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 We are providing this draft financial statement in an electronic format under the condition that it not be modified, or distributed to any third-parties. 3/5/ :26 AM

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

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. Philadelphia, Pennsylvania Date of Report 2

5 Balance Sheet Assets Current Assets Cash and cash equivalents $ 2,834,797 $ 1,402,372 Current portion of assets whose use is limited 409, ,954 Accounts receivable, net of allowance for doubtful accounts of $142,300 in 2013 and $111,655 in , ,268 Other current assets 365, ,771 Total current assets 3,749,311 2,587,365 Investments 26,374,867 26,626,179 Assets Whose Use Is Limited 6,655,900 6,275,661 Property and Equipment, Net 36,738,553 39,160,475 Deferred Financing Costs and Other Assets, Net 1,215, ,852 Total assets $ 74,734,155 $ 75,354,532 Liabilities and Net Deficit Current Liabilities Current portion of long-term debt $ 1,260,000 $ 1,205,000 Accounts payable 739, ,153 Accrued expenses 666, ,434 Due to affiliates 25,167 - Residents' deposits 734, ,343 Total current liabilities 3,425,050 3,394,930 Long-Term Debt 34,548,051 35,804,855 Refundable Entrance Fees 67,317,394 66,065,368 Deferred Revenue from Entrance Fees 5,979,726 5,954,442 Other Liabilities - 1,644,498 Total liabilities 111,270, ,864,093 Net Deficit Unrestricted (38,613,201) (39,390,283) Temporarily restricted 2,077,135 1,880,722 Total net deficit (36,536,066) (37,509,561) Total liabilities and net deficit $ 74,734,155 $ 75,354,532 See notes to financial statements 3

6 Statement of Operations Years Ended Changes in Unrestricted Net Deficit Revenues: Revenue from residential facilities $ 10,115,717 $ 9,710,974 Revenue from healthcare facilities 8,385,231 8,242,546 Services to residents 409, ,173 Contributions and bequests 2,050 26,159 Interest and dividends 722, ,788 Other revenues 27,103 (16,196) Total revenues 19,661,712 19,085,444 Expenses Professional care 3,330,268 3,324,046 Resident services 477, ,474 Dining services 2,685,997 2,642,174 Operation and maintenance of facility 5,732,924 5,357,520 Housekeeping and laundry 998, ,189 Administrative and general 2,036,238 2,142,626 Marketing 980,479 1,011,036 Insurance 286, ,623 Interest 1,792,655 1,861,520 Provision for doubtful accounts 155,096 20,000 Total expenses 18,476,106 18,187,208 Operating income 1,185, ,236 Transfer to temporarily restricted net assets (175,000) (200,000) Net change in unrealized gains and losses on investments 1,253,520 1,130,889 Net realized gain (loss) on investments 1,797, ,373 Amortization of entrance fees 862,886 1,405,786 Expenses related to affiliation with Springpoint Senior Living, Inc. (430,099) - Depreciation and amortization (3,717,381) (3,671,201) Revenues in excess of (less than) expenses and decrease in unrestricted net deficit 777, ,083 Changes in Temporarily Restricted Net Assets Transfer from unrestricted net deficit 175, ,000 Investment income 21,413 14,123 Increase in temporarily restricted net assets 196, ,123 Increase in net deficit $ 973,495 $ 389,206 Net Deficit, Beginning (37,509,561) (37,898,767) Net Deficit, Ending $ (36,536,066) $ (37,509,561) See notes to financial statements 4

