,392,100 Short-term investments 278,952 Assets limited as to use - current 666,358 Patient accounts receivable, net of allowance; $53,207 and $11,218 1,346,455 Notes receivable 284,550 Supplies 140,493 Prepaid expenses 356,514 Accrued interest 143,725 5,609,147 Assets Limited As To Use Under indenture agreement, held by trustee 7,484,688 Externally restricted by donor 413,600 7,898,288 Less amount required to meet current obligations 666,358 7,231,930 Investments 15,860,374 Property and Equipment, At Cost Land and improvements 6,505,096 Buildings and improvements 129,775,794 Equipment 9,354, ,635,805 Less accumulated depreciation 42,940, ,695,751 Deferred financing costs, net of amortization 2,103,947 Total assets $ 133,501,149 $ 2,110,344 1,471, ,487 1,387, , , , ,861 7,282,882 7,600, ,251 8,068, ,487 7,112,849 20,415,048 6,316, ,661,778 8,885, ,864,223 38,461, ,402,330 2,237,919 $ 141,451,028 See Notes to Financial Statements

105 Liabilities and Net Assets Current Liabilities Current portion oflong-term debt Current portion of variable rate debt related to letter of credit Liabilities under split-interest agreements Accounts payable Accrued expenses Refunds in process Deposits and advance payments Total current liabilities $ ,070,000 $ 2,065,000 4,519,000 3,215, , ,124 1,468, ,216 1,397,493 1,240,572 2,397,098 1,623, , ,745 12,461,125 9,780,126 Long-Term Debt 76,156,307 79,513,849 Interest Rate Swap Agreements 2,470,863 1,109,213 Liabilities Under Split-Interest Agreements 513, ,208 Deferred Revenue, Life Tenancy Agreements Total liabilities 66,552,753 67,805, ,154, ,776,044 Net Assets Unrestricted Temporarily restricted Total net assets Total liabilities and net assets $ (24,912,622) (17,636,579) 259, ,563 (24,652,951) (17,325,016) 133,501,149 $ 141,451,028 2

106 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Operations and Changes in Net Assets Years Ended December 31,2008 and 2007 Unrestricted 2008 Temporarily Restricted Total Revenues, Gains and Other Support Resident services, including amortization of entrance fees of$5,922, and $6,181, $ 25,408,911 $ Net patient service revenue and resident fees 6,021,424 Contributions 409,810 9,202 Other revenue 418,674 Total revenues, gains and other support 32,258,819 9,202 Expenses and Losses Salaries and wages 13,025,149 Employee benefits 2,926,980 Professional services 1,621,383 Supplies and other 7,804,630 Depreciation and amortization 5,065,079 Interest 4,054,596 Provision for uncollectible accounts 124,639 Loss on disposal of property and equipment 129,201 Total expenses and losses 34,751,657 Operating Income (Loss) (2,492,838) 9,202 Other Income (Expense) Investment return (2,245,496) (43,030) Actuarial change in split-interest agreements (28,866) (11,611) Refund of entrance fees Change in fair value of interest rate swap agreements (1,361,650) Excess (Deficiency) of Revenues Over Expenses (6,128,850) (45,439) Investment return - change in unrealized gains and losses (1,153,646) Net assets released from restriction used for purchase of property and equipment 6,453 (6,453) Decrease in Net Assets (7,276,043) (51,892) Net Assets, Beginning of the Year (17,636,579) 311,563 Net Assets, End of Year $ (24,912,622) $ 259,671 $ 25,408,911 6,021, , ,674 32,268,021 13,025,149 2,926,980 1,621,383 7,804,630 5,065,079 4,054, , ,201 34,751,657 (2,483,636) (2,288,526) (40,477) (1,361,650) (6,174,289) (1,153,646) (7,327,935) (17,325,016) $ (24,652,951) See Notes to Financial Statements

107 Unrestricted $ 24,435,029 5,233, , ,252 30,396,843 12,534,954 2,701,124 1,584,415 7,458,093 5,158,413 5,083, , ,501 34,760,422 (4,363,579) 1,991,391 (40,323) (237,733) (474,360) (3,124,604) 5, ,216 (2,358,898) (15,277,681) $ (17,636,579) 2007 Temporarily Restricted $ 59,260 59,260 59,260 (8,886) 50,374 34,320 (760,216) (675,522) 987,085 $ 311,563 Total $ 24,435,029 5,233, , ,252 30,456,103 12,534,954 2,701,124 1,584,415 7,458,093 5,158,413 5,083, , ,501 34,760,422 (4,304,319) 1,991,391 (49,209) (237,733) (474,360) (3,074,230) 39,810 (3,034,420) (14,290,596) $ (17,325,016) 3

108 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Cash Flows Years Ended December 31,2008 and Operating Activities Change in net assets $ (7,327,935) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Depreciation and amortization 5,065,079 Loss on disposal of property and equipment 129,201 Net (gain) loss on investments 4,409,568 Change in fair value of interest rate swap agreements 1,361,650 Actuarial change in split-interest agreements and annuities 40,477 Changes in annuities (47,448) Amortization of deferred revenue (5,922,471) Proceeds from nonrefundable life tenancy agreements 6,839,028 Refunds paid on nonrefundable life tenancy agreements (541,299) Changes in Patient accounts receivable 41,320 Accounts payable and accrued expenses 807,150 Other current assets and liabilities 12,817 Net cash provided by operating activities 4,867,137 Investing Activities Purchase of investments (15,491,903) Proceeds from disposition of investments 16,999,932 Investments subject to annuity agreements 71,834 Payments of annuity agreements (116,072) Purchase of property and equipment (3,389,398) Net cash used in investing activities (1,925,607) Financing Activities Principal payments on long-term debt (2,065,000) Proceeds from refundable life tenancy agreements 2,147,802 Refunds paid on refundable life tenancy agreements (2,742,576) Net cash used in financing activities (2,659,774) Increase (Decrease) in Cash and Cash Equivalents 281,756 Cash and Cash Equivalents, Beginning of Year 2,110,344 Cash and Cash Equivalents, End of Year $ 2,392, $ (3,034,420) 5,158, ,501 (807,936) 474,360 49,209 (6,181,336) 10,988,457 (736,773) 39,499 (402,934) (66,679) 5,598,363 (14,764,468) 16,836, ,062 (113,124) (9,254,915) (7,178,263) (1,980,000) 2,877,370 (1,429,686) (532,316) (2,112,216) 4,222,560 $ 2,110,344 Supplemental Cash Flows Information Accounts payable incurred for property and equipment $ 91,352 Interest paid $ 3,532,801 $ 143,479 $ 4,022,081 See Notes to Financial Statements 4

109 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Tempe Life Care Village, mc., d/b/a Friendship Village of Tempe (the "Village"), was incorporated in 1976 as an Arizona not-for-profit corporation and provides health care housing and other related services to residents through the operation of a continuing care retirement community in Tempe, Arizona. The Village's facility is comprised of 296 cottage units, 280 apartments, a common area with recreational facilities, a 128-bed skilled nursing facility, a 67-unit assisted living facility and a 24-unit assisted living dementia unit. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Village considers all liquid investments, other than those limited as to use or held in investment accounts with original maturities of three months or less to be cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted primarily of money market accounts and repurchase agreements with a financial institution. The financial institutions holding the Village's cash accounts are participating in the FDIC's Transaction Account Guarantee Program. Under the program, through June 30, 2010, all noninterest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Effective October 3, 2008, the FDIC's insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31,2013. At December 31, 2008, the Company's cash accounts exceeded federally insured limits by approximately $732,400. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. mvestment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. mvestment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is 5

110 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 included in unrestricted net assets. Other investment return is reflected in the statements of operations and changes in net assets as unrestricted or temporarily restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited As To Use Assets limited as to use include assets held by trustees under indenture agreements and assets externally restricted by donors. Amounts required to meet current liabilities of the Village are classified as current assets. Patient Accounts Receivable The Village reports resident patient accounts receivable for services rendered at net realizable amounts from third-party payers, residents and others. The Village provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. Supplies Supply inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-Lived Asset Impairment The Village 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 estimate 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 31,2008 and

111 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Deferred Revenue - Life Tenancy Agreements The right to occupy various living units is granted under life tenancy agreements under which the tenants pay a certain sum (entrance fee) which entitles them to live in the unit for life. The Village offers two basic types of tenancy agreements - Deferred Entrance Fees, Standard Plan and Deferred Entrance Fees, Return of Capital. Deferred Entrance Fees, Standard Plan Deferred entrance fees under the standard plan are initially recorded as deferred entrance fees and amortized into revenue on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident's occupancy. Under certain circumstances, a portion of the entrance fee may be returned to the resident upon termination of occupancy. Any unrecognized entrance fee at the date of death or termination of occupancy of the respective resident that is not refunded is recorded as operating income in the period in which death or termination of occupancy occurs. Deferred Entrance Fees, Return of Capital The nonrefundable portion (10%) of the entrance fee is initially recorded as deferred entrance fees, and amortized into operating income on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident's initial occupancy. The refundable portion (90%) is not amortized into revenue as the refund is paid upon reoccupancy of the unit or within two years from the date of the move out, whichever occurs first, and is included in refundable entrance fees. Effective January 1,2006, the Return of Capital plan was amended where the nonrefundable portion going forward is 20% and the refundable portion is 80%. Under all contracts the resident's entrance fee is fully refundable during the first year of occupancy, excluding the occurrence of death of the resident. If, after the first year, the agreement is terminated for any reason other than death, the Village will attempt to obtain a new resident for the unit. If, in the sole discretion of the Village, repayment to the resident will not jeopardize the financial structure of the Village, then upon receipt of an entrance fee from a new resident, the resident whose agreement was terminated will be reimbursed for the amount of the entrance fee previously paid, less an appropriate charge for the period of residency until the new resident assumes residency. Under the standard plan the amount of the charge is 1 % per month of residency or 22% of the entrance fee, whichever is greater. It has been management's policy to refund amounts as indicated above. 7

112 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Deposits and Advance Payments Entrance fees received prior to occupancy are recorded as deposits. When a residency agreement is signed, the resident is required to deposit 10% of the entrance fee with the Village. The balance of the entrance fee is due upon occupancy of the unit. Application fee deposits are transferred to deferred entrance fees at the time of occupancy. Under certain circumstances, potential residents may cancel their residency agreements prior to occupancy. Obligation to Provide Future Services The Village annually considers the net cost of future services and the use of facilities to be provided to current residents and compares that amount with the balance of deferred revenue from advance fees and other related cash inflows. If the present value of the net cost of future services and the use of facilities exceeds the deferred revenue from advance fees plus other related cash inflows, a liability is recorded (obligation to provide future services and use of facilities) with the corresponding charge to income. As of December 31, 2008 and 2007, the contracts being offered by the Village contain provisions allowing for increases in monthly service fees, which management intends to increase as is necessary to prevent a net liability to provide future services. Therefore, as of December 31,2008 and 2007, management does not anticipate that the obligation to provide future services will exceed the estimated future cash inflows, and no liability has been recorded. Split-Interest Agreements Charitable gift annuities are recorded at fair value when received based on the present value of expected payments to be made under the agreement. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Village has been limited by donors to a specific time period or purpose. Net Patient Service Revenue and Monthly Resident Fees Net patient service revenue is reported at the estimated net realizable amounts from patients and others for services rendered. Monthly resident fees are recognized as revenue in the related month of occupancy. 8

113 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Charity Care The Village provides charity care to residents who are unable to pay monthly service fees. The amount of charity care is classified in the provision for uncollectible accounts. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or pennanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accompolished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Income Taxes The Village is exempt from income taxes under Section 509(a)(2) of the Internal Revenue Code (the "Code") as an organization described in Section 501(c)(3) of the Code and a similar provision of state law. However, the Village is subject to federal income tax on any unrelated business taxable income. Excess (Deficiency) of Revenues Over Expenses The statements of operations and changes in net assets include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Reclassifications Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 financial statement presentation. These reclassifications had no effect on the change in net assets. 9

114 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Note 2: Concentrations of Credit Risk The Village grants credit without collateral to its residents. At December 31,2008 and 2007, the mix of receivables from patients and third-party payers is: Medicare Insurance Private 41% 14% 45% 100% 44% 13% 43% 100% The Village maintains approximately $1,280,000 of unsecured cash balances invested in eurodollar sweep accounts at December 31, These accounts are legal transfers of funds to the financial institutions offshore entities and are not subject to the federally insured deposit limits. Note 3: Investments and Investment Return Assets Limited As to Use Assets limited as to use include: Externally restricted by donors Cash $ 327,418 $ 332,960 Equity securities 86, ,291 $ 413,600 $ 468,251 Held by trustee under indenture agreement Cash and cash equivalents $ 678,857 $ 1,238,247 U.S. Treasury and government agency obligations 5,758,676 5,456,458 Corporate obligations 1,047, ,380 $ 7,484,688 $ 7,600,085 10

115 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 Other Investments Other investments include: Cash and cash equivalents $ 278,952 U.S. Treasury and government agency obligations 6,233,045 Corporate obligations 409,043 Equity securities 9,218,286 16,139,326 Less long-term investments 15,860,374 $ 1,471,827 6,651, ,090 13,242,936 21,886,875 20,415,048 Short-term investments $ 278,952 $ 1,471,827 Total investment return is comprised of the following: Interest and dividend income $ 967,396 Net unrealized gains (losses) on other than trading securities (1,153,646) Net realized gains (losses) on other than trading securities (789,543) Impairment of equity securities deemed other than temporary (2,466,379) $ 1,223,265 39, ,126 $ (3,442,172) $ 2,031,201 Total investment return is reflected in the statements of operations and changes in net assets as follows: Unrestricted net assets Investment return Investment return - change in unrealized gains and losses 2008 $ (2,288,526) (1,153,646) 2007 $ 1,991,391 39,810 $ (3,442,172) $ 2,031,201 11

116 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 While the Village does not invest directly in derivative securities, it may, through investment holdings with a manager, indirectly hold these securities. This risk is controlled through a diversified portfolio and regular monitoring procedures. At December 31, 2008, the Village wrote down to fair market value their investments in equity securities. The write-down amounted to $2,466,379 and was due to a decline in the fair value of the equity security which was considered to be other than temporary. The write-down is included in other income (expense) in the accompanying statement of operations and changes in net assets for Certain investments in debt securities are reported in the financial statements at an amoul1t less than their historical cost. Total fair value of these investments at December 31, 2008 and 2007, was $2,303,79.6 and $5,391,090 which is approximately 10% and 18% of the Village's investment portfolio, respectively. These declines primarily resulted from recent changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings or meet projected earnings targets. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in debt securities at December 31, 2008, are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following table shows the investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31,2008 and 2007: 2008 Less than 12 Months 12 Months or More Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Debt securities $ 1,145,625 $ 6,002 $ 1,158,171 $ 56,629 $ 2,303,796 $ 62, Less than 12 Months 12 Months or More Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Debt securities $ 180,618 $ 39,290 $ 2,097,031 $ 38,906 $ 2,277,649 $ 78,196 Equity securities 2,976, , ,945 27,004 3,113, ,928 Total temporarily impaired securities $ 3,157,114 $ 674,214 $ 2,233,976 $ 65,910 $ 5,391,090 $ 740,124 12

117 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 Note 4: Split-Interest Agreements The Village has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The Village has recorded a liability at December 31,2008 and 2007, of $629, 123 and $680,332, respectively, which represents the present value of the future annuity obligations. The liability has been determined using net discount rates ranging in 2008 and 2007 from 4.2% to 6%. The Village recorded $66,132 and $77,579 in contribution revenue from these instruments for 2008 and 2007, respectively. Note 5: Deferred Revenue - Life Tenancy Agreements Deferred revenue -life tenancy agreements consist of the following as of December 31,2008 and 2007: 2008 Refundable Nonrefundable Total Deposits by residents $ 23,579,802 $ 70,818,774 $ 94,398,576 Less accumulated amortization 27,845,823 27,845,823 $ 23,579,802 $ 42,972,951 $ 66,552, Refundable Nonrefundable Total Deposits by residents $ 24,511,529 $ 68,301,473 $ 92,813,002 Less accumulated amortization 25,007,354 25,007,354 $ 24,511,529 $ 43,294,119 $ 67,805,648 13

118 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Note 6: Long-Term Debt Series 1993B Bonds (A) Series 2002A Bonds (B) Series 2002B-l Bonds (C) Series 2002B-2 Bonds (D) Series 2002C Bonds (E) Series 2004A Bonds (F) Series 2004B Bonds (G) Less current maturities Less current portion of variable rate debt to letter of credit Less bond discount $ 4,898,000 11,460,000 2,000,000 3,000,000 49,080,000 6,410,000 6,090,000 82,938,000 2,070,000 4,519, ,693 $ 76,156,307 $ 4,898,000 11,460,000 2,000,000 3,000,000 49,400,000 8,155,000 6,090,000 85,003,000 2,065,000 3,215, ,151 $ 79,513,849 (A) (B) (C) (D) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Refunding Revenue Bonds, Series 1993B; in the original amount of$7,690,000 dated December 1, 1993, with $2,376,500 maturing on December 1,2014, bearing interest at 6.00% and $2,521,500 maturing on December 1,2016, bearing interest at 5.25%. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds, Series 2002A; in the original amount of $11,460,000 dated December 1, 2002, maturing on December 1,2030, bearing interest at 6.75%; interest payments due semiannually each December 1 and June 1, beginning June 1,2003, and principal payments are due annually beginning December 1,2018. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-l; in the original amount of $2,000,000 dated December 1,2002, with $1,000,000 maturing on December 1,2030, and $1,000,000 maturing December 1,2031, bearing interest at 5.375%; interest payments due semiannually each December 1 and June 1, beginning June 1,2003. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-2; in the original amount of $3,000,000, maturing on December 1,2031, bearing interest at 5.10%; interest payments due semiannually each December 1 and June 1, beginning June 1,

119 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 (E) (F) (G) Obligations issued by the fudustrial Development Authority of the City of Tempe, Arizona, Senior Living Variable Rate Demand Revenue Bonds, Series 2002C; in the original amount of $50,000,000 dated December 1,2002, maturing on December 1,2027, bearing interest at variable rates; interest payments due monthly beginning January 2, 2003, and principal payments are due annually beginning December 1, The Village has an irrevocable letter of credit in the amount of $50,181,624 from a financial institution to allow for a situation where the remarketing agent is unable to remarket the bonds and the bondholders then put the bonds back to the issuer. The letter of credit expires July 2, If the letter of credit was drawn upon and not immediately reimbursed by the Village, the amount of the advance would initiate a term loan between the letter of credit provider and the Village. The Village would repay the loan in equal monthly installments over the remaining term of the letter of credit at a rate equal to prime plus 1 %. At December 31,2008, all variable rate bonds had been successfully remarketed. The letter of credit requires compliance with certain restrictive covenants, including maintaining a certain debt service coverage ratio, days cash on hand and minimum occupancy levels. At December 31,2008, the Village is not in compliance with the debt service coverage ratio. A waiver was obtained subsequent to year end. Management plans to monitor expenditures and provide additional marketing efforts in order to maintain and increase occupancy. Another financial institution has issued a confirming letter of credit for the existing letter-of-credit agreement. The confirming letter of credit expires July 2, 2009, subject to annual extensions through July 2, Management's plans are based on estimates of future events and actual results may differ from such estimates. Subsequent to year end, the letter-of-credit agreement was amended and expires July 2, 2012 (see Note 16). Obligations issued by the fudustrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds, Series 2004A; in the original amount of $13,690,000, with maturity dates between December 1, 2004, and December 1,2013, bearing interest at rates ranging from 2.50% to 5.375%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due annually beginning December 1,2004. Obligations issued by the fudustrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds Extendable Rate Adjustable Securities, Series 2004B; in the original amount of $6,090,000, maturing December 1, 2016, bearing interest at 5.25%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due beginning December 1,2009. The bonds are secured by all real estate and personal property and gross revenues of the Village and the assets restricted under the bond indenture agreements. The bond indenture agreements require that certain funds be established with the trustee. Accordingly, these funds are included as assets limited as to use under bond indenture agreements in the financial statements. The revenue bond indentures also place limits on the incurrence of additional borrowing and requires that the Village satisfy certain measures of financial performance as long as the bonds are outstanding. 15

120 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 Maturities of long-term debt at December 31, 2008, that include both the scheduled contractual maturities of the variable rate demand bonds and payments that could be required under the term loan included in the letter of credit agreement as described in (E) above are as follows: Scheduled Maturities Maturities Including Letterof-Credit Term Loan 2009 $ 2,070,000 $ 6,589, ,160,000 6,872, ,385,000 7,296, ,505,000 7,634, ,640,000 7,987,000 Thereafter 71,178,000 46,560,000 $ 82,938,000 $ 82,938,000 Note 7: Derivative Financial Instrument As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Village entered into two interest rate swaps with an effective date of December 1, One agreement provides for the Village to receive interest from the counterparty at a rate equal to the BMA Municipal Swap Index and to pay interest to the counterparty at a fixed rate of 4.077% on the notional amount of $10,000,000. This agreement expires on December 1, The second agreement provides for the Village to receive interest from the counterparty at a rate equal to the product of 67% and the USD-LIBOR-BBA and to pay interest to the counterparty at a fixed rate of 3.889% on the notional amount of $10,000,000. This agreement expires December 1, Under these agreements, the Village pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. These agreements are recorded at fair value with subsequent changes in fair value included in excess of revenues over expenses. In October 2008, the counterparty, Lehman Brothers Special Financing, Inc., filed for bankruptcy protection. At December 31, 2008, a new counterparty had not been determined for the Village's swap agreements. The Village has continued to estimate the net monthly settlement amounts related to these agreements and has recorded a liability in accrued expenses at December 31, 2008, of $75,520 for net settlement amounts not yet paid to the counterparty. See Note 16 for termination of the swaps subsequent to year end. 16

121 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 Note 8: Temporarily Restricted Net Assets Temporarily restricted net assets consist of the following at December 31,2008 and 2007: Externally restricted by donors for special projects Charitable remainder annuity trusts $ 110, ,989 $ 107, ,530 $ 259,671 $ 311,563 During 2008 and 2007, net assets of $6,453 and $760,216, respectively, were released for capital purchases. Note 9: Functional Expenses The Village provides residential and health care services to residents. Expenses related to providing these services are as follows: Residential and health care services General and administrative $ 29,673,105 5,078,552 $ 29,558,297 5,202,125 $ 34,751,657 $ 34,760,422 Note 10: Medical Malpractice Claims The Village pays fixed premiums for annual medical malpractice coverage under claims-made basis policies. The Village accrues the expense of its share of asserted and unasserted claims occurring during the year by estimating the probable ultimate cost of any such claim. Such estimates are based on the Village's own claims experience. Management does not presently expect any claims to exceed the insurance coverage limits; therefore, the financial statements include no accrual for loss. However, events could occur in the near term that would change the estimated liability materially. 17

122 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Note 11: Employee Benefit Plan The Village has a defined contribution 403(b) retirement plan. In 2007, employees could participate in the plan after completing one year of employment and who worked a minimum of 1,000 hours per year. Employees contributed from 2% to 6% oftheir compensation to the plan, and the Village contributed an amount equal to 10% to 50% of each employee's contributed amounts. Employees also could contribute an additional amount of up to 17% of each employee's contributed amount, which is not matched by the Village. Employer contributions under this plan for the year ended December 31,2007, was $76,596. As of January 1,2008, employees are eligible to participate in the plan if they worked more than 20 hours a week. Employees contribute an elective percentage of their compensation to the plan with no minimum or maximum contribution requirement, and the Village contributes an amount equal to 10% to 50% of each employee's first 6% of their contributed amounts. Employer contributions under this plan for the year ended December 31,2008, was $82,556. Note 12: Management Company The Village has entered into a management agreement with Life Care Services, LLC (LCS). Pursuant to the agreement, LCS provides the Village's executive director, administrator of resident services and certain management and financial services. Total management fees paid to LCS during the years ended December 31,2008 and 2007, were $936,536 and $841,578, respectively. Note 13: Related Party Transactions The Friendship Village of Tempe Foundation, Inc. (Foundation) solicits contributions on behalf of the Village's residents. In the absence of donor restrictions, the Foundation has discretionary control over the amounts and timing of its distributions to the Village. The Foundation contributed $24,032 and $43,977 to the Village during the years ended December 31,2008 and 2007, respectively. Note 14: Disclosures About Fair Value of Financial Instruments Effective January 1,2008, the Village adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year. 18

123 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 F AS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. F AS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Levell Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Observable inputs other than Levell prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, securities are classified within Levell of the valuation hierarchy. Levell securities include money market funds, U.S. Treasury and equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include government agencies, asset backed securities, SBA loans, collateralized mortgage obligations and corporate bonds. In certain cases where Levell or Level 2 inputs are not available, securities are classified within Level 3. The Village has no investments classified as Level 3. Interest Rate Swap Agreement The fair value is estimated by a third party using certain inputs that are not observable or that cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy. Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Investments Interest rate swap agreements $ 23,713,198 $ $ (2,470,863) $ 14,298,305 $ - $ 9,414,893 $ $ (2,470,863) 19

124 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2008 and 2007 The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs: Liability Interest Rate Swap Agreements Balance, January 1,2008 Change in fair value included in excess of revenue over expenses Balance, December 31,2008 $ 1,109,213 1,361,650 $ 2,470,863 The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Cash Equivalents The carrying amount approximates fair value. Long-Term Debt Fair value is estimated based on the borrowing rates currently available to the Village for debt with similar terms and maturities. The following table presents estimated fair values of the Village's financial instruments at December 31, 2008 and Carrying Carrying Amount Fair Value Amount Fair Value Cash and cash equivalents $ 2,392,100 $ 2,392,100 $ 2,110,344 $ Investments 24,037,614 24,037,614 29,955,211 Long-term debt (82,938,000) (77,471,275) (85,003,000) Interest rate swap agreement (2,470,863) (2,470,863) (1,109,213) 2,110,344 29,955,211 (84,913,386) (1,109,213) 20

125 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Note 15: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerability due to certain concentrations. Those matters include the following: Life Tenancy Agreements Estimates related to deferred revenue from life tenancy agreements are described in Note 1. Medical Malpractice Claims Estimates related to the'accrual for medical malpractice claims are described in Note 10. Litigation In the normal course of business, the Village is, from time to time, subject to allegations that may or do result in litigation. The Village evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. Self-Insurance The Village is self-insured for a portion of its exposure to risk of loss from employee health benefits. Annual estimated provisions are accrued for the self-insured portion of employee health benefits and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported. Investments The Village invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheet. 21

126 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 Current Economic Conditions The current economic environment presents the health care industry with unprecedented circumstances and challenges, which in some cases have resulted in large declines in the fair value of investments and other assets, large declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Village. Current economic conditions, including the decline in the housing market and the financial markets, has made it difficult for potential residents to afford initial entrance fees, which could have an adverse impact on the Village's future operating results. 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 investment values and allowances for accounts receivable that could negatively impact the Village's ability to meet debt covenants or maintain sufficient liquidity. Note 16: Subsequent Event In October 2008, the counterparty to the interest rate swaps (see Note 7), Lehman Brothers Special Financing, Inc. (LBSF), filed for bankruptcy protection. On August 26, 2009, the Village provided LBSF with an early termination notice for both swaps with effective dates of December 1,2006. This notice was provided on the basis that LBSF' s voluntary filing of bankruptcy constituted an event of default to the original swap agreements. As a consequence of early termination a thirdparty prepared an early settlement amount calculation owed by the Village to LBSF based on the terms of the ISDA contract. In August 2009, the Village paid LBSF $625,562 for all unpaid amounts which included interest on unpaid amounts and the early settlement amount as determined by the third party. On August 27, 2009, LBSF provided the Village with a letter (Response Letter) stating that LBSF reserved the right to dispute the validity of the termination notice. The Village responded to LBSF stating that it denies and disputes all claims and assertions made by LBSF's Response Letter and retains all of its rights and protections under the Bankruptcy Code. As of March 11, 2010, there has been no additional correspondence between the Village and LBSF. It is the belief of Management that the swap agreements have been settled in 2009 and no additional liability exists. However, events could occur in the near term that would change the estimated liability materially. 22

127 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2008 and 2007 In July 2009 the confirming letter of credit was not renewed for the existing letter of credit relating to the 2002C bonds. A reoffering statement on the bonds was issued in connection with the replacement of the confirming letter of credit with a different financial institution. Beginning on July 15, 2009, the Village established a new irrevocable confirming letter of credit which will expire in July 2010, subject to annual extensions through July 2, All bonds were successfully remarketed after the new confirming letter of credit was established. In March 2010, the existing letter of credit was amended to become an alternate letter of credit, which prompts a mandatory tender of the 2002C bonds. Management's intention is to immediately remarket the bonds that would be tendered. If the bonds were not successfully remarketed a liquidity drawing would be made on the letter of credit, which would be repaid in the terms described in Note 6 (E). 23

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129 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Accountants' Report and Financial Statements December 31, 2009 and 2008

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131 CPAs & Advisors 910 E. St. Louis Street, Suite 200 P.O. Box 1190 Springfield, MO Fax Independent Accountants' Report Board of Directors Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Tempe, Arizona We have audited the accompanying balance sheets of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2009 and 2008, and the related statements of operations and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Village's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2009 and 2008, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. March 31, 2010 experience BKD Praxiix': MEMBER, ' GLOBAL ALLIANCE OF INDEPENDENT FIRMS

132 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Balance Sheets December 31,2009 and 2008 Assets Curreut Assets Cash and cash equivalents $ 2,310,413 Short-term investments 228,947 Assets limited as to use - current 438,362 Patient accounts receivable, net of allowance; $49,973 and $53,207 1,272,829 Notes receivable Supplies 143,080 Prepaid expenses 354,978 Accrued interest 90,487 4,839,096 Assets Limited As To Use Under indenture agreement, held by trustee 7,538,132 ExternalIy restricted by donor 394,251 7,932,383 Less amount required to meet current obligations 438,362 7,494,021 Iuvestments 16,996,500 Property and Equipment, At Cost Land and improvements 6,766,123 Buildings and improvements 130,946,405 Equipment 9,839, ,552,347 Less accumulated depreciation 47,974,028 99,578,319 Deferred financing costs, net of amortization 1,969,974 Total assets $ 130,877,910 $ 2,392, , ,358 1,346, , , , ,725 5,609,147 7,484, ,600 7,898, ,358 7,231,930 15,860,374 6,505, ,775,794 9,354, ,635,805 42,940, ,695,751 2,103,947 $ 133,501,149 See Notes to Financial Statements

133 Liabilities and Net Assets Current Liabilities Cunent portion of long-term debt Current portion of variable rate debt related to letter of credit Liabilities under split-interest agreements Accounts payable Accrued expenses Refunds in process Deposits and advance payments Total current liabilities $ 2,160,000 14,807, , ,311 1,319,315 2,574, ,441 22,207,327 $ 2,070,000 4,519, ,071 1,468,318 1,397,493 2,397, ,145 12,461,125 Long-Term Debt 63,724,549 76,156,307 Interest Rate Swap Agreements 2,470,863 Liabilities Under Split-Interest Agreements 511, ,052 Deferred Revenue, Life Tenancy Agreements Total liabilities 65,045, ,488,864 66,552, ,154,100 Net Assets Unrestricted Temporarily restricted Total net assets Total liabilities and net assets (20,856,948) 245,994 (20,610,954 ) $ 130,877,91 0 (24,912,622) 259,671 (24,652,951 ) $ 133,501,149 2

134 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Operations and Changes in Net Assets Years Ended December 31, 2009 and 2008 Unrestricted 2009 Temporarily Restricted Total Revenues, Gains and Other Support Resident services, including amortization of entrance fees of $6,347, and $5,912, $ 27,118,362 $ Net patient service revenue and resident fees 5,704,471 Contributions 287,331 7,939 Other revenue 400,524 Total revenues, gains and other support 33,510,688 7,939 Expenses and Losses Salaries and wages 13,252,258 Employee benefits 2,815,487 Professional services 1,421,718 Supplies and other 8,012,105 Depreciation and amortization 5,394,933 Interest 3,704,457 Provision for uncollectible accounts 107,408 Loss on disposal of property and equipment 77,631 Total expenses and losses 34,785,997 Operating Income (Loss) (1,275,309) 7,939 Other Income (Expense) Investment return 3,777,722 28,654 Actuarial change in split-interest agreements (12,714) (11,146) Change in fair value of interest rate swap agreements 2,466,172 Excess (Deficiency) of Revenues Over Expenses 4,955,871 25,447 Investment return - change in unrealized gains and losses on other than trading securities (939,321) Net assets released from restriction used for purchase of property and equipment 39,124 (39,124) Increase (Decrease) in Net Assets 4,055,674 (13,677) Net Assets, Beginning of the Year (24,912,622) 259,671 Net Assets, End of Year $ (20,856,948) $ 245,994 $ 27,118,362 5,704, , ,524 33,518,627 13,252,258 2,815,487 1,421,718 8,012,105 5,394,933 3,704, ,408 77,631 34,785,997 (1,267,370) 3,806,376 (23,860) 2,466,172 4,981,318 (939,321) 4,041,997 (24,652,951 ) $ (20,610,954) See Notes to Financial Statements

135 Unrestricted $ 25,398,911 6,021, , ,674 32,258,819 13,025,149 2,926,980 1,621,383 7,804,630 5,065,079 4,054, , ,201 34,751,657 (2,492,838) (2,245,496) (28,866) (1,361,650) (6,128,850) (1,153,646) 6,453 (7,276,043) (17,636,579) $ (24,912,622) 2008 Temporarily Restricted $ 9,202 9,202 9,202 (43,030) (11,611) (45,439) (6,453) (51,892) 311,563 $ 259,671 Total $ 25,398,911 6,021, , ,674 32,268,021 13,025,149 2,926,980 1,621,383 7,804,630 5,065,079 4,054, , ,201 34,751,657 (2,483,636) (2,288,526) (40,477) (1,361,650) (6,174,289) (1,153,646) (7,327,935) (17,325,016) $ (24,652,951) 3

136 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Cash Flows Years Ended December 31, 2009 and Operating Activities Change in net assets $ 4,041,997 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Depreciation and amortization 5,394,933 Loss on disposal of property and equipment 77,631 Net (gain) loss on investments (2,157,917) Change in fair value of interest rate swap agreements (2,466,172) Actuarial change in split-interest agreements and annuities 23,860 Changes in annuities (7,484) Amortization of deferred revenue (6,347,669) Proceeds from nonrefundable life tenancy agreements 6,265,967 Refunds paid on nonrefundable life tenancy agreements (433,933) Changes in Patient accounts receivable 73,626 Accounts payable and accrued expenses (716,134) Other current assets and liabilities 52,187 Net cash provided by operating activities 3,800,892 Investing Activities Purchase of investments (29,904,913) Proceeds from disposition of investments 30,942,614 Investments subject to annuity agreements 98,147 Payments of annuity agreements (115,963) Purchase of property and equipment (2,261,315) Net cash used in investing activities (1,241,430) Financing Activities Principal payments on long-term debt (2,070,000) Proceeds from refundable life tenancy agreements 1,398,420 Refunds paid on refundable life tenancy agreements (1,872,441) Payments for termination of swap agreement (97,128) Net cash used in financing activities (2,641,149) Increase (Decrease) in Cash and Cash Equivalents (81,687) Cash and Cash Equivalents, Beginning of Year 2,392,100 Cash and Cash Equivalents, End of Year $ 2,310, $ (7,327,935) 5,065, ,201 4,409,568 1,361,650 40,477 (47,448) (5,912,471) 6,849,028 (541,299) 41, ,150 12,817 4,887,137 (15,491,903) 16,999,932 71,834 (116,072) (3,389,398) (1,925,607) (2,065,000) 2,147,802 (2,742,576) (2,659,774) 301,756 2,110,344 $ 2,412,100 Supplemental Cash Flows Information Accounts payable incurred for property and equipment $ 34,738 Interest paid $ 3,176,698 $ 91,352 $ 3,532,801 See Notes to Financial Statements 4

