ACTS Retirement-Life Communities, Inc. (Obligated Group)

Transcription

1 ACTS Retirement-Life Communities, Inc. (Obligated Group) Special-Purpose Combined Financial Statements

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

3 Independent Auditors Report Board of Directors ACTS Retirement-Life Communities, Inc. We have audited the accompanying special-purpose combined financial statements of ACTS Retirement-Life Communities, Inc. Obligated Group, which comprise the special-purpose combined balance sheet as of, and the related special-purpose combined statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Special-Purpose Combined Financial Statements Management is responsible for the preparation and fair presentation of these special-purpose combined financial statements in accordance with the financial reporting provisions of the Master Trust Indenture dated December 1, 1996, as supplemented; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the special-purpose combined 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 special-purpose combined 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 special-purpose combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special-purpose combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the special-purpose combined 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 special-purpose combined 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 special-purpose combined 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 special-purpose combined financial statements referred to above present fairly, in all material respects, the financial position of ACTS Retirement-Life Communities, Inc. Obligated Group as of, and the results of their operations, changes in net assets, and cash flows for the years then ended, in accordance with the financial reporting provisions of the Master Trust Indenture. Basis of Accounting We draw attention to Note 1 to the special-purpose combined financial statements, which describes the basis of accounting. The special-purpose combined financial statements are prepared by ACTS Retirement-Life Communities, Inc. Obligated Group in accordance with the financial reporting provisions of the Master Trust Indenture, which is a basis other than accounting principles generally accepted in the United States of America to meet the Master Trust Indenture s requirements. Our opinion is not modified with respect to this matter. Intended Use Our report is intended solely for the information and use of the boards of directors and management of ACTS Retirement-Life Communities, Inc. Obligated Group, the Master Trustee under the Master Trust Indenture dated December 1, 1996, as supplemented, and other parties as required under the related Master Continuing Disclosure Agreement. It is not intended to be and should not be used by anyone other than these specified parties. Philadelphia, Pennsylvania April 29,

5 Special-Purpose Combined Balance Sheet Assets Cash and cash equivalents $ 19,686 $ 19,600 Investments 259, ,951 Accounts receivable and entrance fee receivables, net 16,131 15,992 Notes receivable - 6,988 Subordinated note receivable 6,082 6,082 Prepaid expenses, inventory, and deposits 8,950 9,248 Property and equipment, net 793, ,682 Deferred costs, net 8,477 9,098 Due from affiliated organizations 2,846 2,687 Total assets $ 1,115,320 $ 1,113,328 Liabilities and Net Assets Accounts payable and accrued expenses $ 54,120 $ 53,577 Short-term indebtedness 1,900 41,900 Long-term indebtedness 506, ,704 Entrance fee deposits 6,358 7,333 Refundable portion of entrance fees 29,128 32,255 Deferred revenue from entrance fees 443, ,283 Accumulated loss on investment contracts 10,308 22,293 Total liabilities 1,051,820 1,058,345 Net assets Unrestricted 46,920 38,785 Temporarily restricted 14,199 13,824 Permanently restricted 2,381 2,374 Total net assets 63,500 54,983 Total liabilities and net assets $ 1,115,320 $ 1,113,328 See notes to special-purpose combined financial statements 3

6 Special-Purpose Combined Statement of Operations Years Ended Operating Revenue Resident services revenue, net of amortization of entrance fees $ 236,915 $ 234,084 Patient revenue from third-party payors 28,793 31,321 Investment income 7,339 8,402 Net assets released from restriction to provide resident services 1,843 1,529 Other revenue 8,705 8,101 Total operating revenue before amortization of entrance fees 283, ,437 Amortization of entrance fees 69,899 72,444 Total operating revenue 353, ,881 Operating Expenses Salaries, wages, and benefits 171, ,745 Contracted services 23,123 24,265 Utilities 19,310 19,186 Food 18,145 17,659 Supplies 12,811 12,512 Real estate taxes 8,850 8,602 Insurance 6,358 6,396 Other 14,097 12,688 Total operating expenses before depreciation, amortization, and interest 274, ,053 Depreciation and amortization 51,928 52,703 Interest, net 20,865 21,614 Total operating expenses 347, ,370 Operating Income 6,032 8,511 Net Unrealized Gain on Investments and Investment Contracts 1,167 1,131 Loss on Early Extinguishment of Debt (154) (3,604) Net Operating Income 7,045 6,038 Satisfaction of Subordinated Notes Receivable Related to the Merger of Obligated Member - (12,768) Net Assets Released From Restriction to Acquire Property and Equipment 1,090 3,500 Increase (Decrease) in Unrestricted Net Assets $ 8,135 $ (3,230) See notes to special-purpose combined financial statements 4

