Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead)

Transcription

1 Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead) Financial Statements

2 Table of Contents Page Independent Auditors Report 1 Financial Statements Balance Sheet 3 Statement of Operations 4 Statement of Changes in Net Deficit 5 Statement of Cash Flows 6 7

3 Independent Auditors Report Board of Directors Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead) We have audited the accompanying balance sheet of Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead) ( Winchester Gardens ) which comprise the balance sheet as of, and the related statements of operations, changes in net deficit, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error Auditors Responsibility 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead) as of, and the results of its operations, changes in net deficit, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter As disclosed in Note 11 to the financial statements, Winchester Gardens adopted new accounting guidance for recording refundable entrance fees. Our opinion is not modified with respect to this matter. Clark, New Jersey April 24,

5 Balance Sheet Assets Liabilities and Net Deficit Current Assets Current Liabilities Cash $ 1,402,372 $ 723,492 Current maturities of long-term debt $ 1,205,000 $ 1,155,000 Investments 3,143,987 2,896,702 Accounts payable, trade 913, ,783 Assets limited as to use 896, ,061 Accrued expenses and other current liabilities 483, ,606 Accounts receivable, Accrued interest expense 285, ,764 Residents, net 120,268 95,705 Refundable entrance fees 2,550,000 2,375,000 Entrance fee 387,062 - Prepaid expenses and other current assets 315, ,088 Total current assets 6,265,793 4,893,048 Total current liabilities 5,436,587 5,219,153 Investments 23,270,493 20,531,519 Long-Term Debt 35,804,855 37,006,662 Assets Limited as to Use 5,590,965 5,368,011 Refundable Entrance Fees and Deposits 63,666,118 60,732,943 Property and Equipment, Net 39,160,475 41,084,301 Deferred Revenue from Entrance Fees 5,954,442 6,122,925 Deferred Financing Costs, Net 704, ,278 Other Liabilities 2,002,091 1,767,395 Other Assets 361, ,154 Total liabilities 112,864, ,849,078 Net Deficit Unrestricted net deficit (39,390,283) (39,565,365) Temporarily restricted net assets 1,880,722 1,666,598 Total net deficit (37,509,561) (37,898,767) Total assets $ 75,354,532 $ 72,950,311 Total liabilities and net deficit $ 75,354,532 $ 72,950,311 See notes to financial statements 3

6 Statement of Operations Years Ended Revenues Net resident service revenue and resident fees $ 18,230,350 $ 16,731,993 Amortization of deferred revenue from entrance fees 1,405,786 1,108,932 Other, net 39,306 16,685 Total revenues 19,675,442 17,857,610 Expenses Salaries and wages 6,501,936 6,280,342 Employee benefits 1,672,086 1,716,029 Supplies and other 7,974,600 7,753,773 Interest 1,864,713 1,883,121 Depreciation and amortization 3,668,008 3,622,404 Provision for (recovery of) bad debts 20,000 (1,154) Total expenses 21,701,343 21,254,515 Operating loss (2,025,901) (3,396,905) Investment Income 2,400, ,133 Revenues in excess of (less than) expenses 375,082 (2,508,772) Transfer to Temporarily Restricted Net Assets (200,000) (200,000) Change in unrestricted net deficit $ 175,082 $ (2,708,772) See notes to financial statements 4

7 Statement of Changes in Net Deficit Years Ended Unrestricted Net Deficit Revenues in excess of (less than) expenses $ 375,082 $ (2,508,772) Transfer to temporarily restricted net assets (200,000) (200,000) Change in unrestricted net deficit 175,082 (2,708,772) Temporarily Restricted Net Assets Transfer from unrestricted net deficit 200, ,000 Investment income 14,124 6,916 Increase in temporarily restricted net assets 214, ,916 Change in net deficit 389,206 (2,501,856) Net Deficit, Beginning, as Previously Reported (37,898,767) (14,411,366) Prior Period Adjustment - (20,985,545) Net Assets, Beginning, as Restated (37,898,767) (35,396,911) Net Deficit, Ending $ (37,509,561) $ (37,898,767) See notes to financial statements 5