137 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe (the "Village"), was incorporated in 1976 as an Arizona not-for-profit corporation and provides health care housing and other related services to residents through the operation of a continuing care retirement community in Tempe, Arizona. The Village's facility is comprised of 296 cottage units, 283 apartments including guest apartments, a common area with recreational facilities, a 128-bed skilled nursing facility, a 67-unit assisted living facility and a 24-unit assisted living dementia unit. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Village considers all liquid investments, other than those limited as to use or held in investment accounts with original maturities of three months or less to be cash equivalents. At December 31, 2009 and 2008, cash equivalents consisted primarily of money market accounts and repurchase agreements with a financial institution. The financial institutions holding the Village's cash accounts are participating in the FDIC's Transaction Account Guarantee Program. Under the program, through June 30, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. For interest-bearing cash accounts, the FDIC's insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, At December 31, 2009, the Company's cash accounts exceeded federally insured limits by approximately $832,000. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is 5

138 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 included in unrestricted net assets. Other investment return is reflected in the statements of operations and changes in net assets as unrestricted or temporarily restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited As To Use Assets limited as to use include assets held by trustees under indenture agreements and assets externally restricted by donors. Amounts required to meet current liabilities of the Village are classified as current assets. Patient Accounts Receivable The Village reports resident patient accounts receivable for services rendered at net realizable amounts from third-party payers, residents and others. The Village provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. Supplies Supply inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-Lived Asset Impairment The Village 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 estimate 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, 2009 and

139 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Deferred Revenue - Life Tenancy Agreements The right to occupy various living units is granted under life tenancy agreements under which the tenants pay a certain sum (entrance fee) which entitles them to live in the unit for life. The Village offers two basic types of tenancy agreements - Deferred Entrance Fees, Standard Plan and Deferred Entrance Fees, Return of Capital. Deferred Entrance Fees, Standard Plan Deferred entrance fees under the standard plan are initially recorded as deferred entrance fees and amortized into revenue on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident's occupancy. Under certain circumstances, a portion of the entrance fee may be returned to the resident upon termination of occupancy. Any unrecognized entrance fee at the date of death or termination of occupancy of the respective resident that is not refunded is recorded as operating income in the period in which death or termination of occupancy occurs. Deferred Entrance Fees, Return of Capital The nonrefundable portion (10%) of the entrance fee is initially recorded as deferred entrance fees, and amortized into operating income on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident's initial occupancy. The refundable portion (90%) is not amortized into revenue as the refund is paid upon reoccupancy of the unit or within two years from the date of the move out, whichever occurs first, and is included in refundable entrance fees. Effective January 1,2006, the Return of Capital plan was amended where the nonrefundable portion going forward is 20% and the refundable portion is 80%. Under all contracts the resident's entrance fee is fully refundable during the first year of occupancy, excluding the occurrence of death of the resident. If, after the first year, the agreement is terminated for any reason other than death, the Village will attempt to obtain a new resident for the unit. If, in the sole discretion of the Village, repayment to the resident will not jeopardize the financial structure of the Village, then upon receipt of an entrance fee from a new resident, the resident whose agreement was terminated will be reimbursed for the amount of the entrance fee previously paid, less an appropriate charge for the period of residency until the new resident assumes residency. Under the standard plan the amount of the charge is 1 % per month of residency or 22% of the entrance fee, whichever is greater. It has been management's policy to refund amounts as indicated above. 7

140 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Deposits and Advance Payments Entrance fees received prior to occupancy are recorded as deposits. When a residency agreement is signed, the resident is required to deposit 10% of the entrance fee with the Village. The balance of the entrance fee is due upon occupancy of the unit. Application fee deposits are transferred to deferred entrance fees at the time of occupancy. Under certain circumstances, potential residents may cancel their residency agreements prior to occupancy. Obligation to Provide Future Services The Village annually considers the net cost of future services and the use of facilities to be provided to current residents and compares that amount with the balance of deferred revenue from advance fees and other related cash inflows. If the present value of the net cost of future services and the use of facilities exceeds the deferred revenue from advance fees plus other related cash inflows, a liability is recorded (obligation to provide future services and use of facilities) with the corresponding charge to income. As of December 31, 2009 and 2008, the contracts being offered by the Village contain provisions allowing for increases in monthly service fees, which management intends to increase as is necessary to prevent a net liability to provide future services. Therefore, as of December 31, 2009 and 2008, management does not anticipate that the obligation to provide future services will exceed the estimated future cash inflows, and no liability has been recorded. Split-Interest Agreements Charitable gift annuities are recorded at fair value when received based on the present value of expected payments to be made under the agreement. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Village has been limited by donors to a specific time period or purpose. Net Patient Service Revenue and Monthly Resident Fees Net patient service revenue is reported at the estimated net realizable amounts from patients and others for services rendered. Monthly resident fees are recognized as revenue in the related month of occupancy. Charity Care The Village provides charity care to residents who are unable to pay monthly service fees. The amount of charity care is classified in the provision for uncollectible accounts. 8

141 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Income Taxes The Village is exempt from income taxes under Section 509(a)(2) of the Internal Revenue Code (the "Code") as an organization described in Section 501(c)(3) of the Code and a similar provision of state law. However, the Village is subject to federal income tax on any unrelated business taxable income. Excess (Deficiency) of Revenues Over Expenses The statements of operations and changes in net assets include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Subsequent Events Subsequent events have been evaluated through March 31, 2010, which is the date the financial statements were available to be issued. 9

142 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Note 2: Concentrations of Credit Risk The Village grants credit without collateral to its residents. At December 31, 2009 and 2008, the mix of receivables from patients and third-party payers is: Medicare Insurance Private 39% 18% 43% 100% 41% 14% 45% 100% Note 3: Investments and Investment Return Assets Limited As to Use Assets limited as to use include: Externally restricted by donors Money market funds Equity securities $ 286, ,556 $ 327,418 86,182 $ 394,251 $ 413,600 Held by trustee under indenture agreement Money market funds U.S. Treasury and government agency obligations Corporate obligations $ 528,937 5,354,388 1,654,807 $ 678,857 5,758,676 1,047,155 $ 7,538,132 $ 7,484,688 10

143 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Other Investments Other investments include: Money market funds $ 228,947 U.S. Treasury and government agency obligations 3,485,187 Corporate obligations 1,674,709 Equity securities 11,836,604 17,225,447 Less long-term investments 16,996,500 $ 278,952 6,233, ,043 9,218,286 16,139,326 15,860,374 Short-term investments $ 228,947 $ 278,952 Total investment return is comprised of the following: 2009 Interest and dividend income $ 709,138 Unrealized gains on trading securities 2,601,942 Realized gains on trading securities 495,296 Net unrealized losses on other than trading securities (939,321) Net realized losses on other than trading securities Impairment of equity securities deemed other than temporary 2008 $ 967,396 (1,153,646) (789,543) (2,466,379) $ 2,867,055 $ (3,442,172) Total investment return is reflected in the statements of operations and changes in net assets as follows: Unrestricted net assets Investment return Investment return - change in unrealized gains and losses on other than trading securities $ 3,806,376 (939,321) $ (2,288,526) (1,153,646) $ 2,867,055 $ (3,442,172) 11

144 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 At December 31, 2008, the Village wrote down to fair market value their investments in equity securities. The write-down amounted to $2,466,379 and was due to a decline in the fair value of the equity security which was considered to be other than temporary. The write-down is included in other income (expense) in the accompanying statement of operations and changes in net assets for During 2009, the Village changed its investment strategy which adjusted its entire investment portfolio to trading securities with unrealized gains and losses recorded as a component of investment return and being included in excess (deficiency) of revenues over expenses, for the year ended December 31,2009. The investments were previously held as available-for-sale with unrealized gains and losses excluded from excess (deficiency) of revenues over expenses. The change required unrealized gains and losses not previously recognized in earnings to be recognized. immediately. This resulted in unrealized gains of $939,321 being recorded in excess of revenues over expenses for the year ended December 31, While the Village does not invest directly in derivative securities, it may, through investment holdings with a manager, indirectly hold these securities. This risk is controlled through a diversified portfolio and regular monitoring procedures. Unrealized Losses on Investments Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2008, was $2,303,796 which is approximately 10% of the Village's investment portfolio. These declines primarily resulted from changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings or meet projected earnings targets. Based on evaluation of available evidence, including changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in debt securities at December 31,2008, are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following table shows the investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008: 2008 Less than 12 Months 12 Months or More Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Debt securities $ 1,145,625 $ 6,002 $ 1,158,171 $ 56,629 $ 2,303,796 $ 62,631 12

145 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Note 4: Split-Interest Agreements The Village has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The Village has recorded a liability at December 31,2009 and 2008, of $627,683 and $629,123, respectively, which represents the present value of the future annuity obligations. The liability has been determined using net discount rates ranging in 2009 and 2008 from 4.2% to 6%. The Village recorded $81,203 and $66,132 in contribution revenue from these instruments for 2009 and 2008, respectively. Note 5: Deferred Revenue - Life Tenancy Agreements Deferred revenue - life tenancy agreements consist of the following as of December 31, 2009 and 2008: 2009 Refundable Nonrefundable Total Deposits by residents $ 22,868,767 $ 72,058,929 $ 94,927,696 Less accumulated amortization 29,882,427 29,882,427 $ 22,868,767 $ 42,176,502 $ 65,045, Refundable Nonrefundable Total Deposits by residents $ 23,579,802 $ 70,818,774 $ 94,398,576 Less accumulated amortization 27,845,823 27,845,823 $ 23,579,802 $ 42,972,951 $ 66,552,753 13

146 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Note 6: Long-Term Debt Series 1993B Bonds (A) Series 2002A Bonds (B) Series 2002B-1 Bonds (C) Series 2002B-2 Bonds (D) Series 2002C Bonds (E) Series 2004A Bonds (F) Series 2004B Bonds (G) Less current maturities Less current portion of variable rate debt related to letter of credit Less bond discount $ 4,898,000 11,460,000 2,000,000 3,000,000 48,755,000 6,410,000 4,345,000 80,868,000 2,160,000 14,807, ,235 $ 63,724,549 $ 4,898,000 11,460,000 2,000,000 3,000,000 49,080,000 6,410,000 6,090,000 82,938,000 2,070,000 4,519, ,693 $ 76,156,307 (A) (B) (C) (D) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Refunding Revenue Bonds, Series 1993B; in the original amount of $7,690,000 dated December 1, 1993, with $2,376,500 maturing on December 1,2014, bearing interest at 6.00% and $2,521,500 maturing on December 1,2016, bearing interest at 5.25%. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds, Series 2002A; in the original amount of $11,460,000 dated December 1, 2002, maturing on December 1,2030, bearing interest at 6.75%; interest payments due semiannually each December 1 and June 1, beginning June 1,2003, and principal payments are due annually beginning December 1,2018. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-l; in the original amount of $2,000,000 dated December 1, 2002, with $1,000,000 maturing on December 1, 2030, and $1,000,000 maturing December 1, 2031, bearing interest at 5.375%; interest payments due semiannually each December 1 and June 1, beginning June 1,2003. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-2; in the original amount of $3,000,000, maturing on December 1,2031, bearing interest at 5.10%; interest payments due semiannually each December 1 and June 1, beginning June 1,

147 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 (E) (F) (G) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Variable Rate Demand Revenue Bonds, Series 2002C; in the original amount of $50,000,000 dated December 1, 2002, maturing on December 1, 2027, bearing interest at variable rates; interest payments due monthly beginning January 2, 2003, and principal payments are due annually beginning December 1, The Village has an irrevocable letter of credit in the amount of $50,181,624 from a financial institution to allow for a situation where the remarketing agent is unable to remarket the bonds and the bondholders then put the bonds back to the issuer. The letter of credit expires July 2, If the letter of credit was drawn upon and not immediately reimbursed by the Village, the amount of the advance would initiate a term loan between the letter of credit provider and the Village. The Village would repay the loan in equal monthly installments over the remaining term of the letter of credit at a rate equal to prime plus 1 %. In July 2009 the confirming letter of credit was not renewed for the existing letter of credit relating to the 2002C bonds. A reoffering statement on the bonds was issued in connection with the replacement of the confirming letter of credit with a different financial institution. Beginning on July 15,2009, the Village established a new irrevocable confirming letter of credit which will expire in July 2010, subject to annual extensions through July 2, All bonds were successfully remarketed after the new confirming letter of credit was established. At December 31, 2009, all variable rate bonds had been successfully remarketed. The letter of credit requires compliance with certain restrictive covenants, including maintaining a certain debt service coverage ratio, day's cash on hand and minimum occupancy levels. Another financial institution has issued a confirming letter of credit for the existing letter-of-credit agreement. The confirming letter of credit expires July 2, 2009, subject to annual extensions through July 2, Subsequent to year end, the letter-of-credit agreement was amended and expires July 2, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds, Series 2004A; in the original amount of $13,690,000, with maturity dates between December 1,2004, and December 1,2013, bearing interest at rates ranging from 2.50% to 5.375%; interest payments due semiannually each December 1 and June 1, beginning December 1,2004, and principal payments are due annually beginning December 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds Extendable Rate Adjustable Securities, Series 2004B; in the original amount of $6,090,000, maturing December 1, 2016, bearing interest at 5.25%; interest payments due semiannually each December 1 and June 1, beginning December 1,2004, and principal payments are due beginning December 1,

148 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 The bonds are secured by all real estate and personal property and gross revenues of the Village and the assets restricted under the bond indenture agreements. The bond indenture agreements require that certain funds be established with the trustee. Accordingly, these funds are included as assets limited as to use under indenture agreements in the financial statements. The revenue bond indentures also place limits on the incurrence of additional borrowing and requires that the Village satisfy certain measures of financial performance as long as the bonds are outstanding. Maturities of long-term debt at December 31, 2009, that include both the scheduled contractual maturities of the variable rate demand bonds and payments that could be required under the term loan included in the letter of credit agreement as described in (E) above are as follows: Scheduled Maturities Maturities Including Letterof-Credit Term Loan 2010 $ 2,160,000 $ 16,967, ,385,000 22,985, ,505,000 14,781, ,640,000 2,250, ,791,500 2,376,500 Thereafter 68,386,500 21,506,500 $ 80,868,000 $ 80,868,000 Note 7: Derivative Financial Instrument As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Village entered into two interest rate swaps with an effective date of December 1, One agreement provides for the Village to receive interest from the counterparty at a rate equal to the BMA Municipal Swap Index and to pay interest to the counterparty at a fixed rate of 4.077% on the notional amount of $10,000,000. This agreement expires on December 1,2011. The second agreement provides for the Village to receive interest from the counterparty at a rate equal to the product of 67% and the USD-LIBOR-BBA and to pay interest to the counterparty at a fixed rate of 3.889% on the notional amount of $10,000,000. This agreement expires December 1,

149 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Under these agreements, the Village pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. These agreements are recorded at fair value with subsequent changes in fair value included in excess of revenues over expenses. In October 2008, the counterparty, Lehman Brothers Special Financing, Inc. (LBSF), filed for bankruptcy protection. At December 31,2008, a new counterparty had not been determined for the Village's swap agreements. The Village has continued to estimate the net monthly settlement amounts related to these agreements and has recorded a liability in accrued expenses at December 31, 2008, of $75,520 for net settlement amounts not yet paid to the counterparty. On August 26,2009, the Village provided LBSF with a notice designating an early termination date of both swaps with effective dates of December 1,2006. This notice was provided on the basis that LBSF' s voluntary filing of bankruptcy constituted an event of default to the original swap agreements. As a consequence of early termination a third party prepared an early settlement amount calculation owed by the Village to LBSF based on the terms of the ISDA contract. In August 2009, the Village paid LBSF $625,562 for all unpaid amounts, which included interest on unpaid amounts and the early settlement amount as determined by the third party in regards to both swap agreements. On August 27,2009, LBSF provided the Village with a letter (Response Letter) stating that LBSF reserved the right to dispute the validity of the termination notice. The Village responded to LBSF stating that it denies and disputes all claims and assertions made by LBSF's Response Letter and retains all of its rights and protections under the Bankruptcy Code. As of March 31, 2010, there has been no additional correspondence between the Village and LBSF. It is the belief of management that the swap agreements have been settled and no liability exists as of December 31,2009. However, events could occur in the near term that would change the estimated liability materially. Note 8: Temporarily Restricted Net Assets Temporarily restricted net assets consist of the following at December 31, 2009 and 2008: Externally restricted by donors for special projects Charitable remainder annuity trusts $ 81, ,991 $ 110, ,989 $ 245,994 $ 259,671 During 2009 and 2008, net assets of $39,124 and $6,453, respectively, were released for capital purchases. 17

150 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Note 9: Functional Expenses The Village provides residential and health care services to residents. Expenses related to providing these services are as follows: Residential and health care services General and administrative $ 29,622,281 5,163,716 $ 29,673,105 5,078,552 $ 34,785,997 $ 34,751,657 Note 10: Medical Malpractice Claims The Village pays fixed premiums for annual medical malpractice coverage under claims-made policies. The Village accrues the expense of its share of asserted and unasserted claims occurring during the year by estimating the probable ultimate cost of any such claim. Such estimates are based on the Village's own claims experience. Management does not presently expect any claims to exceed the insurance coverage limits; therefore, the financial statements include no accrual for loss. However, events could occur in the near term that would change the estimated liability materially. Note 11: Employee Benefit Plan The Village has a defined contribution 403(b) retirement plan. Employees are eligible to participate in the plan if they worked more than 20 hours a week. Employees contribute an elective percentage of their compensation to the plan with no minimum or maximum contribution requirement, and the Village contributes an amount equal to 50% of each employee's first 6% of their contributed amounts. Employer contributions under this plan for the years ended December 31,2009 and 2008, were $127,818 and $82,556, respectively. Note 12: Management Company The Village has entered into a management agreement with Life Care Services, LLC (LCS). Pursuant to the agreement, LCS provides the Village's executive director, administrator of resident services and certain management and financial services. Total management fees paid to LCS during the years ended December 31,2009 and 2008, were $981,999 and $936,536, respectively. 18

151 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Note 13: Related Party Transactions The Friendship Village of Tempe Foundation, Inc. (Foundation) solicits contributions on behalf of the Village's residents. In the absence of donor restrictions, the Foundation has discretionary control over the amounts and timing of its distributions to the Village. The Foundation contributed $88,455 and $24,032 to the Village during the years ended December 31,2009 and 2008, respectively. Note 14: Disclosures About Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Levell Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, securities are classified within Levell of the valuation hierarchy. Levell securities include money market funds, U.S. Treasury and equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include government agencies and corporate obligations. In certain cases where Levell or Level 2 inputs are not available, securities are classified within Level 3. The Village has no investments classified as Level 3. 19

152 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Interest Rate Swap Agreement The fair value is estimated by a third party using certain inputs that are not observable or that cannot be corroborated by observable market data and, therefore, are classified within Level 3 of the valuation hierarchy. Quoted Prices in Active Markets for Identical Assets Fair Value (Level 1) 2009 Fair Value Measurements Using Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds U.S. Treasury and government agency obligations Corporate obligations Equity securities $ 1,044,579 $ 1,044,579 $ - $ 8,839,575 4,946,595 3,892,980 3,329,516 3,329,516 11,944,160 11,944, Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Money market funds U.S. Treasury and government agency obligations Corporate obligations Equity securities Interest rate swap agreements $ 1,285,227 $ 1,285,227 $ - $ 11,991,721 4,033,028 7,958,693 1,456,198 1,456,198 9,304,468 9,304,468 (2,470,863) (2,470,863) 20

153 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs: Liability Interest Rate Swap Agreements Balance, January 1,2008 Change in fair value included in excess of revenue over expenses Balance, December 31, 2008 Change in fair value included in excess of revenue over expenses Balance, December 31, 2009 $ 1,109,213 $ 1,361,650 2,470,863 (2,470,863) The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Cash Equivalents The carrying amount approximates fair value. Long-Term Debt Fair value is estimated based on the borrowing rates currently available to the Village for debt with similar terms and maturities. The following table presents estimated fair values of the Village's financial instruments at December 31,2009 and Carrying Carrying Amount Fair Value Amount Fair Value Cash and cash equivalents $ 2,310,413 $ 2,310,413 $ 2,392,100 $ Long-term debt (80,868,000) (79,900,000) (82,938,000) Interest rate swap agreement (2,470,863) 2,392,100 (84,913,386) (2,470,863) 21

154 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31,2009 and 2008 Note 15: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerability due to certain concentrations. Those matters include the following: Life Tenancy Agreements Estimates related to deferred revenue from life tenancy agreements are described in Note 1. Medical Malpractice Claims Estimates related to the accrual for medical malpractice claims are described in Note 10. Litigation In the normal course of business, the Village is, from time to time, subject to allegations that may or do result in litigation. The Village evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. Self-Insurance The Village is self-insured for a portion of its exposure to risk of loss from employee health benefits. Annual estimated provisions are accrued for the self-insured portion of employee health benefits and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported. Investments The Village invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheet. 22

155 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2009 and 2008 Current Economic Conditions The current protracted economic decline continues to present the health care industry with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Village. Current economic conditions, including the decline in the housing market, have made it difficult for potential residents to afford initial entrance fees, which could have an adverse impact on the Village's future operating results. 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 investment values and allowances for accounts receivable that could negatively impact the Village's ability to meet debt covenants or maintain sufficient liquidity. Note 16: Subsequent Event In March 2010, the existing letter of credit was amended to become an alternate letter of credit, which prompts a mandatory tender of the 2002C bonds. Management's intention is to immediately remarket the bonds that would be tendered. If the bonds are not successfully remarketed a liquidity drawing would be made on the letter of credit, which would be repaid in the terms described in Note 6 (EJ. 23

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157 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Accountants Report and Financial Statements December 31, 2010 and 2009

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159 Independent Accountants Report Board of Directors Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Tempe, Arizona We have audited the accompanying balance sheets of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2010 and 2009, and the related statements of operations and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Village s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe, as of December 31, 2010 and 2009, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. March 31, 2011

160 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Balance Sheets December 31, 2010 and 2009 Assets Current Assets Cash and cash equivalents $ 1,358,253 $ 2,310,413 Short-term investments 418, ,947 Assets limited as to use current 477, ,362 Patient accounts receivable, net of allowance; $37,661 and $49,973 1,374,508 1,272,829 Supplies 151, ,080 Prepaid expenses 330, ,978 Accrued interest 101,507 90,487 4,211,465 4,839,096 Assets Limited As To Use Under indenture agreement, held by trustee 7,762,694 7,538,132 Externally restricted by donor 472, ,251 8,235,057 7,932,383 Less amount required to meet current obligations 477, ,362 7,758,030 7,494,021 Investments 18,532,430 16,996,500 Property and Equipment, At Cost Land and improvements 6,789,911 6,766,123 Buildings and improvements 131,992, ,946,405 Equipment 9,860,191 9,839, ,643, ,552,347 Less accumulated depreciation 52,773,925 47,974,028 95,869,123 99,578,319 Deferred financing costs, net of amortization 1,836,002 1,969,974 Total assets $ 128,207,050 $ 130,877,910 See Notes to Financial Statements

161 Liabilities and Net Assets Current Liabilities Current portion of long-term debt $ 2,385,000 $ 2,160,000 Current portion of variable rate debt related to letter of credit 28,380,372 14,807,216 Liabilities under split-interest agreements 126, ,964 Accounts payable 735, ,311 Accrued expenses 1,404,603 1,319,315 Refunds in process 658,355 2,574,080 Deposits and advance payments 392, ,441 Total current liabilities 34,083,142 22,207,327 Long-Term Debt 47,782,852 63,724,549 Liabilities Under Split-Interest Agreements 557, ,719 Deferred Revenue, Life Tenancy Agreements 65,805,608 65,045,269 Total liabilities 148,228, ,488,864 Net Assets Unrestricted (20,346,590) (20,856,948) Temporarily restricted 324, ,994 Total net assets (20,021,870) (20,610,954) Total liabilities and net assets $ 128,207,050 $ 130,877,910 2

162 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Operations and Changes in Net Assets Years Ended December 31, 2010 and Temporarily Unrestricted Restricted Total Revenues, Gains and Other Support Resident services, including amortization of entrance fees of $6,443, and $6,347, $ 27,395,583 $ - $ 27,395,583 Net patient service revenue and resident fees 4,997,087-4,997,087 Contributions 526, , ,636 Other revenue 408, ,512 Total revenues, gains and other support 33,327, ,888 33,472,818 Expenses and Losses Salaries and wages 13,506,518-13,506,518 Employee benefits 2,989,994-2,989,994 Professional services 1,381,193-1,381,193 Supplies and other 8,108,966-8,108,966 Depreciation and amortization 5,517,312-5,517,312 Interest 3,419,862-3,419,862 Provision for uncollectible accounts 90,416-90,416 Loss on disposal of property and equipment 98,889-98,889 Total expenses and losses 35,113,150-35,113,150 Operating Income (Loss) (1,785,220) 144,888 (1,640,332) Other Income (Expense) Investment return 2,312,252 (26,404) 2,285,848 Actuarial change in split-interest agreements (35,504) (20,928) (56,432) Change in fair value of interest rate swap agreements Excess of Revenues Over Expenses 491,528 97, ,084 Investment return change in unrealized gains and losses on other than trading securities Net assets released from restriction used for purchase of property and equipment 18,830 (18,830) - Increase (Decrease) in Net Assets 510,358 78, ,084 Net Assets, Beginning of the Year (20,856,948) 245,994 (20,610,954) Net Assets, End of Year $ (20,346,590) $ 324,720 $ (20,021,870) See Notes to Financial Statements

163 2009 Temporarily Unrestricted Restricted Total $ 27,118,362 $ - $ 27,118,362 5,704,471-5,704, ,331 7, , , ,524 33,510,688 7,939 33,518,627 13,252,258-13,252,258 2,815,487-2,815,487 1,421,718-1,421,718 8,012,105-8,012,105 5,394,933-5,394,933 3,704,457-3,704, , ,408 77,631-77,631 34,785,997-34,785,997 (1,275,309) 7,939 (1,267,370) 3,777,722 28,654 3,806,376 (12,714) (11,146) (23,860) 2,466,172-2,466,172 4,955,871 25,447 4,981,318 (939,321) - (939,321) 39,124 (39,124) - 4,055,674 (13,677) 4,041,997 (24,912,622) 259,671 (24,652,951) $ (20,856,948) $ 245,994 $ (20,610,954) 3

164 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Cash Flows Years Ended December 31, 2010 and Operating Activities Change in net assets $ 589,084 $ 4,041,997 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Depreciation and amortization 5,517,312 5,394,933 Loss on disposal of property and equipment 98,889 77,631 Net gain on investments (1,687,692) (2,157,917) Change in fair value of interest rate swap agreements - (2,466,172) Actuarial change in split-interest agreements and annuities 56,432 23,860 Changes in annuities (10,098) (7,484) Amortization of deferred revenue (6,443,563) (6,347,669) Proceeds from nonrefundable life tenancy agreements 7,552,157 6,265,967 Refunds paid on nonrefundable life tenancy agreements (581,792) (433,933) Changes in Patient accounts receivable (101,679) 73,626 Accounts payable and accrued expenses 133,960 (716,134) Other current assets and liabilities 5,106 52,187 Net cash provided by operating activities 5,128,116 3,800,892 Investing Activities Purchase of investments (31,110,814) (29,904,913) Proceeds from disposition of investments 30,770,611 30,942,614 Investments subject to annuity agreements 136,565 98,147 Payments of annuity agreements (126,632) (115,963) Purchase of property and equipment (1,751,293) (2,261,315) Net cash used in investing activities (2,081,563) (1,241,430) Financing Activities Principal payments on long-term debt (2,160,000) (2,070,000) Proceeds from refundable life tenancy agreements 1,145,524 1,398,420 Refunds paid on refundable life tenancy agreements (2,984,237) (1,872,441) Payments for termination of swap agreement - (97,128) Net cash used in financing activities (3,998,713) (2,641,149) Decrease in Cash and Cash Equivalents (952,160) (81,687) Cash and Cash Equivalents, Beginning of Year 2,310,413 2,392,100 Cash and Cash Equivalents, End of Year $ 1,358,253 $ 2,310,413 Supplemental Cash Flows Information Accounts payable incurred for property and equipment $ 40,020 $ 34,738 Interest paid $ 3,407,969 $ 3,795,208 See Notes to Financial Statements 4

165 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe (the Village ), was incorporated in 1976 as an Arizona not-for-profit corporation and provides health care housing and other related services to residents through the operation of a continuing care retirement community in Tempe, Arizona. The Village s facility is comprised of 296 cottage units, 283 apartments including guest apartments, a common area with recreational facilities, a 128-bed skilled nursing facility, a 67-unit assisted living facility and a 24-unit assisted living dementia unit. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Village considers all liquid investments, other than those limited as to use or held in investment accounts with original maturities of three months or less to be cash equivalents. At December 31, 2010 and 2009, cash equivalents consisted primarily of money market accounts and repurchase agreements with a financial institution. The financial institutions holding the Village s cash accounts are participating in the FDIC s Transaction Account Guarantee Program. Under the program, through December 31, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterestbearing transaction accounts beginning December 31, 2010, through December 31, 2012, at all FDIC-insured institutions. For interest-bearing cash accounts, the FDIC s insurance limits were permanently increased to $250,000, effective July 21, At December 31, 2010, the Company s cash accounts exceeded federally insured limits by approximately $317,000. Cash equivalents include $755,000 of repurchase agreements which are not covered by federal insurance programs. 5

166 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the statements of operations and changes in net assets as unrestricted or temporarily restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited As To Use Assets limited as to use include assets held by trustees under indenture agreements and assets externally restricted by donors. Amounts required to meet current liabilities of the Village are classified as current assets. Patient Accounts Receivable The Village reports resident patient accounts receivable for services rendered at net realizable amounts from third-party payers, residents and others. The Village provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. Supplies Supply inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. 6

167 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Long-Lived Asset Impairment The Village 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 estimate 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, 2010 and Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Deferred Revenue Life Tenancy Agreements The right to occupy various living units is granted under life tenancy agreements under which the tenants pay a certain sum (entrance fee) which entitles them to live in the unit for life. The Village offers two basic types of tenancy agreements Deferred Entrance Fees, Standard Plan and Deferred Entrance Fees, Return of Capital. Deferred Entrance Fees, Standard Plan Deferred entrance fees under the standard plan are initially recorded as deferred entrance fees and amortized into revenue on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident s occupancy. Under certain circumstances, a portion of the entrance fee may be returned to the resident upon termination of occupancy. Any unrecognized entrance fee at the date of death or termination of occupancy of the respective resident that is not refunded is recorded as operating income in the period in which death or termination of occupancy occurs. Deferred Entrance Fees, Return of Capital The nonrefundable portion (10%) of the entrance fee is initially recorded as deferred entrance fees, and amortized into operating income on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident s initial occupancy. The refundable portion (90%) is not amortized into revenue as the refund is paid upon reoccupancy of the unit or within two years from the date of the move out, whichever occurs first, and is included in refundable entrance fees. Effective January 1, 2006, the Return of Capital plan was amended where the nonrefundable portion going forward is 20% and the refundable portion is 80%. 7

168 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Under all contracts the resident s entrance fee is fully refundable during the first year of occupancy, excluding the occurrence of death of the resident. If, after the first year, the agreement is terminated for any reason other than death, the Village will attempt to obtain a new resident for the unit. If, in the sole discretion of the Village, repayment to the resident will not jeopardize the financial structure of the Village, then upon receipt of an entrance fee from a new resident, the resident whose agreement was terminated will be reimbursed for the amount of the entrance fee previously paid, less an appropriate charge for the period of residency until the new resident assumes residency. Under the standard plan the amount of the charge is 1% per month of residency or 22% of the entrance fee, whichever is greater. It has been management s policy to refund amounts as indicated above. Deposits and Advance Payments Entrance fees received prior to occupancy are recorded as deposits. When a residency agreement is signed, the resident is required to deposit 10% of the entrance fee with the Village. The balance of the entrance fee is due upon occupancy of the unit. Application fee deposits are transferred to deferred entrance fees at the time of occupancy. Under certain circumstances, potential residents may cancel their residency agreements prior to occupancy. Obligation to Provide Future Services The Village annually considers the net cost of future services and the use of facilities to be provided to current residents and compares that amount with the balance of deferred revenue from advance fees and other related cash inflows. If the present value of the net cost of future services and the use of facilities exceeds the deferred revenue from advance fees plus other related cash inflows, a liability is recorded (obligation to provide future services and use of facilities) with the corresponding charge to income. As of December 31, 2010 and 2009, the contracts being offered by the Village contain provisions allowing for increases in monthly service fees, which management intends to increase as is necessary to prevent a net liability to provide future services. Therefore, as of December 31, 2010 and 2009, management does not anticipate that the obligation to provide future services will exceed the estimated future cash inflows, and no liability has been recorded. Split-Interest Agreements Charitable gift annuities are recorded at fair value when received based on the present value of expected payments to be made under the agreement. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Village has been limited by donors to a specific time period or purpose. 8

169 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Net Patient Service Revenue and Monthly Resident Fees Net patient service revenue is reported at the estimated net realizable amounts from patients and others for services rendered. Monthly resident fees are recognized as revenue in the related month of occupancy. Charity Care The Village provides charity care to residents who are unable to pay monthly service fees. The amount of charity care is classified in the provision for uncollectible accounts. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Income Taxes The Village is exempt from income taxes under Section 509(a)(2) of the Internal Revenue Code (the Code ) as an organization described in Section 501(c)(3) of the Code and a similar provision of state law. However, the Village is subject to federal income tax on any unrelated business taxable income. Excess of Revenues Over Expenses The statements of operations and changes in net assets include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). 9

170 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Subsequent Events Subsequent events have been evaluated through March 31, 2011, which is the date the financial statements were available to be issued. Note 2: Concentrations of Credit Risk The Village grants credit without collateral to its residents. At December 31, 2010 and 2009, the mix of receivables from patients and third-party payers is: Medicare 42% 39% Insurance 14% 18% Private 44% 43% 100% 100% Note 3: Investments and Investment Return Assets Limited As to Use Assets limited as to use include: Externally restricted by donors Money market funds $ 263,890 $ 286,695 Equity securities 208, ,556 $ 472,363 $ 394,251 Held by trustee under indenture agreement Money market funds $ 704,769 $ 528,937 U.S. Treasury and government agency obligations 3,686,813 5,354,388 Corporate obligations 3,371,112 1,654,807 $ 7,762,694 $ 7,538,132 10

171 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Other Investments Other investments include: Money market funds $ 481,323 $ 228,947 U.S. Treasury and government agency obligations 3,061,260 3,485,187 Corporate obligations 2,692,006 1,674,709 Equity securities 12,716,079 11,836,604 18,950,668 17,225,447 Less long-term investments 18,532,430 16,996,500 Short-term investments $ 418,238 $ 228,947 Total investment return is comprised of the following: Interest and dividend income $ 598,156 $ 709,138 Unrealized gains on trading securities 766,891 2,601,942 Realized gains on trading securities 920, ,296 Net unrealized losses on other than trading securities - (939,321) $ 2,285,848 $ 2,867,055 Total investment return is reflected in the statements of operations and changes in net assets as follows: Unrestricted net assets Investment return $ 2,285,848 $ 3,806,376 Investment return - change in unrealized gains and losses on other than trading securities - (939,321) $ 2,285,848 $ 2,867,055 During 2009, the Village changed its investment strategy which adjusted its entire investment portfolio to trading securities with unrealized gains and losses recorded as a component of investment return and being included in excess (deficiency) of revenues over expenses, for the year ended December 31, The investments were previously held as available-for-sale with 11