7 Statement of Cash Flows Years Ended Cash Flows from Operating Activities Decrease in net deficit $ 973,495 $ 389,206 Adjustments to reconcile (increase) decrease in net deficit to net cash provided by operating activities: Amortization of entrance fees (862,886) (1,405,786) Depreciation and amortization 3,651,108 3,630,582 Loss on disposal of equipment 3,229 26,189 Amortization of original issue discount 3,196 3,193 Amortization of deferred costs 66,273 37,426 Investment income restricted for long-term purposes (21,413) (14,124) Realized and unrealized gains (3,051,070) (1,742,262) Changes in operating assets and liabilities: Accounts receivable, net (19,466) (24,563) Other current assets 337,077 (64,621) Other assets (576,945) (30,800) Accounts payable (173,320) 131,370 Accrued expenses (102,429) (138,936) Due to affiliates 25,167 - Residents' deposits 225,702 17,936 Other liabilities (1,644,498) 216,760 Net cash (used in) provided by operating activities (1,166,780) 1,031,570 Cash Flows from Investing Activities Purchases of property and equipment (1,232,415) (1,732,945) Net purchases (sales) of investments 2,875,011 (1,437,285) Net cash provided by (used in) investing activities 1,642,596 (3,170,230) Cash Flows from Financing Activities Payment of long-term debt (1,205,000) (1,155,000) Net cash received under refundable entrance fee plans 2,140,196 3,958,416 Investment income restricted for long-term purposes 21,413 14,124 Net cash provided by financing activities 956,609 2,817,540 Increase in cash 1,432, ,880 Cash, Beginning 1,402, ,492 Cash, Ending $ 2,834,796 $ 1,402,372 Supplemental Disclosure of Cash Flow Information Interest paid $ 1,801,127 $ 1,868,902 See notes to financial statements 5

8 1. Organization and Summary of Significant Accounting Policies 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 201 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. On July 17, 2013 there was a change of control of Winchester Gardens which resulted in becoming one of thirty-six affiliates of Springpoint Senior Living, Inc. ( SSL ). SSL controls Winchester Gardens through a governing body comprised principally of the same individuals who control all of the affiliated entities of SSL. 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 and Cash Equivalents Winchester Gardens considers all highly liquid financial instruments with maturities of three months or less at date of purchase to be cash equivalents, except for those classified as assets whose use is limited. Investments and Investment Risk Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheet. Investment income (including realized and unrealized gains and losses on investments, interest, and dividends) is included in revenues (less than) 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 based 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 and are managed by 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 accompanying balance sheet could change materially in the near term. 6

9 Assets Whose Use is Limited Assets whose use is limited are recorded at fair value which is determined by reference to quoted market prices. Assets whose use is limited consist of funds held for bond indenture agreements, residents deposits and other limited uses (see Note 2) Accounts Receivable Winchester Gardens establishes an allowance for uncollectible accounts to reduce its receivables to net realizable value. The allowances are estimated by management based on general factors such as payor mix, aging of the receivables and historical collection experience. Accounts are written off through bad debt expense when Winchester Gardens has exhausted all collection efforts and accounts are deemed uncollectible. 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 assets. Deferred Costs Deferred costs include deferred financing costs and acquisition costs. Deferred financing costs represent costs incurred to obtain financing. Deferred financing costs are being amortized using the straight line method, which approximated the effective interest method, over the terms of the indebtedness. At, deferred financing costs, net of accumulated amortization, were $667,427 and $704,852, respectively. Accumulated amortization was $492,461 and $455,036. The acquisition costs include cost related to a change in control of Winchester Gardens from a separate board of directors to a governing body comprised principally of the same individuals who control all of the affiliated entities of SSL. These costs are being amortized using the straight-line method based on the expected lives of the residents. At December 31, 2013 and 2012, acquisition costs, net of accumulated amortization, were $548,097 and $0, respectively. Accumulated amortization was $28,847 and $0. Residents Deposits Residents deposits consist of security deposits for healthcare residents and amounts received from prospective residents who have entered into a residency agreement and are accounted for as refundable deposits in accordance with the terms of the residency agreement. Deposited amounts are held in escrow and deducted from the remaining entrance fee payment which is payable upon occupancy. Prior to establishing residency, these deposits are refundable to the resident upon termination of the residency agreement. After residency is established, the fees are refundable to the resident on a declining balance basis according to the terms of the specific contract. 7