8 Statement of Cash Flows Years Ended Cash Flows from Operating Activities Change in net deficit $ 389,206 $ (2,501,856) Adjustments to reconcile change in net deficit to net cash provided by operating activities: Proceeds from entrance fees and refundable deposits 10,093,749 10,920,705 Amortization of deferred revenue from entrance fees (1,405,786) (1,108,932) Refundable entrance fees used for the provision of healthcare and other services (1,385,831) (1,399,648) Depreciation and amortization 3,668,008 3,622,404 Loss on disposal of equipment 26,189 17,464 Amortization of original issue discount 3,193 3,193 Investment income restricted for long-term purposes (14,124) (6,916) Net realized and unrealized gain on investments (1,742,262) (176,725) Changes in assets and liabilities: Accounts receivable, net (24,563) 1,995 Prepaid expenses and other current assets (64,621) 36,471 Other assets (30,800) (48,244) Accounts payable, trade 131,370 (22,398) Accrued expenses and other current liabilities (131,554) 189,643 Accrued interest expense (7,382) (6,659) Other liabilities 234, ,082 Net cash provided by operating activities 9,739,488 9,802,579 Cash Flows from Investing Activities Purchases of property and equipment (1,732,945) (1,720,955) Net purchases of investments (1,437,285) (570,642) Net cash used in investing activities (3,170,230) (2,291,597) Cash Flows from Financing Activities Payment of long-term debt (1,155,000) (1,105,000) Refunds of entrance fees and refundable deposits (4,749,502) (6,144,806) Investment income restricted for long-term purposes 14,124 6,916 Net cash used in financing activities (5,890,378) (7,242,890) Increase in cash 678, ,092 Cash, Beginning 723, ,400 Cash, Ending $ 1,402,372 $ 723,492 Supplemental Disclosure of Cash Flow Information Interest paid $ 1,868,902 $ 1,886,587 Noncash Financing Activity Refundable entrance fees used for the provision of healthcare and other services $ 1,385,831 $ 1,399,648 See notes to financial statements 6

9 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Marcus L. Ward Home (d/b/a Winchester Gardens at Ward Homestead) ( Winchester Gardens ) is a tax-exempt, not-for-profit corporation located in Maplewood, New Jersey. Winchester Gardens operates a continuing care retirement community ( CCRC ) consisting of 202 independent living units, 101 assisted living units (including 8 double occupancy companion suites), and 6 comprehensive personal care units. Winchester Gardens primary service area includes Maplewood, New Jersey and surrounding communities in Essex, Morris, and Union Counties, New Jersey. Accounts Receivable Accounts receivable are reported at net realizable value. Accounts are written off when determined to be uncollectible based upon management s assessment of individual accounts. The allowance for doubtful collections was $38,000 and $18,000 at December 31, 2012 and 2011, respectively, and was estimated based upon a periodic review of individual accounts. Investments and Investment Risk - General Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheet. The fair value of substantially all securities is determined by quoted market prices. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in the determination of revenues in excess of expenses unless the income or loss is restricted by donor or law. Interest income is measured as earned on the accrual basis. Dividends are measured on the ex-dividend date. Purchases and sales of securities and realized gains and losses are recorded on a trade-date basis. Winchester Gardens investments are comprised of a variety of financial instruments, most of which are managed by external investment advisors. The fair values reported in the balance sheet are subject to various risks including changes in the equity markets, the interest rate environment, and general economic conditions. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the fair value of investment securities, it is reasonably possible that the amounts reported in the balance sheet could materially change in the near term. Investments Investments generally include unrestricted assets that are available for the general use of Winchester Gardens. Amounts designated to meet current liabilities have been classified as current assets in the balance sheet. Assets Limited as to Use Assets limited as to use include assets held by a bond trustee under bond indenture agreements, assets whose use has been limited to specific purposes, and entrance fee deposits from prospective residents. Amounts available to meet current liabilities have been classified as current assets in the balance sheet. 7