172 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 unrealized gains and losses excluded from excess (deficiency) of revenues over expenses. The change required unrealized gains and losses not previously recognized in earnings to be recognized immediately. This resulted in unrealized gains of $939,321 being recorded in excess of revenues over expenses for the year ended December 31, While the Village does not invest directly in derivative securities, it may, through investment holdings with a manager, indirectly hold these securities. This risk is controlled through a diversified portfolio and regular monitoring procedures. Note 4: Split-Interest Agreements The Village has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The Village has recorded a liability at December 31, 2010 and 2009, of $683,950 and $627,683, respectively, which represents the present value of the future annuity obligations. The liability has been determined using net discount rates ranging in 2010 and 2009 from 4.2% to 6%. The Village recorded $52,672 and $81,203 in contribution revenue from these instruments for 2010 and 2009, respectively. Note 5: Deferred Revenue Life Tenancy Agreements Deferred revenue life tenancy agreements consist of the following as of December 31, 2010 and 2009: 2010 Refundable Nonrefundable Total Deposits by residents $ 22,498,522 $ 74,967,409 $ 97,465,931 Less accumulated amortization - 31,660,323 31,660,323 $ 22,498,522 $ 43,307,086 $ 65,805, Refundable Nonrefundable Total Deposits by residents $ 22,868,767 $ 72,058,929 $ 94,927,696 Less accumulated amortization - 29,882,427 29,882,427 $ 22,868,767 $ 42,176,502 $ 65,045,269 12

173 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Note 6: Long-Term Debt Series 1993B Bonds (A) $ 4,898,000 $ 4,898,000 Series 2002A Bonds (B) 11,460,000 11,460,000 Series 2002B-1 Bonds (C) 2,000,000 2,000,000 Series 2002B-2 Bonds (D) 3,000,000 3,000,000 Series 2002C Bonds (E) 48,415,000 48,755,000 Series 2004A Bonds (F) 6,410,000 6,410,000 Series 2004B Bonds (G) 2,525,000 4,345,000 78,708,000 80,868,000 Less current maturities 2,385,000 2,160,000 Less current portion of variable rate debt related to letter of credit 28,380,372 14,807,216 Less bond discount 159, ,235 $ 47,782,852 $ 63,724,549 (A) (B) (C) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Refunding Revenue Bonds, Series 1993B; in the original amount of $7,690,000 dated December 1, 1993, with $2,376,500 maturing on December 1, 2014, bearing interest at 6.00% and $2,521,500 maturing on December 1, 2016, bearing interest at 5.25%. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds, Series 2002A; in the original amount of $11,460,000 dated December 1, 2002, maturing on December 1, 2030, bearing interest at 6.75%; interest payments due semiannually each December 1 and June 1, beginning June 1, 2003, and principal payments are due annually beginning December 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-1; in the original amount of $2,000,000 dated December 1, 2002, with $1,000,000 maturing on December 1, 2030, and $1,000,000 maturing December 1, 2031, bearing interest at 5.375%; interest payments due semiannually each December 1 and June 1, beginning June 1,

174 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 (D) (E) (F) (G) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-2; in the original amount of $3,000,000, maturing on December 1, 2031, bearing interest at 5.10%; interest payments due semiannually each December 1 and June 1, beginning June 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Variable Rate Demand Revenue Bonds, Series 2002C; in the original amount of $50,000,000 dated December 1, 2002, maturing on December 1, 2027, bearing interest at variable rates; interest payments due monthly beginning January 2, 2003, and principal payments are due annually beginning December 1, The Village has an irrevocable letter of credit in the amount of $50,181,624 from a financial institution to allow for a situation where the remarketing agent is unable to remarket the bonds and the bondholders then put the bonds back to the issuer. The letter of credit expires July 2, During 2010 the letter-of-credit agreement was amended to expire July 2, If the letter of credit was drawn upon and not immediately reimbursed by the Village, the amount of the advance would initiate a term loan between the letter of credit provider and the Village. The Village would repay the loan in equal monthly installments over the remaining term of the letter of credit at a rate equal to prime plus 1%. In addition, the above mentioned irrevocable letter of credit has a confirming letter of credit that originally expired in July 2, 2008, subject to annual extensions through July 2, In July 2009, the confirming letter of credit was not renewed for the existing letter of credit relating to the 2002C bonds. On July 15, 2009, the Village established a new irrevocable confirming letter of credit which will expire in July 2010, subject to annual extensions through July 2, The letter of credit and the confirming letter of credit require compliance with certain restrictive covenants, including maintaining a certain debt service coverage ratio, day s cash on hand and minimum occupancy levels. At December 31, 2010, all variable rate bonds had been successfully remarketed. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds, Series 2004A; in the original amount of $13,690,000, with maturity dates between December 1, 2004, and December 1, 2013, bearing interest at rates ranging from 2.50% to 5.375%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due annually beginning December 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds Extendable Rate Adjustable Securities, Series 2004B; in the original amount of $6,090,000, maturing December 1, 2016, bearing interest at 5.25%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due beginning December 1,

175 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 The bonds are secured by all real estate and personal property and gross revenues of the Village and the assets restricted under the bond indenture agreements. The bond indenture agreements require that certain funds be established with the trustee. Accordingly, these funds are included as assets limited as to use under indenture agreements in the financial statements. The revenue bond indentures also place limits on the incurrence of additional borrowing and requires that the Village satisfy certain measures of financial performance as long as the bonds are outstanding. Maturities of long-term debt at December 31, 2010, that include both the scheduled contractual maturities of the variable rate demand bonds and payments that could be required under the term loan included in the letter-of-credit agreement as described in (E) above are as follows: Maturities Including Letter- Scheduled of-credit Maturities Term Loan 2011 $ 2,385,000 $ 30,765, ,505,000 21,809, ,640,000 2,250, ,791,500 2,376, ,956,500 2,521,500 Thereafter 65,430,000 18,985,000 $ 78,708,000 $ 78,708,000 Note 7: Derivative Financial Instrument As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Village entered into two interest rate swaps with an effective date of December 1, One agreement provides for the Village to receive interest from the counterparty at a rate equal to the BMA Municipal Swap Index and to pay interest to the counterparty at a fixed rate of 4.077% on the notional amount of $10,000,000. This agreement expires on December 1, The second agreement provides for the Village to receive interest from the counterparty at a rate equal to the product of 67% and the USD-LIBOR-BBA and to pay interest to the counterparty at a fixed rate of 3.889% on the notional amount of $10,000,000. This agreement expires December 1, Under these agreements, the Village paid or received the net interest amount monthly, with the monthly settlements included in interest expense. These agreements were recorded at fair value with subsequent changes in fair value included in excess (deficiency) of revenues over expenses. In October 2008, the counterparty, Lehman Brothers Special Financing, Inc. (LBSF), filed for 15

176 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 bankruptcy protection. A new counterparty had not been determined for the Village s swap agreements. On August 26, 2009, the Village provided LBSF with a notice designating an early termination date for both of the interest rate swap agreements. This notice was provided on the basis that LBSF s voluntary filing of bankruptcy constituted an event of default under the original swap agreements. As a consequence of early termination a third party prepared an early settlement amount calculation owed by the Village to LBSF based on the terms of the ISDA contract. In August 2009, the Village paid LBSF $625,562 for all unpaid amounts, which included interest on unpaid amounts and the early settlement amount as determined by the third-party in regards to both swap agreements. On August 27, 2009, LBSF provided the Village with a letter (Response Letter) stating that LBSF reserved the right to dispute the validity of the termination notice. The Village responded to LBSF stating that it denies and disputes all claims and assertions made by LBSF s Response Letter and retains all of its rights and protections under the Bankruptcy Code. On February 10, 2011, the Village filed an Adversary Proceeding in the United States Bankruptcy Court for the Southern District of New York against Debtor LBSF. In the action, the Village seeks a declaratory judgment stating that: (a) the Village had the contractual right to terminate the Swap Agreements; (b) such termination was properly affected by the Village on August 26, 2009; and (c) the Swap Agreements have, therefore, been terminated. In response on February 15, 2011, LBSF filed with the Court an alternative dispute resolution (ADR) seeking to compel mediation of the dispute between LBSF and the Village pursuant to an Order of the Court, entered September 17, 2009, requiring that all open and terminated swap agreements with LBSF proceed through the mediation process. The Village plans to participate in the mediation process. At this time, it is not possible to predict the outcome of the litigation. Therefore no liability has been recorded in the accompanying financial statement. However, events could occur in the near term that would change the estimated liability materially. Note 8: Temporarily Restricted Net Assets Temporarily restricted net assets consist of the following at December 31, 2010 and 2009: Externally restricted by donors for special projects $ 208,022 $ 81,003 Charitable remainder annuity trusts 116, ,991 $ 324,720 $ 245,994 16

177 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 During 2010 and 2009, net assets of $18,830 and $39,124, respectively, were released for capital purchases. Note 9: Functional Expenses The Village provides residential and health care services to residents. Expenses related to providing these services are as follows: Residential and health care services $ 29,741,599 $ 29,622,281 General and administrative 5,371,551 5,163,716 $ 35,113,150 $ 34,785,997 Note 10: Medical Malpractice Claims The Village pays fixed premiums for annual medical malpractice coverage under claims-made policies. The Village accrues the expense of its share of asserted and unasserted claims occurring during the year by estimating the probable ultimate cost of any such claim. Such estimates are based on the Village s own claims experience. Management does not presently expect any claims to exceed the insurance coverage limits; therefore, the financial statements include no accrual for loss. However, events could occur in the near term that would change the estimated liability materially. Note 11: Employee Benefit Plan The Village has a defined contribution 403(b) retirement plan. Employees are eligible to participate in the plan if they worked more than 20 hours a week. Employees contribute an elective percentage of their compensation to the plan with no minimum or maximum contribution requirement, and the Village contributes an amount equal to 50% of each employee s first 6% of their contributed amounts. Employer contributions under this plan for the years ended December 31, 2010 and 2009, were $129,478 and $127,818, respectively. 17

178 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Note 12: Management Company The Village has entered into a management agreement with Life Care Services, LLC (LCS). Pursuant to the agreement, LCS provides the Village s executive director, administrator of resident services and certain management and financial services. Total management fees paid to LCS during the years ended December 31, 2010 and 2009, were $965,939 and $981,999, respectively. Note 13: Related Party Transactions The Friendship Village of Tempe Foundation, Inc. (Foundation) solicits contributions on behalf of the Village s residents. In the absence of donor restrictions, the Foundation has discretionary control over the amounts and timing of its distributions to the Village. The Foundation contributed $105,713 and $88,455 to the Village during the years ended December 31, 2010 and 2009, respectively. Note 14: Disclosures About Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. 18

179 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include money market funds, U.S. Treasury and equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include government agencies and corporate obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3. The Village has no investments classified as Level Fair Value Level 1 Level 2 Level 3 Money market funds $ 1,449,982 $ 1,449,982 $ - $ - U.S. Treasury and government agency obligations 6,748,073 2,940,890 3,807,183 - Corporate obligations 6,063,118-6,063,118 - Equity securities 12,924,552 12,924, Fair Value Level 1 Level 2 Level 3 Money market funds $ 1,044,579 $ 1,044,579 $ - $ - U.S. Treasury and government agency obligations 8,839,575 4,946,595 3,892,980 - Corporate obligations 3,329,516-3,329,516 - Equity securities 11,944,160 11,944, The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Cash Equivalents The carrying amount approximates fair value. 19

180 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Long-Term Debt Fair value is estimated based on the borrowing rates currently available to the Village for debt with similar terms and maturities. The following table presents estimated fair values of the Village s financial instruments at December 31, 2010 and Carrying Amount Carrying Fair Value Amount Fair Value Cash and cash equivalents $ 1,358,253 $ 1,358,253 $ 2,310,413 $ 2,310,413 Long-term debt (78,708,000) (77,837,077) (80,868,000) (79,900,000) Note 15: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerability due to certain concentrations. Those matters include the following: Life Tenancy Agreements Estimates related to deferred revenue from life tenancy agreements are described in Note 1. Medical Malpractice Claims Estimates related to the accrual for medical malpractice claims are described in Note 10. Litigation In the normal course of business, the Village is, from time to time, subject to allegations that may or do result in litigation. The Village evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. See Note 7 for details of ongoing litigation regarding the Village s termination of an interest rate swap agreement with Lehman Brothers Financial Services. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. 20

181 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements December 31, 2010 and 2009 Self-Insurance The Village is self-insured for a portion of its exposure to risk of loss from employee health benefits. Annual estimated provisions are accrued for the self-insured portion of employee health benefits and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported. Investments The Village invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheet. Current Economic Conditions The current protracted economic decline continues to present the real estate and health care industries with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Village. Current economic conditions, including the decline in the housing market, have made it difficult for potential residents to afford initial entrance fees, which could have an adverse impact on the Village s future operating results. 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 investment values and allowances for accounts receivable that could negatively impact the Village s ability to meet debt covenants or maintain sufficient liquidity. 21

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183 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Accountants Report and Financial Statements November 30, 2011 and 2010

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185 Independent Accountants Report Board of Directors Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Tempe, Arizona We have reviewed the accompanying balance sheets of Tempe Life Care Village Inc., d/b/a Friendship Village of Tempe, as of November 30, 2011 and 2010, and the related statements of operations and changes in net assets and cash flows for the eleven-month periods ended November 30, 2011 and This interim financial information is the responsibility of the Village s management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 15, certain conditions indicate that the Village may be unable to continue as a going concern. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty. January 25, 2012

186 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Balance Sheets November 30, 2011 and 2010 (Unaudited) Assets Current Assets Cash and cash equivalents $ 1,193,512 $ 1,287,348 Short-term investments 473, ,715 Assets limited as to use current 9,968,679 2,945,345 Patient accounts receivable, net of allowance; $48,769 and $50,064 1,359,465 1,363,745 Supplies 159, ,453 Prepaid expenses 348, ,896 Accrued interest 129,725 86,179 13,632,284 6,762,681 Assets Limited As To Use Under indenture agreement, held by trustee 10,468,679 10,230,746 Externally restricted by donor 343, ,948 10,811,865 10,652,694 Less amount required to meet current obligations 9,968,679 2,945, ,186 7,707,349 Investments 18,268,248 17,663,817 Property and Equipment, At Cost Land and improvements 6,729,090 6,782,134 Buildings and improvements 133,568, ,975,727 Equipment 10,434,104 9,769, ,731, ,527,620 Less accumulated depreciation 57,519,354 52,331,237 93,212,222 96,196,383 Deferred financing costs, net of amortization 1,713,194 1,847,166 Total assets $ 127,669,134 $ 130,177,396 See Notes to Financial Statements

187 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 50,440,000 $ 32,230,516 Liabilities under split-interest agreements 154, ,178 Accounts payable 717, ,143 Accrued expenses 2,060,052 2,046,086 Refunds in process 899, ,979 Deposits and advance payments 223, ,035 Total current liabilities 54,495,460 36,116,937 Long-Term Debt 28,122,755 48,476,336 Liabilities Under Split-Interest Agreements 463, ,368 Deferred Revenue, Life Tenancy Agreements 65,462,335 65,689,709 Total liabilities 148,544, ,894,350 Net Assets Unrestricted (21,133,189) (20,988,012) Temporarily restricted 257, ,058 Total net assets (20,875,370) (20,716,954) Total liabilities and net assets $ 127,669,134 $ 130,177,396 2

188 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Operations and Changes in Net Assets Eleven-Month Periods Ended November 30, 2011 and 2010 (Unaudited) 2011 Temporarily Unrestricted Restricted Total Revenues, Gains and Other Support Resident services, including amortization of entrance fees of $6,891, and $5,886, $ 26,179,995 $ - $ 26,179,995 Net patient service revenue and resident fees 4,493,437-4,493,437 Contributions 852,933 74, ,230 Other revenue 377, ,669 Total revenues, gains and other support 31,904,034 74,297 31,978,331 Expenses and Losses Salaries and wages 12,715,890-12,715,890 Employee benefits 2,858,167-2,858,167 Professional services 1,580,909-1,580,909 Supplies and other 7,483,186-7,483,186 Depreciation and amortization 5,050,519-5,050,519 Interest 3,347,603-3,347,603 Provision for uncollectible accounts 50,908-50,908 Loss on disposal of property and equipment 47,129-47,129 Total expenses and losses 33,134,311-33,134,311 Operating Income (Loss) (1,230,277) 74,297 (1,155,980) Other Income (Expense) Investment return 336,906 11, ,928 Actuarial change in split-interest agreements (38,949) (6,499) (45,448) Excess (Deficiency) of Revenues Over Expenses (932,320) 78,820 (853,500) Net assets released from restriction 145,721 (145,721) - Change in Net Assets (786,599) (66,901) (853,500) Net Assets, Beginning of the Period (20,346,590) 324,720 (20,021,870) Net Assets, End of Period $ (21,133,189) $ 257,819 $ (20,875,370) See Notes to Financial Statements

189 2010 Temporarily Unrestricted Restricted Total $ 25,069,492 $ - $ 25,069,492 4,706,918-4,706, ,539 99, , , ,528 30,560,477 99,043 30,659,520 12,322,307-12,322,307 2,643,715-2,643,715 1,558,591-1,558,591 7,232,212-7,232,212 5,059,531-5,059,531 3,238,764-3,238,764 49,522-49,522 98,687-98,687 32,203,329-32,203,329 (1,642,852) 99,043 (1,543,809) 1,525,889 (36,351) 1,489,538 (32,545) (19,184) (51,729) (149,508) 43,508 (106,000) 18,444 (18,444) - (131,064) 25,064 (106,000) (20,856,948) 245,994 (20,610,954) $ (20,988,012) $ 271,058 $ (20,716,954) 3

190 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Statements of Cash Flows Eleven-Month Periods Ended November 30, 2011 and 2010 (Unaudited) Operating Activities Change in net assets $ (853,500) $ (106,000) Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization 5,050,519 5,059,531 Loss on disposal of property and equipment 47,129 98,687 Net (gain) loss on investments 297,479 (955,692) Actuarial change in split-interest agreements and annuities 45,448 51,729 Changes in annuities - (10,098) Amortization of deferred revenue (6,891,545) (5,886,763) Proceeds from nonrefundable life tenancy agreements 6,796,477 6,803,579 Refunds paid on nonrefundable life tenancy agreements (250,359) (566,792) Changes in Patient accounts receivable 15,043 (90,916) Accounts payable and accrued expenses 586, ,040 Other current assets and liabilities (53,946) (30,983) Net cash provided by operating activities 4,789,586 4,893,322 Investing Activities Purchase of investments (20,432,267) (29,391,932) Proceeds from disposition of investments 17,767,157 26,642,228 Investments subject to annuity agreements 47, ,410 Payments of annuity agreements (158,573) (101,178) Purchase of property and equipment (2,252,339) (1,498,824) Net cash used in investing activities (5,028,572) (4,205,296) Financing Activities Proceeds from refundable life tenancy agreements 1,670,100 1,145,524 Refunds paid on refundable life tenancy agreements (1,595,855) (2,856,615) Net cash used in financing activities 74,245 (1,711,091) Decrease in Cash and Cash Equivalents (164,741) (1,023,065) Cash and Cash Equivalents, Beginning of Period 1,358,253 2,310,413 Cash and Cash Equivalents, End of Period $ 1,193,512 $ 1,287,348 Supplemental Cash Flows Information Accounts payable incurred for property and equipment $ 91,089 $ 174,301 Interest paid $ 2,258,060 $ 2,453,372 See Notes to Financial Statements 4

191 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 1: Nature of Operations and Summary of Significant Accounting Policies Basis of Presentation The information included in these interim financial statements should be read in conjunction with the financial statements and accompanying notes for the years ended December 31, 2010 and In the opinion of management, the accompanying unaudited financial statements reflect all adjustments considered necessary for the fair presentation of their financial position, results of operations, changes in net assets and cash flows of the Village. Those adjustments consist only of normal recurring adjustments. The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. Nature of Operations Tempe Life Care Village, Inc., d/b/a Friendship Village of Tempe (the Village ), was incorporated in 1976 as an Arizona not-for-profit corporation and provides health care housing and other related services to residents through the operation of a continuing care retirement community in Tempe, Arizona. The Village s facility is comprised of 296 cottage units, 283 apartments including guest apartments, a common area with recreational facilities, a 128-bed skilled nursing facility, a 67-unit assisted living facility and a 24-unit assisted living dementia unit. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Village considers all liquid investments, other than those limited as to use or held in investment accounts with original maturities of three months or less to be cash equivalents. At November 30, 2011 and 2010, cash equivalents consisted primarily of money market accounts and repurchase agreements with a financial institution. 5

192 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Effective July 21, 2010, for interest-bearing accounts, 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 November 30, 2011, none of the Village s cash accounts exceeded federally insured limits. Cash equivalents at November 30, 2011, include $751,000 of repurchase agreements which are not covered by federal insurance programs. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at the lower of cost (or fair value at time of donation, if acquired by contribution) or fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the statements of operations and changes in net assets as unrestricted or temporarily restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited As To Use Assets limited as to use include assets held by trustees under indenture agreements and assets externally restricted by donors. Amounts required to meet current liabilities of the Village are classified as current assets. Patient Accounts Receivable The Village reports resident patient accounts receivable for services rendered at net realizable amounts from third-party payers, residents and others. The Village provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. 6

193 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Supplies Supply inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-Lived Asset Impairment The Village 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 estimate 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 periods ending November 30, 2011 and Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Deferred Revenue Life Tenancy Agreements The right to occupy various living units is granted under life tenancy agreements under which the tenants pay a certain sum (entrance fee) which entitles them to live in the unit for life. The Village offers two basic types of tenancy agreements Deferred Entrance Fees, Standard Plan and Deferred Entrance Fees, Return of Capital. 7

194 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Deferred Entrance Fees, Standard Plan Deferred entrance fees under the standard plan are initially recorded as deferred entrance fees and amortized into revenue on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident s occupancy. Under certain circumstances, a portion of the entrance fee may be returned to the resident upon termination of occupancy. Any unrecognized entrance fee at the date of death or termination of occupancy of the respective resident that is not refunded is recorded as operating income in the period in which death or termination of occupancy occurs. Deferred Entrance Fees, Return of Capital The nonrefundable portion (10%) of the entrance fee is initially recorded as deferred entrance fees, and amortized into operating income on a straight-line basis over the estimated remaining life, actuarially adjusted annually, of each resident beginning with the date of each resident s initial occupancy. The refundable portion (90%) is not amortized into revenue as the refund is paid upon reoccupancy of the unit or within two years from the date of the move out, whichever occurs first, and is included in deferred revenue, life tenancy agreements on the balance sheet. Effective January 1, 2006, the Return of Capital plan was amended where the nonrefundable portion going forward is 20% and the refundable portion is 80%. Under all contracts the resident s entrance fee is fully refundable during the first year of occupancy, excluding the occurrence of death of the resident. If, after the first year, the agreement is terminated for any reason other than death, the Village will attempt to obtain a new resident for the unit. If, in the sole discretion of the Village, repayment to the resident will not jeopardize the financial structure of the Village, then upon receipt of an entrance fee from a new resident, the resident whose agreement was terminated will be reimbursed for the amount of the entrance fee previously paid, less an appropriate charge for the period of residency until the new resident assumes residency. Under the standard plan the amount of the charge is 1% per month of residency or 22% of the entrance fee, whichever is greater. It has been management s policy to refund amounts as indicated above. Deposits and Advance Payments Entrance fees received prior to occupancy are recorded as deposits. When a residency agreement is signed, the resident is required to deposit 10% of the entrance fee with the Village. The balance of the entrance fee is due upon occupancy of the unit. Application fee deposits are transferred to deferred entrance fees at the time of occupancy. Under certain circumstances, potential residents may cancel their residency agreements prior to occupancy. 8

195 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Obligation to Provide Future Services The Village annually considers the net cost of future services and the use of facilities to be provided to current residents and compares that amount with the balance of deferred revenue from advance fees and other related cash inflows. If the present value of the net cost of future services and the use of facilities exceeds the deferred revenue from advance fees plus other related cash inflows, a liability is recorded (obligation to provide future services and use of facilities) with the corresponding charge to income. As of November 30, 2011 and 2010, the contracts being offered by the Village contain provisions allowing for increases in monthly service fees, which management intends to increase as is necessary to prevent a net liability to provide future services. Therefore, as of November 30, 2011 and 2010, management does not anticipate that the obligation to provide future services will exceed the estimated future cash inflows, and no liability has been recorded. Split-Interest Agreements Charitable gift annuities are recorded at fair value when received based on the present value of expected payments to be made under the agreement. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Village has been limited by donors to a specific time period or purpose. Net Patient Service Revenue and Monthly Resident Fees Net patient service revenue is reported at the estimated net realizable amounts from patients and others for services rendered. Monthly resident fees are recognized as revenue in the related month of occupancy. Charity Care The Village provides charity care to residents who are unable to pay monthly service fees. The amount of charity care is classified in the provision for uncollectible accounts. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. 9

196 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Income Taxes The Village is exempt from income taxes under Section 509(a)(2) of the Internal Revenue Code (the Code ) as an organization described in Section 501(c)(3) of the Code and a similar provision of state law. However, the Village is subject to federal income tax on any unrelated business taxable income. Excess (Deficiency) of Revenues Over Expenses The statements of operations and changes in net assets include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Presentation of Insurance Claims and Related Insurance Recoveries During 2011, the Village adopted the provisions of Accounting Standards Update (ASU) No Presentation of Insurance Claims and Related Insurance Recoveries which requires health care entities to separately report insurance recoveries from the related claim liabilities. The adoption of this ASU had no material impact on the Village s financial statements. 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. 10

197 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 2: Concentrations of Credit Risk The Village grants credit without collateral to its residents. At November 30, 2011 and 2010, the mix of receivables from patients and third-party payers is: Medicare 39% 35% Insurance 18% 21% Private 43% 44% 100% 100% Note 3: Investments and Investment Return Assets Limited As to Use Assets limited as to use include: Externally restricted by donors Money market funds $ 201,200 $ 305,735 Equity securities Mutual funds 61,463 45,008 Energy industry 80,523 71,205 $ 343,186 $ 421,948 Held by trustee under indenture agreement Money market funds $ 2,972,920 $ 3,380,064 U.S. Treasury and government agency obligations 3,280,599 3,679,512 Corporate obligations 4,215,160 3,171,170 $ 10,468,679 $ 10,230,746 11

198 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Other Investments Other investments include: Money market funds $ 473,243 $ 546,715 U.S. Treasury and government agency obligations 3,509,043 3,399,639 Corporate obligations 1,961,632 2,228,130 Collateralized mortgage obligations 305,445 - Equity securities Mutual funds 524,136 38,558 Energy industry 1,569,166 1,128,006 Materials industry 849, ,963 Industrials industry 1,306,942 1,344,885 Consumer discretionary industry 1,535,651 1,687,323 Consumer staples industry 740, ,981 Healthcare industry 1,413,793 1,096,228 Financial industry 1,566,972 1,899,657 Information technology and telecommunications industry 2,570,734 2,983,246 Other 414, ,201 18,741,491 18,210,532 Less long-term investments 18,268,248 17,663,817 Short-term investments $ 473,243 $ 546,715 Total investment return is comprised of the following: Interest and dividend income $ 645,407 $ 533,846 Unrealized gains (losses) on trading securities (434,589) 121,486 Realized gains on trading securities 137, ,206 $ 347,928 $ 1,489,538 While the Village does not invest directly in derivative securities, it may, through investment holdings with a manager, indirectly hold these securities. This risk is controlled through a diversified portfolio and regular monitoring procedures. 12

199 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 4: Split-Interest Agreements The Village has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The Village has recorded a liability at November 30, 2011 and 2010, of $618,275 and $712,546, respectively, which represents the present value of the future annuity obligations. The liability has been determined using net discount rates ranging in 2011 and 2010 from 4.2% to 6.0%. The Village recorded $10,263 and $88,176 in contribution revenue from these instruments for 2011 and 2010, respectively. Note 5: Deferred Revenue Life Tenancy Agreements Deferred revenue life tenancy agreements consist of the following as of November 30, 2011 and 2010: 2011 Refundable Nonrefundable Total Deposits by residents $ 21,926,357 $ 75,979,178 $ 97,905,535 Less accumulated amortization - 32,443,200 32,443,200 $ 21,926,357 $ 43,535,978 $ 65,462, Refundable Nonrefundable Total Deposits by residents $ 22,498,522 $ 74,870,683 $ 97,369,205 Less accumulated amortization - 31,679,496 31,679,496 $ 22,498,522 $ 43,191,187 $ 65,689,709 13

200 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 6: Long-Term Debt Series 1993B Bonds (A) $ 4,898,000 $ 4,898,000 Series 2002A Bonds (B) 11,460,000 11,460,000 Series 2002B-1 Bonds (C) 2,000,000 2,000,000 Series 2002B-2 Bonds (D) 3,000,000 3,000,000 Series 2002C Bonds (E) 48,415,000 48,755,000 Series 2004A Bonds (F) 6,410,000 6,410,000 Series 2004B Bonds (G) 2,525,000 4,345,000 78,708,000 80,868,000 Less current maturities 50,440,000 32,230,516 Less bond discount 145, ,148 $ 28,122,755 $ 48,476,336 (A) (B) (C) (D) (E) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Refunding Revenue Bonds, Series 1993B; in the original amount of $7,690,000 dated December 1, 1993, with $2,376,500 maturing on December 1, 2014, bearing interest at 6.00% and $2,521,500 maturing on December 1, 2016, bearing interest at 5.25%. Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds, Series 2002A; in the original amount of $11,460,000 dated December 1, 2002, maturing on December 1, 2030, bearing interest at 6.75%; interest payments due semiannually each December 1 and June 1, beginning June 1, 2003, and principal payments are due annually beginning December 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-1; in the original amount of $2,000,000 dated December 1, 2002, with $1,000,000 maturing on December 1, 2030, and $1,000,000 maturing December 1, 2031, bearing interest at 5.375%; interest payments due semiannually each December 1 and June 1, beginning June 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Revenue Bonds Extendable Rate Adjustable Securities, Series 2002B-2; in the original amount of $3,000,000, maturing on December 1, 2031, bearing interest at 5.10%; interest payments due semiannually each December 1 and June 1, beginning June 1, Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Variable Rate Demand Revenue Bonds, Series 2002C; in the original amount 14

201 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) of $50,000,000 dated December 1, 2002, maturing on December 1, 2027, bearing interest at variable rates; interest payments due monthly beginning January 2, 2003, and principal payments are due annually beginning December 1, The Village has an irrevocable letter of credit in the amount of $50,181,624 from a financial institution to allow for a situation where the remarketing agent is unable to remarket the bonds and the bondholders then put the bonds back to the issuer. The letter of credit expires July 2, If the letter of credit was drawn upon and not immediately reimbursed by the Village, the amount of the advance would initiate a term loan between the letter of credit provider and the Village. The Village would repay the loan in equal monthly installments over the remaining term of the letter of credit at a rate equal to prime plus 1%. In addition, the above mentioned irrevocable letter of credit has an irrevocable confirming letter of credit which is subject to annual extensions through July 2, The Village has not secured a letter of credit with satisfactory terms commencing after the current expiration date of July 2, Therefore, the entire amount of the related debt has been classified as current. The letter of credit and the confirming letter of credit require compliance with certain restrictive covenants, including maintaining a certain debt service coverage ratio, day s cash on hand and minimum occupancy levels. At November 30, 2011, all variable rate bonds had been successfully remarketed. (F) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds, Series 2004A; in the original amount of $13,690,000, with maturity dates between December 1, 2004, and December 1, 2013, bearing interest at rates ranging from 2.50% to 5.375%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due annually beginning December 1, (G) Obligations issued by the Industrial Development Authority of the City of Tempe, Arizona, Senior Living Refunding Revenue Bonds Extendable Rate Adjustable Securities, Series 2004B; in the original amount of $6,090,000, maturing December 1, 2016, bearing interest at 5.25%; interest payments due semiannually each December 1 and June 1, beginning December 1, 2004, and principal payments are due beginning December 1, The bonds are secured by all real estate and personal property and gross revenues of the Village and the assets restricted under the bond indenture agreements. The bond indenture agreements require that certain funds be established with the trustee. Accordingly, these funds are included as assets limited as to use under indenture agreements in the financial statements. The revenue bond indentures also place limits on the incurrence of additional borrowing and requires that the Village satisfy certain measures of financial performance as long as the bonds are outstanding. 15

202 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Maturities of long-term debt at November 30, 2011, are as follows: 2012 $ 50,440, ,135, ,250, ,376, ,521,500 Thereafter 18,985,000 $ 78,708,000 Note 7: Derivative Financial Instrument As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Village entered into two interest rate swaps with an effective date of December 1, One agreement provided for the Village to receive interest from the counterparty at a rate equal to the BMA Municipal Swap Index and to pay interest to the counterparty at a fixed rate of 4.077% on the notional amount of $10,000,000. This agreement expired on December 1, The second agreement provided for the Village to receive interest from the counterparty at a rate equal to the product of 67% and the USD-LIBOR-BBA and to pay interest to the counterparty at a fixed rate of 3.889% on the notional amount of $10,000,000. This agreement expires December 1, Under these agreements, the Village paid or received the net interest amount monthly, with the monthly settlements included in interest expense. These agreements were recorded at fair value with subsequent changes in fair value included in excess (deficiency) of revenues over expenses. In October 2008, the counterparty, Lehman Brothers Special Financing, Inc. (LBSF), filed for bankruptcy protection. A new counterparty had not been determined for the Village s swap agreements. On August 26, 2009, the Village provided LBSF with a notice designating an early termination date for both of the interest rate swap agreements. This notice was provided on the basis that LBSF s voluntary filing of bankruptcy constituted an event of default under the original swap agreements. As a consequence of early termination a third party prepared an early settlement amount calculation owed by the Village to LBSF based on the terms of the ISDA contract. In August 2009, the Village paid LBSF $625,562 for all unpaid amounts, which included interest on unpaid amounts and the early settlement amount, as determined by the third-party in regards to both swap agreements. On August 27, 2009, LBSF provided the Village with a letter (Response Letter) stating that LBSF reserved the right to dispute the validity of the termination notice. The Village responded to LBSF stating that it denies and disputes all claims and assertions made by LBSF s Response Letter and retains all of its rights and protections under the Bankruptcy Code. 16

203 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) On February 10, 2011, the Village filed an Adversary Proceeding in the United States Bankruptcy Court for the Southern District of New York against Debtor LBSF. In the action, the Village seeks a declaratory judgment stating that: (a) the Village had the contractual right to terminate the Swap Agreements; (b) such termination was properly affected by the Village on August 26, 2009; and (c) the Swap Agreements have, therefore, been terminated. In response on February 15, 2011, LBSF filed with the Court an alternative dispute resolution (ADR) seeking to compel mediation of the dispute between LBSF and the Village pursuant to an Order of the Court, entered September 17, 2009, requiring that all open and terminated swap agreements with LBSF proceed through the mediation process. The Village plans to continue to participate in the mediation process. At this time, it is not possible to predict the outcome of the litigation. Therefore no liability has been recorded in the accompanying financial statement. However, events could occur in the near term that would change the estimated liability materially. Note 8: Temporarily Restricted Net Assets Temporarily restricted net assets consist of the following at November 30, 2011 and 2010: Externally restricted by donors for special projects $ 179,702 $ 156,545 Charitable remainder annuity trusts 78, ,513 $ 257,819 $ 271,058 During 2011 and 2010, net assets of $145,721 and $18,444 were released for capital purchases, charity care and other restricted purposes. 17

204 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 9: Functional Expenses The Village provides residential and health care services to residents. Expenses related to providing these services are as follows: Residential and health care services $ 27,942,602 $ 27,280,588 General and administrative 5,191,709 4,922,741 $ 33,134,311 $ 32,203,329 Note 10: Medical Malpractice Claims The Village pays fixed premiums for annual medical malpractice coverage under claims-made policies. The Village accrues the expense of its share of asserted and unasserted claims occurring during the year by estimating the probable ultimate cost of any such claim. Such estimates are based on the Village s own claims experience. Management does not presently expect any claims to exceed the insurance coverage limits; therefore, the financial statements include no accrual for loss. However, events could occur in the near term that would change the estimated liability materially. Note 11: Employee Benefit Plan The Village has a defined contribution 403(b) retirement plan. Employees are eligible to participate in the plan if they worked more than 20 hours a week. Employees contribute an elective percentage of their compensation to the plan with no minimum or maximum contribution requirement, and the Village contributes an amount equal to 50% of each employee s first 6% of their contributed amounts. Employer contributions under this plan for the eleven-month periods ended November 30, 2011 and 2010, were $136,287 and $118,042, respectively. 18