7 Special-Purpose Combined Statement of Changes in Net Assets Years Ended Unrestricted Net Assets Total operating revenue $ 353,494 $ 355,881 Total operating expenses (347,462) (347,370) Net unrealized gain on investments and investment contracts 1,167 1,131 Loss on early extinguishment of debt (154) (3,604) Satisfaction of subordinated notes receivable related to the merger of obligated member - (12,768) Net assets released from restriction to acquire property and equipment 1,090 3,500 Increase (decrease) in unrestricted net assets 8,135 (3,230) Increase (Decrease) In Temporarily Restricted Net Assets Change in beneficial interest in investments of ACTS Mission Foundation and PUMH Foundation, Inc. 375 (2,285) Increase In Permanently Restricted Net Assets Change in beneficial interest in investments of ACTS Mission Foundation and PUMH Foundation, Inc. 7 - Increase (Decrease) In Net Assets 8,517 (5,515) Net Assets, Beginning 54,983 60,498 Net Assets, Ending $ 63,500 $ 54,983 See notes to special-purpose combined financial statements 5

8 Special-Purpose Combined Statement of Cash Flows Years Ended Cash Flows From Operating Activities Increase (decrease) in net assets $ 8,517 $ (5,515) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Satisfaction of subordinated notes receivable related to the merger of obligated member - 12,768 Depreciation and amortization 51,928 52,703 Loss on disposal of assets Amortization of entrance fees (69,899) (72,444) Amortization of bond discount and premium, net (996) (688) Entrance fees from non-refundable resale contracts 97,293 89,565 Refunds of entrance fees and deposits from non-refundable resale contracts (6,673) (4,366) Administrative fee included in gross entrance fees (4,899) (4,129) Net realized and unrealized loss (gain) on investments 7,118 (2,169) Change in fair value of investment contracts (8,598) 294 Loss on early extinguishment of debt 154 3,604 Change in beneficial interest in investments of ACTS Mission Foundation and PUMH Foundation, Inc. (382) 2,285 Net change in due from/to affiliated organizations (159) (2,881) Changes in assets and liabilities: Decrease (increase) in accounts receivable 1,086 (1,853) Decrease (increase) in prepaid expenses, inventory, and deposits 298 (247) Increase in accounts payable and accrued expenses 34 1,439 Net cash provided by operating activities 74,986 68,366 Cash Flows From Investing Activities Decrease (increase) in notes receivable 6,988 (536) Purchase of property and equipment (73,962) (55,383) Decrease (increase) in investments 6,643 (9,924) Net cash used in investing activities (60,331) (65,843) Cash Flows From Financing Activities Entrance fees from initial sale contracts Refunds of refundable entrance fees (2,731) (3,936) Proceeds from short-term indebtedness 8,702 30,000 Net proceeds from long-term indebtedness 30,778 15,553 Increase in deferred costs (557) (1,414) Decrease in charitable gift annuity obligations - (4,039) Payments on short-term indebtedness (38,702) (32,655) Principal payments on long-term indebtedness (12,385) (10,173) Net cash used in financing activities (14,569) (5,702) Net Increase (Decrease) in Cash and Cash Equivalents 86 (3,179) Cash and Cash Equivalents, Beginning 19,600 22,779 Cash and Cash Equivalents, Ending $ 19,686 $ 19,600 Supplemental Disclosure of Cash Flow Information Interest paid, net of amounts capitalized $ 22,006 $ 22,339 Supplemental Disclosure of Noncash Investing and Financing Activities Proceeds from long-term indebtedness used to repay short-term indebtedness $ 10,000 $ - Proceeds from long-term indebtedness used to repay long-term indebtedness $ 13,210 $ 98,555 Proceeds from long-term indebtedness used for interest rate swap agreement termination payment $ 3,387 $ - Satisfaction of subordinated notes receivable related to the merger of obligated member $ - $ 12,768 Investments (debt service reserve funds) used to repay long-term indebtedness $ - $ 1,312 See notes to special-purpose combined financial statements 6