10 Property and Equipment Property and equipment acquisitions are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Property and equipment are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If expected cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets. Deferred Financing Costs Costs of $1,159,888 incurred in connection with the issuance of long-term debt in 2004 are deferred and amortized over the term of the related debt using the straight-line method, which approximates the effective-interest method. Amortization expense was $37,426 in both 2012 and Accumulated amortization was $455,036 and $417,610 at December 31, 2012 and 2011, respectively. Entrance Fees Under the terms of the continuing care Residence and Care Agreement, Winchester Gardens receives an entrance fee that entitles the resident to living accommodations and healthcare and other services on a monthly, modified fee-for-service basis. Winchester Gardens offers two entrance fee options, a 90% refundable plan and a 35% refundable plan. Under the 90% plan, refunds are generally equal to 90% of the entrance fees paid. Under the 35% plan, refunds are generally equal to 90% of the entrance fees paid, minus 2% of the entrance fee paid for each full or partial month of occupancy, to a minimum of 35%. Refund of entrance fees under both options occurs only after a person is no longer a resident of Winchester Gardens and after an entrance fee is received from a subsequent resident for the resident s former independent living residence. The Residence and Care Agreement also entitles CCRC residents to a maximum of sixty lifetime days of healthcare services without an additional per-diem charge. Following an accumulation of sixty lifetime days, the resident will continue to pay an amount equal to the current monthly service fee for the type of living accommodation previously occupied. The refundable portion of the resident s entrance fee will be reduced by the difference between the monthly service fee and 90% of the current published per-diem rate for the applicable health center services provided to the resident. 8

11 At December 31, 2012, approximately 87% of the existing Residence and Care Agreements are under the 90% refundable option. The net amount of contractual refund obligations at December 31, 2012 approximates $66,300,000. Through December 31, 2011, the refundable component of entrance fees received was amortized to income using the straight-line method over the estimated useful life of the independent living unit. Effective January 1, 2012, Winchester Gardens has discontinued the practice of amortizing the refundable liability component as a result of implementing new authoritative guidance. These fees are classified as refundable entrance fees and deposits in the accompanying balance sheet. The balance of the entrance fees is amortized to income using the straight-line method over annually adjusted estimated remaining life expectancies of the residents. The nonrefundable component of the entrance fees are classified as deferred revenue from entrance fees in the balance sheet. In addition, management classified $2,550,000 and $2,375,000 of the refundable entrance fees balance at, respectively, as current liabilities in the balance sheet. These amounts are comprised of the following: The estimated amount of refundable entrance fees that will be paid the following year to residents who leave Winchester Gardens after permanently transferring to the health center and have already had their former independent living unit reoccupied. These amounts were $1,250,000 and $950,000 at, respectively. The estimated amount of refundable entrance fees that will be used for the provision of healthcare and other services the following year. These amounts were $1,300,000 and $1,425,000 at, respectively. Refundable Deposits Winchester Gardens accepts deposits from prospective residents that are applied to entrance fee payments upon move-in. Deposits held as of were $150,750 and $244,480, respectively. The deposits are refundable if the prospective residents do not move in. Temporarily Restricted Net Assets Temporarily restricted net assets are limited to specific purposes (Note 6). Obligation to Provide Future Services Winchester Gardens periodically calculates the present value of the net cost of future services and the use of facilities with assistance from an independent actuary. Based upon an actuarial calculation and the opinion of management, the balance of deferred revenue from entrance fees exceeds the present value of the net cost of future services and the use of facilities. 9

12 Net Resident Service Revenue and Resident Fees Net resident service revenue includes fees charged directly to residents and third-party payors for services rendered and refundable entrance fees used for the provision of healthcare and other services. Refundable entrance fees so used were $1,385,831 in 2012 and $1,399,648 in Resident fees represent charges for other services provided to residents. Charity Care and Discounted Revenue Winchester Gardens provides services to qualified residents at amounts less than the contracted rates. Charges foregone, based on contracted rates, were approximately $225,000 in 2012 and $155,000 in These amounts are not materially different than the difference between the cost of providing services to residents that qualified for charity care and the amounts these residents were able to pay for services rendered. Under the terms of the continuing care Residence and Care Agreement, residents from independent living apartments receive the first 60 days of care in the health center at no additional cost. In addition, the residents who receive services in the health center beyond the 60 lifetime days are granted a 10% discount. The Consent Judgment (Note 6) requires Winchester Gardens to make 20% of its total current unit count available for occupancy at or less than the same fees (indexed for increases in the Consumer Price Index) that were charged for comparable services provided by the former Ward Homestead units at the time of the Consent Judgment. Income Taxes Winchester Gardens is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. Winchester Gardens is also exempt from state income taxes. Winchester Gardens accounts for uncertainty in income taxes by prescribing a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold has been met. Management determined that there were no tax uncertainties that met the recognition threshold in 2012 or Winchester Gardens federal Returns of Organization Exempt from Income Tax for the years ended prior to December 31, 2009 are no longer subject to examination by the Internal Revenue Service. Revenues in Excess of (Less Than) Expenses The statement of operations includes the determination of revenues in excess of (less than) expenses. Changes in unrestricted net deficit which are excluded from revenues in excess of (less than) expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). 10