205 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Note 12: Management Company The Village has entered into a management agreement with Life Care Services, LLC (LCS). Pursuant to the agreement, LCS provides the Village s executive director, administrator of resident services and certain management and financial services. Total management fees paid to LCS during the eleven-month periods ended November 30, 2011 and 2010, were $884,771 and $891,978, respectively. Note 13: Related Party Transactions The Friendship Village of Tempe Foundation, Inc. (Foundation) solicits contributions on behalf of the Village s residents. In the absence of donor restrictions, the Foundation has discretionary control over the amounts and timing of its distributions to the Village. The Foundation contributed $87,315 and $52,713 to the Village during the eleven-month periods ended November 30, 2011 and 2010, respectively. Note 14: Disclosures About Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 19

206 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include money market funds, U.S. Treasury and equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include government agencies, collateralized mortgage obligations and corporate obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3. The Village has no investments classified as Level Fair Value Level 1 Level 2 Level 3 Money market funds $ 3,647,363 $ 3,647,363 $ - $ - U.S. Treasury and government agency obligations 6,789,642 3,054,424 3,735,218 - Corporate obligations 6,176,792-6,176,792 - Collateralized mortgage obligations 305, ,445 - Equity securities Mutual funds 585, , Energy industry 1,649,689 1,649, Materials industry 849, , Industrials industry 1,306,942 1,306, Consumer discretionary industry 1,535,651 1,535, Consumer staples industry 740, , Healthcare industry 1,413,793 1,413, Financial industry 1,566,972 1,566, Information technology and - - telecommunications industry 2,570,734 2,570, Other 414, ,

207 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) 2010 Fair Value Level 1 Level 2 Level 3 Money market funds $ 4,232,514 $ 4,232,514 $ - $ - U.S. Treasury and government agency obligations 7,079,151 2,699,154 4,379,997 - Corporate obligations 5,399,300-5,399,300 - Equity securities - - Mutual funds 83,566 83, Energy industry 1,199,211 1,199, Materials industry 826, , Industrials industry 1,344,885 1,344, Consumer discretionary industry 1,687,323 1,687, Consumer staples industry 720, , Healthcare industry 1,096,228 1,096, Financial industry 1,899,657 1,899, Information technology and telecommunications industry 2,983,246 2,983, Other 310, , The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value. Cash and Cash Equivalents The carrying amount approximates fair value. Long-Term Debt Fair value is estimated based on the borrowing rates currently available to the Village for debt with similar terms and maturities. 21

208 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) The following table presents estimated fair values of the Village s financial instruments at November 30, 2011 and Carrying Amount Carrying Fair Value Amount Fair Value Cash and cash equivalents $ 1,193,512 $ 1,193,512 $ 1,287,348 $ 1,287,348 Long-term debt (78,708,000) (77,956,503) (80,868,000) (80,139,044) Note 15: Management s Consideration of Going Concern Matters and Future Liquidity Needs The financial statements have been prepared assuming the Village will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business. As discussed in Note 6 (E), the letter of credit associated with the Senior Living Variable Rate Demand Revenue Bonds, Series 2002C, expires on July 2, The Village has been unable to secure a new letter of credit with satisfactory terms, causing the balance of the demand debt to be classified as current in the accompanying balance sheet, without sufficient resources to pay these obligations upon demand. Management is in the process of refinancing all existing debt, but has not completed this process. Note 16: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerability due to certain concentrations. Those matters include the following: Life Tenancy Agreements Estimates related to deferred revenue from life tenancy agreements are described in Note 1. Medical Malpractice Claims Estimates related to the accrual for medical malpractice claims are described in Note

209 Tempe Life Care Village, Inc. d/b/a Friendship Village of Tempe Notes to Financial Statements November 30, 2011 and 2010 (Unaudited) Litigation In the normal course of business, the Village is, from time to time, subject to allegations that may or do result in litigation. The Village evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. See Note 7 for details of ongoing litigation regarding the Village s termination of an interest rate swap agreement with Lehman Brothers Financial Services. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. Self-Insurance The Village is self-insured for a portion of its exposure to risk of loss from employee health benefits. Annual estimated provisions are accrued for the self-insured portion of employee health benefits and include an estimate of the ultimate costs for both reported claims and claims incurred but not yet reported. Investments The Village invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheet. Current Economic Conditions The current protracted economic decline continues to present the real estate and health care industries with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Village. Current economic conditions, including the decline in the housing market, have made it difficult for potential residents to afford initial entrance fees, which could have an adverse impact on the Village s future operating results. 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 investment values and allowances for accounts receivable that could negatively impact the Village s ability to meet debt covenants or maintain sufficient liquidity. 23

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211 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS

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213 TABLE OF CONTENTS Page DEFINITIONS OF CERTAIN TERMS... C-1 SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE... C-18 Funds... C-18 Investment of Funds... C-21 Arbitrage; Compliance with the Tax Certificate and Agreement... C-22 Supplemental Bond Indentures... C-22 Defeasance... C-24 Events of Default; Acceleration... C-25 Waiver of Events of Default... C-26 Rights and Remedies of Bondholders... C-27 Direction of Proceedings... C-27 Application of Moneys... C-28 Removal of the Bond Trustee... C-29 SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT... C-29 Representations and Warranties by the Corporation... C-29 Assignment and Pledge of Authority s Rights... C-30 Payments on the Loan Agreement and Related Obligations... C-31 The Corporation s Obligations Unconditional... C-31 Certain Covenants of the Corporation Relating to the Use and Operation of Certain of Its Property... C-31 Indemnification... C-31 Maintenance of Corporate Existence and Status... C-32 Licensure... C-33 Financial Statements... C-33 Supplements and Amendments to the Loan Agreement... C-34 Defaults and Remedies... C-35 SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE... C-36 General... C-36 Authorization of Obligations... C-37 Payment of Principal and Interest... C-37 Pledge of Gross Revenues... C-37 Covenants as to Maintenance of Properties, Etc.... C-38 Insurance Required... C-39 C-i

214 TABLE OF CONTENTS (continued) Page Limitations on Encumbrances... C-40 Limitations on Additional Indebtedness... C-40 Limitations and Guaranties... C-42 Rates and Charges, Debt Coverage... C-42 Sale, Lease or Other Disposition of Property... C-43 Liquidity Covenant... C-44 Consolidation, Merger, Sale or Conveyance... C-45 Financial Statements... C-46 Application for Rating... C-46 Approval of Consultants... C- 47 Membership in the Obligated Group... C-48 Withdrawal from the Obligated Group... C-49 Insurance and Condemnation Proceeds... C-50 Designation of Principal Property... C-50 Additions to Excluded Property... C-50 Defaults and Remedies... C-51 Removal and Resignation of the Master Trustee... C-56 Supplements and Amendments... C-57 Satisfaction and Discharge of Master Indenture... C-59 SUMMARY OF CERTAIN PROVISIONS OF THE DEED OF TRUST... C-59 Grant in Trust... C-60 Secured Obligations... C-62 Security Agreement and Fixture Filing... C-62 Absolute Assignment; Assignment of Leases and Rents... C-62 Power of Sale; Foreclosure... C-63 C-ii

215 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS THE MASTER INDENTURE, THE BOND INDENTURE, THE LOAN AGREEMENT AND THE DEED OF TRUST Brief descriptions of the Master Indenture, the Bond Indenture, the Loan Agreement and the Deed of Trust are included hereafter in this Appendix C of the Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Master Indenture, the Bond Indenture, the Loan Agreement and the Deed of Trust are qualified in their entirety by reference to each such document, copies of which are available for review prior to the issuance and delivery of the Series 2012 Bonds at the offices of the Authority and thereafter at the offices of the Bond Trustee. All references to the Series 2012 Bonds are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the Bond Indenture. DEFINITIONS OF CERTAIN TERMS 501(c)(3) Organization means an organization described in Section 501(c)(3) of the Code. Act means the Title 35, Chapter 5, Arizona Revised Statutes, as now in effect and as it may from time to time hereafter be amended or supplemented. Additional Indebtedness means any Indebtedness incurred subsequent to the execution and delivery of the Master Indenture other than Obligation No. 1 and Obligation No. 2. Affiliate means a corporation, partnership, joint venture, association, limited liability company, business trust or similar entity (a) which controls, is controlled by or is under common control with, directly or indirectly, a Member; or (b) a majority of the members of the Directing Body of which are members of the Directing Body of a Member. For the purposes of this definition, control means with respect to: (a) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors of such corporation; (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the members of the Directing Body of such corporation; or (c) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect at least a majority of the members of its Directing Body, by contract or otherwise. For the purposes of this definition, Directing Body means with respect to: (a) a corporation having stock, such corporation s board of directors and the owners, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporation s directors (both of which groups shall be considered a Directing Body); (b) a not for profit corporation not having stock, such corporation s members if the members have complete discretion to elect the corporation s directors, or the corporation s directors if the corporation s members do not have such discretion; and (c) any other entity, its governing board or body. For the purposes of this definition, all references to directors and members shall be deemed to include all entities performing the function of directors or members however denominated. Annual Debt Service means for each Fiscal Year the aggregate amount (without duplication) of principal and interest scheduled to become due (either by maturity or by mandatory redemption) and sinking fund payments required to be paid in that Fiscal Year on all Long-Term Indebtedness, less any C-1

216 amounts on irrevocable deposit in escrow to be applied during that Fiscal Year to pay principal or interest on Long-Term Indebtedness; provided that (i) any annual fees payable in respect of a credit facility issued to secure any series of Related Bonds, if any (other than annual fees to be paid from proceeds of a bond issue escrowed for such purpose) shall be included in the determination of Annual Debt Service; and (ii) to the extent an Interest Rate Agreement has been entered into in connection with any particular Indebtedness, the actual debt service paid after the effect of payments made to or received from the provider of the Interest Rate Agreement shall be included in the determination of Annual Debt Service. Whenever the term Annual Debt Service is used in the calculation of a Debt Service Coverage Ratio, any Guaranties shall be included only to the extent there was an actual payment on the Guaranty in such Fiscal Year. Authority means The Industrial Development Authority of the City of Tempe, Arizona, a nonprofit corporation organized and existing under and by virtue of the laws of the State and designated by laws as a political subdivision of the State, or its successors and assigns. Authorized Denomination means $5,000 and integral multiples thereof. Authorized Representative means with respect to each Member, the chairperson of its Governing Body or its chief executive officer or its chief financial officer or any other person designated an authorized representative of such Member by a Certificate of such Member signed by the chairperson of its Governing Body or its chief executive officer or chief financial officer and filed with the Master Trustee. Balloon Indebtedness means Long-Term Indebtedness of a Member, 25% or more of the principal of which becomes due (either by maturity or mandatory redemption) during any period of 12 consecutive months, which portion of the principal is not required by the documents governing such Indebtedness to be amortized by redemption prior to such date. Beneficiary means Wells Fargo Bank, N.A., as Master Trustee and Beneficiary under the Deed of Trust. Bond Financed Property means all of the property of the Corporation financed or refinanced with the proceeds of the Bonds. Bond Indenture means the Bond Trust Indenture dated as of March 1, 2012, between the Authority and the Bond Trustee, as it may from time to time be amended or supplemented. Bond Register means the registration books of the Authority kept by the Bond Trustee to evidence the registration and transfer of Bonds. Bond Registrar means the Bond Trustee, as keeper of the Bond Register. Bond Reserve Fund means the fund by that name established pursuant to the Bond Indenture. Bond Reserve Fund Requirement, means $5,416,562.50, being an amount not greater than the lowest of (i) Maximum Annual Bond Service on the Bonds, (ii) 125% of average annual debt service on the Bonds, and (iii) 10% of the sale proceeds of the Bonds. Bond Trustee means Wells Fargo Bank, N.A., as bond trustee, or any successor trustee under the Bond Indenture. C-2

217 Bondholder, holder and owner of the Bonds means any registered owner of any Bond. Bonds means the $77,030,000 aggregate principal amount of The Industrial Development Authority of the City of Tempe, Arizona, Revenue Refunding Bonds (Friendship Village of Tempe), authorized to be issued pursuant to the Bond Indenture and comprised of the Series 2012A Bonds and the Taxable Series 2012B Bonds. Book Value means, when used in connection with Principal Property or other Property of any Member, the value of such property, net of accumulated depreciation, as it is carried on the books of such person and in conformity with generally accepted accounting principles, and when used in connection with Principal Property or other Property of the Obligated Group, means the aggregate of the values so determined with respect to such Property of each Member determined in such a way that no portion of such value of Property of any Member is included more than once. Business Day means (i) for purposes of the Master Indenture, a day of the year which is not (a) a Saturday, Sunday or legal holiday on which banking institutions located in the city of the Corporate Trust Office are authorized by law to close or (b) a day on which the New York Stock Exchange is closed and (ii) for purposes of the Bond Indenture, any day other than (a) a Saturday, Sunday or legal holiday on which banking institutions located in the city of the designated corporate trust office of the Bond Trustee is located are required or authorized by law to remain closed or (b) a day on which the New York Stock Exchange is closed. Cash and Liquid Investments means all unrestricted cash and liquid investment balances, including without limitation, such amounts constituting board designated funds, whether classified as current or noncurrent assets, held by the Obligated Group for any of its corporate purposes, but excluding amounts available under lines of credit and excluding amounts held by the Master Trustee, all as set forth in the most recent financial statements delivered under the Master Indenture. Certificate, Statement, Request, Consent or Order of any Member or of the Master Trustee means, respectively, a written certificate, statement, request, consent or order signed in the name of such Member by its respective Authorized Representative or in the name of the Master Trustee by its Responsible Officer. Any such instrument and supporting opinions or certificates, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or certificate and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by the Bond Indenture, each such instrument shall include the statements provided for in the Bond Indenture. Closing Date means the date of original issuance and delivery of the Bonds. Code means (i) for purposes of the Master Indenture, the Internal Revenue Code of 1986 and the regulations issued thereunder, or any successor to the Internal Revenue Code of 1986 and (ii) for purposes of the Bond Indenture, the Internal Revenue Code of 1986, as amended from time to time. Each reference to a Section of the Code in the Bond Indenture shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such Section which are applicable to the Bonds or the use of the proceeds thereof. Completion Indebtedness means any Long-Term Indebtedness incurred by any Member for the purpose of financing the completion of acquiring, constructing, renovating, refurbishing, equipping or improving any project for which Long-Term Indebtedness has previously been incurred in accordance with the provisions of the Bond Indenture. C-3

218 Construction Consultant means the architects, engineers, development consultant, supervising contractors or other qualified consultant selected by the Obligated Group or any Member in connection with the acquisition, installation, improvement or construction of a project or a portion thereof for which Long-Term Indebtedness has previously been incurred in accordance with the provisions of the Master Indenture, delivered to the Master Trustee in connection with the issuance of Completion Indebtedness. Continuing Disclosure Agreement means the Continuing Disclosure Agreement dated the Closing Date, executed and delivered by the Corporation and relating to the Bonds, as originally executed and as it may from time to time be amended in accordance with the terms thereof. Corporate Trust Office means the office of the Master Trustee at which its designated corporate trust business is conducted, which, at the date hereof, is located at 100 West Washington, 22nd Floor, Phoenix, Arizona Corporation means Tempe Life Care Village, Inc., an Arizona nonprofit corporation, and its successors and assigns and any surviving, resulting or transferee corporation. Current Value means the aggregate sum of the Book Value of personal property plus the fair market value of the real property. The fair market value of real property shall be as reflected in the most recent written report of an appraiser selected by the Corporation, which shall be an appraiser who is a member of the American Institute of Real Estate Appraisers (MAI), and the report shall be delivered to the Master Trustee (which report shall be dated not more than three years prior to the date as of which Current Value is to be calculated). Days Cash on Hand means the amount determined by dividing (1) the Cash and Liquid Investments of the Obligated Group as of a particular date by (2) the quotient derived by dividing (a) the Obligated Group s total operating expenses (less depreciation and amortization and other non-cash items, including, without limitation, losses on refinancing of debt, non-cash termination value of any hedging, derivative, interest rate exchange or similar contract, and any one-time charges in connection with development projects that have been abandoned by the Obligated Group) for the most recent preceding Fiscal Year for which audited financial statements have been delivered under the Master Indenture by (b) the number of days in such Fiscal Year. Debt Service Coverage Ratio means, for any period of time, the ratio determined by dividing Income Available for Debt Service by Annual Debt Service. Deed of Trust means the Deed of Trust, dated as of March 1, 2012, as amended and supplemented, and as the same may be further supplemented and amended from time to time, under which the Corporation has granted a lien and security interest in the Property to Old Republic National Title Insurance Company, as trustee, to be held for the benefit of the Master Trustee. due. Defaulted Interest means interest on any Bond which is payable but not duly paid on the date Depository Bank means a banking institution designated in writing to the Master Trustee by the Obligated Group Representative as the location of an account constituting all or a portion of the Gross Revenue Fund pursuant to the Master Indenture. EMMA means the Electronic Municipal Market Access system as described in the Securities Exchange Act of 1934, as amended by Release No , and maintained by the Municipal Securities C-4

219 Rulemaking Board for purposes of Rule 15c2-12, or any similar system that is acceptable to the Securities and Exchange Commission. Escrow Obligations means: (1) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or obligations the timely payment of the principal of and interest on which are fully guaranteed by the United States of America; (2) obligations, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following: Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Bank System, Export-Import Bank of the United States, Federal Financing Bank, Federal Land Banks, Government National Mortgage Association, Farmer s Home Administration, Small Business Administration, Federal Home Loan Mortgage Corporation or Federal Housing Administration, (3) certificates which evidence ownership of the right to the payment of the principal of and interest on obligations described in clauses (1) and (2), provided that such obligations are held in the custody of a bank or trust company in a special account separate from the general assets of such custodian, and (4) obligations the interest on which is excluded from gross income for purposes of federal income taxation pursuant to Section 103 of the Internal Revenue Code of 1986, and the timely payment of the principal of and interest on which is fully provided for by the deposit in trust or escrow of cash or obligations described in clauses (1), (2) or (3). Event of Default means any of the events specified in the Master Indenture or the Bond Indenture, as applicable. Excluded Property means any assets of employee pension benefit plans as defined in the Employee Retirement Income Security Act of 1974, as amended, maintained by or for the benefit of the Obligated Group, any moneys and securities held as an entrance fee or security deposit, or in a resident trust fund, for any resident of any Facility of a Member, any real estate parcels the Corporation may hold temporarily as a convenience to its Affiliates, and the real estate described in Exhibit C to the Master Indenture, as amended as provided in the Master Indenture from time to time, and all improvements, fixtures, tangible personal property and equipment located thereon and used in connection therewith. Except where explicitly set forth in the Master Indenture, neither Principal Property nor Property include Excluded Property. Extendable Indebtedness means indebtedness which is repayable or subject to purchase at the option of the holder thereof prior to its stated maturity, but only to the extent of money available for the repayment or purchase therefore and not more frequently than once every year. Financing means a borrowing pursuant to any Obligation authorized by the Master Indenture. First Supplemental Master Indenture means the First Supplemental Master Trust Indenture dated as of March 1, 2012, pursuant to which Obligation No. 1 and Obligation No. 2 will be issued. Fiscal Year means, (i) for purposes of the Master Indenture, that period adopted by the Obligated Group Representative as its annual accounting period and (ii) for purposes of the Bond Indenture, that period adopted by the Corporation as its annual accounting period. Initially, the Fiscal Year is the period from January 1 of a year to December 31 of the next year. Fitch means Fitch Ratings Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, and if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Fitch shall be deemed to refer to any other nationally recognized securities rating agency designated by the Obligated Group Representative. C-5

220 Governing Body means, when used with respect to any Member, its board of directors, board of trustees, or other board or group of individuals in which all of the powers of such Member are vested except for those powers reserved to the corporate membership thereof by the articles of incorporation or bylaws of such Member. Government Issuer means any municipal corporation, political subdivision, state, territory or possession within the United States, or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, which obligations would constitute Related Bonds under the Master Indenture. Government Obligations means securities which consist of (a) United States Government Obligations, or (b) evidences of a direct ownership in future interest or principal payments on United States Government Obligations, which obligations are held in a custody account by a custodian pursuant to the terms of a custody agreement. Gross Revenue Fund means the fund by that name established pursuant to the Master Indenture. Gross Revenues means all receipts, revenues, income and other money received by or on behalf of any Member of the Obligated Group from any source whatsoever, including, but not limited to, (a) revenues derived from the operation and possession of each Member s facilities, including accounts receivable, (b) gifts, bequests, grants, donations and contributions, exclusive of any gifts, bequests, grants, donations or contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Required Payments or for the payment of operating expenses, and (c) revenues derived from (1) condemnation proceeds, (2) inventory and other tangible and intangible property, (3) private and governmental health care reimbursement programs and agreements, (4) insurance proceeds, (5) contract rights and other rights owned by each Member, and (6) realized investment earnings. Guaranty means all loan commitments and all obligations of any Member guaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Person which would, if such other Person were a Member, constitute Indebtedness. Holder means the registered owner of any Obligation in registered form or the bearer of any Obligation in coupon form which is not registered or is registered to bearer. Immediate Notice means notice by telephone, telex, telecopier or electronic mail to such address as the addressee shall have directed in writing, promptly followed by written notice by first class mail, postage prepaid; provided, however, that if any Person required to give an Immediate Notice shall not have been provided with the necessary information as to the telephone, telex, telecopier number or electronic mail address of an addressee, Immediate Notice shall mean written notice by first class mail, postage prepaid. Income Available for Debt Service means, with respect to the Obligated Group, as to any period of time, the excess of revenues over expenses (or, in the case of for-profit Members, net income after taxes) of the Obligated Group for such period, to which shall be added depreciation, amortization and interest, all as determined in accordance with generally accepted accounting principles, provided that no such determination shall include any gain or loss resulting from (i) the extinguishment of Indebtedness, (ii) any disposition of capital assets not made in the ordinary course of business or any revenue of an Affiliate which is not a Member, (iii) any one-time charge in connection with a development project that has been abandoned by the Obligated Group, (iv) any gain or loss resulting from changes in the valuation of Indebtedness, investment securities or any Interest Rate Agreement, and any non-cash termination C-6

221 value of any Interest Rate Agreement, (v) the application of changes in accounting principles, (vi) any other extraordinary or non-recurring losses or gains, (vii) Initial Entrance Fees, or (viii) any other noncash revenue or expense items. For purposes of this definition, revenues shall include (1) resident service revenues, (2) other operating revenues, (3) non-operating revenues or contributions (other than restricted contributions, income derived from the sale or other disposition of assets not in the ordinary course of business or any gain from the extinguishment of debt or other extraordinary item or earnings which constitute funded interest or earnings on amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness), and (4) entrance fees received minus (a) entrance fees amortized during such Fiscal Year and (b) entrance fees refunded to residents. Indebtedness means, for any Person, (a) all Guaranties by such Person, (b) all liabilities (exclusive of reserves such as those established for deferred taxes or litigation) recorded or required to be recorded as such on the audited financial statements of such Person in accordance with generally accepted accounting principles, and (c) all obligations for the payment of money incurred or assumed by such Person (i) due and payable in all events or (ii) if incurred or assumed primarily to assure the repayment of money borrowed or credit extended, due and payable upon the occurrence of a condition precedent or upon the performance of work, possession of Property as lessee, rendering of services by others or otherwise; provided that Indebtedness shall not include Indebtedness of one Member to another Member, any Guaranty by any Member of Indebtedness of any other Member, the joint and several liability of any Member on Indebtedness issued by another Member, Interest Rate Agreements or any obligation to repay moneys deposited by patients or others with a Member as security for or as prepayment of the cost of patient care or any rights of residents of life care, elderly housing or similar facilities to entrance fees (whether amortized into income or not), endowment or similar funds deposited by or on behalf of such residents including but not limited to any deferred obligations for the refund or repayment of entrance fees, any rent, development, marketing, operating or other fees that have been deferred from the year in which they were originally due as a result of deferral or subordination. Independent Consultant means a firm (but not an individual) which (1) is in fact independent of and has no relationship with the Corporation or a Member other than as provided within the scope of a consulting engagement including, but not limited to, subparagraphs (2) and (3) below, (2) does not have any direct financial interest or any material indirect financial interest in any Member or any Affiliate and (3) is not connected with any Member or any Affiliate as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions, and designated by the Obligated Group Representative, qualified to pass upon questions relating to the financial affairs of facilities of the type or types operated by the Obligated Group and having a favorable reputation for skill and experience in the financial affairs of such facilities. Independent Counsel means an attorney, duly admitted to practice law before the highest court of any state and, without limitation, may include independent legal counsel for the Authority, the Corporation or the Bond Trustee. Industry Restrictions means federal, state or other applicable governmental laws or regulations or general industry standards or general industry conditions placing restrictions and limitations on the rates, fees and charges to be fixed, charged and collected by the Members. Initial Entrance Fees means fees received upon the initial occupancy of any newly-constructed independent living units that are part of a project (including any such fees collected for the purpose of obtaining a parking space) not previously occupied, other than security deposits, monthly rentals or monthly service charges, paid to a Member by residents of living units for the purpose of obtaining the right to reside in those living units or to obtain a parking space including any refundable resident deposits described in any lease, residency agreement or similar agreement with respect to those living units or C-7

222 parking spaces, but shall not include any such amounts held in escrow or otherwise set aside pursuant to the requirements of any such agreement or a reservation agreement prior to the occupancy of the living unit or parking space covered by such lease, residency agreement or similar agreement (which amounts shall be included if and when occupancy occurs). Insurance Consultant means a person or firm (which may be an insurance broker or agent of a Member) who is not, and no member, director, officer or employee of which is, an officer or employee of any Member or any Affiliate, designated by the Obligated Group Representative and qualified to survey risks and to recommend insurance coverage for hospitals, health-related facilities and services and organizations engaged in such operations. Interest Payment Date means each June 1 and December 1, commencing June 1, 2012, unless any date so specified is not a Business Day, in which case the Interest Payment Date shall be the immediately following Business Day. Interest Rate Agreement means an interest rate exchange, hedge or similar agreement, expressly identified in an Officer s Certificate of the Corporation delivered to the Master Trustee as being entered into in order to hedge the interest payable on all or a portion of any Indebtedness, which agreement may include, without limitation, an interest rate swap, a forward or futures contract or an option (e.g. a call, put, cap, floor or collar) and which agreement does not constitute an obligation to repay money borrowed, credit extended or the equivalent thereof. An Interest Rate Agreement shall not constitute Indebtedness under the Master Indenture. Interim Indebtedness means Long-Term Indebtedness with a final maturity 60 months or less from the date of incurrence, certified in an Officer s Certificate filed with the Master Trustee to have been incurred in anticipation of refinancing with the proceeds of other Long-Term Indebtedness other than Interim Indebtedness prior to the final maturity thereof. Lien means any mortgage or pledge of, or security interest in, or lien or encumbrance on, any Property, excluding Liens applicable to Property in which any Member has only a leasehold interest unless the Lien is with respect to such leasehold interest. Loan Agreement means the Loan Agreement dated as of March 1, 2012, between the Authority and the Corporation relating to the Bonds, as it may from time to time be amended and supplemented. Long-Term Debt Service Coverage Ratio means, for any period of time, the ratio determined by dividing Income Available for Debt Service by Maximum Annual Debt Service. Long-Term Indebtedness means Indebtedness having an original maturity greater than one year or renewable at the option of a Member for a period greater than one year from the date of original incurrence or issuance thereof unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least 30 consecutive days during each calendar year. Master Indenture means the Master Trust Indenture dated as of March 1, 2012, by and among the Corporation, as the initial Member of the Obligated Group and the Master Trustee, as supplemented and amended by the First Supplemental Master Indenture, and as it may from time to time be further amended or as supplemented in accordance with the terms thereof. Master Trustee means Wells Fargo Bank, N.A., a national banking association, and, subject to the limitations contained in the Master Indenture, any other corporation or association which may be C-8

223 co-trustee with the Master Trustee and any successor or successors to said trustee or co-trustee in the trusts created under the Master Indenture. Maximum Annual Bond Service means, as of any date of calculation, the sum of (1) the interest falling due on then Outstanding Bonds (assuming that all then Outstanding serial Bonds are retired on their respective maturity dates and that all then Outstanding term Bonds are retired at the times and in the amounts provided for by mandatory sinking account payments, (2) the principal amount of then Outstanding serial Bonds falling due by their terms, and (3) the amount of all mandatory sinking account payments required; all as computed for the Bond year in which such sum shall be largest. Maximum Annual Debt Service means the greatest amount of Annual Debt Service becoming due and payable in any Fiscal Year including the Fiscal Year in which the calculation is made or any subsequent Fiscal Year; provided, however, that for the purposes of computing Maximum Annual Debt Service: (a) There shall be included in the Long-Term Indebtedness of any Member, 20% of the annual principal and interest requirements with respect to the debt of any Person subject to a Guaranty by such Member. If any Member has been required by reason of its Guaranty to make a payment in respect of another Person s Indebtedness within the immediately preceding two Fiscal Years, all of the annual principal and interest requirements with respect to the debt subject to the Guaranty shall be included in Long-Term Indebtedness. (b) For any Long-Term Indebtedness for which a binding commitment, letter of credit or other credit arrangement providing for the extension of such Indebtedness beyond its original maturity date exists, the computation of Maximum Annual Debt Service shall, at the option of the Obligated Group Representative, be made on the assumption that such Long-Term Indebtedness will be amortized in accordance with such credit arrangement. (c) For any Balloon Indebtedness and Interim Indebtedness, the computation of Maximum Annual Debt Service shall, at the option of the Obligated Group Representative, assume that such Long-Term Indebtedness is to be amortized over a period specified by the Obligated Group Representative up to 30 years in duration, beginning on the date of maturity of such Indebtedness or such earlier date as may be specified by the Obligated Group Representative, assuming level debt service and a rate of interest equal to the Projected Rate; provided, however that if the Projected Rate cannot be determined the rate shall be assumed to be a fixed rate of interest equal to the most recently published Bond Buyer 30-year Revenue Bond Index or a similar index. (d) For any Extendable Indebtedness, the computation of Maximum Annual Debt Service shall, at the option of the Obligated Group Representative, assume that such Extendable Indebtedness is to be amortized over the period until its stated maturity, assuming level debt service and a fixed rate of interest equal to the current rate of interest on such Extendable Indebtedness. (e) If interest on Long-Term Indebtedness is payable pursuant to a variable interest rate formula (including Balloon Indebtedness and Interim Indebtedness, if the Obligated Group Representative does not choose to use paragraph (c) above, and including Extendable Indebtedness, if the Obligated Group Representative does not choose to use paragraph (d) above), the interest rate on such Long-Term Indebtedness for periods when the actual interest rate cannot yet be determined shall be assumed to be a fixed rate of interest equal to the most recently published average of the Securities Industry and Financial Markets Association (SIFMA) C-9

224 Municipal Swap Index over the preceding ten years (or a similar index if unavailable), plus the cost of any credit enhancement fees, and remarketing fees, if any. (f) Anything contained in the Master Indenture to the contrary notwithstanding, any portion of any Indebtedness of any Member for which an Interest Rate Agreement has been obtained by such Member shall be deemed to bear interest for the period of time that such Interest Rate Agreement is in effect at a net rate which takes into account the interest payments made by such Member on such Indebtedness and the payments made or received by such Member on such Interest Rate Agreement; provided that the long-term credit rating of the provider of such Interest Rate Agreement (or any guarantor thereof) is in one of the three highest rating categories of any Rating Agency (without regard to any refinements of gradation of rating category by numerical modifier or otherwise) or is at least as high as that of the Obligated Group. Member or Member of the Obligated Group means any Person who is designated as a Member of the Obligated Group pursuant to the terms and conditions of the Master Indenture. Moody s means Moody s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the Obligated Group Representative. Obligated Group means all Members. Obligated Group Representative means the Corporation or such other Member as may have been designated pursuant to written notice to the Master Trustee executed by all of the Members. Obligation means any obligation of the Obligated Group issued under the Master Indenture, as a joint and several obligation of each Member, which may be in any form set forth in a Related Supplement, including, but not limited to, bonds, obligations, debentures, reimbursement agreements, loan agreements or leases. Reference to a Series of Obligations or to Obligations of a Series means Obligations or series of Obligations issued pursuant to a single Related Supplement. Obligation No. 1 means Direct Note Obligation No. 1 dated the date of initial issuance of the Series 2012A Bonds, issued to the Authority under the First Supplemental Master Indenture to secure the Series 2012A Bonds. Obligation No. 2 means Direct Note Obligation No. 2 dated the date of initial issuance of the Taxable Series 2012B Bonds, issued to the Authority under the First Supplemental Master Indenture to secure the Taxable Series 2012B Bonds. Officer s Certificate means a certificate signed by the Authorized Representative of the Obligated Group Representative. Official Statement means this Official Statement relating to the Bonds. Opinion of Bond Counsel means an opinion of nationally recognized municipal bond counsel, which opinion may be based upon a ruling or rulings of the Internal Revenue Service, and which counsel and opinion, including the scope, form, substance and other aspects thereof, are acceptable to the Authority. C-10

225 Opinion of Independent Counsel means an opinion in writing signed by an attorney or firm of attorneys, duly admitted to practice law before the highest court of any state and, without limitation, may include independent legal counsel for the Obligated Group Representative. Outstanding, when used with reference to Indebtedness, means, as of any date of determination, all Indebtedness theretofore issued or incurred and not paid and discharged other than (a) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (b) Obligations in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to the provisions of a Related Supplement regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser, (c) any Obligation held by any Member, and (d) Indebtedness deemed paid and no longer outstanding pursuant to the terms thereof; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when an Obligation secures an issue of Related Bonds and another Obligation secures repayment obligations to a bank under a letter of credit which secures such Related Bonds) for purposes of the various financial covenants contained in the Master Indenture, but only for such purposes, only one of such Obligations shall be deemed Outstanding. Interest Rate Agreements shall not be deemed Outstanding as they are not deemed Indebtedness. Outstanding Bonds or Bonds outstanding means all Bonds which have been duly authenticated and delivered by the Bond Trustee under the Bond Indenture, except: (a) Bonds canceled after purchase in the open market or because of payment at or redemption prior to maturity; (b) Bonds for the payment or redemption of which cash or Government Obligations shall have been theretofore deposited with the Bond Trustee (whether upon or prior to maturity or redemption date of any such Bonds) in accordance with the Bond Indenture; provided that if such Bonds are to be redeemed prior to maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Bond Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Bond Trustee shall have been filed with the Bond Trustee; and (c) Bonds in lieu of which others have been authenticated under the Bond Indenture; (d) For the purpose of determining whether the owners of a requisite aggregate principal amount of outstanding Bonds have concurred in any request, demand, authorization, direction, notice, consent or waiver under the provisions of the Bond Indenture, Bonds which are owned or held by a Member or an Affiliate shall be disregarded, and in determining whether the Bond Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver only Bonds (i) which are registered in the name of a Member or (ii) which the Bond Trustee knows to be so owned shall be disregarded. Permitted Encumbrances shall have the meaning and include: (a) Liens securing any Member s Obligations; (b) Liens arising by reason of good faith deposits by any Member in the ordinary course of business (for other than borrowed money), deposits by any Member to secure public or C-11

226 statutory obligations or deposits to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges; (c) any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with worker s compensation, unemployment insurance, pension or profit-sharing plans or other similar social security plans, or to share in the privileges or benefits required for companies participating in such arrangements; (d) any judgment Lien against any Member so long as such judgment is being contested in good faith and execution thereon is stayed; (e) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law affecting any Property, to: (1) terminate such right, power, franchise, grant, license, or permit, provided, that the exercise of such right would not materially impair the use of such Property or materially and adversely affect the value thereof, or (2) purchase, condemn appropriate or recapture, or designate a purchaser of, the Property or any portion thereof; (f) any Liens on any of the Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any Liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to Liens of mechanics, materialmen, laborers, suppliers or vendors, have been due for less than 90 days; (g) easements, rights-of-way, servitudes, restrictions, oil, gas, or other mineral reservations and other minor defects, encumbrances, and irregularities in the title to any of the Property which do not materially impair the use of such Property or materially and adversely affect the value thereof, (h) rights reserved to or vested in any municipality or public authority to control or regulate any of the Property or to use such Property in any manner, which rights do not materially impair the use of such Property or materially and adversely affect the value thereof, to the extent that it affects title to any Property; (i) landlord s Liens; (j) Liens on moneys deposited with any Member as security for or as prepayment for the cost of patient care; (k) Liens on Property received by any Member through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests or the income thereon; (l) Liens on Property due to rights of third-party payors for recoupment of amounts paid to any Member; C-12