9 1. Organization ACTS Retirement Services, Inc. ( ARS ) is a not-for-profit Pennsylvania corporation that serves as the parent organization providing the highest level of governance and control over all of its controlled entities. The following is a listing of ARS controlled entities: ACTS Management Services, Inc. ( AMS ), a not-for-profit Pennsylvania corporation providing management, marketing, and development services to ACTS and affiliated entities. ACTS Signature Community Services, Inc. ( ASCS ), a not-for-profit Pennsylvania corporation providing home and community based services to ACTS and affiliated entities. ASCS has one wholly-owned subsidiary, Village Nursing Care, Inc. ( VNC ), a for-profit Georgia corporation that provides home health services in Gainesville, Georgia. ACTS Mission Foundation ( AMF ), a not-for-profit Pennsylvania corporation providing fundraising, supporting all charitable programs, and managing the donor restricted funds for ACTS and affiliated entities, except Peninsula United Methodist Homes, Inc. ACTS Retirement-Life Communities, Inc. ( ACTS ), a not-for-profit Pennsylvania corporation that, along with the affiliates, as herein defined, provides residential, assisted living, and skilled care services to senior adults in its 23 continuing care retirement communities ( CCRCs ), located in Alabama (1), Delaware (3), Florida (6), Georgia (1), Maryland (1), North Carolina (2), Pennsylvania (8), and South Carolina (1). ACTS operates 17 CCRCs as divisions within the legal entity of ACTS, and 6 CCRCs within separate, related legal entities (the Affiliates ). The Affiliates are as follows: ACTS Acquisition Company, LLC ( AAC ), a Florida limited liability company. Heron Point of Chestertown, Inc. ( HP ), a not-for-profit Maryland corporation which operates a CCRC located in Chestertown, Maryland. Magnolia Trace, An ACTS Retirement-Life Community, LLC ( MT ), an Alabama limited liability company which operates a CCRC located in Huntsville, Alabama. Park Pointe Village, Inc. ( PPV ), a not-for-profit South Carolina corporation which operates a CCRC located in Rock Hill, South Carolina. Peninsula United Methodist Homes, Inc. ( PUMH ), a not-for-profit Delaware corporation which operates CCRCs located in Hockessin, Seaford, and Wilmington, Delaware. PUMH Foundation, Inc. ( PUMH-F ), a not-for-profit Delaware corporation that provides fundraising and other support for the exclusive benefit of PUMH. PUMH is the sole member of the PUMH-F. The ACTS Obligated Group includes ACTS, AMS, ASCS, MT, and PUMH under the terms of a Master Trust Indenture (Note 8); MT and PUMH were admitted as new members of the Obligated Group in December

10 ARS, AMS, ASCS, AMF, ACTS, HP, PPV, PUMH, and PUMH-F are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code (the Code ) and are exempt from federal income taxes on their exempt income under Section 501(a) of the Code. AAC and MT, as single member limited liability companies, are considered disregarded entities for federal tax purposes. Because ACTS is exempt from federal income tax under Section 501(a) of the Code, as a charitable organization described in Section 501(c)(3) of the Code, and because AAC and MT are both disregarded entities for federal tax purposes, AAC and MT are considered exempt under Section 501(a) of the Code as charitable organizations described in Section 501(c)(3) of the Code. Basis of Presentation and Principles of Combination The ACTS Obligated Group (the Company ) prepares special-purpose combined financial statements in accordance with the financial reporting provisions specified in the disclosure requirements of the Master Trust Indenture. The Master Trust Indenture specifies the preparation of combined financial statements of the Obligated Group members; accordingly, the accompanying special-purpose combined financial statements include only the accounts of the Obligated Group members and exclude the accounts of ARS, AMF, HP, PPV, PUMH- F, AAC, and VNC. The combination of financial statements for only certain controlled organizations differs from accounting principles generally accepted in the United States of America. All inter-affiliate transactions between the members of the Company have been eliminated in combination. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents For purposes of the special-purpose combined statement of cash flows, cash and cash equivalents include working capital accounts invested in highly liquid instruments purchased with an original maturity of three months or less. Investments and Investment Risk Investments with readily determinable fair values are measured at fair value in the specialpurpose combined balance sheet. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in net operating income in the special-purpose combined statement of operations unless the income or loss is restricted by donor or law. Interest income is measured as earned on the accrual basis. Dividends are measured based on the ex-dividend date. Purchases and sales of securities and realized gains and losses are recorded on a trade-date basis. The Company s investments are comprised of a variety of financial instruments. The fair values reported in the special-purpose combined 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 on the special-purpose combined balance sheet could materially change in the near term. 8

11 Investments include unrestricted assets and restricted assets. Unrestricted assets represent assets that are available for the general use and purposes of the Company. Restricted assets include amounts held in trust to meet statutory and debt reserve requirements and amounts restricted by donors for specific purposes or time periods. Accounts Receivable and Entrance Fee Receivables The Company establishes an allowance for uncollectible accounts to reduce its accounts receivable to net realizable value. The allowance is estimated by management based on general factors such as payor mix, aging of the accounts receivable, and historical collection experience. Accounts are written off through bad debt expense when the Company has exhausted all collection efforts and accounts are deemed uncollectible. Entrance fee receivables are evaluated for collectability based on specific identification. The terms and conditions of each receivable are determined when a resident agreement is executed. Notes Receivable and Subordinated Notes Receivable At December 31, 2012, notes receivable included $3,988,000 and $3,000,000 advanced to HP evidenced by promissory notes. The promissory notes were satisfied in Subordinated note receivable of $6,082,000 at consists of an amount advanced to AAC related to the affiliation with PPV. As the sole corporate member, AAC used the proceeds to provide an investment in PPV. This note is satisfied upon AAC transferring its sole corporate membership to another entity, or PPV making a payment to AAC as a return on investment. During 2012, as part of the merger of Azalea Trace, Inc. ( ATI ) into ACTS, AAC transferred its sole corporate membership to ACTS, resulting in a $12,768,000 reduction in subordinated notes receivable and unrestricted net assets, as the transfer of cash related to this merger was recognized in 2010 when ATI became a member of the Obligated Group. Property and Equipment Property and equipment are stated at cost. Donated assets are recorded at their fair value at the date of donation. Depreciation is computed using the straight-line method based on the following estimated useful lives, which were re-evaluated in 2013 (Note 6): Land improvements Building and improvements Furniture, fixtures, and equipment 10 to 25 years 8 to 50 years 3 to 10 years When assets are sold or retired, the asset values and related accumulated depreciation are eliminated from the accounts and any gain or loss is included in the special-purpose combined statement of operations. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized. 9