13 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. Subsequent Events Winchester Gardens evaluated subsequent events for recognition or disclosure through April 24, 2013, the date the financial statements were issued. New Accounting Standards Refundable Advance Fees Winchester Gardens elected to adopt updated guidance related to healthcare entities which clarifies that in order for a CCRC to treat guaranteed refundable entrance fees as deferred revenue that is amortized to income over the life of the facility, any refund payable must be limited to the proceeds of re-occupancy of the unit, and it must be the CCRC s policy and practice to comply with that limitation. The updated authoritative guidance requires a CCRC to restore the guaranteed refundable entrance fee liability to the full refund amount in the resident agreements, with a corresponding decrease in unrestricted net assets. The change is required to be reported as a cumulative-effect of a change in accounting principle as of the earliest period presented. See Note 11 for the results of Winchester Gardens adopting the updated authoritative guidance. Fair Value Measurements and Disclosure In May 2011, the Financial Accounting Standards Board ("FASB") issued new and clarified guidance on fair value measurements (highest and best use, equity instruments, managed net portfolio positions, and application of premiums and discounts) and disclosure (quantitative information, valuation processes and sensitivity of unobservable inputs, assets not in highest and best use, and assets not measured at fair value). The adoption of the amended guidance required certain additional disclosures in the notes to the combined financial statements on a prospective basis. 11

14 2. Investments and Assets Limited as to Use The composition of investments at is as follows: Equity securities $ 12,364,729 $ 10,673,420 Corporate bonds, investment grade 8,614,860 8,109,767 Cash and cash equivalents 2,437,924 1,915,781 U.S. government agency obligations 1,759,929 1,655,072 U.S. government notes 1,124, ,204 Other 112, ,977 Total 26,414,480 23,428,221 Less amounts designated to meet current liabilities 3,143,987 2,896,702 Noncurrent portion of investments $ 23,270,493 $ 20,531,519 The composition of assets limited as to use at is as follows: U.S. government agency obligations $ 2,645,837 $ 2,457,826 U.S. government notes 884,922 1,242,226 Cash and cash equivalents 1,262,380 1,166,311 Corporate bonds, investment grade 1,086, ,113 Equity securities 584, ,743 Other 23,127 22,853 Total 6,487,360 6,294,072 Less amounts available to meet current liabilities 896, ,061 Noncurrent portion of assets limited as to use $ 5,590,965 $ 5,368,011 Assets limited as to use consist of the following: Assets held by a bond trustee, under bond indenture agreements: Debt service reserve funds $ 3,539,909 $ 3,627,094 Debt service (principal and interest) funds 687, ,388 Other 10,510 12,465 Total 4,237,533 4,275,947 Ward fund (Note 6) 2,038,128 1,712,946 Entrance fee deposits 211, ,179 Total assets limited as to use $ 6,487,360 $ 6,294,072

15 The New Jersey Continuing Care Retirement Community Regulation and Financial Disclosure Act (the Act ) requires facilities to establish liquid reserves. At December 31, 2012, the liquid reserve requirement applicable to Winchester Gardens under the Act was no more than $3,100,000, which is the estimated 2013 principal and interest due on long-term debt. Because not all of the residents of Winchester Gardens are covered under Residence and Care Agreements, the actual amount of the reserve requirement is equal to the proportionate share of debt service for residents under Residence and Care Agreements at December 31, The liquid reserve requirement is funded with the balance in the debt service reserve funds held by a bond trustee, under bond indenture agreements. Unrestricted investment return for 2012 and 2011 is comprised of the following: Interest and dividend income $ 815,788 $ 859,808 Net realized gain on sales of securities 611, ,278 Net unrealized gain (loss) on trading securities 1,130,889 (75,553) Investment fees (157,067) (148,400) Total $ 2,400,983 $ 888, Property and Equipment Property and equipment at consist of the following: Land and land improvements $ 1,947,296 $ 1,837,030 Buildings 74,958,754 74,143,010 Furnishings and equipment 5,900,233 5,385,039 Construction-in-progress 684, ,154 Total 83,490,969 81,892,233 Less accumulated depreciation 44,330,494 40,807,932 Property and equipment, net $ 39,160,475 $ 41,084,301 Depreciation expense was $3,630,582 in 2012 and $3,581,097 in