227 (m) purchase of money security interest and security interest existing on any of the Property prior to the time of its acquisition through purchase, merger, consolidation or otherwise, or placed upon Property to secure a portion of the purchase price thereof, or lessee s interest in leases required to be capitalized in accordance with GAAP; (n) Any Lien described in Exhibit A to the Master Indenture which is existing on the date of execution of the Master Indenture provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of any Member not subject to such Lien on such date, unless such Lien as so extended, renewed or modified otherwise qualifies as a Permitted Encumbrance under the Master Indenture; (o) Liens on funds or securities posted in a collateral account held by a counterparty to an Interest Rate Agreement, or by a third party custodian; and (p) Liens on Excluded Property. Person means any natural person, firm, joint venture, association, partnership, business trust, corporation, limited liability company, public body, agency or political subdivision thereof or any other similar entity. Primary Obligor means that Member or those Members primarily obligated to make Required Payments with respect to any particular Obligation as set forth in a Related Supplement. Principal Property means that portion of the Property, Plant and Equipment, wherever situated and whether now owned or hereafter acquired that: (a) is material and integral to or a material and integral part of the primary operations of a Member, and (b) is so designated pursuant to the Master Indenture. At the time of original execution and delivery of the Master Indenture, Principal Property includes the Property shown on Exhibit B to the Master Indenture. Prior Bonds Being Refunded means the following bonds of the Authority which will be refunded with proceeds of the Bonds to be issued under the Bond Indenture: $4,898,000 outstanding principal amount Friendship Village of Tempe Refunding Revenue Bonds, Series 1993B Extendable Adjustable Rate Securities sm (EXTRAS sm ); $64,515,000 outstanding principal amount Senior Living Revenue Bonds (Friendship Village of Tempe Project) Series 2002; and $6,910,000 outstanding principal amount Senior Living Refunding Revenue Bonds (Friendship Village of Tempe Project) Series Prior Bonds Escrow Agreement means the Escrow Agreement dated as of March 1, 2012 between the Corporation and the Prior Bonds Trustee providing for the application of the proceeds of Bonds to provide for the retirement of the Prior Bonds Being Refunded. Prior Bonds Indenture means the Bond Indenture dated as of December 1, 1993, as supplemented, between the Authority and the Prior Bonds Trustee. Prior Bonds Trustee means Wells Fargo Bank, N.A., as successor trustee, under the Prior Bonds Indenture. Projected Rate means the projected yield at par of an obligation as set forth in the report of an Independent Consultant. Such report shall state that in determining the Projected Rate such Independent Consultant reviewed the yield evaluations at par of no fewer than three obligations selected by such Independent Consultant, the interest on which is entitled to the exemption from federal income tax afforded by Section 103(a) of the Code or any successor thereto (or, if it is not expected that it will be C-13

228 reasonably possible to issue such tax-exempt obligations, then obligations the interest on which is subject to federal income taxation) which obligations such Independent Consultant states in its report are reasonable comparators for utilizing in developing such Projected Rate and which obligations: (i) were outstanding on a date selected by the Independent Consultant which date so selected occurred during the 90-day period preceding the date of the calculation utilizing the Projected Rate in question, (ii) to the extent practicable, are obligations of Persons engaged in operations similar to those of the Obligated Group and having a credit rating similar to that of the Obligated Group, (iii) are not entitled to the benefits of any credit enhancement, including without limitation any letter or line of credit or insurance policy, and (iv) to the extent practicable, have a remaining term and amortization schedule substantially the same as the obligation with respect to which such Projected Rate is being developed. Property means any and all rights, titles and interests in and to any and all assets of the Obligated Group, whether real or personal, tangible or intangible and wherever situated, as shown on the most recent audited financial statements for the Obligated Group for the most recent Fiscal Year for which they are available. Property shall not include the land, leasehold interests, buildings, fixtures or equipment constituting Excluded Property. Property, Plant and Equipment means any Property of the Obligated Group which constitutes property, plant and equipment in accordance with generally accepted accounting principles. Purchase Contract means the Bond Purchase Contract among B.C. Ziegler and Company, the Corporation and the Authority, providing for the sale of the Bonds. Qualified Investments under the Bond Indenture means, if and to the extent the same are at the time legal for investment of funds held under the Bond Indenture, dollar denominated investments in any of the following: (a) Government Obligations; (b) debt obligations which are (i) issued by any state or political subdivision thereof or any agency or instrumentality of such state or political subdivision, and (ii) at the time of purchase, rated in one of the two highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by any Rating Agency; (c) any bond, debenture, note, participation certificate or other similar obligation issued by a government sponsored agency (such as the Federal National Mortgage Association, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation or the Federal Farm Credit Bank) which is either (i) rated in the highest rating category by any Rating Agency, or (ii) backed by the full faith and credit of the United States of America; (d) U.S. denominated deposit account, certificates of deposit and banker s acceptances of any bank, trust company, or savings and loan association, including the Bond Trustee, the Master Trustee or their affiliates, which have a rating on their short-term certificates of deposit on the date of purchase in one of the two highest short-term rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by any Rating Agency, and which mature not more than 360 days after the date of purchase; (e) commercial paper which is rated at the time of purchase in one of the two highest shortterm rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by any Rating Agency, and which matures not more than 270 days after the date of purchase; C-14

229 (f) bonds, notes, debentures or other evidences of indebtedness issued or guaranteed by a corporation which are, at the time of purchase, rated by any Rating Agency in any of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise); (g) investment agreements with banks that at the time such agreement is executed are rated in one of the two highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by any Rating Agency or investment agreements with nonbank financial institutions, provided that (1) all of the unsecured, direct long-term debt of either the nonbank financial institution or the related guarantor of the non-bank financial institution is rated by any Rating Agency at the time the agreement is executed in one of the two highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) for obligations of that nature; or (2) if the non-bank financial institution and any related guarantor have no outstanding long-term debt that is rated, all of the short-term debt of either the non-bank financial institution or the related guarantor of the non-bank financial institution is rated by any Rating Agency in one of the two highest rating categories (without regard to any refinement or gradation of the rating category by numerical modifier or otherwise) assigned to short term indebtedness by any Rating Agency. If the non-bank financial institution and any guarantor do not have any short-term or long-term debt, but do have a rating in one of the two highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise), then investment agreements with the non-bank financial institutions will be permitted; (h) repurchase agreements with respect to and secured by Government Obligations or by obligations described in clauses (b) and (c) above, which agreements may be entered into with a bank (including without limitation the Bond Trustee or the Master Trustee), a trust company, financial services firm or a broker dealer which is a member of the Securities Investors Protection Corporation, provided that (i) the Bond Trustee or a custodial agent of the Bond Trustee has possession of the collateral and that the collateral is, to the knowledge of the Bond Trustee, free and clear of third party claims, (ii) a master repurchase agreement or specific written repurchase agreement governs the transaction, (iii) the collateral securities are valued no less frequently than monthly, (iv) the fair market value of the collateral securities in relation to the amount of the repurchase obligation, including principal and interest, is equal to at least 103%, and (v) such obligations must be held in the custody of the Bond Trustee or Bond Trustee s agent; (i) investments in a money market fund, which may be funds of the Bond Trustee, the Master Trustee or an affiliate of either, rated (at the time of purchase) in the highest rating category for this type of investment by any Rating Agency; and (j) shares in any investment company, money market mutual fund, fixed income mutual fund, Exchange Traded Fund or other collective investment fund registered under the federal Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933, and the majority of whose investments consist solely of Qualified Investments as defined in paragraphs (a) through (i) above, including money market mutual funds from which the Bond Trustee, the Master Trustee or their affiliates derive a fee for investment advisory or other services to the fund. The Bond Trustee shall be entitled to assume that any investment which at the time of purchase is a Qualified Investment remains a Qualified Investment thereafter, absent receipt of written notice or information to the contrary. For the purposes of this definition, obligations issued or held in the name of the Bond Trustee (or in the name of the Authority and payable to the Bond Trustee) in book-entry form on the books of the C-15

230 Department of Treasury of the United States shall be deemed to be deposited with the Bond Trustee, as applicable. Rating Agency means Moody s, Standard & Poor s or Fitch, and their respective successors and assigns. Related Bond Indenture means any indenture, trust agreement, bond resolution or other comparable instrument pursuant to which a series of Related Bonds are issued or executed and delivered. Related Bond Issuer means the Government Issuer of any issue of Related Bonds, including the Authority. Related Bond Trustee means the trustee and its successors in the trusts created under any Related Bond Indenture, and if there is no such trustee, means the Related Bond Issuer. Related Bonds means any revenue bonds, certificates of participation or other obligations issued or executed and delivered by any Government Issuer, pursuant to a single Related Bond Indenture, the proceeds of which are loaned or otherwise made available to the Corporation or a Member in consideration of the execution, authentication and delivery of an Obligation or Obligations to or for the order of such Government Issuer. As of the initial execution and delivery of the Master Indenture, Related Bonds include the Series 2012A Bonds and the Taxable Series 2012A Bonds. Related Loan Document means any document or documents (including without limitation any loan agreement, lease, sublease or installment sales contract) pursuant to which any proceeds of any Related Bonds are advanced to any Member (or any Property financed or refinanced with such proceeds is loaned, leased, subleased or sold to a Member). Related Obligations means Obligation No. 1 and Obligation No. 2. Related Supplement means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture. Required Information Recipients means the Master Trustee, B.C. Ziegler and Company, as the initial purchaser of the Related Bonds issued in 2012, each Related Bond Trustee, EMMA or any other nationally recognized municipal securities information repositories identified by the Securities and Exchange Commission, the Authority, and all owners of $500,000 or more in aggregate principal amount of Bonds who request such reports in writing (which written request shall include a certification as to such ownership). Required Payment means any payment whether at maturity, by acceleration, upon proceeding for redemption or otherwise, required to be made by any Member under the Master Indenture, any Related Supplement, any Obligation or otherwise in connection with a Financing, including, but not limited to, the payment of principal, interest and premium and lease payments. Responsible Officer means, with respect to the Master Trustee, the chairman and vice chairman of the board of directors, the chairman of the executive committee of the board of directors, the vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the cashier, any assistant cashier, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer, any assistant trust officer or any other officer of the Master Trustee customarily performing functions similar to those performed by the persons above-designated or to whom any corporate trust matter is referred because of such person s C-16

231 knowledge of and familiarity with the particular subject. With respect to the Corporation, Responsible Officer means the president, chief executive officer, chief financial officer or any executive vice president of the Corporation. Rule 15c2-12 means Rule 15c2-12 of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended. Series 2012A Bonds means the $72,570,000 principal amount of The Industrial Development Authority of the City of Tempe, Arizona, Revenue Refunding Bonds (Friendship Village of Tempe) Series 2012A authorized to be issue pursuant to the Bond Indenture. Short-Term Indebtedness means all Indebtedness having an original maturity less than or equal to one year and not renewable at the option of a Member for a term greater than one year. Special Record Date means the date fixed by the Bond Trustee pursuant to the Bond Indenture for the payment of Defaulted Interest. Standard & Poor s or S&P means Standard & Poor s Ratings Services, a division of The McGraw-Hill Companies Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Standard & Poor s or S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the Obligated Group Representative. State means the State of Arizona. Subordinated Indebtedness means Indebtedness incurred by a Member which by its terms is specifically subordinated with respect to any security therefor and with respect to right of payment to all Outstanding Obligations and to all other obligations of a Member not containing such subordination provisions. Taxable Series 2012B Bonds means the $4,460,000 principal amount of The Industrial Development Authority of the City of Tempe, Arizona, Revenue Refunding Bonds (Friendship Village of Tempe) Taxable Series 2012B authorized to be issued pursuant to the Bond Indenture. Tax Certificate and Agreement means the Tax Certificate and Agreement relating to the Series 2012A Bonds dated the Closing Date among the Corporation, the Authority and the Bond Trustee, as it may from time to time be amended or supplemented. Tax-Exempt Organization means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code, which is exempt from federal income taxes under Section 501(a) of the Code and which is not a private foundation within the meaning of Section 509(a) of the Code, or corresponding provisions of federal income tax laws from time to time in effect. Total Operating Revenues means the sum of total unrestricted operating revenues as shown on the consolidated financial statements of the Obligated Group, determined in accordance with generally accepted accounting principles. Trustor, as used in the Deed of Trust, means the Corporation. C-17

232 Unassigned Rights means the right of the Authority to receive payment of its fees and expenses, the Authority s right to indemnification in certain circumstances, the Authority s right to receive notices under the Bond Indenture, the Loan Agreement, the Purchase Contract, the Tax Certificate and Agreement or any other Bond document, and the Authority s right to execute and deliver supplements and amendments to the Loan Agreement. United States Government Obligations means noncallable direct obligations of, or obligations the timely payment of the principal of and interest on which is fully guaranteed by, the United States of America including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America. Valuation Date means, with respect to the Master Indenture, the last Business Day of each Fiscal Year, and with respect to the Bond Indenture, the First Business Day of each Fiscal Year. Written Request with reference to the Authority means a request in writing (which may be by electronic means acceptable to the Bond Trustee) signed by the President, the Vice President, Secretary or a member of the Authority, and with reference to the Corporation means a request in writing signed by the President, a Vice President, Secretary or Assistant Secretary of the Corporation, or any other officers designated by the Authority or the Corporation, as the case may be. SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE The Bond Indenture contains various covenants, security provisions, terms and conditions, certain of which are summarized below. Reference is made to the Bond Indenture for a full and complete statement of its provisions. All references to the Interest Fund, Bond Sinking Fund, Optional Redemption Fund and Bond Reserve Fund under this heading shall mean such funds created under and pursuant to the Bond Indenture. FUNDS (a) Interest Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Bonds are outstanding a separate account to be known as the Interest Fund Series 2012 (the Interest Fund ). On or before April 20, 2012 and on or before May 20, 2012, the Bond Trustee shall deposit in the Interest Fund moneys received from the Corporation in an amount which is equal to not less than one-half (1/2) of the interest to become due on the next succeeding Interest Payment Date, and on or before June 20, 2012 and on the 20th day of each month thereafter, the Bond Trustee shall deposit in the Interest Fund moneys received from the Corporation in an amount which is equal to not less than one-sixth (1/6) of the interest to become due on the next succeeding Interest Payment Date. No deposit pursuant to this paragraph need be made if and to the extent that there is a sufficient amount already on deposit and available for such purpose in the Interest Fund. If the 20th day of any such month is not a Business Day, the deposit required under the Bond Indenture to be made shall be made on the next succeeding Business Day. Moneys on deposit in the Interest Fund, other than income earned thereon which is to be transferred to other funds created under the Bond Indenture, must be used to pay interest on the Bonds. In connection with any partial redemption or defeasance prior to maturity of the Bonds, the Bond Trustee may, at the written request of the Corporation, use any amounts on deposit in the Interest Fund in excess of the amount needed to pay the interest on the Bonds remaining outstanding on the first interest C-18

233 payment date occurring on or after the date of such redemption or defeasance to pay the principal of and interest on the Bonds to be redeemed or defeased. (b) Bond Sinking Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Bonds are outstanding a separate account to be known as the Bond Sinking Fund Series 2012 (the Bond Sinking Fund ). On each bond sinking fund payment date, after making the deposits required by the provisions of the Bond Indenture summarized under the heading SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE FUNDS Interest Fund above, the Bond Trustee shall deposit in the Bond Sinking Fund moneys received from the Corporation in an amount which, together with any moneys already on deposit in the Bond Sinking Fund and available to make such payment, is not less than the principal becoming due on the Bonds on such date. On or before the 20th day of each month commencing April 20, 2012 and ending November 20, 2012, after making the deposits required by the provisions of the Bond Indenture summarized under the heading SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE FUNDS Interest Fund above, the Bond Trustee shall deposit in the Bond Sinking Fund from moneys received from the Corporation an amount which is not less than one-eighth (1/8) of the principal of the Bonds on December 1, 2012 by maturity or by mandatory Bond Sinking Fund redemption. On or before the 20th day of each month commencing December 20, 2012, after making the deposits required by the provisions of the Bond Indenture summarized under the heading SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE FUNDS Interest Fund above, the Bond Trustee shall deposit in the Bond Sinking Fund from moneys received from the Corporation an amount which is not less than one-twelfth (1/12) of the principal of the Bonds on the next succeeding December 1 by maturity or by mandatory Bond Sinking Fund redemption. No deposit pursuant to this paragraph need be made if and to the extent that there is a sufficient amount already on deposit and available for such purpose in the Bond Sinking Fund. If the 20th day of any month is not a Business Day, the deposit required to be made shall be made on the next succeeding Business Day. In lieu of such mandatory Bond Sinking Fund redemption, the Bond Trustee may, at the written request of the Corporation, purchase an equal principal amount of Bonds in the open market at prices not exceeding the principal amount of the Bonds being purchased plus accrued interest which may be paid from the Interest Fund. In addition, the amount of Bonds to be redeemed on any date pursuant to the mandatory Bond Sinking Fund redemption schedule shall be reduced by the principal amount of Bonds assigned to such mandatory Bond Sinking Fund redemption date or to the period during which such Bond Sinking Fund redemption date occurs which are acquired by the Corporation and delivered to the Bond Trustee for cancellation. In connection with any partial redemption or defeasance prior to maturity of the Bonds, the Bond Trustee may, at the request of the Corporation, use any amounts on deposit in the Bond Sinking Fund in excess of the amount needed to pay principal on the Bonds remaining outstanding on the first principal or mandatory sinking fund payment date occurring on or after the date of such redemption or defeasance to pay the principal of and interest on the Bonds to be redeemed or defeased. (c) Bond Reserve Fund. The Bond Trustee shall establish and maintain within the Bond Reserve Fund a separate Bond Proceeds Account and a separate Corporate Deposit Account. All amounts deposited in the Bond Reserve Fund from the proceeds of the Bonds shall be credited to the Bond Proceeds Account. Any amounts deposited in the Bond Reserve Fund from any other sources (including moneys received from the Corporation and any other moneys deposited in the Bond Reserve Fund, which deposits the Bond Trustee shall accept) shall be credited to the Corporate Deposit Account. All amounts C-19

234 in the Bond Reserve Fund shall be used and withdrawn by the Bond Trustee (first from the Bond Proceeds Account and then from the Corporate Deposit Account) solely for the purpose of making up any deficiency in the Interest Fund or Bond Sinking Fund, or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding. Qualified Investments in the Bond Reserve Fund shall be valued by the Bond Trustee on the Valuation Date, on the basis of fair market value (which valuation shall take into account any accrued and unpaid interest). If on any Valuation Date the amount on deposit in the Bond Reserve Fund is less than 90% of the Bond Reserve Fund Requirement as a result of a decline in the market value of investments on deposit in the Bond Reserve Fund, the Loan Agreement requires the Corporation to deposit in the Bond Reserve Fund the amount necessary to restore the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement within 120 days following the date on which the Corporation receives notice of such deficiency. If at any time the amount on deposit in the Bond Reserve Fund is less than 100% of the Bond Reserve Fund Requirement as a result of the Bond Reserve Fund having been drawn upon, the Loan Agreement requires the Corporation to restore the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement by the deposit with the Bond Trustee of an amount equal to such deficiency in not more than 12 substantially equal monthly installments beginning with the first day of the seventh month after the month in which such draw occurred. The provisions of this paragraph are intended to address the reserve fund escrow requirements of Arizona Revised Statutes section applicable to providers of services pursuant to life care contracts. To that end, the following provisions will be applicable unless and to the extent that the Bond Trustee has received an opinion of counsel to the effect that the provisions are not required under applicable law: (1) At all times there shall be held under the Bond Indenture as a reserve fund escrow an amount which equals the aggregate of the payments due during the next 12 months under the Loan Agreement and the Related Obligations with respect to principal and interest (the Statutory Reserve Requirement ) consisting of amounts credited to the Interest Fund, the Bond Sinking Fund and the Bond Reserve Fund (the Statutory Reserve Funds ) to the extent necessary to make up such aggregate. (2) If at any time there is a withdrawal from the Bond Reserve Fund, the Bond Trustee shall determine whether the aggregate amount credited to the Statutory Reserve Funds is less than the Statutory Reserve Requirement and, if it is, the Bond Trustee shall give immediate written notice to the Director of Insurance of the State of Arizona and the Corporation stating in the notice (i) the amount of the deficiency, (ii) whether the amount of the deficiency is less than, equal to or greater than one-sixth (16.67%) of the Statutory Reserve Requirement, and (ii) that the Corporation is required to remedy the deficiency by restoring the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement by the deposit with the Bond Trustee of an amount equal to such deficiency in not more than 12 substantially equal monthly installments beginning with the first day of the seventh month after the month in which the withdrawal from the Bond Reserve Fund occurred. If the amount withdrawn has not been so restored within two years after the withdrawal, the Bond Trustee shall determine whether the aggregate amount credited to the Statutory Reserve Funds is less than the Statutory Reserve Requirement and, if it is, the Bond Trustee shall give immediate written notice to the Director of Insurance of the State of Arizona and the Corporation stating in the notice (x) that the Corporation has failed to restore the amount withdrawn, (y) the amount of the remaining deficiency, and (z) whether the amount of the remaining deficiency is less than, equal to or greater than one-sixth (16.67%) of the Statutory Reserve Requirement. (3) If on any Valuation Date the amount on deposit in the Bond Reserve Fund is less than 90% of the Bond Reserve Fund Requirement as a result of a decline in the market value C-20

235 of investments on deposit in the Bond Reserve Fund, the Bond Trustee shall determine whether the aggregate amount credited to the Statutory Reserve Funds is less than the Statutory Reserve Requirement and, if it is, the Bond Trustee shall give immediate written notice to the Director of Insurance of the State of Arizona and the Corporation stating in the notice (i) the amount of the deficiency, (ii) whether the deficiency is less than, equal to or greater than one-sixth (16.67%) of the Statutory Reserve Requirement, and (iii) that the Corporation is required to remedy the deficiency by restoring the amount on deposit in the Bond Reserve Fund to an amount equal to the Bond Reserve Fund Requirement within not more than 120 days. If the amount of the deficiency has not been so restored within two years after the Valuation Date, the Bond Trustee shall determine whether the aggregate amount credited to the Statutory Reserve Funds is less than the Statutory Reserve Requirement and, if it is, the Bond Trustee shall give immediate written notice to the Director of Insurance of the State of Arizona and the Corporation stating in the notice (x) that the Corporation has failed to restore the amount of the deficiency, (y) the amount of the remaining deficiency, and (z) whether the amount of the remaining deficiency is less than, equal to or greater than one-sixth (16.67%) of the Statutory Reserve Requirement. (d) Optional Redemption Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Bonds are outstanding a separate account to be known as the Optional Redemption Fund Series 2012 (the Optional Redemption Fund ). In the event of (a) prepayment by or on behalf of the Corporation of amounts payable on the Loan Agreement, (b) receipt by the Bond Trustee of condemnation awards or insurance proceeds for purposes of redeeming Bonds or (c) deposit with the Bond Trustee by the Corporation or the Authority of moneys from any other source for redeeming Bonds, such moneys shall be deposited in the Optional Redemption Fund. Moneys on deposit in the Optional Redemption Fund shall be used first to make up any deficiencies existing in the Interest Fund and the Bond Sinking Fund (in the order listed) and second for the purchase or redemption of Bonds in accordance with the provisions of the Bond Indenture. Funds transferred to the Bond Trustee pursuant to the provisions of the Bond Indenture shall be deposited in the Optional Redemption Fund and used to optionally redeem Bonds on the earliest date practicable in accordance with the provisions of the Bond Indenture without further request from the Authority or the Corporation. (e) Expense Fund. The Authority shall establish with the Bond Trustee a separate account to be known as the Expense Fund Series 2012 (the Expense Fund ). A deposit to the credit of the Expense Fund will be made under the provisions of the Bond Indenture. Amounts on deposit in the Expense Fund shall be disbursed upon the written request of the Corporation for the payment of expenses for any recording, trustee s and depository s fees and expenses, accounting and legal fees, financing costs, and other fees and expenses incurred or to be incurred by or on behalf of the Authority or the Corporation in connection with or incident to the issuance and sale of the Bonds. At such time as the Bond Trustee is furnished with a written request of the Corporation stating that all such fees and expenses have been paid, and in no event later than the one year anniversary of the Closing Date, the Bond Trustee shall transfer any moneys remaining in the Expense Fund to the Interest Fund. INVESTMENT OF FUNDS The Bond Indenture provides that: Moneys in the Interest Fund, Bond Sinking Fund, Bond Reserve Fund and Optional Redemption Fund shall be invested in Qualified Investments upon a Written Request of the Corporation filed with the Bond Trustee. In the absence of written investment instructions, the Bond Trustee is directed to invest available funds in Qualified Investments described in paragraph (i) of the definition thereof. Such C-21

236 investments shall be made so as to mature on or prior to the date or dates that moneys therefrom are anticipated to be required. The Bond Trustee may purchase or sell securities authorized in the Bond Indenture through itself or a related subsidiary as principal or agent, in the purchase and sale of securities for such investments. The Bond Trustee shall not be liable or responsible for any loss resulting from any such investments. All income in excess of the requirements of the funds held under the Bond Indenture derived from the investment of moneys on deposit in any such funds or accounts shall be deposited in: (i) The Bond Sinking Fund to the extent of the amount required to be deposited therein to make the next required principal payment on the Bonds occurring within 13 months of the date of deposit; (ii) The Interest Fund to the extent of the estimated amount required to be deposited therein to make any interest payment on the Bonds occurring within 13 months of the date of deposit; and (iii) The balance, if any, in the Optional Redemption Fund. For the purpose of determining the amount in any fund or account, all Qualified Investments credited to such fund or account shall be valued at market value, exclusive of accrued interest, such valuation to occur on each Valuation Date. The Authority and the Corporation, by their execution of the Loan Agreement, acknowledge that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Authority and the Corporation the right to receive brokerage confirmations of security transactions as they occur, the Authority and the Corporation specifically waive receipt of such confirmations to the extent permitted by law. The Bond Trustee will furnish the Corporation (and the Authority to the extent requested by the Authority) periodic cash transaction statements which include detail for all investment transactions made by the Bond Trustee under the Bond Indenture. ARBITRAGE; COMPLIANCE WITH THE TAX CERTIFICATE AND AGREEMENT The Authority, to the extent within its control, and the Corporation covenant and agree that they will not take any action or fail to take any action with respect to the investment of the proceeds of the Bonds or with respect to the payments derived from the Related Obligations pledged under the Bond Indenture or from the Loan Agreement or any other moneys regardless of source or where held which may, notwithstanding compliance with the other provisions of the Bond Indenture, the Loan Agreement and the Tax Certificate and Agreement, result in constituting the Series 2012A Bonds arbitrage bonds within the meaning of such term as used in Section 148 of the Code. The Corporation covenants and agrees that it will not sell, lease or otherwise dispose of (including without limitation any involuntary disposition), directly or indirectly, in whole or in part, any portion of its portion of the property financed with the proceeds of Series 2012A Bonds unless the conditions set forth in the Tax Certificate and Agreement related to the preservation of the tax-exempt status of interest on the Series 2012A Bonds are satisfied. SUPPLEMENTAL BOND INDENTURES The Authority and the Bond Trustee may, without the consent of, or notice to, any of the Bondholders, enter into an indenture or indentures supplemental to the Bond Indenture, as shall not be C-22

237 inconsistent with the terms and provisions of the Bond Indenture, for any one or more of the following purposes: (a) to cure any ambiguity or formal defect or omission in the Bond Indenture; (b) to grant to or confer upon the Bond Trustee for the benefit of the Bondholders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Bondholders and the Bond Trustee, or either of them; (c) collateral; to assign and pledge under the Bond Indenture additional revenues, properties or (d) to evidence the appointment of a separate bond trustee or the succession of a new bond trustee under the Bond Indenture; (e) to permit the qualification of the Bond Indenture under the Trust Indenture Act of 1939, as then amended, or any similar federal statute thereafter in effect or to permit the qualification of the Bonds for sale under the securities laws of any state of the United States of America; (f) To preserve the exclusion of the interest on any Series 2012A Bonds from gross income for purposes of federal or State income taxes and to preserve the power of the Authority to continue to issue bonds or other obligations (specifically not limited to Bonds) the interest on which is likewise exempt from federal and State income taxes; (g) to permit the issuance of coupon bonds under the Bond Indenture and to permit the exchange of Bonds from fully registered form to coupon form and vice versa; (h) to provide for the refunding or advance refunding of the Bonds, including the right to establish and administer an escrow fund and to take related action in connection therewith; (i) in any other way which the Bond Trustee has determined does not materially adversely affect the rights or interests of any Bondholder. The Authority and the Bond Trustee may not enter into an indenture or indentures supplemental to the Bond Indenture pursuant to subparagraphs (g) and (h) above unless they shall have received an Opinion of Bond Counsel to the effect that the supplemental indenture will not adversely affect the validity of such Bonds or any exemption from federal income tax to which the interest on the Bonds would otherwise be entitled. In addition to supplemental indentures described in the preceding paragraphs under this caption, and subject to the terms and provisions described in the last three paragraphs under this caption, and not otherwise, the holders of a majority in aggregate principal amount of the Bonds which are outstanding under the Bond Indenture at the time of the execution of such indenture or supplemental indenture shall have the right, from time to time, anything contained in the Bond Indenture to the contrary notwithstanding, to consent to and approve the execution by the Authority and the Bond Trustee of such other indenture or indentures supplemental thereto as shall be deemed necessary and desirable by the Authority for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Bond Indenture or any supplemental indenture; provided, however, that nothing contained in the provisions of the Bond Indenture summarized under this caption shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal amount of, or reduction in the rate or extension of the time of paying of interest on, or reduction C-23

238 of any premium payable on the redemption of, any Bonds, without the consent of the holders of such Bonds, (b) a reduction in the amount or extension of the time of any payment required to be made to or from the Interest Fund or the Bond Sinking Fund provided in the Bond Indenture, without the consent of the holders of all the Bonds at the time outstanding, (c) the creation of any lien prior to or on a parity with the lien of the Bond Indenture, without the consent of the holders of all the Bonds at the time outstanding, or (d) a reduction in the aggregate principal amount of Bonds the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all the Bonds at the time outstanding. If at any time the Authority shall request the Bond Trustee to enter into any such supplemental indenture for any of the purposes described in the preceding paragraph, the Bond Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such supplemental indenture to be mailed by first class mail or an overnight delivery service, postage prepaid, to the registered owners of the Bonds at their addresses as the same shall appear on the Bond Register. Such notice, prepared by the Authority or the Corporation, shall briefly set forth the nature of the proposed supplemental indenture and shall state that copies thereof are on file at the designated corporate trust office of the Bond Trustee for inspection by all Bondholders. The Bond Trustee shall not, however, be subject to any liability to any Bondholder by reason of its failure to mail such notice, and any such failure shall not affect the validity of such supplemental indenture when consented to and approved as provided in the Bond Indenture and summarized under this caption. If the holders of not less than a majority in aggregate principal amount of the Bonds which are outstanding under the Bond Indenture at the time of the execution of any such supplemental indenture shall have consented to and approved the execution thereof as provided in the Bond Indenture, no holder of any Bond shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Bond Trustee or the Authority from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such supplemental indenture as described under this caption permitted and provided, the Bond Indenture shall be and be deemed to be modified and amended in accordance therewith. Anything in the Bond Indenture to the contrary notwithstanding, so long as the Corporation is not in default under the Loan Agreement or the Members of the Obligated Group are not in default under the Master Indenture, a supplemental indenture described under this caption which adversely affects the rights of the Corporation under the Loan Agreement or any Member under the Master Indenture shall not become effective unless and until the Corporation shall have consented in writing to the execution and delivery of such supplemental indenture. In this regard, the Bond Trustee shall cause notice of the proposed execution and delivery of any such supplemental indenture to which the Corporation has not already consented, together with a copy of the proposed supplemental indenture and a written consent form to be signed by the Corporation, to be sent by first class mail or an overnight delivery service, postage prepaid, to the Corporation at least 30 days prior to the proposed date of execution and delivery of any such supplemental indenture. No modification of the rights, duties or immunities of the Bond Trustee may be made without the written consent of the Bond Trustee. The Bond Trustee may require delivery of an Opinion of Bond Counsel acceptable to Trustee to the effect that each such supplement is permitted pursuant to the terms of the Bond Indenture. DEFEASANCE If the Authority shall pay or provide for the payment of the entire indebtedness on all Bonds outstanding (including, for the purpose of the Bond Indenture, any Bonds held by the Corporation) in any one or more of the following ways: C-24

239 (a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on all Bonds outstanding, as and when the same become due and payable; (b) by depositing with the Bond Trustee, in trust, at or before maturity, moneys, in an amount sufficient to pay or redeem (when redeemable) all Bonds outstanding (including the payment of premium, if any, and interest payable on such Bonds to maturity or redemption date thereof), provided that such moneys, if invested, shall be invested in Government Obligations in an amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Bonds outstanding at or before their respective maturity dates; it being understood that the investment income on such United States Government Obligations may be used for any other purpose under the Act; (c) by delivering to the Bond Trustee, for cancellation by it, all Bonds outstanding; or (d) by depositing with the Bond Trustee, in trust, United States Government Obligations in such amount as the Bond Trustee shall determine, in reliance on a certified public accountant s verification report, will, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof and any uninvested cash, be fully sufficient to pay or redeem (when redeemable) and discharge all the Bonds outstanding (including the payment of premium, if any, and interest payable on such Bonds to maturity or redemption date thereof), at or before their respective maturity dates; and if the Authority shall also pay or cause to be paid all other sums payable under the Bond Indenture by the Authority, including all fees and expenses due under the Bond Indenture or payable pursuant to the Tax Certificate and Agreement, then and in that case the Bond Indenture and the estate and rights granted thereunder shall cease, determine and become null and void, and thereupon the Bond Trustee shall, upon Written Request of the Authority, and upon receipt by the Bond Trustee of an Officer s Certificate and an opinion of Independent Counsel, each stating that in the opinion of the signers all conditions precedent to the satisfaction and discharge of the Bond Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging the Bond Indenture and the lien thereof. The satisfaction and discharge of the Bond Indenture shall be without prejudice to the rights of the Bond Trustee to charge and be reimbursed by the Authority and the Corporation for any expenditures which it may thereafter incur in connection therewith. All moneys, funds, securities, or other property remaining on deposit in the Interest Fund, Bond Sinking Fund, Optional Redemption Fund, Bond Reserve Fund, Expense Fund, or in any other fund or investment under the Bond Indenture (other than said Government Obligations or other moneys deposited in trust as above provided) shall, upon the full satisfaction of the Bond Indenture, forthwith be transferred, paid over and distributed to the Authority and the Corporation, as their respective interests may appear. The Authority or the Corporation may at any time surrender to the Bond Trustee for cancellation by it any Bonds previously authenticated and delivered which the Authority or the Corporation may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. EVENTS OF DEFAULT; ACCELERATION Each of the following events is declared an Event of Default under the Bond Indenture, that is to say, if: (a) payment of any installment of interest on any of the Bonds shall not be made when the same shall become due and payable; or C-25