12 Gifts of long-lived assets such as land, buildings, or equipment are reported as other revenue unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted contributions. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Depreciation expense was $50,904,000 in 2013 and $51,541,000 in Interest is capitalized for assets that require a period of time to be constructed or to prepare them for their intended use. The amount of interest capitalized was $1,131,000 in 2013 and $1,493,000 in Deferred Costs Deferred costs include certain sales and marketing costs associated with selling resident agreements that provide for the occupancy of independent living units that have not been previously occupied. These are amortized using the straight-line method over the average life expectancy of the residents. Deferred costs also include costs incurred in connection with the issuance of long-term debt. These costs are amortized over the terms of the related debt using the straight-line method, which approximates the effective interest method. Deferred costs are net of accumulated amortization of $10,432,000 as of December 31, 2013 and $11,525,000 as of December 31, Amortization expense was $1,024,000 in 2013 and $1,162,000 in Derivative Financial Instruments The Company uses interest rate swap agreements which are considered derivative financial instruments, to manage its interest rate risk on its long-term debt. The interest rate swap agreements are reported at fair value in the special-purpose combined balance sheet and related changes in fair value are reported on the special-purpose combined statement of operations as a component of net unrealized gain on investments and investment contracts. Deferred Revenue from Entrance Fees Under a continuing care contract ( resident agreement ) for a residential living unit, the Company receives entrance fee payments in advance. The Company offers both nonrefundable and refundable resident agreements. As of, the majority of the Company s resident agreements are nonrefundable. Under the majority of nonrefundable resident agreements, residents who terminate residency generally will be entitled to a full refund less an administrative fee of up to 5% and less 1%-2% (based on resident agreement) of the remaining entrance fee per month of residency. Under refundable resident agreements, the entrance fee is reduced to no less than the guaranteed refund, as specified in the resident agreement and refunds to residents are generally paid by the Company after a new resident occupies the residential living unit vacated by the former resident. 10

13 The nonrefundable portion of entrance fees is amortized to revenue over the actuarially computed life expectancy of the residents using the straight-line method and is classified as deferred revenue from entrance fees on the special-purpose combined balance sheet. The guaranteed refundable portion of entrance fees is classified as refundable portion of entrance fees on the special-purpose combined balance sheet and is not amortized to revenue. The gross contractual refund obligations under existing resident agreements were approximately $272,215,000 and $270,185,000 at, respectively. Under the majority of existing resident agreements, residential living residents are entitled to assisted living or skilled care services, as needed, with no increases in the current monthly service fees as a result of transferring to a higher level of care. Obligation to Provide Future Services The Company engages an independent actuary once every three years to calculate the present value of 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 entrance fees. Based upon the last calculation performed (as of December 31, 2011), the present value of the net cost of future services and the use of facilities, based on a discount rate of 5%, did not exceed the balance of deferred revenue from entrance fees. Based upon this calculation, and the analysis of management, no liability for the obligation to provide future services has been recorded at. Donor-Restricted Contributions The Company reports gifts of cash and other assets as restricted contributions if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported on the special-purpose combined statement of operations as net assets released from restrictions. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets consist of contributions whose use by the Company is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the Company pursuant to those stipulations. Permanently restricted net assets are restricted to investment in perpetuity, the income from which is temporarily restricted. Resident Services and Patient Revenues Resident services and patient revenues are reported at the estimated net realizable amounts from residents and third-party payors. Patient revenues are recorded at rates established by the respective third-party in the period during which the service is provided. The Company records appropriate contractual allowances for Medicare and Medicaid revenue. 11