16 4. Long-Term Debt Long-term debt at is as follows: New Jersey Economic Development Authority ( NJEDA ), Series 2004A fixed rate Revenue Refunding Bonds (the 2004A Bonds ), due in varying annual installments through November 2031, plus interest payable semi-annually at rates ranging from 4.8% to 5.8% per annum $ 29,435,000 $ 30,295,000 NJEDA, Series 2004B variable rate Revenue Refunding Bonds (the 2004B Bonds ), due in varying annual installments through November 2031, plus interest payable monthly at a variable rate (.56% at December 31, 2012), determined weekly by prevailing market conditions, a letter of credit fee (.80% per annum), and a remarketing fee (.085% per annum) 7,635,000 7,930,000 Total 37,070,000 38,225,000 Less: Unamortized original issue discount 60,145 63,338 Current maturities 1,205,000 1,155,000 Long-term debt $ 35,804,855 $ 37,006,662 Scheduled principal payments for the next five years and thereafter are as follows: 2004A Bonds 2004B Bonds Total 2013 $ 900,000 $ 305,000 $ 1,205, , ,000 1,260, , ,000 1,320, ,060, ,000 1,390, ,120, ,000 1,460,000 Thereafter 24,415,000 6,020,000 30,435,000 Total $ 29,435,000 $ 7,635,000 $ 37,070,000 14

17 The 2004A Bonds and the 2004B Bonds are collateralized by a pledge of gross receipts and a first mortgage lien on and security interest in land and facilities. The related loan agreement requires Winchester Gardens to be in compliance with certain financial ratios and covenants including a debt service coverage ratio (as defined) of at least 1.20 and a reserve ratio (as defined) of at least 0.30 to 1.0. The debt service coverage ratio (as defined) was 2.38 for 2012 and the reserve ratio (as defined) was.87 to 1.0 at December 31, Winchester Gardens is also required to maintain a quarterly average occupancy level of not less than 85% of its independent living units (the Targeted Occupancy Level ). Winchester Gardens exceeded the required Target Occupancy Level for all four quarters in The debt service coverage ratio is calculated as follows: Revenues available for debt service: Revenues in excess of expenses $ 375,082 Add: Depreciation and amortization 3,668,008 Interest 1,864,713 Proceeds from entrance fees and refundable deposits 10,093,749 Refundable deposits, December 31, ,480 Loss on disposal of equipment 26,189 Deduct: Net unrealized gain on trading securities (1,130,889) Amortization of deferred revenue from entrance fees (1,405,786) Refunds of entrance fees and refundable deposits (4,749,502) Refundable entrance fees used for the provision of healthcare and other services (1,385,831) Refundable deposits, December 31, 2012 (150,750) Revenues available for debt service $ 7,449,463 Maximum annual debt service $ 3,124,336 Debt service coverage ratio 2.38 Debt service coverage ratio requirement 1.20 Winchester Gardens entered into an irrevocable letter-of-credit agreement with a bank to secure the 2004B Bonds. The letter of credit is equal to the 2004B Bonds outstanding plus 49 days of interest on such outstanding bonds not to exceed 10%. The letter of credit fees are classified as interest expense in the statement of operations. The letter-of-credit agreement expires on February 25, The loan agreement requires that the letter-of-credit be maintained through maturity of the 2004B Bonds. 15