240 (b) payment of the principal of or the redemption premiums, if any, on any of the Bonds shall not be made when the same shall become due and payable, whether such payment is at maturity or by proceedings for redemption, and whether such payment is expected to be paid from any Fund under the Bond Indenture or otherwise; or (c) the occurrence of an event of default as defined in the Loan Agreement and summarized in the first paragraph under the caption SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT DEFAULTS AND REMEDIES ; or (d) the Authority shall for any reason be rendered incapable of fulfilling its obligations under the Bond Indenture; or (e) the Authority shall default materially in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Bonds or in the Bond Indenture or in any agreement supplemental thereto on the part of the Authority to be performed, and such default shall continue for 30 days after written notice specifying such default and requiring the same to be remedied shall have been given to the Authority and the Corporation by the Bond Trustee; provided that the Bond Trustee may give notice in its discretion and shall give such notice at the written request of the holders of not less than 25% in aggregate principal amount of the Bonds then outstanding under the Bond Indenture; and provided further that if any such default can be cured but cannot be cured within the 30 day curative period described above, it shall not constitute an Event of Default if corrective action is instituted within such 30 day period and diligently pursued until the default is corrected; or (f) any event of default as defined in the Master Indenture shall occur and such event of default shall be continuing from and after the date the Authority, or the Bond Trustee, as assignee, is entitled to request that the Master Trustee declare Obligation No. 1 or Obligation No. 2 to be immediately due and payable, or such event of default shall be continuing from and after the date on which the Master Trustee is entitled under the Master Indenture to declare any Obligation immediately due and payable, or the Master Trustee shall declare any Obligation immediately due and payable. Upon (i) the happening of any Event of Default specified in the provisions of the Bond Indenture summarized under subparagraphs (c), (d), (e), (f) or (g) above, and the continuance of the same for the period, if any, specified in said subparagraphs, the Bond Trustee may, without any action on the part of the Bondholders, or (ii) the happening of an Event of Default specified in subparagraphs (a) or (b) above, the Bond Trustee shall, or (iii) the happening and continuance of an Event of Default specified in subparagraphs (c), (d), (e), (f) or (g) above and the written request of the Bondholders of not less than 25% in aggregate principal amount of the Bonds then outstanding under the Bond Indenture exclusive of Bonds then owned by the Authority, the Bond Trustee shall, declare the entire principal amount of the Bonds then outstanding under the Bond Indenture and the interest accrued thereon, immediately due and payable, and the entire principal and interest shall thereupon become and be immediately due and payable, subject, however, to the provisions of the Bond Indenture summarized below under the caption SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE WAIVER OF EVENTS OF DEFAULT with respect to waivers of events of default and to the Bond Trustee being indemnified to its satisfaction. Upon the acceleration of the Bonds after an Event of Default, interest on the Bonds shall cease to accrue on the date of acceleration. WAIVER OF EVENTS OF DEFAULT The Bond Trustee may in its discretion waive any Event of Default under the Bond Indenture and its consequences and rescind any declaration of maturity of principal, and shall do so upon written request of the holders of (1) at least a majority in aggregate principal amount of all the Bonds outstanding in C-26

241 respect of which default in the payment of principal and/or interest exists, or (2) at least a majority in aggregate principal amount of all the Bonds outstanding in the case of any other Event of Default under the Bond Indenture; provided, however, that there shall not be waived (a) any Event of Default in the payment of the principal of any outstanding Bonds when due whether by mandatory redemption or at maturity specified therein or (b) any default in the payment when due of the interest on any such Bonds, unless prior to such waiver or rescission all arrears of interest, with interest thereon (to the extent permitted by law) at the rate borne by the Bonds in respect of which such default shall have occurred or all arrears of payments of principal when due, as the case may be, and all expenses of the Bond Trustee, in connection with such default, shall have been paid or provided for. In case of any such waiver or rescission or in case any proceeding taken by the Bond Trustee on account of any such default shall have been discontinued or abandoned or determined adversely, then and in every such case the Authority, the Bond Trustee and the Bondholders shall, subject to any determination in such proceeding, be restored to their former positions and rights under the Bond Indenture respectively, but no such waiver or rescission shall extend to any subsequent or other default, or impair any right consequent thereon. RIGHTS AND REMEDIES OF BONDHOLDERS No holder of any Bond shall have any right to institute any suit, action or proceedings in equity or at law for the enforcement of the Bond Indenture or for the execution of any trust or for the appointment of a receiver or any other remedy under the Bond Indenture, unless a default shall have become an Event of Default under the Bond Indenture and the holders of not less than 25% in aggregate principal amount of the Bonds then outstanding shall have made written request to the Bond Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers granted or to institute such action, suit or proceeding in its own name, and unless also they have offered to the Bond Trustee indemnity as provided in the Bond Indenture, and unless the Bond Trustee shall thereafter fail or refuse to exercise the power granted, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are hereby declared in every case at the option of the Bond Trustee to be conditions precedent to the execution of the powers and trusts of the Bond Indenture and to any action or cause of action for the enforcement of the Bond Indenture, or for the appointment of a receiver or for any other remedy under the Bond Indenture; it being understood and intended that no one or more holders of the Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice the lien of the Bond Indenture by its, his, her or their action or to enforce any right under the Bond Indenture except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of the holders of all Bonds outstanding. Nothing in the Bond Indenture contained shall, however, affect or impair the right of any Bondholder to enforce the payment of the principal of and interest on any Bond at and after the maturity thereof, or the obligation of the Authority to pay the principal of and interest on each of the Bonds issued under the Bond Indenture to the respective holders thereof at the time and place, from the source and in the manner in said Bonds expressed. DIRECTION OF PROCEEDINGS The holders of a majority in aggregate principal amount of the Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Bond Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Bond Indenture, including enforcement of the rights of the Authority under the Loan Agreement and the rights of the Bond Trustee as the assigned holder of Obligation No. 1 and Obligation No. 2 or for the appointment of a receiver or any other proceedings C-27

242 under the Bond Indenture; provided, that such direction shall be in accordance with the provisions of law and of the Bond Indenture. APPLICATION OF MONEYS All moneys received by the Bond Trustee, by any receiver or by any Bondholder pursuant to any right given or action taken under the provisions of the Bond Indenture and all moneys deposited during the continuance of an Event of Default under the Bond Indenture (other than moneys for the payment of Bonds which have previously matured or otherwise become payable prior to such Event of Default under the Bond Indenture or for the payment of interest due prior to such Event of Default under the Bond Indenture), together with all moneys in the funds maintained by the Bond Trustee under the Bond Indenture, shall, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and payment of the fees of and the expenses, liabilities and advances incurred or made by the Bond Trustee, including reasonable attorneys fees and expenses, be applied as follows: (i) Unless the principal of all the Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied: First: To the payment of amounts, if any, payable pursuant to the Tax Certificate and Agreement; Second: To the payment to the Persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the Persons entitled thereto, without any discrimination or privilege; and Third: To the payment to the Persons entitled thereto of the unpaid principal of any of the Bonds, which shall have become due (other than the Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Bond Indenture), and, if the amount available shall not be sufficient to pay in full the Bonds, then to the payment ratably, according to the amount of principal due to the Persons entitled thereto, without any discrimination or privilege; (ii) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied: First: To the payment of amounts, if any, payable pursuant to the Tax Certificate and Agreement; and Second: To the payment of the principal and interest then due and unpaid upon the Bonds, without preference or priority of principal over interest or of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or privilege. (iii) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of the Bond Indenture, then, subject to the provisions of the Bond Indenture summarized in the previous paragraph in the event that the principal of all the Bonds shall later become due or be declared C-28

243 due and payable, the moneys shall be applied in accordance with the provisions of the Bond Indenture summarized in the first paragraph under this caption. Whenever moneys are to be applied by the Bond Trustee pursuant to the provisions of the Bond Indenture summarized under this caption, such moneys shall be applied by it at such times, and from time to time, as the Bond Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Bond Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Bond Trustee shall give notice of the deposit with it of any such moneys and of the fixing of any such date and of the Special Record Date in accordance with the Bond Indenture ten days prior to the Special Record Date. The Bond Trustee shall not be required to make payment to the holder of any unpaid Bond until such Bond shall be presented to the Bond Trustee for appropriate endorsement or for cancellation if fully paid. REMOVAL OF THE BOND TRUSTEE The Bond Trustee may be removed at any time by an instrument or concurrent instruments in writing delivered to the Bond Trustee and the Authority and signed by the owners of a majority in aggregate principal amount of Bonds then outstanding. The foregoing notwithstanding, so long as no Event of Default has occurred and is continuing under the Bond Indenture or the Loan Agreement and so long as no event has occurred which would, with the giving of notice or the passage of time become an event of default under the Bond Indenture or the Loan Agreement, the Bond Trustee may be removed at any time upon the written request of the Corporation, and delivered to the Bond Trustee and the Authority. The foregoing notwithstanding, the Bond Trustee may not be removed by the Corporation unless written notice of the delivery of such instrument or instruments signed by the Corporation is mailed to the owners of all Bonds outstanding under the Bond Indenture, which notice indicates the Bond Trustee will be removed and replaced by the successor trustee named in such notice, such removal and replacement to become effective upon the later of the acceptance of the appointment by the successor Bond Trustee, or the 60th day next succeeding the date of such notice, unless the owners of 10% or more in aggregate principal amount of such Bonds then outstanding under the Bond Indenture shall object in writing to such removal and replacement. Such notice shall be mailed by first class mail postage prepaid to the owners of all such Bonds then outstanding at the address of such owners then shown on the Bond Register, and to the Authority. SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT The following is a summary of certain provisions of the Loan Agreement. Reference is made to the Loan Agreement for a full and complete statement of its provisions. The Corporation agrees that the proceeds of the Bonds being loaned to the Corporation shall be deposited with the Bond Trustee and applied as provided in the Bond Indenture. REPRESENTATIONS AND WARRANTIES BY THE CORPORATION The following representations and warranties by the Corporation are made as of the date of the execution of the Loan Agreement and as of the date of delivery of the Bonds. The Corporation is an Arizona nonprofit corporation duly incorporated and in good standing under the laws of the State of Arizona, has full legal right, power and authority to enter into the Loan Agreement, the Master Indenture, the First Supplemental Master Indenture, the Related Obligations, the Deed of Trust, the Purchase Contract, the Continuing Disclosure Agreement and the Tax Certificate and Agreement (collectively, the C-29

244 Corporation Agreements ), and to carry out all of its obligations under and consummate all transactions contemplated by the Loan Agreement and by the Corporation Agreements, and by proper corporate action has duly authorized the execution, delivery and performance of the Corporation Agreements. There is no action, suit, proceeding, inquiry or investigation, before or by any court or federal, state, municipal or other governmental authority, pending, or to the knowledge of the Corporation, after reasonable investigation, threatened, against or affecting the Corporation or the assets, properties or operations of the Corporation which, if determined adversely to the Corporation or its interests, would have a material adverse effect upon the consummation of the transactions contemplated by, or the validity of, the Corporation Agreements, or upon the financial condition, assets, properties or operations of the Corporation, and the Corporation is not in default (and no event has occurred and is continuing which with the giving of notice or the passage of time or both could constitute a default) with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default might have consequences that would materially and adversely affect the consummation of the transactions contemplated by the Corporation Agreements, or the financial condition, assets, properties or operations of the Corporation. All tax returns (federal, state and local) required to be filed by or on behalf of the Corporation have been filed, and all taxes shown thereon to be due, including interest and penalties, except such, if any, as are being actively contested by the Corporation in good faith, have been paid or adequate reserves have been made for the payment thereof which reserves, if any, are reflected in the audited financial statements described therein. The Corporation enjoys the peaceful and undisturbed possession of all of the premises upon which it is operating its facilities. The Corporation is an organization described in Section 501(c)(3) of the Code and is exempt from federal income tax under Section 501(a) of the Code, except for unrelated business taxable income under Section 511 of the Code, and is not a private foundation as described in Section 509(a) of the Code. ASSIGNMENT AND PLEDGE OF AUTHORITY S RIGHTS As security for the payment of the Bonds, the Authority will assign and pledge to the Bond Trustee all right, title and interest of the Authority in and to the Loan Agreement, and the Bond Trustee is the holder of the Related Obligations, including the right to receive payments thereunder and under the Loan Agreement (except its Unassigned Rights, including without limitation, the right to receive payment of expenses, fees, indemnification and the rights to make determinations and receive notices as provided in the Loan Agreement), and thereby directs the Corporation to make said payments directly to the Bond Trustee. The Corporation therewith assents to such assignment and pledge and will make payments directly to the Bond Trustee without defense or set-off by reason of any dispute between the Corporation and the Authority or the Bond Trustee, and agrees that its obligation to make payments under the Loan Agreement and to perform the other agreements contained in the Loan Agreement are absolute and unconditional. Until the principal of and interest on the Bonds shall have been fully paid or provision for the payment of the Bonds made in accordance with the Bond Indenture, the Corporation (a) will not suspend or discontinue any payments provided for in the Loan Agreement, (b) will perform all its other duties and responsibilities called for by the Loan Agreement, and (c) will not terminate the Loan Agreement for any cause including any acts or circumstances that may constitute failure of consideration, destruction of or damage to the facilities, commercial frustration of purpose, any change in the laws of the United States or of the State or any agency or political subdivision of either or any failure of the Authority to perform any of its agreements, whether express or implied, or any duty, liability or obligation arising from or connected with the Loan Agreement. C-30

245 PAYMENTS ON THE LOAN AGREEMENT AND RELATED OBLIGATIONS Under the terms of the Loan Agreement and the Related Obligations, the Corporation agrees to pay the Bond Trustee such amounts at such times as to provide for payment of the principal of, premium, if any, and interest on the outstanding Bonds under the Bond Indenture when due, whether upon a scheduled Interest Payment Date, at maturity, upon any date fixed for prepayment or by acceleration or otherwise, and the continuance of such failure for five days. The Loan Agreement also requires that the Corporation pay certain other charges which may be incurred for such items as the Bond Trustee s fees, the Authority s fees and expenses, taxes and assessments, if any, and costs incurred in connection with the Bonds. All payments due on the Related Obligations, except for certain enumerated payments described in the Loan Agreement, shall be paid directly to the Bond Trustee and deposited into the appropriate fund established by the Bond Indenture. THE CORPORATION S OBLIGATIONS UNCONDITIONAL The Authority and the Corporation agree that the Corporation shall bear all risk of damage or destruction in whole or in part to its facilities or any part thereof including without limitation any loss, complete or partial, or interruption in the use, occupancy or operation of such facilities, or any manner or thing which for any reason interferes with, prevents or renders burdensome, the use or occupancy of such facilities or the compliance by the Corporation with any of the terms of the Loan Agreement. In furtherance of the foregoing, but without limiting any of the other provisions of the Loan Agreement, the Corporation agrees that its obligations to pay the principal, premium, if any, and interest on the amounts due under the Loan Agreement and on the Related Obligations, to pay the other sums provided for in the Loan Agreement and to perform and observe the other agreements contained in the Loan Agreement shall be absolute and unconditional and that the Corporation shall not be entitled to any abatement or diminution thereof nor to any termination of the Loan Agreement for any reason whatsoever. CERTAIN COVENANTS OF THE CORPORATION RELATING TO THE USE AND OPERATION OF CERTAIN OF ITS PROPERTY No portion of the proceeds of the Series 2012A Bonds shall be used to finance or refinance any facility, place or building to be used (1) primarily for sectarian instruction or study or as a place for devotional activities or religious worship or (2) by a Person that is not an organization described in Section 501(c)(3) of the Code or a governmental unit (as described in the Code), or by an organization described in Section 501(c)(3) of the Code (including the Corporation) in an unrelated trade or business (as set forth in Section 513(a) of the Code), in such a manner or to such extent as would result in any of the Series 2012A Bonds being treated as an obligation not described in Section 103(a) of the Code or (3) in a manner inconsistent with the definition of project as defined in the Act. INDEMNIFICATION To the fullest extent permitted by law, the Corporation agrees to indemnify, hold harmless and defend the Authority, the Bond Trustee and the City of Tempe, Arizona (the City ) and each of their respective officers, governing members, directors, officials, employees, attorneys and agents (collectively, the Indemnified Parties ), for, from and against any and all losses, damages, claims, actions, liabilities, costs and expenses of any conceivable nature, kind or character (including, without limitation, attorneys fees, litigation and court costs, amounts paid in settlement and amounts paid to discharge judgments) to which the Indemnified Parties, or any of them, may become subject under or any statutory law (including federal or state securities laws) or at common law or otherwise, arising out of or based upon or in any way relating to: C-31

246 (i) the Project or the facilities, or any part thereof or the conditions, occupancy, use, possession, conduct or management of, or work done in or about, or from the planning, design, acquisition, installation or construction of such facilities or any part thereof including arising out of any violation of any law, rule or regulation affecting the same or the ownership, occupation, use, possession or condition thereof; (ii) the issuance of any Bonds and the carrying out of any of the transactions contemplated by the Loan Agreement and the Bond Indenture; (iii) the Bond Trustee s acceptance or administration of the trust under the Bond Indenture, or the exercise or performance of any of its powers or duties thereunder, or; (iv) any violation of any Environmental Regulations with respect to, or the release of any Hazardous Substances from, the Project or the facilities or any part thereof; or (v) any untrue statement or misleading statement or alleged untrue statement or alleged misleading statement of a material fact contained in any offering or disclosure document or disclosure or continuing disclosure document for the Bonds or any of the documents relating to the Bonds, or any omission or alleged omission from any offering or disclosure document or disclosure or continuing disclosure document for the Bonds of any material fact necessary to be stated therein in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading; except (A) in the case of the foregoing indemnification of the Bond Trustee or any of its respective officers, members, directors, officials, employees, attorneys and agents, to the extent such damages are caused by the negligence or willful misconduct of such Indemnified Party; or (B) in the case of the foregoing indemnification of the Authority or the City or any of their officers, members, directors, officials, employees, attorneys and agents, to the extent such damages are caused by the willful misconduct of such Indemnified Party. The Corporation further agrees, to the extent permitted by law, to pay or to reimburse the Authority, the Bond Trustee and the City and its respective officers, officials, members, employees and agents for any and all costs, attorney s fees, liabilities or expenses incurred in connection with investigating, defending against or otherwise in connection with any such losses, claims, damages, liabilities, expenses or actions. The obligations of the Corporation shall not be affected by any assignment or other transfer by the Authority of its rights, title or interest under the Loan Agreement to the Bond Trustee pursuant to the Bond Indenture. The rights of any persons to indemnity under the Loan Agreement and rights to payment of fees and reimbursement of expenses pursuant to the Loan Agreement shall survive the final payment or defeasance of the Bonds and in the case of the Bond Trustee any resignation or removal. The provisions of the Loan Agreement summarized under this caption shall survive the termination of the Loan Agreement. MAINTENANCE OF CORPORATE EXISTENCE AND STATUS The Corporation agrees that as long as any Bonds are outstanding it will maintain its existence, will not dissolve, liquidate or otherwise dispose of all or substantially all of its assets, and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it. Any dissolution, liquidation, disposition, consolidation or merger shall be subject to the following conditions: C-32

247 (a) the Corporation provides a certificate to the Authority and the Bond Trustee, in form and substance reasonably satisfactory to such parties, to the effect that no event of default exists under the Loan Agreement or under the Bond Indenture and that no event of default will be caused by the dissolution, liquidation, disposition, consolidation or merger; (b) the entity surviving the dissolution, liquidation, disposition, consolidation or merger assumes in writing and without condition or qualification the obligations of the Corporation under the Loan Agreement, the Tax Certificate and Agreement and the Master Indenture; (c) the Corporation or the entity surviving the dissolution, liquidation, disposition, consolidation or merger, within ten (10) days after execution thereof, furnishes to the Authority and the Bond Trustee a true and complete copy of the instrument of dissolution, liquidation, disposition, consolidation or merger; (d) neither the validity nor the enforceability of the Bonds or the Bond Indenture is adversely affected by the dissolution, liquidation, disposition, consolidation or merger; (e) the dissolution, liquidation, disposition, consolidation or merger will not adversely affect any exemption from federal income taxation to which interest on the Bonds would otherwise be entitled; (f) evidence that no rating on the Bonds, if the Bonds are then rated, is reduced or withdrawn as a result of the dissolution, liquidation, disposition, consolidation or merger; (g) (i) neither the validity or enforceability of the Loan Agreement, the Master Indenture or the Tax Certificate and Agreement will be adversely affected by the dissolution, liquidation, disposition, consolidation or merger and (ii) the provisions of the Act, the Bond Indenture, the Loan Agreement, the Master Indenture and the Tax Certificate and Agreement are complied with concerning the dissolution, liquidation, disposition, consolidation or merger. As of the effective date of the dissolution, liquidation, disposition, consolidation or merger, the Corporation (at its cost) shall furnish to the Authority and the Bond Trustee (i) an Opinion of Bond Counsel, in form and substance satisfactory to such parties, as to items (d) and (e) above, and (ii) an opinion of Independent Counsel, in form and substance satisfactory such parties, as to the legal, valid and binding nature of item (c) above. The Corporation further agrees that it will not act or fail to act in any other manner which would adversely affect any exemption from federal income taxation of the interest earned by the owners of the Bonds to which such Bonds would otherwise be entitled. LICENSURE The Corporation warrants that its facilities have all material state and local licenses required for the operation thereof. The Corporation will obtain and maintain or cause to be obtained and maintained all such licenses required for the operation of its facilities, including the Project, and will use its best efforts to obtain and maintain or cause to be obtained and maintained such licensure, so long as it is in the best interests of the Corporation and the Bondholders, as determined by the governing body of the Corporation. C-33

248 FINANCIAL STATEMENTS The Corporation covenants that it will keep proper books of records and accounts in which full, true and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of the Corporation in accordance with generally accepted principles of accounting consistently applied (except as stated in the notes thereto), and will furnish the materials and notices required to be delivered to the Master Trustee under the Master Indenture to the Authority, to the Bond Trustee and to any requesting holder or holders of the Bonds. SUPPLEMENTS AND AMENDMENTS TO THE LOAN AGREEMENT Subject to the terms and provisions of the Bond Indenture summarized in the second and third paragraphs under this caption, the Authority and the Corporation may, with the prior written consent of the Bond Trustee, amend or modify the Loan Agreement, or any provision thereof, or may consent to the amendment or modification thereof, in any manner not inconsistent with the terms and provisions of the Bond Indenture, for any one or more of the following purposes: (a) to cure any ambiguity or formal defect in the Loan Agreement; (b) to grant to or confer upon the Authority or Bond Trustee, for the benefit of the Bondholders, any additional rights, remedies, powers or authorities that lawfully may be granted to or conferred upon the Authority or the Bond Trustee; (c) to amend or modify the Loan Agreement, or any part thereof, in any manner specifically required or permitted by the terms thereof, including, without limitation, as may be necessary to maintain the exclusion from gross income for purposes of federal income taxation of the interest on the Bonds; (d) to modify, amend or supplement the Loan Agreement, or any part thereof, or any supplement thereto, in such manner as the Bond Trustee and Corporation deem necessary in order to comply with any statute, regulation, judicial decision or other law relating to secondary market disclosure requirements with respect to tax-exempt obligations of the type that includes the Bonds; (e) to provide that Bonds may be secured by additional security not otherwise provided for in the Bond Indenture or the Loan Agreement; (f) to provide for the appointment of a successor securities depository; (g) to provide for the availability of certificated Bonds; (h) to provide for the addition of any interest rate mode or to provide for the modification or deletion of any interest rate mode so long as no Bonds will be operating in the interest rate mode when it is to be so modified or deleted, or to amend, modify or alter the interest rate setting provisions, tender provision or conversion provisions for any then-existing interest rate mode so long as no Bonds will be operating in the interest mode when such provisions are to be so amended, modified or altered; provided that, in each case, there is delivered to the Bond Trustee an opinion of Bond Counsel stating that any such addition, deletion, amendment, modification or alteration will not adversely affect any exclusion from gross income for purposes of federal income taxation of interest on the Bonds; and (i) to make any other change which does not, in the opinion of the Bond Trustee, have a material adverse effect upon the interests of the Bondholders. In addition, subject to the terms and provisions contained in the Bond Indenture, the Bond Trustee may grant such waivers of compliance by the Corporation with the provisions of the Loan Agreement as to which the Bond Trustee may deem necessary or desirable to effectuate the purposes of the intent of the Loan Agreement and which, in the opinion of the Bond Trustee, do not have a material adverse effect upon the interests of the Bondholders. Except for the amendments, changes or modifications as described in the previous paragraph, neither the Authority nor the Bond Trustee shall consent to any other amendment, change or modification of the Loan Agreement without the written approval or consent of the holders of a majority in aggregate principal amount of the Bonds which are outstanding under the Bond Indenture at the time of execution of any such amendment, change or modification; provided, however, that no such amendment, change or modification shall ever affect the obligation of the Corporation to make payments on the Related Obligations as they become due and payable. If at any time the Authority or the Corporation shall request the consent of the Bond Trustee to any such proposed amendment, change or modification of the Loan C-34

249 Agreement, the Bond Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause a notice of such proposed amendment, change or modification to be mailed in the same manner as described in the last three paragraphs under the caption SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE SUPPLEMENTAL BOND INDENTURES above with respect to supplemental bond indentures. Such notice prepared by the Authority or the Corporation, shall briefly set forth the nature of such proposed amendment, change or modification and shall state that copies of the instrument embodying the same are on file at the principal office of the Bond Trustee for inspection by all Bondholders. The Bond Trustee shall not, however, be subject to any liability to any Bondholder by reason of its failure to mail such notice, and any such failure shall not affect the validity of such amendment, change or modification when consented to and approved as described in this paragraph. If the holders of a majority in aggregate principal amount of the Bonds outstanding under the Bond Indenture at the time of the execution of any such amendment, change or modification shall have consented to and approved the execution thereof as provided in the Bond Indenture, no holder of any Bond shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Bond Trustee or the Authority from executing the same or from taking any action pursuant to the provisions thereof. Under no circumstances shall any amendment to the Loan Agreement alter the related Obligations pledged under the Bond Indenture regarding the payments of principal, premium, if any, and interest thereon, without the consent of the owners of all the Bonds outstanding. DEFAULTS AND REMEDIES The occurrence and continuance of any of the following events shall constitute an event of default under the Loan Agreement: (a) failure of the Corporation to pay any installment of principal, interest or premium on or any other payment required by the Loan Agreement, including failure of the Obligated Group to pay any installment of principal, interest or premium on Obligation No. 1 or Obligation No. 2, when the same shall become due and payable, whether upon a scheduled Interest Payment Date, at maturity, upon any date fixed for prepayment or by acceleration or otherwise, and the continuance of such failure for five days; or (b) failure by the Corporation to perform or comply with any of the covenants, conditions or provisions of the Loan Agreement and to remedy such default within 30 days after notice thereof from the Authority to the Corporation; provided, however, that if failure to comply or perform with such covenants, conditions or provisions cannot be remedied within 30 days, but can be remedied, no event of default shall be deemed to have occurred or to exist if the Authority, in its discretion, shall consent to the Corporation commencing corrective action and the Corporation diligently pursues such corrective action until it shall have complied with or performed such covenants, conditions or provisions; or (c) any event of default shall occur under the Bond Indenture or the Master Indenture which would permit the acceleration of any obligation; or (d) if the Corporation admits insolvency or bankruptcy or its inability to pay its debts as they mature, or is generally not paying its debts as such debts become due, or makes an assignment for the benefit of creditors or applies for or consents to the appointment of a trustee, custodian or receiver for the Corporation or for the major part of its facilities; or C-35

250 (e) if a trustee, custodian or receiver is appointed for the Corporation or for the major part of its facilities and is not discharged within 60 days after such appointment; or (f) if bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against the Corporation (other than bankruptcy proceedings instituted by the Corporation against third parties), and if instituted against the Corporation are allowed against the Corporation or are consented to or are not dismissed, stayed or otherwise nullified within 60 days after such institution; or (g) if payment of any installment of interest, principal or premium on any Bond shall not be made when the same shall become due and payable under the provisions of the Bond Indenture. Whenever any event of default shall have occurred and be continuing under the Loan Agreement, the Authority may at its discretion, by written notice to the Corporation, request that the Bond Trustee declare the principal due under the Loan Agreement and the Related Obligations (if not then due and payable) to be due and payable immediately and such principal shall thereupon become immediately due and payable as if all of the sums of money payable thereunder were originally stipulated to be paid on such accelerated payment date, anything in the Loan Agreement or the Related Obligations to the contrary notwithstanding. The Authority shall, request that the Bond Trustee declare the principal due under the Loan Agreement and on the Related Obligations due and payable immediately upon the occurrence of any of the defaults described in subparagraphs (a), (e), (f), or (g) above. This provision, however, is subject to the condition that if, at any time after the principal of the Related Obligations shall have been so declared and become due and payable, all arrears of interest, if any, upon the amounts due under the Loan Agreement and the Related Obligations and the expenses of the Authority shall be paid by the Corporation, and every other default in the observance or performance of any covenant, condition or agreement in the Loan Agreement or in the Related Obligations contained shall be made good, or be secured, to the satisfaction of the Authority, or provision deemed by the Authority to be adequate shall be made therefor, then and in every such case the Authority, by written notice to the Corporation may waive the event of default by reason of which the principal due under the Loan Agreement and on the Related Obligations shall have been so declared and become due and payable and may rescind and annul such declaration and its consequences; provided, however, that there shall not be waived any event of default in the payment of the principal payable on the Bonds when due whether by mandatory or optional redemption or at the date of maturity specified therein; and provided further that no such waiver, rescission or annulment shall extend to or affect any subsequent event of default or impair any right consequent thereon. GENERAL SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE The Master Indenture, as supplemented, authorizes the Corporation, as Obligated Group Representative, and each Member to issue Obligations which are full and unlimited obligations of the respective Obligated Group. The Obligations are joint and several obligations of the current and future Members of the Obligated Group. Set forth below is a summary of certain provisions of the Master Indenture primarily relating to restrictions imposed on the Obligated Group with respect to debt service coverage requirements, the incurrence of Additional Indebtedness and certain other matters. The summary is not comprehensive and reference is made to the Master Indenture for a complete recital of its terms. C-36

251 AUTHORIZATION OF OBLIGATIONS Each Member authorizes to be issued from time to time Obligations or series of Obligations, without limitation as to amount, except as provided in the Master Indenture or as may be limited by law, and subject to the terms, conditions and limitations established under the Master Indenture. PAYMENT OF PRINCIPAL AND INTEREST Each Member jointly and severally covenants and agrees to pay or cause to be paid promptly all Required Payments at the place, on the dates and in the manner provided in the Master Indenture, in any Related Supplement and in the Obligations whether at maturity, upon proceedings for redemption, by acceleration or otherwise, and that each Member shall faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture, any Related Supplement and any Obligation, and that the time of such payment and performance is of the essence concerning the obligations under the Master Indenture. PLEDGE OF GROSS REVENUES Each Member covenants and agrees in the Master Indenture that, so long any Obligation remains Outstanding, all of the Gross Revenues of the Obligated Group shall be deposited as soon as practicable upon receipt in a fund (in one or more accounts at one or more Depository Bank designated in writing to the Master Trustee by the Obligated Group Representative from time to time) designated as the Gross Revenue Fund which the Members shall establish and maintain, subject to the provisions of the Master Indenture summarized in the next paragraph. Subject only to the provisions of the Master Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein, each Member pledges, and to the extent permitted by law, grants a security interest to the Master Trustee in, the Gross Revenue Fund and all of the Gross Revenues of the Obligated Group to secure the payment of Required Payments and the performance by the Members of their other obligations under the Master Indenture; provided however that each Member may create, assume or suffer to exist Permitted Encumbrances. Each Member shall execute a depository account control agreement with each Depository Bank, a copy of which shall be given to the Master Trustee and shall execute and deliver such other documents as may be necessary or reasonably requested by the Master Trustee in order to perfect or maintain as perfected such security interest or give public notice thereof. Amounts in the Gross Revenue Fund may be used and withdrawn by any Member at any time for any lawful purpose, except as provided in the Master Indenture. If any Member is delinquent for more than one Business Day in the payment of any Required Payment with respect to any Obligation issued pursuant to a Related Supplement, the Master Trustee shall notify the Obligated Group Representative and the Depository Bank(s) of such delinquency, and, unless such Required Payment is paid, or provision for payment is duly made in a manner satisfactory to the Master Trustee in its sole discretion, within five days after receipt of such notice, the Obligated Group Representative or the appropriate Member shall cause the Depository Bank(s) to transfer the Gross Revenue Fund to the name and credit of the Master Trustee. The Master Trustee shall continue to hold the Gross Revenue Fund until amounts on deposit in said fund are sufficient to pay in full, or have been used to pay in full, all Required Payments in default and all other Events of Default actually known to a Responsible Officer of the Master Trustee shall have been made good or cured to the satisfaction of the Master Trustee in its sole discretion or provision deemed by the Master Trustee in its sole discretion to be adequate shall have been made therefor, whereupon the Gross Revenue Fund (except for the Gross Revenues required to make such payments or cure such defaults, including payment of fees and expenses of the Master Trustee) shall be returned to the name and credit of the appropriate Members. During any period that the Gross Revenue Fund is held in the name and to the credit of the Master Trustee, the Master Trustee shall use and withdraw amounts in C-37

252 said fund from time to time to make Required Payments as such payments become due (whether by maturity, redemption, acceleration or otherwise), and, if such amounts shall not be sufficient to pay in full all such payments due on any date, then to the payment of debt service on Obligations ratably, without any discrimination or preference, and to such other payments in the order which the Master Trustee, in its discretion, shall determine to be in the best interests of the Holders, without discrimination or preference. During any period that the Gross Revenue Fund is held in the name and to the credit of the Master Trustee, the Members shall not be entitled to use or withdraw any of the Gross Revenues of the Obligated Group unless and to the extent that the Master Trustee at its sole discretion so directs for the payment of current or past due operating expenses of the Members; provided, however, that the Members shall be entitled to use or withdraw any amounts in the Gross Revenue Fund which do not constitute Gross Revenues of the Obligated Group. Each Member agrees to execute and deliver all instruments as may be required to implement the provisions of the Master Indenture summarized under this caption. Each Member further agrees that a failure to comply with the terms of the Master Indenture summarized under this caption shall cause irreparable harm to the Holders and shall entitle the Master Trustee, with or without notice, to take immediate action to compel the specific performance of the obligations of the Members as described under this caption. COVENANTS AS TO MAINTENANCE OF PROPERTIES, ETC. Each Member, respectively, covenants and agrees: (a) That it will operate and maintain its Principal Property in accordance with all valid and applicable governmental laws, ordinances, approvals and regulations including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon it; provided, however, that no Member shall be required to comply with any law, ordinance, approval or regulation as long as it shall in good faith contest the validity thereof. Each Member, respectively, further covenants and agrees that it will maintain and operate its Principal Property and all engines, boilers, pumps, machinery, apparatus, fixtures, fittings and equipment of any kind in or that shall be placed in any building or structure now or thereafter at any time constituting part of its Principal Property in good repair, working order and condition, and that it will from time to time make or cause to be made all needful and proper replacements, repairs, renewals and improvements so that the operations of such Member will not be materially impaired. (b) That it will pay and discharge all applicable taxes, assessments, governmental charges of any kind whatsoever, water rates, meter charges and other utility charges which may be or have been assessed or which may have become liens upon the Principal Property and will make such payments or cause such payments to be made, respectively, in due time to prevent any delinquency thereon or any forfeiture or sale of the Principal Property or any part thereof, and, upon request, will furnish to the Master Trustee receipts for all such payments, or other evidences satisfactory to the Master Trustee; provided, however, that no Member shall be required to pay any tax, assessment, rate or charge as provided in the Master Indenture as long as it shall in good faith contest the validity thereof, provided that such Member shall have set aside reserves with respect thereto that, in the opinion of the Governing Body of the Obligated Group Representative, are adequate. (c) That it will pay or otherwise satisfy and discharge all of its Obligations and Indebtedness and all demands and claims against it as and when the same become due and payable, other than any thereof (exclusive of the Obligations issued and Outstanding under the Master Indenture) whose validity, amount or collectability is being contested in good faith. (d) That it will at all times comply with all terms, covenants and provisions of any Lien at such time existing upon its Property or any part thereof or securing any of its Indebtedness C-38