14 Income Taxes AMS, ASCS, ACTS, and PUMH are not-for-profit corporations and MT is a limited liability company. Each is exempt from federal income taxes on exempt income under Section 501(a) of the Code and other income taxes under similar statutes. Accordingly, no provision for income taxes has been recorded in the special-purpose combined financial statements. The Company accounts for uncertainty in income taxes using 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 is met. Management determined there were no tax uncertainties that met the recognition threshold in 2013 and The federal Exempt Organization Business Income Tax Returns for the Company for the years ended December 31, 2012, 2011 and 2010 (years ended December 31, 2012 and 2011, and the period ended December 31, 2010 for PUMH) have been filed but remain subject to examination by the Internal Revenue Service. Net Operating Income The operating indicator is identified in the special-purpose combined statement of operations as net operating income. Changes in unrealized gains and losses on investments and investment contracts are included in net operating income and satisfaction of subordinated notes receivable related to the merger of obligated members and contributions of long-lived assets are included in changes in unrestricted net assets. Use of Estimates The preparation of financial statements in accordance with the basis of accounting described in Note 1 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 special-purpose combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Company evaluated subsequent events for recognition or disclosure through April 29, 2014, the date the special-purpose combined financial statements were issued. Reclassifications Certain 2012 amounts on the special-purpose combined statement of cash flows have been reclassified to conform with the 2013 special-purpose combined statement of cash flows presentation. 12

15 3. Investments The composition of investments at is set forth in the following table: U.S. government securities $ 71,463 $ 77,195 Corporate debt securities 61,739 64,061 Guaranteed investment contracts 34,491 37,595 Cash and cash equivalents 30,168 49,019 Mutual funds - fixed income 25,559 15,783 Beneficial interest in the investments of AMF and PUMH-F 16,580 16,198 Other 8,240 3,338 Equities 7,707 6,438 Alternative investments 2,249 2,415 Municipal bonds 1, Total $ 259,572 $ 272,951 The Company s alternative investments are specific to PUMH and represent ownership interests in three funds that invest primarily in limited partnerships. The limited partnerships invest in hedge funds, real estate funds, private equity/venture capital funds, and distressed debt funds. These investments represent less than 3% ownership in the limited partnerships and are recorded at cost. As part of these alternative investments, PUMH has committed additional capital of $700,000 to the funds. The capital can be called at anytime, and is expected to be funded by future distributions from the funds. The classification of the Company s investments as of is set forth in the following table: Unrestricted assets $ 148,116 $ 142,462 State required liquid reserves 45,084 46,349 Debt service reserve funds 31,589 31,589 Other debt related reserves 18,203 36,353 Beneficial interest in the investments of AMF and PUMH-F 16,580 16,198 Total $ 259,572 $ 272,951 13

16 Investment performance is as follows: Unrestricted: Interest and dividend income $ 7,026 $ 7,658 Net realized gain on investments Total $ 7,339 $ 8,402 Net unrealized (loss) gain on investments $ (7,431) $ 1, Fair Value of Financial Instruments Fair Value Measurements The Company measures its investments and derivative financial instruments 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 transfer 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 the Company for identical assets or liabilities. 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 or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, 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. 14

17 The fair value of the Company s cash and cash equivalents, investments (including alternative investments at cost), short-term indebtedness, long-term indebtedness, and derivative financial instruments was measured using the following inputs at December 31, 2013 and 2012: Total Quoted Prices in Active Markets (Level 1) 2013 Other Observable Inputs (Level 2) Other Unobservable Inputs (Level 3) Instruments measured and reported at fair value: Investments: U.S. government securities $ 71,463 $ - $ 71,463 $ - Corporate debt securities 61,739-61,739 - Guaranteed investment contracts 34, ,491 Cash and cash equivalents 30,168 30, Mutual funds - fixed income 25,559 25, Beneficial interest in the investments of AMF and PUMH-F 16,580-16,580 - Other 8,240-8,240 - Equities 7,707 7, Alternative investments 2, ,249 Municipal bonds 1,376-1,376 - Total $ 259,572 $ 63,434 $ 159,398 $ 36,740 Liabilities, Accumulated loss on investment contracts $ 10,308 $ - $ 10,308 $ - Instruments disclosed at fair value: Assets, Cash and cash equivalents $ 19,686 $ 19,686 $ - $ - Liabilities: Short-term indebtedness $ 1,900 $ - $ 1,900 $ - Long-term indebtedness 496, ,811 - Total $ 498,711 $ - $ 498,711 $ - 15