18 5. Retirement Plans Winchester Gardens sponsors a defined contribution 401(k) retirement plan. Winchester Gardens contributions to the plan were approximately $116,000 in 2012 and $119,000 in Winchester Gardens sponsors an executive retirement plan (the Plan ) for the benefit of Winchester Gardens Chief Executive Officer ( CEO ). The Plan is structured to provide a lump sum payment at retirement that will provide an annual retirement benefit of $150,000 for the life of the CEO. Winchester Gardens estimated liability under the Plan is being accrued through annual charges to expense. The annual expense is intended to equal the estimated present value of the benefits expected to be paid under the Plan as of the CEO s normal retirement date. Winchester Gardens recognized expense of $216,760 in 2012 and $208,423 in This expense is included in employee benefits expenses in the statement of operations. The accrued liability at was $1,644,498 and $1,427,738, respectively, and is included in other liabilities in the balance sheet. 6. Temporarily Restricted Net Assets On February 27, 1996, the Superior Court of New Jersey, Chancery Division, entered a Second Amended Consent Judgment (the Consent Judgment ) which held that the development, construction, and operation of Winchester Gardens and the renovation of the former Ward Homestead (collectively, the Project ) are subject to certain conditions set forth in the Consent Judgment, consistent with the charitable purpose and intent as set forth in the Last Will and Testament of Marcus L. Ward, Jr. Under the terms of the Consent Judgment, Winchester Gardens is obligated to make a $2,000,000 equity investment into a separate trust fund (the Ward Fund ). This equity investment is required to be paid in varying annual installments and is reported as a transfer from unrestricted net deficit to temporarily restricted net assets in the financial statements. Winchester Gardens has complied with all funding requirements. The Ward Fund had a balance of $2,038,128 and $1,712,946 at, respectively, which is included in assets limited as to use in the balance sheet. In addition, temporarily restricted net assets related to the Ward Fund totaled $1,880,722 and $1,666,598 at, respectively. Winchester Gardens is permitted to withdraw up to 90% of the income earned in the Ward Fund, and will be permitted to utilize principal and 10% of the income earned in the Ward Fund for expanding (as defined), provided it gives prior written notice to the New Jersey Attorney General's office and obtains a court order permitting the use of such funds for the intended purpose. 7. Medical Malpractice Claims Coverage Winchester Gardens maintains professional liability coverage on a claims-made basis through a commercial insurance carrier. Other than for premiums paid under this policy, no provision has been made for estimated losses. Management believes no incidents have occurred or will be asserted that will exceed Winchester Gardens insurance coverages or will have a material adverse effect on the financial statements. 16

19 8. Concentration of Credit Risk Winchester Gardens maintains cash accounts, which, at times, may exceed federally insured limits. Winchester Gardens has not experienced any losses from maintaining cash accounts in excess of federally insured limits. Management believes Winchester Gardens is not subject to any significant credit risk on its cash accounts. 9. Fair Value Measurements and Financial Instruments Fair Value Measurements Winchester Gardens measures its investments and assets limited as to use at fair value on a recurring basis in accordance with accounting principles generally accepted in the United States of America. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to dispose of a liability in an orderly transaction between market participants at the measurement date. The framework that the authoritative guidance establishes for measuring fair value includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows: Level 1 Fair value is based on unadjusted quoted prices in active markets that are accessible to Winchester Gardens for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. 17

20 The fair values of Winchester Gardens cash and cash equivalents, investments, assets limited as to use, and long-term debt were measured with the following inputs at : Total 2012 Quoted Prices in Active Markets (Level 1) Other Observable Inputs (Level 2) Instruments measured and reported at fair value: Investments: Equity securities $ 12,364,729 $ 12,364,729 $ - Corporate bonds, investment grade 8,614,860-8,614,860 Cash and cash equivalents 2,437,924 2,437,924 - U.S. government agency obligations 1,759,929-1,759,929 U.S. government notes 1,124,567-1,124,567 Other 112, ,471 Total investments 26,414,480 14,802,653 11,611,827 Assets limited as to use: U.S. government agency obligations 2,645,837-2,645,837 U.S. government notes 884, ,922 Cash and cash equivalents 1,262,380 1,262,380 - Corporate bonds, investment grade 1,086,305-1,086,305 Equity securities 584, ,789 - Other 23,127-23,127 Total assets limited as to use 6,487,360 1,847,169 4,640,191 Total $ 32,901,840 $ 16,649,822 $ 16,252,018 Instruments disclosed at fair value: Cash and cash equivalents $ 1,402,372 $ 1,402,372 $ - Long-term debt $ 38,040,000 $ - $ 38,040,000 18