253 noncompliance with which would have a material adverse effect on the operations of the Obligated Group or its Property. (e) That it will use its best efforts (as long as it is in its best interest and will not materially adversely affect the interests of the holders) to procure and maintain all permits, licenses and other governmental approvals necessary for the operation of its Property and to maintain its qualification for participation in and payment under private insurance programs having broad application and federal, state and local governmental programs providing for payment or reimbursement for services rendered. (f) That it will take no action or suffer any action to be taken by others which would result in the interest on any Related Bonds issued as tax-exempt bonds becoming subject to federal income taxation. INSURANCE REQUIRED Each Member covenants and agrees that it will keep its Property and all of its operations adequately insured at all times and carry and maintain such insurance in amounts which are commercially feasible, customarily carried, subject to customary deductibles, and against such risks as are customarily insured against by other corporations in connection with the ownership and operation of facilities of similar character and size. For the purpose of this provision, the term Property shall be deemed to include Excluded Property. The Obligated Group Representative shall employ an Insurance Consultant at least every two years to review the insurance requirements of the Members, unless the Obligated Group is self-insured, in which case an Insurance Consultant must be retained annually to review insurance requirements of the Members. If the Insurance Consultant makes recommendations for the increase of any Members insurance coverage, the Obligated Group Representative shall increase or cause to be increased such coverage in accordance with such recommendations, subject to a good faith determination of the Governing Body of the Obligated Group Representative that such recommendations, in whole or in part, are in the best interests of the Obligated Group. In lieu of maintaining insurance coverage that the Governing Body of the Obligated Group Representative deems necessary, the Members shall have the right to adopt alternative risk management programs that the Governing Body of the Obligated Group Representative determines to be reasonable and that shall not have a material adverse impact on reimbursement from third party payors; including, without limitation, the right to self-insure in whole or in part individually or in connection with other institutions, to participate in programs of captive insurance companies, to participate with other health care institutions in mutual or other cooperative insurance or other risk management programs, to participate in state or federal insurance programs, to take advantage of state or federal laws in existence limiting medical and malpractice liability, or to establish or participate in other alternative risk management programs; all as may be approved, in writing, as reasonable and appropriate risk management by the Insurance Consultant and reviewed each year thereafter. The Master Trustee shall not be responsible for the sufficiency of any insurance required in the Master Indenture or for the obtaining of such insurance and in all events shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by any Member. The Obligated Group Representative shall cause to be delivered to the Master Trustee on the date the Master Indenture is executed and at least annually thereafter, no later than within 120 days following the date audited financial statements are required to be furnished pursuant to the Master Indenture, an Officer s Certificate stating that the Obligated Group is in compliance with the provisions of the Master Indenture summarized under this caption. The Master Trustee may conclusively rely on such Officer s Certificate. C-39

254 LIMITATIONS ON ENCUMBRANCES Each Member, respectively, covenants and agrees that it will not create, assume or suffer to exist any Lien upon the Gross Revenues or the Principal Property other than Permitted Encumbrances. Each Member, respectively, further covenants and agrees that if such a Lien is created or assumed by any Member, it will make or cause to be made effective a provision whereby all Obligations will be secured prior to any such Indebtedness or other obligation secured by such Lien. Nothing in the Master Indenture is intended to create an equitable or legal lien or interest on or in the Property, though the Deed of Trust creates a mortgage lien on certain Property to the Master Trustee for the benefit of the holders of the Obligations. LIMITATIONS ON ADDITIONAL INDEBTEDNESS Each Member, respectively, agrees not to incur any Additional Indebtedness except as follows: (a) Long-Term Indebtedness, provided that: (1) the aggregate principal amount of such Long-Term Indebtedness and all other Outstanding Long-Term Indebtedness incurred pursuant to the provisions of the Master Indenture summarized in this clause (1) does not exceed 10% of the Total Operating Revenues of the Obligated Group for the most recent Fiscal Year for which audited financial statements are available immediately preceding the issuance of such Long-Term Indebtedness (provided that to the extent Long-Term Indebtedness initially incurred pursuant to this clause subsequently complies with any other incurrence requirement, such Long-Term Indebtedness shall, at the option of the Obligated Group Representative, thereafter not be deemed to be incurred pursuant to this clause); or (2) the Master Trustee receives an Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio, taking into account all Outstanding Long-Term Indebtedness and the Long-Term Indebtedness proposed to be incurred, for the most recent complete Fiscal Year for which audited financial statements are available, which Long-Term Debt Service Coverage Ratio is not less than 1.20:1; or (3) the Master Trustee receives: (A) an Officer s Certificate, certifying that, taking into account all Outstanding Long-Term Indebtedness but not the Long-Term Indebtedness proposed to be incurred, for the most recent Fiscal Year for which audited financial statements are available, the Long-Term Debt Service Coverage Ratio is not less than 1.20:1; and (B) either (i) an Officer s Certificate, accompanied by the written report of an Independent Consultant, stating the forecasted Long-Term Debt Service Coverage Ratio, taking into account the Long-Term Indebtedness proposed to be incurred, for (x) in the case of Long-Term Indebtedness to finance capital improvements, the Fiscal Year succeeding the date on which such capital improvements are expected to be in operation or (y) in the case of Long-Term Indebtedness issued for other purposes than are described in (x), the Fiscal Year succeeding the date on which the proposed Long-Term Indebtedness is to be incurred, is not less than 1.25:1, as shown by forecasted statements of revenues and expenses for such Fiscal Year, accompanied by a statement of the relevant assumptions upon which such forecasted statements are based; or (ii) an Officer s Certificate stating the forecasted Long-Term Debt Service Coverage Ratio, C-40

255 taking into account the Long-Term Indebtedness proposed to be incurred, for (x) in the case of Long-Term Indebtedness to finance capital improvements, the two Fiscal Years succeeding the date on which such capital improvements are expected to be in operation or (y) in the case of Long-Term Indebtedness issued for other purposes than are described in (x), the two Fiscal Years succeeding the date on which the proposed Long-Term Indebtedness is to be incurred, is not less than 1.50:1, as shown by forecasted statements of revenues and expenses for such Fiscal Years, accompanied by a statement of the relevant assumptions upon which such forecasted statements are based. (b) Completion Indebtedness in an amount up to 10% of the principal amount of the Long- Term Indebtedness incurred for the subject project, if there is delivered to the Master Trustee a Construction Consultant s certificate to the effect that the Completion Indebtedness proposed to be incurred is (i) necessary to provide a completed and fully equipped facility of the type and scope contemplated at the time the original Long-Term Indebtedness was incurred, and (ii) necessary to complete the acquisition, construction and/or equipping in accordance with the general plans and specifications for such facility as originally prepared and approved in connection with the incurrence of the Long-Term Indebtedness, and (iii) in an amount estimated to be sufficient, together with other identified funds of the relevant Member, to complete the facility within the parameters described in clauses (i) and (ii) above. (c) Long-Term Indebtedness incurred for the purpose of refunding, refinancing or replacing any Outstanding Long-Term Indebtedness so as to render it no longer Outstanding if the Master Trustee receives an Officer s Certificate to the effect that Maximum Annual Debt Service, taking into account the Long-Term Indebtedness proposed to be incurred, will not be increased by more than 15% as a result of such refunding, refinancing or replacement. (d) Short-Term Indebtedness provided that: (1) such Short-Term Indebtedness is incurred in compliance with the provisions described in subparagraph (a) above, treating such Short-Term Indebtedness for such purposes only as if it were Long-Term Indebtedness; or (2) (i) the total amount of such Short-Term Indebtedness does not exceed 15% of Total Operating Revenues of the Obligated Group for the most recent Fiscal Year for which audited financial statements are available; and (ii) in every Fiscal Year, there shall be at least a 30-day period when the balance of such Short-Term Indebtedness is reduced to an amount which shall not exceed 5% of Total Operating Revenues of the Obligated Group for the most recent Fiscal Year for which audited financial statements of the Obligated Group are available. (e) Subordinated Indebtedness without limitation. (f) Balloon Indebtedness or Interim Indebtedness provided that the conditions described in subparagraph (a) above are satisfied with respect to the incurrence of such Balloon Indebtedness or Interim Indebtedness utilizing the assumptions specified in clause (c) of the definition of Maximum Annual Debt Service. (g) Extendable Indebtedness provided that the conditions described in subparagraph (a) above are satisfied with respect to the incurrence of such Extendable Indebtedness utilizing the assumptions specified in clause (d) of the definition of Maximum Annual Debt Service. C-41

256 (h) Reimbursement and other obligations arising under reimbursement agreements relating to letters of credit or similar credit facilities used to secure Indebtedness otherwise permitted under this paragraph. (i) Indebtedness which is non-recourse to any Member of the Obligated Group. LIMITATIONS AND GUARANTIES Each Member covenants and agrees that it will not enter into, or become liable with respect to, any Guaranty except: (a) (b) Guaranties of Indebtedness of another Member; Guaranties of Obligations; (c) Any other Guaranty provided that the conditions described in subparagraph (a) under the caption LIMITATIONS ON ADDITIONAL INDEBTEDNESS above are satisfied with respect to the issuance of such Guaranty utilizing the assumptions specified in clause (a) of the definition of Maximum Annual Debt Service. RATES AND CHARGES, DEBT COVERAGE Each Member covenants and agrees to fix, charge and collect rates, fees and charges for the use of its facilities and for the services furnished so that the Long-Term Debt Service Coverage Ratio of the Obligated Group as a whole meets the standards summarized under this caption. (a) Within 120 days after the end of each Fiscal Year (commencing with the first full Fiscal Year following the execution of the Master Indenture) the Obligated Group Representative shall compute Income Available for Debt Service and Maximum Annual Debt Service and promptly furnish to the Required Information Recipients a Certificate setting forth the results of such computation. (b) If the Long-Term Debt Service Coverage Ratio of the Obligated Group for any Fiscal Year is less than 1.20:1, the Master Trustee shall require the Obligated Group, at the Obligated Group s expense, to retain an Independent Consultant within 30 days following the calculation described in the immediately preceding paragraph to make recommendations with respect to the rates, fees and charges of the Obligated Group s methods of operation and other factors affecting its financial condition in order to increase such Long-Term Debt Service Coverage Ratio to at least 1.20:1 for the following Fiscal Year. For purposes of calculations of the Master Indenture described under this caption, an unrestricted contribution from any Affiliate of any Member of the Obligated Group may, at the sole discretion of the Obligated Group Representative, be treated as Income Available for Debt Service being earned during the period of such calculation so long as the unrestricted contribution is made prior to the date the applicable Certificate is required to be delivered with respect to such calculation. If the unrestricted contribution is counted in a period prior to the date of such transfer in accordance with the previous sentence, it shall not be included in the calculation for the period in which such contribution was actually made. If a written report of an Independent Consultant is delivered to the Master Trustee stating that Industry Restrictions have made it impossible for the ratio in this subparagraph (b) to be met, then such ratio shall be reduced to 1.00:1 for such Fiscal Year and determined by computing the Debt Service Coverage Ratio for such Fiscal Year (rather than the Long-Term Debt Service Coverage Ratio). C-42

257 (c) A copy of the Independent Consultant s report and recommendations, if any, shall be filed with each of the Required Information Recipients within 60 days of retaining the Independent Consultant. Each Member shall follow each recommendation of the Independent Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law. The provisions of the Master Indenture summarized under this caption shall not be construed to prohibit any Member from serving indigent patients to the extent required for such Member to continue its qualification as a Tax-Exempt Organization or from serving any other class or classes of patients without charge or at reduced rates so long as such service does not prevent the Obligated Group from satisfying the other requirements described under this caption. (d) Notwithstanding any other provisions of the Master Indenture, an Event of Default arising from the Long-Term Debt Service Coverage Ratio shall only occur under the Master Indenture if one or more of the following conditions applies: (1) the Obligated Group fails to achieve a Long-Term Debt Service Coverage Ratio of at least 1.20:1, and (ii) fails to take all necessary action to comply with the procedures described under this caption for preparing a report, adopting a plan, and following all recommendations contained in such report or plan to the extent feasible (as determined by the Governing Body of the Obligated Group Representative) and permitted by law; or (2) the Obligated Group fails to achieve a Long-Term Debt Service Coverage Ratio of at least 1.00:1 for any Fiscal Year. SALE, LEASE OR OTHER DISPOSITION OF PROPERTY Each Member agrees that it will not transfer any Property except as permitted in the provisions of the Master Indenture summarized under this caption. (a) Each Member may sell, lease or otherwise dispose (including without limitation any involuntary disposition) of Property (either real or personal, including cash and investments) to another Member, except that none of the Property or any other Property financed with the proceeds of any Related Bonds issued as tax-exempt bonds shall be transferred by the Corporation to any other Member unless the Bond Trustee has received an Opinion of Bond Counsel to the effect that such transfer shall not adversely affect the validity of the Related Bonds or any exemption from federal income taxation to which such Related Bonds would otherwise be entitled. (b) The Property sold, leased or otherwise disposed of does not, for any consecutive 12- month period, exceed 3% of the total Book Value or the Current Value of all Property of the Obligated Group and the Long-Term Debt Service Coverage Ratio was not less than 1.20:1 for the last Fiscal Year, and as of the end of the last fiscal quarter, the Obligated Group had not less than 150 Days Cash on Hand after giving effect to the transaction. If the Long-Term Debt Service Coverage Ratio is not less than 1.20:1, the foregoing percentage of the total Book Value or Current Value may be increased as follows under the following conditions: (1) to 5%, if Days Cash on Hand would not be less than 300 after the effect of such sale, lease or disposition of assets; or (2) to 7.5%, if Days Cash on Hand would not be less than 400 after the effect of such sale, lease or disposition of assets; or C-43

258 (3) to 10%, if Days Cash on Hand would not be less than 500 after the effect of such sale, lease or disposition of assets; (c) A Member may transfer Property, including cash or cash equivalents, to a Person other than a Member or an Affiliate without limitation if: (1) the transfer is (i) in return for other Property of equal or greater value and usefulness or (ii) in the ordinary course of business upon fair and reasonable terms; or (2) prior to such sale, lease or other disposition there is delivered to the Master Trustee an Officer s Certificate of a Member stating that, in the judgment of the signer, such Property has, or within the next succeeding 24 calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease or other disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property; or (3) such Property consists solely of assets which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payment on the Obligations. (d) If the amount of such Property sold, leased or otherwise disposed of does not, for any consecutive 12-month period, exceed 1% of the total Book Value or Current Value of all Property of the Obligated Group. If any Property to be disposed in accordance with the provisions of the Master Indenture summarized under this caption is subject to a Lien, including any Deed of Trust, the Master Trustee shall, upon the written request of the Obligated Group Representative, release such Property from the Lien pursuant to the terms of any documentation creating such Lien. Nothing in the Master Indenture shall prohibit any Member from making secured or unsecured loans provided that (1) any such loan is evidenced in writing, (2) the Obligated Group Representative reasonably expects such loan to be repaid and (3) such loan bears interest at a reasonable rate of interest as determined in good faith by the Obligated Group Representative. LIQUIDITY COVENANT The Obligated Group covenants that it will calculate the Days Cash on Hand of the Obligated Group as of June 30 and December 31 of each Fiscal Year (each such date being a Testing Date ). The Obligated Group shall include such calculations in the Officer s Certificates that are delivered on each June 30 and December 31 pursuant to the Master Indenture. Each Obligated Group Member is required to conduct its business so that on each Testing Date the Obligated Group, as a whole, shall have not less than 150 Days Cash on Hand. If the amount of Days Cash on Hand as of any Testing Date is less than 150, the Obligated Group Representative shall, within 30 days after receipt of the Officer s Certificate disclosing such deficiency, deliver an Officer s Certificate approved by a resolution of the Governing Body of the Obligated Group Representative to the Master Trustee setting forth in reasonable detail the reasons for such deficiency and adopting a specific plan setting forth steps to be taken designed to achieve the required level of Days Cash on Hand for future periods. C-44

259 If the Obligated Group has not achieved 150 Days Cash on Hand by the next Testing Date following delivery of the Officer s Certificate required in the preceding paragraph, the Obligated Group Representative shall, within 30 days after that next Testing Date, retain an Independent Consultant to make recommendations with respect to the rates, fees and charges of the Obligated Group and the Obligated Group s methods of operation and other factors affecting its financial condition in order to increase the Days Cash on Hand to the required level for future periods. A copy of the Independent Consultant s report and recommendations, if any, shall be filed with each of the Required Information Recipients within 60 days of the date such Independent Consultant is retained. Each Member of the Obligated Group shall follow each recommendation of the Independent Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of the Member) and permitted by law. Notwithstanding any other provision of the Master Indenture, failure of the Obligated Group to achieve the required liquidity covenant for any Fiscal Year shall not constitute an event of default under the Master Indenture if the Obligated Group takes all action necessary to comply with the procedures set forth above for preparing a report and adopting a plan and follows each recommendation contained in such report to the extent feasible (as determined by the Governing Body of the Obligated Group Representative) and permitted by law. CONSOLIDATION, MERGER, SALE OR CONVEYANCE Each Member agrees that it will not merge into, or consolidate with, one or more corporations which are not Members, or allow one or more of such corporations to merge into it, or sell or convey all or substantially all of its Principal Property to any Person who is not a Member, unless: (1) Any successor corporation to such Member (including without limitation any purchaser of all or substantially all the Property of such Member) is a Person (other than a natural person) organized and existing under the laws of the United States of America or a state thereof and shall execute and deliver to the Master Trustee an appropriate instrument containing the agreement of such successor to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of the Master Indenture to be kept and performed by such Member; (2) Immediately after such merger or consolidation, or such sale or conveyance, no Member would be in default in the performance or observance of any covenant or condition of any Related Loan Document or the Master Indenture; (3) Assuming that any Indebtedness of any successor or acquiring corporation is Indebtedness of such Member and that the revenues and expenses of the Member for such most recent Fiscal Year include the revenues and expenses of such other corporation (A) immediately after such merger or consolidation, sale or conveyance, the Long-Term Debt Service Coverage Ratio of the Obligated Group for the most recent Fiscal Year for which financial statements that have been reported upon by independent certified public accountants are available would be not less than 1.20:1, or that such Long-Term Debt Service Coverage Ratio of the Obligated Group is greater than the Long-Term Debt Service Coverage Ratio of the Obligated Group was for such Fiscal Year prior to such merger or consolidation, sale or conveyance; (4) If all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or fully provided for, there shall be delivered to the Master Trustee an Opinion of Bond Counsel to the effect that under then-existing law the consummation of such C-45

260 merger, consolidation, sale or conveyance would not adversely affect the validity of such Related Bonds or the exemption otherwise available from federal or state income taxation of interest payable on such Related Bonds; and (5) If any Related Bonds were rated by a Rating Agency prior to such merger, consolidation, sale or conveyance, written evidence that, after such merger, consolidation, sale or conveyance, all Related Bonds will have a rating of at least BBB- (or an equivalent rating) from at least one Rating Agency. In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for its predecessor, with the same effect as if it had been named in the Master Indenture as such Member. Each successor, assignee, surviving, resulting or transferee corporation of a Member must agree to become, and satisfy the conditions described under the caption MEMBERSHIP IN THE OBLIGATED GROUP below to becoming, a Member of the Obligated Group prior to any such succession, assignment or other change in such Member s corporate status. Any successor corporation to such Member thereupon may cause to be signed and may issue in its own name Obligations under the Master Indenture and the predecessor corporation shall be released from its obligations under the Master Indenture and under any Obligations, if such predecessor corporation shall have conveyed all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor corporation. All Obligations so issued by such successor corporation under the Master Indenture shall in all respects have the same legal rank and benefit under the Master Indenture as Obligations theretofore or thereafter issued in accordance with the terms of the Master Indenture as though all of such Obligations had been issued under the Master Indenture by such prior Member without any such consolidation, merger, sale or conveyance having occurred. In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in Obligations thereafter to be issued as may be appropriate. The Master Trustee may rely upon an Opinion of Independent Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture summarized under this caption and that it is proper for the Master Trustee under the provisions of the Master Indenture to join in the execution of any instrument required to be executed and delivered by the provisions of the Master Indenture summarized under this caption. FINANCIAL STATEMENTS As described in the forepart of this Official Statement under the heading, FINANCIAL REPORTING, the Obligated Group has agreed to provide certain information to the Required Information Recipients. APPLICATION FOR RATING Not later than 150 days after receipt by the Obligated Group Representative of the audited financial statements of the Obligated Group for each Fiscal Year, the Obligated Group will approach any Rating Agency and seek to obtain a credit rating of BBB- or an equivalent rating (an Investment Grade Credit Rating ). Notwithstanding the foregoing, (a) the requirement to annually approach a Rating Agency shall terminate when the Obligated Group obtains an Investment Grade Credit Rating; and (b) the Obligated Group shall not be required to approach a Rating Agency to obtain a credit rating if the Obligated Group Representative reasonably believes that the Obligated Group will not meet the criteria of C-46

261 any Rating Agency for an Investment Grade Credit Rating based on the then-existing published rating criteria of the Rating Agencies. APPROVAL OF CONSULTANTS If at any time the Members of the Obligated Group are required to engage an Independent Consultant under the provisions of the Master Indenture summarized under the captions RATES AND CHARGES; DEBT COVERAGE and LIQUIDITY COVENANT above, such Independent Consultant shall be engaged in the manner set forth below in the provisions summarized under this caption (other than any determination of the Projected Rate pursuant to the Master Indenture, to which the provisions of the Master Indenture summarized under the caption LIQUIDITY COVENANT above do not apply). Upon selecting an Independent Consultant as required by the provisions of the Master Indenture summarized under the captions RATES AND CHARGES; DEBT COVERAGE and LIQUIDITY COVENANT above, the Obligated Group Representative shall promptly notify the Master Trustee in writing of such selection. The Master Trustee shall, as soon as practicable but in no case longer than five Business Days after receipt of notice, notify the holders of all Obligations outstanding of such selection. Such notice shall (i) include the name of the Independent Consultant and a brief description of the Independent Consultant, (ii) state the reason that the Independent Consultant is being engaged including a description of the covenant(s) of the Master Indenture that require the Independent Consultant to be engaged, and (iii) state that the holder of the Obligation will be deemed to have consented to the selection of the Independent Consultant named in such notice unless such Obligation holder submits an objection to the selected Independent Consultant in writing to the Master Trustee within 15 days of the date that the notice is sent to the Obligation holders. No later than two Business Days after the end of the 15-day objection period, the Master Trustee shall notify the Obligated Group of the number of objections. If two-thirds (66.6%) or more in aggregate principal amount of the holders of the outstanding Obligations have been deemed to have consented to the selection of the Independent Consultant, the Obligated Group Representative may engage the Independent Consultant within five days of receiving notice of that consent. If more than one-third (33.3%) in aggregate principal amount of the owners of the Obligations outstanding have objected to the Independent Consultant selected, the Obligated Group Representative shall select another Independent Consultant within 14 days after receiving notice of such objection which may be engaged upon compliance with the procedures of the provisions summarized under this caption. All Independent Consultant reports required under the Master Indenture shall be prepared in accordance with then-effective industry-appropriate standards. When the Master Trustee sends the notice to the holders of Obligations of such selection, the Master Trustee shall also request any Related Bond Trustee to send the notice containing the information required by subparagraph (b) above to the owners of all of the Related Bonds outstanding. Such Related Bond Trustee shall, as the owner of an Obligation securing such Related Bonds, consent or object to the selection of the Independent Consultant in accordance with the response of the owners of such Related Bonds. If two-thirds (66.6%) or more in aggregate principal amount of the Related Bonds have been deemed to have consented to the selection of the Independent Consultant, the Related Bond Trustee shall approve the Independent Consultant within five days of receiving notice of that consent. If more than one-third (33.3%) in aggregate principal amount of the owners of the Related Bonds have objected to the Independent Consultant selected, the Related Bond Trustee shall reject the Independent Consultant within 14 days after receiving notice of such objection. The 15-day notice period described in the second paragraph under this caption above may be extended by the Master Trustee in order to permit each Related Bond Trustee to give the owners of the Related Bonds 15 days to respond to the notice given by the Related Bond Trustee. By acceptance of an C-47

262 Obligation securing any Related Bonds, the Related Bond Trustee agrees to comply with the provisions of the provisions of the Master Indenture summarized under this caption. MEMBERSHIP IN THE OBLIGATED GROUP Additional Members may be added to the Obligated Group from time to time, provided that prior to such addition, the Master Trustee receives: (a) a copy of a resolution of the proposed new Member which authorizes the execution and delivery of the Master Indenture or a Related Supplement and compliance with the terms of the Master Indenture; (b) a Related Supplement pursuant to which the proposed new Member (1) agrees to become a Member; (2) agrees to be bound by the terms and restrictions imposed by the Master Indenture and Indebtedness represented by the Obligations; (3) irrevocably appoints the Obligated Group Representative as its agent and attorney-in-fact and grants to the Obligated Group Representative full power to execute Related Supplements authorizing the issuance of Obligations or Series of Obligations; and (4) designates any or all of its Property as Principal Property consistent with the determination of the Governing Body of the Obligated Group Representative that such Property is Principal Property, pursuant to the provisions of the Master Indenture summarized under the caption DESIGNATION OF PRINCIPAL PROPERTY below; (c) an Opinion of Independent Counsel to the proposed new Member, which opinion states that the proposed new Member has taken all necessary action to become a Member, and upon execution of a Related Supplement, such proposed new Member will be bound by the terms of the Master Indenture; (d) a description of any existing Long-Term Indebtedness of the proposed new Member and any Indebtedness which the proposed new Member plans to incur simultaneously with the execution of the Related Supplement; (e) an Officer s Certificate (i) showing that the Obligated Group could issue at least one dollar of Long-Term Indebtedness under the provisions of the Master Indenture described in subparagraph (a) under the caption LIMITATIONS ON ADDITIONAL INDEBTEDNESS above immediately following the addition of such Member to the Obligated Group, or (ii) demonstrating that an event of default under the Master Indenture will be cured if the new Member becomes a Member of the Obligated Group; or (iii) to the effect that the Long-Term Debt Service Coverage Ratio of the Obligated Group for the most recent Fiscal Year would be not less than 1.20:1, or that such Long-Term Debt Service Coverage Ratio of the Obligated Group is greater than the Long-Term Service Coverage Ratio of the Obligated Group was for such Fiscal Year prior to such new Member joining the Obligated Group; (f) an Opinion of Bond Counsel to the effect that the addition of such Member (1) under then existing law, would not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Bond otherwise entitled to such exemption; and (2) will not cause the Master Indenture or the Obligations issued under the Master Indenture to be subject to registration under federal securities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred); (g) an Officer s Certificate to the effect that no Member, immediately after the addition of such new Member, would be in default in the performance or observance of any covenant or condition of the Master Indenture; C-48

263 (h) if any Related Bonds were rated by a Rating Agency prior to the proposed new Member becoming a Member of the Obligated Group, written evidence from such Rating Agency that, after such proposed new Member becomes a Member, all Related Bonds will have a rating of at least BBB- (or an equivalent rating) from at least one Rating Agency; and (i) such additional documentation as may be required by the Related Supplements. WITHDRAWAL FROM THE OBLIGATED GROUP Any Member may withdraw from the Obligated Group, and be released from further liability or obligation under the provisions of the Master Indenture, provided that prior to such withdrawal, the Master Trustee receives: (j) an Officer s Certificate stating that immediately following withdrawal of such Member, no Member would be in default in the performance or observance of any covenant or condition of the Master Indenture; and (k) an Officer s Certificate stating that such Member is not a Primary Obligor with respect to any Outstanding Obligations; and (l) an Officer s Certificate (i) showing that the Obligated Group could issue at least one dollar of Long-Term Indebtedness under the provisions of the Master Indenture described in subparagraph (a) under the caption LIMITATIONS ON ADDITIONAL INDEBTEDNESS above immediately following the withdrawal of such Member from the Obligated Group, or (ii) demonstrating that an event of default under the Master Indenture will be cured if the withdrawing Member leaves the Obligated Group; or (iii) to the effect that (1) the Long-Term Debt Service Coverage Ratio of the Obligated Group for the most recent Fiscal Year would be not less than 1.20:1 immediately following withdrawal of such member, or that such Long-Term Debt Service Coverage Ratio of the Obligated Group is greater than the Long-Term Service Coverage Ratio of the Obligated Group was for such Fiscal Year prior to such Member withdrawing from the Obligated Group, and (2) the Days Cash on Hand of the Obligated Group would be not less than 150 immediately following withdrawal of such member; and (m) an Opinion of Bond Counsel to the effect that the withdrawal of such Member, under then existing law, would not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond otherwise entitled to such exemption; and (n) if any Related Bonds were rated by a Rating Agency prior to the Member withdrawing from the Obligated Group, evidence from such Rating Agency that, after such Member withdraws from the Obligated Group, all Related Bonds will have a rating of at least BBB- (or an equivalent rating) from at least one Rating Agency. Upon compliance with the conditions summarized under this subcaption, the Master Trustee shall execute any documents reasonably requested by the withdrawing Member to evidence the termination of such Member s obligations under the Master Indenture, under any Related Supplements and under all Obligations. C-49

264 INSURANCE AND CONDEMNATION PROCEEDS Any insurance proceeds, condemnation award or payment in lieu of condemnation in an amount more than $1,000,000 or 3% of the Obligated Group s assets, whichever is greater, shall, at the option of the Obligated Group Representative (and subject to the provisions of the Master Indenture): (a) Be deposited with the Master Trustee to apply to the prepayment or redemption of Obligations outstanding, on a pro rata basis; or (b) Be applied by the Obligated Group to repair, renovate or rebuild the facilities subject to the payment; or (c) For any other legitimate purpose, in the sole discretion of the Obligated Group Representative; or (d) Be applied in any combination of (a), (b) and (c) above. Notwithstanding the foregoing, in the case of the destruction of the Obligated Group s facilities or any portion thereof as a result of fire or other casualty, or any damage to such facilities or portion thereof as a result of fire or other casualty, any related proceeds in an amount more than $1,000,000 or 3% of the Obligated Group s assets, whichever is greater, shall be applied in accordance with subparagraph (b) above. Any Member may make agreements and covenants with the holder of any Indebtedness which is incurred in compliance with the provisions of the Master Indenture and which is secured by a Permitted Encumbrance with respect to the application or use to be made of insurance proceeds or condemnation awards which may be received in connection with Property which is subject to such Permitted Encumbrance. DESIGNATION OF PRINCIPAL PROPERTY The Obligated Group Representative (a) shall monitor the Property of the Members at least annually to determine whether such Property meets the qualifications contained in clause (a) of the definition of Principal Property; and (b) shall determine, at the time a Member is added to the Obligated Group, whether any property of the Member (that will constitute Property upon such Member joining the Obligated Group) satisfies the description contained in clause (a) of the definition of Principal Property. Upon such determination, the Governing Body of the Obligated Group Representative shall designate by resolution such Property as Principal Property under the Master Indenture, and, pursuant to the provisions of the Master Indenture summarized under the caption MEMBERSHIP IN THE OBLIGATED GROUP above, each Member, upon joining the Obligated Group, shall designate such Property as Principal Property. Any such designation by the Obligated Group Representative is conclusive and binding upon the Members. ADDITIONS TO EXCLUDED PROPERTY Exhibit C to the Master Indenture (Description of Excluded Property) may be amended to include additional real property acquired by a Member subsequent to the Closing Date and all improvements, fixtures, tangible personal property and equipment located thereon and used in connection therewith upon the receipt by the Master Trustee of an Officer s Certificate of such Member stating that the total value of such Property included on Exhibit C to the Master Indenture does not exceed 10% of the total value of C-50

265 Property of the Obligated Group (calculated on the basis of the Book Value of the assets shown on the asset side of the balance sheet in the consolidated financial statements of the Obligated Group for the most recent Fiscal Year next preceding the date of such amendment to Exhibit C thereto for which consolidated financial statements reported on by independent certified public accountants are available or, if the Obligated Group Representative so elects, on the basis of Current Value). DEFAULTS AND REMEDIES Events of Default Each of the following events is an Event of Default under the Master Indenture: (a) Failure on the part of the Obligated Group to make due and punctual payment of the principal of, redemption premium, if any, or interest on an Obligation. (b) Failure of any Member to duly observe and perform any other covenant or agreement under the Master Indenture (including covenants or agreements contained in any Obligation) for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Obligated Group Representative by the Master Trustee or to the Obligated Group Representative and the Master Trustee by the holders of 25% in aggregate principal amount of Outstanding Obligations. (c) Default by any Member in the payment of any Indebtedness for borrowed moneys (other than an Obligation), whether such Indebtedness exists or shall be created, and any period of grace with respect thereto shall have expired, or an event of default, as defined in any mortgage, indenture or instrument, under which there may be secured or evidenced any Indebtedness, whether such Indebtedness exists or shall be created, shall occur; provided, however, that such default shall not constitute an Event of Default within the meaning of this section if within 60 days, or within the time allowed for service of a responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced (1) any Member in good faith commences proceedings to contest the existence or payment of such Indebtedness, and (2) sufficient moneys are escrowed with a bank or trust company or a bond acceptable to the Master Trustee is posted for the payment of such Indebtedness. (d) Entry by a court having jurisdiction of a decree or order for (1) relief with respect to any Member in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law in effect, or (2) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) for any Member or for any substantial part of the property of any Member, or (3) winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days. (e) Occurrence of the following actions of any Member: (1) commencement of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law in effect, (2) consent to the entry of an order for relief in an involuntary case under any such law, or (3) consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of any Member or for any substantial part of its property, or (4) making any general assignment for the benefit of creditors, or (5) failure to generally pay its debts as they become due, or (6) taking any corporate action in furtherance of the foregoing. Trust. (f) An event of default shall exist under any Related Bond Indenture or under any Deed of C-51

266 Acceleration; Annulment of Acceleration Upon the occurrence and during the continuation of an Event of Default, the Master Trustee may and, upon (1) the written request of the Holders of not less than 25% in aggregate principal amount of Outstanding Obligations or of any Holder if an Event of Default described in subparagraph (a) under the subcaption Events of Default above, has occurred or (2) the acceleration of any Obligation pursuant to the terms of the Related Supplement under which such Obligation was issued, shall, subject to the Master Trustee being indemnified to its satisfaction, by notice to the Members, declare all Outstanding Obligations immediately due and payable. Upon such declaration of acceleration, all Outstanding Obligations shall become and be immediately due and payable. If the terms of any Related Supplement give a Person the right to consent to acceleration of the Obligations issued pursuant to such Related Supplement, the Obligations issued pursuant to such Related Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Related Supplement. In the event of acceleration, an amount equal to the aggregate principal amount of all Outstanding Obligations, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues on such principal and interest to the date of payment, shall be due and payable on the Obligations. At any time after the Master Trustee has declared the principal of the Obligations to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of an Event of Default, the Master Trustee may annul such declaration and its consequences if: (1) the Obligated Group has paid or caused to be paid (or deposited with the Master Trustee moneys sufficient to pay) all payments then due on all Outstanding Obligations (other than the principal or other payments then due only because of such declaration); (2) the Obligated Group has paid (or caused to be paid or deposited with the Master Trustee) moneys sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee and any paying agents; (3) the Obligated Group has paid all other amounts then payable by the Obligated Group under the Master Indenture (or a sum sufficient to pay the same shall have been deposited with the Master Trustee); and (4) every Event of Default (other than a default in the payment of the principal or other payments of such Obligations then due only because of such declaration) shall have been remedied. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. Additional Remedies and Enforcement of Remedies Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the request of (1) the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding, (2) any Holder which, pursuant to a Related Supplement, is given the right to require the Master Trustee to institute actions pursuant to the provisions described in this paragraph, or (3) any Holder if an Event of Default described in subparagraph (a) under the subcaption Events of Default above has occurred, shall upon the indemnification of the Master Trustee to its satisfaction therefor, proceed forthwith to protect and enforce its rights and the rights of the Holders under the Master C-52