18 Total Quoted Prices in Active Markets (Level 1) 2012 Other Observable Inputs (Level 2) Other Unobservable Inputs (Level 3) Instruments measured and reported at fair value: Investments: U.S. government securities $ 77,195 $ - $ 77,195 $ - Corporate debt securities 64,061-64,061 - Guaranteed investment contracts 37, ,595 Cash and cash equivalents 49,019 49, Mutual funds - fixed income 15,783 15, Beneficial interest in the investments of AMF and PUMH-F 16,198-16,198 - Other 3,338-3,338 - Equities 6,438 6, Alternative investments 2, ,415 Municipal bonds Total $ 272,951 $ 71,240 $ 161,701 $ 40,010 Liabilities, Accumulated loss on investment contracts $ 22,293 $ - $ 22,293 $ - Instruments disclosed at fair value: Assets, Cash and cash equivalents $ 19,600 $ 19,600 $ - $ - Liabilities: Short-term indebtedness $ 41,900 $ - $ 41,900 $ - Long-term indebtedness 494, ,870 - Total $ 536,770 $ - $ 536,770 $ - The Company s guaranteed investment contracts decreased $3,104,000 in 2013 and $13,086,000 in 2012, due to deposits and withdrawals, net. The Company s alternative investments decreased $166,000 in 2013 and increased $58,000 in 2012 due to distributions received, net of additional capital contributions made. 16

19 Financial Instruments The carrying amount of cash and cash equivalents approximates fair value due to the shortterm nature of these instruments. Mutual funds and equities are valued based on quoted market prices in active markets which are considered Level 1 inputs. Corporate debt securities, U.S. government securities, other investments, and municipal bonds are generally valued using quoted market prices of similar securities, which are considered Level 2 inputs. The Company has a beneficial interest in the investments of AMF and PUMH-F. Since AMF and PUMH-F generally invest the Company s funds in corporate debt securities, U.S. government securities, other investments, and municipal bonds, the fair value of the beneficial interest in the investments of AMF and PUMH-F was deemed to be determined using Level 2 inputs. The fair value of the Company s variable rate long-term indebtedness (including variable rate demand revenue bonds and taxable term loans) approximates the carrying amount as reported in the special-purpose combined balance sheet; the carrying amount of this longterm indebtedness was $196,650,000 and $157,090,000 at, respectively. The carrying amount of the Company's fixed rate long-term indebtedness was $301,590,000 and $309,370,000 at, respectively. The estimated fair value of the Company s fixed rate long-term indebtedness was $300,161,000 and $337,780,000 at, respectively. The fair values are based on quoted market prices for the same or similar issues. The guaranteed investment contracts are reported at contract value, which approximates fair value, based on the ability of the counterparties to pay the guaranteed claims in accordance with the terms of the contracts. The credit ratings of the counterparties as of the measurement date uphold the guaranteed investment contracts ability to meet obligations set forth in the contracts. Contract value is the aggregation of contributions, plus interest, less withdrawals. Contract value approximates a discounted cash flow value calculated using an appropriate risk-adjusted market discount rate which correlates closely with the counterparties historical crediting rates. The guaranteed investment contracts have redemption restrictions based on the terms of the underlying contracts. The redemption restrictions do not have a material impact on the contract value of the guaranteed investment contracts. The Company measures its accumulated loss on investment contracts at fair value based on proprietary models of an independent third party valuation specialist. The fair value takes into consideration the prevailing interest rate environment and the specific terms and conditions of the derivative financial instruments and considers the credit risk of the counterparty to the agreements and the Company. The method used to determine the fair value calculates the estimated future payments required by the derivative financial instruments and discounts these payments using an appropriate discount rate. The value represents the estimated exit price the Company would pay to terminate the agreements. 17

20 5. Accounts Receivable and Entrance Fee Receivables Accounts receivable and entrance fee receivables are comprised of the following at : Resident monthly fees $ 3,028 $ 3,838 Resident entrance fees 6,141 4,916 Third party accounts 5,392 6,134 Other 2,006 1,679 Total receivables 16,567 16,567 Allowance for uncollectible accounts (436) (575) Accounts receivable and entrance fee receivables, net $ 16,131 $ 15, Property and Equipment Property and equipment is comprised of the following at : Land and improvements $ 89,699 $ 87,066 Building and improvements 1,075,896 1,040,139 Furniture, fixtures, and equipment 160, ,107 Construction in progress 30,566 16,787 Total property and equipment 1,356,737 1,303,099 Accumulated depreciation (563,161) (532,417) Property and equipment, net $ 793,576 $ 770,682 During 2013, the Company completed a review of the state and condition of its buildings and improvements, which included property surveys completed by an independent engineering firm. As a result, the Company extended the remaining useful lives of certain buildings by ten years effective January 1, This change in estimate resulted in a reduction of 2013 depreciation expense of approximately $2,700,000 on the special-purpose combined statement of operations. 18