21 Total 2011 Quoted Prices in Active Markets (Level 1) Other Observable Inputs (Level 2) Instruments measured and reported at fair value: Investments: Equity securities $ 10,673,420 $ 10,673,420 $ - Corporate bonds, investment grade 8,109,767-8,109,767 Cash and cash equivalents 1,915,781 1,915,781 - U.S. government agency obligations 1,655,072-1,655,072 U.S. government notes 962, ,204 Other 111, ,977 Total investments 23,428,221 12,589,201 10,839,020 Assets limited as to use: U.S. government agency obligations 2,457,826-2,457,826 U.S. government notes 1,242,226-1,242,226 Cash and cash equivalents 1,166,311 1,166,311 - Corporate bonds, investment grade 863, ,113 Equity securities 541, ,743 - Other 22,853-22,853 Total assets limited as to use 6,294,072 1,708,054 4,586,018 Total $ 29,722,293 $ 14,297,255 $ 15,425,038 Instruments disclosed at fair value: Cash and cash equivalents $ 723,492 $ 723,492 $ - Long-term debt $ 38,500,000 $ - $ 38,500,000 19

22 Financial Instruments The carrying amount of cash and cash equivalents approximates fair value at December 31, 2012 and 2011 due to the short-term nature of these instruments. Investments and assets limited as to use are valued at fair value based on quoted market prices in active markets for equity securities and cash and cash equivalents or estimated using quoted prices for similar securities for corporate bonds, U.S. government agency obligations, U.S. government notes, and other investments. The fair value of long-term debt, excluding bond discount, is based on quoted market prices for the same or similar issues. 10. Functional Expenses Winchester Gardens provides housing, healthcare, and other related services to residents within its geographic location. Expenses related to providing these services are as follows: Resident services $ 18,701,189 $ 18,227,259 Administrative 3,000,154 3,027,256 Total $ 21,701,343 $ 21,254, Prior Period Adjustment Winchester Gardens restated its net deficit as of January 1, 2011 as a result of electing to adopt updated authoritative guidance related to the accounting for guaranteed refundable entrance fees. Prior to 2011, Winchester Gardens amortized guaranteed refundable entrance fees to income over the estimated remaining useful life of the independent living units. The updated authoritative guidance requires Winchester Gardens to discontinue amortization of its guaranteed refundable entrance fees to income and also requires Winchester Gardens to restore the guaranteed refundable entrance fee liability to the full refund amount in the resident agreements, with a corresponding decrease in deferred revenue from entrance fees and increase in unrestricted net deficit. The change in accounting principle was reported as a cumulative-effect adjustment. The effect of the change was to decrease the amortization of deferred revenue from entrance fees and the operating indicator by $2,518,378 in The restatement resulted in a cumulative-effect increase in refundable entrance fees and deposits of $60,488,463, a decrease in deferred revenue from entrance fees of $36,984,540, and an increase in unrestricted net deficit of $23,503,923 as of January 1, Winchester Gardens also determined the effect of the change in accounting principle did not result in a future service obligation liability. 20

23 The effect on Winchester Garden s financial statement line items for 2011 is summarized as follows: Previously Reported Increase (Decrease) Restated All other liabilities $ 43,993,210 $ - $ 43,993,210 Refundable entrance fees and deposits 244,480 60,488,463 60,732,943 Deferred revenue from entrance fees 43,107,465 (36,984,540) 6,122,925 Total liabilities 87,345,155 23,503, ,849,078 Unrestricted net deficit (16,061,442) (23,503,923) (39,565,365) Temporarily restricted net assets 1,666,598-1,666,598 Total net deficit (14,394,844) (23,503,923) (37,898,767) Total liabilities and net deficit $ 72,950,311 $ - $ 72,950,311 Amortization of deferred revenue from entrance fees $ 3,627,310 $ (2,518,378) $ 1,108,932 Total unrestricted revenues $ 20,375,988 $ (2,518,378) $ 17,857,610 Revenues in excess of (less than) expenses $ 9,606 $ (2,518,378) $ (2,508,772) Change in net deficit $ 16,522 $ (2,518,378) $ (2,501,856) 21