267 Indenture by such suits, actions or proceedings as the Master Trustee, being advised by its counsel, shall deem expedient, including but not limited to: (1) Enforcement of the right of the Holders to collect and enforce the payment of amounts due or becoming due under the Obligations and exercise of the Master Trustee s rights described in subparagraph (b) under the caption PLEDGE OF GROSS REVENUES above to direct the transfer of the Gross Revenue Fund to the Master Trustee and to hold and use the same in accordance with the provisions of the Master Indenture summarized under the caption PLEDGE OF GROSS REVENUES above. Application of Revenues and Other Moneys After Default During the continuance of an Event of Default, all moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture, after payment of the costs and expenses of any action, proceeding or the like resulting in the collection of such moneys and payment of the fees, costs, expenses, advances and all other amounts owed to the Master Trustee, shall be applied as follows: (1) If the Master Trustee has not declared the principal of all Outstanding Obligations due and payable: First: To the payment of all installments of interest then due on the Obligations in the order of their due dates, and, if the amount available is not sufficient to pay in full all installments due on the same date, then to the payment thereof ratably, according to the amounts of interest due on such date, without any discrimination or preference; and Second: To the payment of the unpaid installments of principal then due on the Obligations, whether at maturity or by call for redemption, in the order of their due dates, and, if the amount available is not sufficient to pay in full all installments due on the same date, then to the payment thereof ratably, according to the amounts of principal due on such date, to the Persons entitled thereto, without any discrimination or preference. (2) If the Master Trustee has declared all Outstanding Obligations due and payable (and has not annulled such declaration under the terms of the Master Indenture), to the payment of the principal and interest then due and unpaid upon the Obligations and, if the amount available is not sufficient to pay in full the whole amount then due and unpaid, then to the payment thereof ratably, without preference or priority of principal over interest, of interest over principal, of any installment over any other installment, or of any Obligation over any other Obligation, according to the amounts due, without any discrimination or preference. Such moneys shall be applied by the Master Trustee as it shall determine, having due regard for the amount of moneys available for application and the likelihood of additional moneys becoming available in the future. Whenever the Master Trustee shall apply such moneys, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates shall cease to accrue. The Master Trustee shall give such notices as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date. The Master Trustee shall not be required to make payment to the Holder of any unpaid Obligation until such Obligation (and all unmatured coupons, if any) is presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid. C-53

268 Whenever all Obligations have been paid under the terms of the Master Indenture summarized under this subcaption and all expenses and charges of the Master Trustee have been paid, any balance remaining shall be paid to the Person entitled to receive such balance. If no other Person shall be entitled thereto, then the balance shall be paid to the Members, their successors, or as a court of competent jurisdiction may direct. Remedies Not Exclusive No remedy by the terms of the Master Indenture conferred upon or reserved to the Master Trustee or the Holders is intended to be exclusive of any other remedy. Each remedy shall be cumulative and shall be in addition to every other remedy given under the Master Indenture or existing at law or in equity on or after the date of the Master Indenture. Remedies Vested in the Master Trustee All rights of action (including the right to file proof of claims) under the Master Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any trial or other proceedings relating thereto. Any such suit or proceeding instituted by the Master Trustee may be brought in its name as the Master Trustee without the necessity of joining as plaintiffs or defendants any Holders of the Obligations. Subject to the provisions of the Master Indenture summarized under the subcaption Application of Revenues and Other Moneys After Default above, any recovery or judgment shall be for the equal benefit of the Holders of the Outstanding Obligations. Master Trustee to Represent Holders The Master Trustee is irrevocably appointed (and the successive respective Holders of the Obligations, by taking and holding the same, shall be conclusively deemed to have so appointed the Master Trustee) as trustee and true and lawful attorney-in-fact of the Holders of the Obligations for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Master Indenture, the Obligations, any Related Supplement, and applicable provisions of any other law. In addition to the provisions described under the subcaption Additional Remedies and Enforcement of Remedies above, upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Master Trustee to represent the Holders, the Master Trustee may, and upon the written direction of the Holders of not less than 25% in aggregate principal amount of the Obligations then Outstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Master Indenture, or in aid of the execution of any power granted in the Master Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Master Trustee or in such Holders under the Master Indenture, the Obligations, any Related Supplement, or any other law; and upon instituting such proceeding, the Master Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the assets pledged under the Master Indenture, pending such proceedings. All rights of action under the Master Indenture, the Obligations or Related Supplement, or otherwise may be prosecuted and enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Master Trustee shall be brought in the name of the Master Trustee for the benefit and protection of all the Holders of such Obligations, subject to the provisions of the Master Indenture. C-54

269 Holders Control of Proceedings If an Event of Default shall have occurred and be continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate principal amount of Obligations then Outstanding shall have the right, at any time, by any instrument in writing executed and delivered to the Master Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture. However, the Master Trustee shall not follow any such direction that is in conflict with any applicable law or the provisions of the Master Indenture or, in the sole judgment of the Master Trustee, is unduly prejudicial to the interest of Holders not joining in such direction. Nothing described in this paragraph shall impair the right of the Master Trustee in its discretion to take any other action authorized by the Master Indenture that it may deem proper and which is not inconsistent with such direction by Holders. Nothing in the Master Indenture shall affect or impair the rights of any Holder to enforce the payment of principal of, interest on and other amounts due under the Obligation held by such Holder or any agreement or instrument secured by such Obligation, by suit or other action available pursuant thereto or in law or in equity. Termination of Proceedings In case any proceeding taken by the Master Trustee on account of an Event of Default is discontinued or abandoned for any reason or is determined adversely to the Master Trustee or to the Holders, then the Members, the Master Trustee and the Holders shall be restored to their former positions and rights under the Master Indenture, and all rights, remedies and powers of the Master Trustee and the Holders shall continue as if no such proceeding had been taken. Waiver of Event of Default No delay or omission of the Master Trustee or of any Holder to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of or acquiescence to any such Event of Default. Every power and remedy given by the Master Indenture, summarized under this caption, to the Master Trustee and the Holders may be exercised from time to time and as often as may be deemed expedient by them. The Master Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the provisions of the Master Indenture, or before the completion of the enforcement of any other remedy thereunder. Notwithstanding anything contained in the Master Indenture to the contrary, upon the written request of the Holders of at least a majority of the aggregate principal amount of Obligations then Outstanding, the Master Trustee shall waive any Event of Default under the Master Indenture and its consequences; provided, however, that, except under the circumstances described in the second paragraph under the subcaption Acceleration; Annulment of Acceleration above, a default in the payment of the principal of, premium, if any, or interest on any Obligation when due may not be waived without the written consent of the Holders of all Outstanding Obligations. If the Master Trustee waives an Event of Default under the Master Indenture, the Members, the Master Trustee and the Holders shall be restored to their former positions and rights. No such waiver shall extend to, or impair any right with respect to any other Event of Default. C-55

270 Appointment of Receiver Upon the occurrence of any Event of Default, the Master Trustee shall be entitled, (a) without declaring the Obligations to be due and payable, (b) after declaring the same to be due and payable, or (c) upon the commencement of any proceeding to enforce any right of the Master Trustee or the Holders, to the appointment of a receiver or receivers of any or all of the Property of the Members with such powers as the court making such appointment shall confer. Each Member consents and agrees, and will if requested by the Master Trustee, consent and agree at the time of application by the Master Trustee for appointment of a receiver, to the appointment of such receiver and agrees that such receiver may be given the right, power and authority, to the extent the same may lawfully be given, to take possession of and operate and deal with such Property and the revenues, profits and proceeds therefrom, with the same effect as the Member could, and to borrow money and issue evidences of indebtedness as such receiver. Remedies Subject to Provisions of Law All rights, remedies and powers described under this caption may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law. All the provisions of the Master Indenture summarized under this caption are intended to be limited to the extent necessary so that they will not render any provisions of the Master Indenture invalid or unenforceable under the provisions of any applicable law. Related Bond Trustee or Bondholders Deemed to be Obligation Holders For the purposes of the Master Indenture, unless a Related Bond Trustee elects to the contrary or contrary provision is made in a Related Bond Indenture, each Related Bond Trustee shall be deemed the holder of the Obligation or Obligations pledged to secure the Related Bonds with respect to which such Related Bond Trustee is acting as trustee. If such a Related Bond Trustee so elects or the Related Bond Indenture so provides, the holders of each series of Related Bonds shall be deemed the holders of the Obligations to the extent of the principal amount of the Obligations to which their bonds relate. Notice of Default Within ten days after the Master Trustee has actual knowledge or has received written notice of the occurrence of an Event of Default, the Master Trustee shall mail to all Holders notice of such Event of Default, unless such Event of Default shall have been cured before the giving of such notice (the term Event of Default for the purposes of the Master Indenture summarized under this subcaption being defined to be the events specified in subparagraphs (a)-(f) under the subcaption Events of Default above, not including any periods of grace provided for in subparagraphs (b), (c) and (d) respectively, and irrespective of the giving of written notice specified in subparagraph (b)). Except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Obligations and the Events of Default specified in subparagraphs (d) and (e) under the subcaption Events of Default above, the Master Trustee shall be protected in withholding such notice if and so long as the Master Trustee in good faith determines that the withholding of such notice is in the best interests of the Holders. REMOVAL AND RESIGNATION OF THE MASTER TRUSTEE The Master Trustee may be removed at any time by an instrument or instruments in writing signed by the Holders of not less than a majority of the principal amount of Obligations then Outstanding or, unless an Event of Default has occurred and is then continuing, the Obligated Group Representative. C-56

271 The Master Trustee may at any time resign by giving written notice of such resignation to the Obligated Group Representative and by giving the Holders of all Obligations then Outstanding notice of such resignation by mail at the addresses shown on the registration books maintained by the Master Trustee. No such resignation or removal shall become effective unless and until a successor Master Trustee has been appointed and has assumed the trusts created by the Master Indenture. Written notice of removal shall be given to the Members and to each Holder at the address then reflected on the books of the Master Trustee. A successor Master Trustee may be appointed at the direction of the Holders of not less than a majority in aggregate principal amount of Obligations Outstanding, or, if the Master Trustee has resigned or has been removed by the Obligated Group Representative, by the Obligated Group Representative. If a successor Master Trustee has not been appointed and qualified within 60 days of the date notice of resignation is given, the Master Trustee, any Member or any Holder may apply to any court of competent jurisdiction for the appointment of an interim successor Master Trustee to act until such time as a permanent successor is appointed. Unless otherwise ordered by a court or regulatory body having competent jurisdiction, or unless required by law, any successor Master Trustee shall be a trust company or bank having the powers of a trust company as to trusts, qualified to do and doing trust business in one or more states of the United States of America and having an officially reported combined capital, surplus, undivided profits and reserves (or if the Master Trustee is a subsidiary of such financial institution, the parent institution shall satisfy these requirements) aggregating at least $50,000,000, if there is such an institution willing, qualified and able to accept the trust upon reasonable or customary terms. Every successor Master Trustee howsoever appointed under the Master Indenture shall execute, acknowledge and deliver to its predecessor and also to each Member an instrument in writing, accepting such appointment. Upon the delivery of such acceptance, such successor Master Trustee shall, without further action, become fully vested with all the rights, immunities, powers, trusts, duties and obligations of its predecessor. The predecessor Master Trustee shall execute and deliver an instrument transferring to such successor Master Trustee all the rights, powers and trusts of such predecessor Master Trustee. The predecessor Master Trustee shall execute any and all documents necessary or appropriate to convey all interest it may have to the successor Master Trustee. The predecessor Master Trustee shall promptly deliver all records relating to the trust or copies thereof and communicate all material information it may have obtained concerning the trust to the successor Master Trustee. Each successor Master Trustee, not later than 10 days after its assumption of the duties under the Master Indenture, shall mail a notice of such assumption to each Holder. SUPPLEMENTS AND AMENDMENTS Supplements Not Requiring Consent of Holders The Obligated Group Representative, acting for itself and as agent for each Member, and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Related Supplements for one or more of the following purposes: (a) To cure any ambiguity or formal defect or omission in the Master Indenture; (b) To correct or supplement any provision in the Master Indenture which may be inconsistent with any other provision in the Master Indenture, or to make any other provisions with C-57

272 respect to matters or questions arising under the Master Indenture and which shall not materially and adversely affect the interests of the Holders; (c) To grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority, or to add to the covenants of and restrictions on the Members; (d) To qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect; (e) To create and provide for the issuance of an Obligation or Series of Obligations as permitted under the Master Indenture; (f) To obligate a successor to any Member as provided in the Master Indenture and summarized under the caption CONSOLIDATION, MERGER, SALE OR CONVEYANCE above; or (g) To add a new Member as described under the caption MEMBERSHIP IN THE OBLIGATED GROUP above, or have a Member withdraw as described under the caption WITHDRAWAL FROM THE OBLIGATED GROUP above. Supplements Requiring Consent of Holders Other than Related Supplements described in the preceding paragraph and subject to the terms and provisions and limitations described under this caption, the Holders of not less a majority in aggregate principal amount of the Outstanding Obligations shall have the right to consent to and approve the execution by the Obligated Group Representative, acting for itself and as agent for each Member, and the Master Trustee of such Related Supplements as shall be deemed necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture. Nothing described under this subcaption shall permit or be construed as permitting a Related Supplement which would: (a) extend the stated maturity of or time for paying interest on any Obligation or reduce the principal amount of or the redemption premium or rate of interest or method of calculating interest payable on any Obligation without the consent of the Holder of such Obligation; (b) modify, alter, amend, add to or rescind any of the terms or provisions described under this caption so as to affect the right of the Holders of any Obligations in default as to payment to compel the Master Trustee to declare the principal of all Obligations to be due and payable, without the consent of the Holders of all Obligations then Outstanding; or (c) reduce the aggregate principal amount of Obligations then Outstanding (the consent of the Holders of which is required to authorize such Related Supplement) without the consent of the Holders of all Obligations then Outstanding. The Master Trustee may execute a Related Supplement (in substantially the form delivered to it as described below) without liability or responsibility to any Holder (whether or not such Holder has consented to the execution of such Related Supplement) if the Master Trustee receives: (a) a Request of the Obligated Group Representative to enter into such Related Supplement; (b) a certified copy of the resolution of the Governing Body of the Obligated Group Representative approving the execution of such Related Supplement; C-58

273 (c) the proposed Related Supplement; and (d) an instrument or instruments executed by the Holders of not less than the aggregate principal amount or number of Obligations described in the first paragraph under this caption for the Related Supplement in question which instrument or instruments shall refer to the proposed Related Supplement and shall specifically consent to and approve the execution thereof in substantially the form of the copy thereof as on file with the Master Trustee. Any such consent shall be binding upon the Holder of the Obligation giving such consent and upon any subsequent Holder of such Obligation and of any Obligation issued in exchange therefor (whether or not such subsequent Holder thereof has notice thereof), unless such consent is revoked in writing by the Holder of such Obligation giving such consent or by a subsequent Holder thereof by filing with the Master Trustee, prior to the execution by the Master Trustee of such Related Supplement, such revocation and, if such Obligation or Obligations are transferable by delivery, proof that such Obligations are held by the signer of such revocation. At any time after the Holders of the required principal amount or number of Obligations shall have filed their consents to the Related Supplement, the Master Trustee shall make and file with the Corporation a written statement to that effect. Such written statement shall be conclusive that such consents have been so filed. If the Holders of the required principal amount or number of the Outstanding Obligations shall have consented to and approved the execution of such Related Supplement, no Holder of any Obligation shall have any right to object to the execution thereof, or to object to any of the terms and provisions contained therein or the operation thereof, or to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or the Obligated Group Representative from executing the same or from taking any action pursuant to the provisions thereof. SATISFACTION AND DISCHARGE OF MASTER INDENTURE If (1) the Members shall deliver to the Master Trustee for cancellation all Obligations previously authenticated (other than any Obligations which shall have been mutilated, destroyed, lost or stolen and which shall have been replaced or paid as provided in any Related Supplement) and not cancelled, or (2) upon payment of all Obligations not previously cancelled or delivered to the Master Trustee for cancellation, or (3) the Members shall deposit with the Master Trustee (or with a bank or trust company pursuant to an agreement between a Member and such bank or trust company) as cash or Escrow Obligations or both, sufficient to pay at maturity or upon redemption all Obligations not previously cancelled or delivered to the Master Trustee for cancellation, including without limitation principal and interest due or to become due to such date of maturity or redemption date, as the case may be, and if in any case the Members shall also pay or cause to be paid all other sums payable under the Master Indenture by the Members, then the Master Indenture shall cease to be of further effect, and the Master Trustee, on demand of the Members and at the cost and expense of the Members, shall execute proper instruments acknowledging satisfaction of and discharging the Master Indenture. The Members shall cause a report to be prepared by a firm nationally recognized for providing verification services regarding the sufficiency of funds for such discharge and satisfaction, upon which report the Master Trustee may rely. SUMMARY OF CERTAIN PROVISIONS OF THE DEED OF TRUST The following information summarizes certain provisions of the Deed of Trust, as amended. The Deed of Trust contain substantially similar provisions and therefore have been summarized together. Reference is made to the Deed of Trust for a full and complete statement of their provisions. C-59

274 GRANT IN TRUST The Trustor assigns, grants, mortgages, warrants, conveys, transfers, pledges, sets over and confirms to the Trustee in trust, with power of sale and right of entry and possession for the benefit of the Beneficiary and its successors and assigns forever, and grants a security interest thereunto in, all of the Trustor s right, title and interest in to and under that certain real property more particularly described in the Deed of Trust ( Land ), all right, title and interest that the Trustor otherwise has or acquires in the Land, together with all right, title and interest that the Trustor has or acquires in: (a) All buildings, structures, improvements, fixtures, equipment and appurtenances owned, constructed, located, erected, installed or affixed by or on behalf of the Trustor upon or appurtenant to the Land and all replacements and substitutions therefor ( Facilities ); (b) All appurtenances, improvements, easements, pipes, transmission lines or wires and other rights used in connection with the Land or as a means of access thereto, owned or constructed or placed upon or in the Land or Facilities ( Appurtenances ); (c) All machinery, equipment, goods and other personal property of the Trustor, whether moveable or not, and wherever located, and all improvements, restorations, replacements, repairs, additions, accessions or substitutions thereto or therefor, including, without limitation, all machinery, equipment, material, furnishings and appliances for generation or distribution of air, water, heat, electricity, light, fuel or refrigeration, for purposes of ventilation, sanitation or drainage, for exclusion of vermin or insects, for removal or disposal of dust, refuse or garbage; all elevators, awnings, window coverings, floor covering, cabinets; all fixed equipment installed in the Land or Facilities which are essential elements of the Facilities and are necessary for their operation and use; the products and proceeds from any and all such property; all the estate, interest, right, title, property or other claim or demand of every nature whatsoever, in and to such property, including specifically, but without limitation, all deposits made with or other security given to utility companies by the Trustor with respect to such property and claims or demands relating to insurance or condemnation awards which the Trustor has or acquires ( Equipment ); (d) ( Leases ); All leases or subleases with respect to the Land, Facilities, Appurtenances and Equipment (e) All rentals or other payments which may accrue or otherwise become payable under the Leases to or for the benefit of the Trustor together with all other income, rents, revenues, issues, profits, reserves, and royalties produced by the Land, Facilities, Appurtenances and Equipment or by all management or service contracts or other contracts affecting the Trust Property (as defined below), including but not limited to security deposits (collectively the Rents ); (f) All earnings, products, damages, indemnifications, insurance proceeds and any other proceeds from any and all of such Land, Facilities, Appurtenances, Equipment, Leases, Rents and Accounts (as defined below) including specifically, but without limitation, all deposits made with or other security given to utility companies and claims or demands relating to insurance or condemnation awards which the Trustor has or acquires, including all advance payments of insurance premiums made by the Trustor with respect thereto ( Proceeds ); (g) All accounts, accounts receivable and other rights to payment of money or other value owned or acquired by the Trustor, whether due or to become due and whether or not earned by performance ( Accounts ), including without limitation the following: C-60

275 (i) Any and all Accounts arising from any source, including without limitation operations of the Trustor or its agents at the Facilities; and agents. (ii) Any and all Accounts accruing from programs run by and operations of the Trustor or its (h) For purposes hereof, Accounts covered hereby shall include without limitation accounts, notes, bills, drafts, acceptances, chattel paper, deposit accounts and instruments as defined by the Arizona Uniform Commercial Code, and any amounts receivable from third party payors (including insurance companies, Medicare and Medicaid including, without limitation, any Medicare and/or Medicaid losses paid on recapture, unless otherwise prohibited by law) in connection with the foregoing and all other debts, obligations and liabilities in whatever form owing to the Trustor from any person or other entity for goods (as defined in the Uniform Commercial Code) sold by it or for services rendered by it, or however otherwise established or created, all guaranties and security therefor, all right, title and interest of the Trustor in the goods or services which have given rise thereto, including rights to reclamation and stoppage in transit and all rights of an unpaid seller of goods or services; all whether any of the foregoing items are now existing or hereafter arising, now or hereafter received by or owing or belonging to the Trustor; (i) All right, title and interest of the Trustor in all the Trustor s raw materials, work in process, finished goods and goods held for sale or furnished under contracts of service, and all returned and repossessed goods, and all goods covered by documents of title, including warehouse receipts, bills of lading and all other documents of every type covering all or any part of the Trust Property, owned or acquired, whether held by the Trustor or any third party ( Inventory ); (j) All of the Trustor s know how, trade secrets, copyrights, patents, trade names, trademarks (whether owned or licensed), servicemarks and licenses and the goodwill of the business associated with the foregoing, including, without limitation, the registered (or applied for) trademarks, patents and copyrights (if any) described in the Deed of Trust and the goodwill of the business associated therewith, together with all right, title and interest of the Trustor therein, including, without limitation, all common law rights, registrations, renewals of registrations, applications for new uses, the right to sue for past, present and future infringements thereof, and all other intellectual property rights necessary and proper to the continuation of the business associated with and symbolized by said trademarks, patents and copyrights (the Intellectual Property Rights ); (k) All general intangibles, goodwill, customer lists, choses in action, chattel paper, insurance policies, bank deposits, deposit accounts, checking accounts, certificates of deposit, money, cash, securities (whether certificated or uncertificated), securities accounts, security entitlements, commodity contracts, commodity accounts, documents and instruments (whether negotiable or nonnegotiable and regardless of attachment to chattel paper), whether arising out of, relating to or evidencing all or any of the foregoing property or otherwise, and all whether now existing and owned by the Trustor or hereafter acquired or arising ( Intangibles ); (l) All liens, guaranties, securities, rights, remedies and privileges pertaining to, and all products and proceeds (including, without limitation, insurance proceeds) of and all accessions to, any of the foregoing items of property (all whether now existing and owned by the Trustor or hereafter arising or acquired); and (m) All proceeds and records of any of the foregoing. C-61

276 All of the above referenced Land, Facilities, Appurtenances, Equipment, Leases, Rents, Proceeds, Gross Revenues, Accounts, Inventory, Intellectual Property Rights and Intangibles and the proceeds thereof, as conveyed by the Deed of Trust to the Trustee or made subject to the security interest described in the Deed of Trust is collectively referred to as the Trust Property. The Trustor warrants and agrees that as of the date of recording of the Deed of Trust it is not currently bound by any sales agreement, option, assignment, sublease, pledge, mortgage, deed of trust, financing statement, security agreement or any other arrangement regarding the Trust Property apart from the transactions referenced in or secured by the Deed of Trust and has not nor will execute any document or instrument referring to or covering the Trust Property, or any part thereof, and no such documents or instruments are on file, recorded or in effect in any public office, other than Permitted Encumbrances (as that term is defined in the Master Indenture), and agrees that the Trust Property is, and shall be, kept free from any lien, security interest, encumbrance or any other interest other than Permitted Encumbrances, with the exception of any lien for taxes or assessments which are not past due. SECURED OBLIGATIONS The grants described under the preceding caption are made for the purpose of securing the: (a) Payment to the Beneficiary of all amounts due with respect to Obligations issued and outstanding pursuant to the Master Indenture, including, without limitation, repayment of up to $77,030,000 or so much thereof as Outstanding, together with interest thereon as specified in the Master Indenture; (b) Performance and observance of each and every condition, obligation, covenant, promise and agreement of Trustor contained in the Master Indenture; and (c) Payment and performance of each and every obligation, covenant and agreement arising under or contained in the Deed of Trust. SECURITY AGREEMENT AND FIXTURE FILING The Deed of Trust shall also constitute a security agreement and the Trustor pledges and grants to the Beneficiary a first priority lien and security interest in and to all of the property described above which is not real property under the laws of the State ( Personal Property ), whether Trustor now or hereafter obtains an interest in such Personal Property and all the proceeds or products thereof. ABSOLUTE ASSIGNMENT; ASSIGNMENT OF LEASES AND RENTS The Trustor by the Deed of Trust absolutely, unconditionally and irrevocably assigns to the Beneficiary the Leases and Rents. The Beneficiary authorizes the Trustor, prior to any default in the payment of any indebtedness secured hereby or in the performance of any covenant or obligation under the Deed of Trust, without notice, to collect and use all such Rents as they become due and payable and to exercise all rights under the Leases if not otherwise restricted under the Master Indenture or the following paragraph. The foregoing assignment shall not impose upon the Beneficiary any duty to produce Rents from the Trust Property or cause the Beneficiary to be a trustee in possession for any purpose. The Trustor agrees that it will take all steps and do all things necessary to keep and maintain the Leases in full force and effect and will enforce or cause to be enforced all and singular the provisions thereof, and bring and prosecute or cause to be prosecuted any and all suits, actions and proceedings necessary to enforce compliance with all of the terms, provisions and covenants thereof. If, in the C-62

277 reasonable opinion of the Beneficiary, the Trustor has failed, or is about to fail, to take suitable action to enforce the Leases or any guaranty thereof or to first preserve any rights or remedies thereunder, the Beneficiary, after giving five days written notice to Trustor, may, but is not required to, take such action as it shall deem appropriate, in its own name or in the name of the Trustor for the use and benefit of the Beneficiary, to enforce the Leases and to preserve any rights or remedies thereunder, and all costs and expenses incurred by the Beneficiary in taking any such action shall be payable on demand and shall constitute part of the secured indebtedness. POWER OF SALE; FORECLOSURE If an Event of Default occurs, the Beneficiary at its option may invoke the power of sale pursuant to applicable law. If an Event of Default has occurred and is continuing, the Trustee or the Beneficiary shall have the right to foreclose the lien under the Deed of Trust as a mortgage and shall have the rights and remedies afforded by Arizona Revised Statutes Section or similar provisions of law from time to time in effect for the indebtedness secured under the Deed of Trust. C-63

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279 APPENDIX D PROPOSED FORMS OF OPINIONS OF BOND COUNSEL

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281 [Closing Date] To: The Industrial Development Authority of the City of Tempe, Arizona Tempe, Arizona Tempe Life Care Village, Inc. Tempe, Arizona We have served as bond counsel to our client Tempe Life Care Village, Inc. (the Corporation ) and not as counsel to any other person in connection with the issuance by The Industrial Development Authority of the City of Tempe, Arizona (the Authority ) of its $ Revenue Refunding Bonds (Friendship Village of Tempe) Series 2012A (the Series 2012A Bonds ), dated the date of this letter. The Series 2012A Bonds are issued pursuant to the provisions of Title 35, Chapter 5, Arizona Revised Statutes, as amended, and the Bond Trust Indenture, dated as of March 1, 2012 (the Bond Indenture ), between the Authority and Wells Fargo Bank, N.A., as bond trustee (the Trustee ). Capitalized terms not otherwise defined in this letter are used as defined in the Bond Indenture. In our capacity as bond counsel, we have examined the transcript of proceedings relating to the issuance of the Series 2012A Bonds, a copy of the signed and authenticated Series 2012A Bond of the first maturity, the Bond Indenture, the Loan Agreement, dated as of March 1, 2012 (the Loan Agreement ), between the Authority and the Corporation, and such other documents, matters and law as we deem necessary to render the opinions set forth in this letter. Based on that examination and subject to the limitations stated below, we are of the opinion that under existing law: 1. The Series 2012A Bonds, the Bond Indenture and the Loan Agreement are valid and binding obligations of the Authority, enforceable in accordance with their respective terms. 2. The Series 2012A Bonds constitute limited obligations of the Authority, and the principal of and interest and any premium on (collectively, debt service ) the Series 2012A Bonds, are payable solely from the revenues and other money assigned by the Bond Indenture to pay debt service, including the payments required to be made by the Corporation under the Loan Agreement and Obligation D-1

282 , 2012 Page 2 No. 1. The payment of debt service on the Series 2012A Bonds is not secured by an obligation or pledge of any money raised by taxation, and the Series 2012A Bonds do not represent or constitute a general obligation or a pledge of the faith and credit of the Authority, the State of Arizona or any of its political subdivisions. 3. Interest on the Series 2012A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, portions of the interest on the Series 2012A Bonds earned by certain corporations may be subject to a corporate alternative minimum tax. Further, interest on the Series 2012A Bonds is exempt from Arizona state income tax. We express no opinion as to any other tax consequences regarding the Series 2012A Bonds. The opinions stated above are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. In rendering all such opinions, we assume, without independent verification, and rely upon (i) the accuracy of the factual matters represented, warranted or certified in the proceedings and documents we have examined, (ii) the due and legal authorization, execution and delivery of those documents by, and the valid, binding and enforceable nature of those documents upon, any parties other than the Corporation, and (iii) the correctness of the legal conclusions contained in the legal opinion letter of Douglas K. Cook, Attorney, P.C., as counsel to the Corporation, delivered in connection with this matter. In rendering those opinions with respect to the treatment of the interest on the Series 2012A Bonds under the federal tax laws, we further assume and rely upon compliance with the covenants in the proceedings and documents we have examined, including those of the Authority and the Corporation, and to the extent applicable, the Trustee. Failure to comply with certain of those covenants subsequent to issuance of the Series 2012A Bonds may cause interest on the Series 2012A Bonds to be included in gross income for federal income tax purposes retroactively to their date of issuance. In addition, in rendering those opinions with respect to the treatment of the interest on the Series 2012A Bonds under the federal tax laws, we also further assume the correctness of, and rely on the opinion of, Douglas K. Cook, Attorney, P.C., counsel to the Corporation, regarding the current qualification of the Corporation as an organization described in Section 501(c)(3) of the Code and the use of the facilities refinanced by the Series 2012A Bonds in activities that are not considered unrelated trade or business activities of the Corporation, as defined in Section 513(a) of the Code, which opinion is subject to a number of qualifications and limitations. Failure of the Corporation to maintain its qualification as an organization described in Section 501(c)(3) of the Code, or to use the facilities refinanced by the Series 2012A Bonds in a manner that is substantially related to the Corporation s charitable purpose under Section 513(a) of the Code, may cause interest on the Series 2012A Bonds to be included in gross income retroactively to the date of the issuance of the Series 2012A Bonds. D-2

283 , 2012 Page 3 The rights of the owners of the Series 2012A Bonds and the enforceability of the Series 2012A Bonds, the Loan Agreement and the Bond Indenture are subject to bankruptcy, insolvency, arrangement, fraudulent conveyance or transfer, reorganization, moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion, and to limitations on legal remedies against public entities. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the Series 2012A Bonds, the Loan Agreement or the Bond Indenture. Furthermore, we express no opinion with respect to the status or quality of title to, or interest in, any of the real, personal or intangible property and other assets described in, or subject to, the pledge or lien granted in the Bond Indenture, or the accuracy or sufficiency of the description contained therein of, or the priority of, or the remedies available to enforce, any pledge or lien on any such assets. The opinions rendered in this letter are stated only as of this date, and no other opinion shall be implied or inferred as a result of anything contained in or omitted from this letter. Our engagement as bond counsel with respect to the Series 2012A Bonds has concluded on this date. Respectfully submitted, D-3

284 [Closing Date] To: The Industrial Development Authority of the City of Tempe, Arizona Tempe, Arizona Tempe Life Care Village, Inc. Tempe, Arizona Ladies and Gentlemen: We have served as bond counsel to our client Tempe Life Care Village, Inc. (the Corporation ) and not as counsel to any other person in connection with the issuance by The Industrial Development Authority of the City of Tempe, Arizona (the Authority) of its $ Revenue Refunding Bonds (Friendship Village of Tempe) Taxable Series 2012B (the Taxable Series 2012B Bonds ), dated the date of this letter. The Taxable Series 2012B Bonds are issued pursuant to Title 35, Chapter 5, Arizona Revised Statutes, as amended, and the Bond Trust Indenture, dated as of March 1, 2012 (the Bond Indenture ), between the Authority and Wells Fargo Bank, N.A., as bond trustee (the Trustee ). Capitalized terms not otherwise defined in this letter are used as defined in the Bond Indenture. In our capacity as bond counsel, we have examined the transcript of proceedings relating to the issuance of the Taxable Series 2012B Bonds, a copy of the signed and authenticated Taxable Series 2012B Bond of the first maturity, the Bond Indenture, the Loan Agreement, dated as of March 1, 2012 (the Loan Agreement ), between the Authority and the Corporation, and such other documents, matters and law as we deem necessary to render the opinions set forth in this letter. Based on that examination and subject to the limitations stated below, we are of the opinion that under existing law: 1. The Taxable Series 2012B Bonds, the Bond Indenture and the Loan Agreement are valid and binding obligations of the Corporation, enforceable in accordance with their respective terms. 2. The Taxable Series 2012B Bonds constitute limited obligations of the Authority, and the principal of and interest and any premium on (collectively, debt service ) the Taxable Series 2012B Bonds, are payable solely from the revenues and other money assigned by the Bond Indenture to pay debt service, including the payments required to be made by the Corporation under the Loan Agreement and Obligation No. 1. The payment of debt service on the Taxable Series 2012B Bonds is not secured by an obligation or pledge of any money raised by taxation, and the Taxable Series 2012B Bonds do not represent or D-4

285 , 2012 Page 2 constitute a general obligation or a pledge of the faith and credit of the Authority, the State of Arizona or any of its political subdivisions. 3. The interest on the Taxable Series 2012B Bonds is exempt from Arizona state income tax. We express no opinion as to any other tax consequences regarding the Taxable Series 2012B Bonds, except as stated in this paragraph 3. Interest on the Taxable Series 2012B Bonds is not excluded from gross income for federal income tax purposes. No attempt has been or will be made to comply with certain requirements of the Internal Revenue Code of 1986, as amended, relating to the exclusion from gross income for federal income tax purposes of interest on the Taxable Series 2012B Bonds. The opinions stated above are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. In rendering all such opinions, we assume, without independent verification, and rely upon (i) the accuracy of the factual matters represented, warranted or certified in the proceedings and documents we have examined, (ii) the due and legal authorization, execution and delivery of those documents by, and the valid, binding and enforceable nature of those documents upon, any parties other than the Corporation, and (iii) the correctness of the legal conclusions contained in the legal opinion letter of Douglas K. Cook, Attorney, P.C., as counsel to the Corporation, delivered in connection with this matter. The rights of the owners of the Bonds and the enforceability of the Bonds, the Loan Agreement and the Bond Indenture are subject to bankruptcy, insolvency, arrangement, fraudulent conveyance or transfer, reorganization, moratorium and other laws relating to or affecting creditors rights, to the application of equitable principles, to the exercise of judicial discretion, and to limitations on legal remedies against public entities. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the Taxable Series 2012B Bonds, the Loan Agreement or the Bond Indenture. Furthermore, we express no opinion with respect to the status or quality of title to, or interest in, any of the real, personal or intangible property and other assets described in, or subject to, the pledge or lien granted in the Bond Indenture, or the accuracy or sufficiency of the description contained therein of, or the priority of, or the remedies available to enforce, any pledge or lien on any such assets. The opinions rendered in this letter are stated only as of this date, and no other opinion shall be implied or inferred as a result of anything contained in or omitted from this letter. Our engagement as bond counsel with respect to the Bonds has concluded on this date. THE FOREGOING DISCUSSION OF FEDERAL INCOME TAX MATTERS REGARDING THE TAXABLE SERIES 2012B BONDS WAS NOT INTENDED OR WRITTEN BY BOND COUNSEL TO BE USED, AND IT CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON AN OWNER OF THE TAXABLE SERIES 2012B BONDS. THE FOREGOING DISCUSSION OF FEDERAL INCOME TAX MATTERS REGARDING THE TAXABLE SERIES 2012B BONDS WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TAXABLE SERIES 2012B BONDS. EACH PROSPECTIVE PURCHASER D-5

286 , 2012 Page 3 OF THE TAXABLE SERIES 2012B BONDS SHOULD SEEK ADVICE BASED ON THE PROSPECTIVE PURCHASER S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. Respectfully submitted, D-6

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289

290 THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF TEMPE, ARIZONA Revenue Refunding Bonds (Friendship Village of Tempe) Series 2012A and Taxable Series 2012B