21 7. Short-Term Indebtedness Lines of Credit ACTS has an available $15,000,000 revolving line of credit with a financial institution allowing for cash advances and providing support for the issuance of direct pay letters of credit. Interest on amounts outstanding on the line of credit was 2.16% at December 31, Interest is calculated monthly based on changes to the LIBOR Advantage Rate, as defined. Borrowings were $1,900,000 at. Letters of credit issued in connection with the line of credit were $8,587,000 and $8,092,000 at December 31, 2013 and 2012, respectively. ACTS also has an available $50,000,000 revolving line of credit established during 2013 with a financial institution allowing for cash advances. Interest is calculated monthly based on changes to the LIBOR Rate, as defined. There were no borrowings in ACTS had available a $12,000,000 revolving loan with a financial institution. Borrowings were $10,000,000 at December 31, 2012 and were repaid during 2013 using proceeds from a Taxable Term Loan. PUMH has an available $1,000,000 line of credit with a financial institution allowing for cash advances and providing support for the issuance of direct pay letters of credit. Interest is calculated monthly using the bank s Prime Rate, as defined. There were no borrowings at. A $290,000 letter of credit was issued in connection with the line of credit at. The Company s obligations under the line of credit agreements are secured under the terms of a Master Trust Indenture dated December 1, 1996, as supplemented, on a parity basis by a pledge of gross revenues (as defined), a covenant not to create or allow to exist upon its property any lien except for permitted liens, and a promise to deliver mortgages and/or deeds of trust granting liens upon and security interest on its facilities to the Master Trustee if certain events occur, as defined. Commercial Paper The Company issued four separate series of commercial paper, with a maximum aggregate authorized amount of $50,000,000. At December 31, 2012, the Company had $30,000,000 of commercial paper amounts outstanding. The Company issued additional commercial paper of $5,000,000 and $3,702,000 in June 2013 and August 2013, respectively. All commercial paper amounts outstanding were repaid by December 31, 2013, primarily using the proceeds from Taxable Term Loans. Each commercial paper series was secured by a one year bank letter of credit, which expired in The commercial paper program is currently dormant. 19

22 Short-Term Indebtedness Summary The Company s short-term indebtedness is summarized as follows: Lines of credit $ 1,900 $ 11,900 Commercial paper - 30,000 Total short-term indebtedness $ 1,900 $ 41, Long-Term Indebtedness The Company s long-term indebtedness has been issued under a Master Trust Indenture dated December 1, 1996, as supplemented, which secures the obligations of the Company and includes a pledge of gross revenues (as defined), a covenant not to create or allow to exist upon its property any lien except for permitted liens, and a promise to deliver mortgages and/or deeds of trust granting liens upon and security interest on its facilities to the Master Trustee if certain events occur, as defined. The Company is required to maintain certain reserves with a trustee. Such reserves are included in investments. The Company is also required to meet certain financial covenants. As of, the Company was in compliance with all financial covenants. The Company's long-term indebtedness consists of the following: Taxable Term Loan dated December 19, The interest rate is 2.56%. Principal is anticipated to mature in varying amounts through November However, the Company must request an extension of the initial maturity date (December 2018) to formally extend the term loan. The initial maturity date will be considered extended only if the bank provides written notice of the extension. $ 25,500 $ - Taxable Term Loan dated December 19, The interest rate is 3.20% and resets in December 2018 and every five years thereafter. Principal matures in varying amounts through ,000 - Taxable Term Loan dated December 16, The interest rate is 2.54% at December 31, 2013 and may be adjusted annually, as defined. Principal matures in varying amounts through ,875 - Taxable Term Loan dated October 15, The loan was repaid during ,775 20

23 Montgomery County Industrial Development Authority (PA) Retirement Communities Revenue Refunding Bonds Series The interest rate is 5% and principal matures in varying amounts from 2023 through $ 80,465 $ 80,465 Palm Beach County Health Facilities Authority (FL) Retirement Communities Revenue Refunding Bonds Series The interest rate is 5% and principal of $5,735,000 and $7,595,000 matures in 2022 and 2023, respectively. 13,330 13,330 Gainesville and Hall County Development Authority (GA) Retirement Community Revenue Refunding Bonds Series The interest rates range from 4% to 5% and principal matures in varying amounts through ,720 12,080 Palm Beach County Health Facilities Authority (FL) Retirement Communities Revenue Bonds Series The interest rate is 5.5% and principal matures in varying amounts from 2030 through ,630 54,630 Gainesville and Hall County Development Authority (GA) Retirement Communities Revenue Bonds Series The interest rates range from 5% to 6.625% and principal matures in varying amounts through ,380 15,625 Montgomery County Industrial Development Authority (PA) Retirement Communities Revenue Bonds Series The interest rates range from 5% to 6.25% and principal matures in varying amounts through ,790 14,290 Delaware Economic Development Authority Variable Rate Demand Revenue Bonds Series 2007A. The interest rate is fixed at 1.87% and resets in December 2018 on $33,675,000 of the bonds, and variable at 0.97% at December 31, 2013 on $14,000,000 of the bonds. Principal matures in varying amounts from 2021 through ,675 47,675 Montgomery County Industrial Development Authority (PA) Retirement Communities Revenue Bonds Series 2006A. The interest rate is 4.5% and principal matures in varying amounts from 2030 through ,000 25,000 Montgomery County Industrial Development Authority (PA) Retirement Communities Refunding Revenue Bonds Series 2006B. The interest rate is 5% and principal matures in varying amounts through ,450 50,125 21

24 Palm Beach County Health Facilities Authority (FL) Retirement Communities Revenue Bonds Series 2006A. The interest rate is 4.5% and principal matures in varying amounts from 2030 through $ 20,620 $ 20,620 Palm Beach County Health Facilities Authority (FL) Retirement Communities Refunding Revenue Bonds Series 2006B. The interest rate is 5% and principal matures in varying amounts from 2017 through ,205 23,205 Variable Rate Demand Revenue Bonds Series 2003A, Taxable. The interest rate was 1.28% at December 31, Principal matures in varying amounts through Additional security is provided through a letter of credit agreement expiring January 30, ,950 16,475 Gainesville and Hall County Development Authority (GA) Senior Living Facility Variable Rate Demand Revenue Bonds Series 2003B. The interest rate was 1.21% at December 31, Principal matures in varying amounts through Security is provided through a direct pay letter of credit expiring November 30, Further security is provided by a bond insurance policy. 34,980 35,905 Escambia County Health Facilities Authority (FL) Healthcare Facilities Variable Rate Revenue Refunding Bonds Series 2003A. The interest rate was 1.21% at December 31, Principal matures in varying amounts through Security is provided through a direct pay letter of credit expiring November 30, Further security is provided by a bond insurance policy. 2,455 3,615 Escambia County Health Facilities Authority (FL) Healthcare Facilities Variable Rate Revenue Refunding Bonds Series 2003B. The interest rate was 1.21% at December 31, Principal matures in varying amounts from 2016 through Security is provided through a direct pay letter of credit expiring November 30, Further security is provided by a bond insurance policy. 25,395 25,395 22

25 Montgomery County Industrial Development Authority (PA) Retirement Community Variable Rate Demand Revenue Bonds Series The interest rate was 1.21% at December 31, Principal matures in varying amounts through Security is provided through a direct pay letter of credit expiring November 30, Further security is provided through a bond insurance policy. $ 12,820 $ 13,250 Total 498, ,460 Unamortized bond premiums and discounts, net 8,248 9,244 Total long-term indebtedness $ 506,488 $ 475,704 Variable rates are determined based on prevailing market rates and general financial conditions. The variable interest rates above include letter of credit and remarketing fees. The letter of credit fees are subject to change if the rating for the Company changes in the future. Certain debt provisions require the maintenance of the letters of credit. Anticipated principal repayments on long-term indebtedness are as follows (in thousands): Years ending December 31: 2014 $ 14, , , , , , , , ,755 Thereafter 1,165 Total $ 498,240 23

26 Loss on Early Extinguishment of Debt During 2013, the Company used the proceeds from the 2013 Taxable Term Loan dated December 16, 2013 to refinance the 2012 Taxable Term Loan and to terminate an interest rate swap agreement. During 2012, the Company completed a financing transaction through the issuance of three series of revenue refunding bonds to provide for overall debt service savings, while also establishing a project fund for certain capital projects in the Pennsylvania CCRCs. The majority of the proceeds of the bonds were used to refund prior indebtedness. In conjunction with these transactions, the Company recorded a loss on early extinguishment of debt that is included in the special-purpose combined statement of operations. The loss consists of the following: Unamortized bond discounts $ - $ 2,181 Unamortized deferred financing costs 154 1,423 Total $ 154 $ 3, Derivative Instruments and Hedging Activities The Company has interest rate swap agreements with financial institutions that are considered derivative financial instruments. The objective of the swap agreements is to minimize the risks associated with financing activities by reducing the impact of changes in the interest rates on variable rate debt. The swap agreements are contracts to exchange variable rate for fixed rate payments over the terms of the swap agreements without the exchange of the underlying notional amount. The notional amount of the swap agreements is used to measure the interest to be paid or received and does not represent the amount of exposure to credit loss. Exposure to credit loss is limited to the receivable amount, if any, which may be generated as a result of the swap agreements. Management believes that losses related to credit risk are remote and that the swap agreements are continuing to function as intended. The net cash paid or received under the swap agreements is recognized as an adjustment to interest expense. The Company does not utilize interest rate swap agreements or other financial instruments for trading or other speculative purposes. In addition, in December 2013, the Company paid $3,387,000 to terminate an interest rate swap that had a notional amount of $23,225,000. This interest rate swap agreement had a fair value of ($5,027,000) at December 31, Changes in fair value of the interest rate swap agreements are recorded as a component of net unrealized gain on investments and investment contracts. The change in unrealized loss was $8,598,000 in 2013 and ($294,000) in