10 Deferred Revenue from Entrance Fees Residents of Winchester Gardens are required to pay a fee to obtain a nontransferable right to lifetime occupancy at Winchester Gardens. Residents enter into different types of continuing care contracts depending on their move-in date and the contract selected. Under the terms of the various contracts, entrance fees may be nonrefundable or partially refundable. Nonrefundable entrance fees are recorded as deferred revenue upon receipt and amortized to income using the straight-line method over the estimated remaining life expectancy of the resident, adjusted at the beginning of each year. Refundable entrance fees are classified as a liability on the balance sheet. Through December 2011, the refundable component of entrance fees received under the refundable plans was amortized to income using a straight-line method over the estimated useful life of the independent living unit. Effective January 2012, Winchester Gardens 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 in the balance sheet. Gross contractual refund obligations at December 31, 2013 were $72,625,376. The refundable entrance fees reported on the balance of $67,317,394 is 2013 is impacted by the portion of the entrance fee earned through amortization and amounts used by those residents under refundable contracts in a higher level of care. Obligation to Provide Future Services Winchester Gardens calculates the present value of the net cost of future service and use of facilities to be provided to current residents and compares that amount with the balance of deferred revenue from entrance fees. If the present value of the net obligation to provide future service and use of facilities (discounted at X%) exceeds the deferred revenue from entrance fees, a liability is recorded with the corresponding charge to income. At December 31, 2013 and 2012, deferred revenue from entrance fees exceeded Winchester Gardens calculation of the present value of the net cost of future services. Therefore, an additional liability for an obligation to provide future services and use of facilities is not required. Residential and Healthcare Facilities Revenues Residential and healthcare facilities revenues are reported at the estimated net realizable amounts from residents and third-party payors. Revenues are recorded at rates established by the respective third party in the period during which the service is provided. Performance Indicator The statement of operations and changes in net deficit includes revenues (less than) in excess of expenses as the performance indicator. Changes in unrestricted net deficit which are excluded from revenues (less than) in excess of 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). Donor-Restricted Gifts 8

11 Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support 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 purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of operations as net assets released from restrictions. 9

12 Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by Winchester Gardens has been limited by donors to a specific time period or purpose. Malpractice Winchester Gardens maintains professional liability coverage through a commercial insurance carrier on a claims-made basis. 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 its exempt income under Section 501(a) of the Internal Revenue Code. Montgomery is also exempt from state and local income taxes under similar statutes. Winchester Gardens 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 Winchester Gardens' federal Exempt Organization Business Income Tax Returns for the years ended December 31, 2012, 2011, and 2010, remain subject to examination by the Internal Revenue Service. 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, 2014, the date the financial statements were issued. 10

13 2. Investments and Assets Limited as to Use Investments consist of the following at December 31: Cash and cash equivalents $ 950,183 $ 2,649,623 U.S. government obligations 1,287,594 2,884,496 Fixed income mutual funds 10,298,739 8,727,331 Equity mutual funds 13,838,351 12,364,729 Total $ 26,374,867 $ 26,626,179 Assets whose use is limited consist of the following at December 31: Cash and cash equivalents $ 1,497,927 $ 1,412,635 U.S. government obligations 3,538,436 3,530,759 Fixed income mutual funds 1,244,214 1,086,305 Equity mutual funds 777, ,789 Other 6,446 23,127 Total 7,064,986 6,637,615 Less current portion 409, ,954 Noncurrent portion of assets limited as to use $ 6,655,900 $ 6,275,661 Assets whose use is limited are held for the following purposes: Bond indenture agreements $ 4,247,601 $ 4,237,533 Ward fund 2,408,299 2,038,128 Other restricted funds 409, ,954 Total assets limited as to use $ 7,064,986 $ 6,637,615 Winchester Gardens is regulated by the New Jersey Department of Community Affairs ( DCA ) pursuant to the Continuing Care Retirement Community Regulation and Financial Disclosures Act (the Act ). The Act requires, among other things, that Winchester Gardens establish and maintain a liquid reserve fund which is calculated as the greater of the following years debt service or 15% of the projected operating expenses, excluding depreciation and amortization and expenses related to private pay residents. Funds held under bond indenture agreements can be used to satisfy the requirement. Winchester Gardens has complied with those requirements at. 11

14 3. Fair Value of Financial Instruments Winchester Gardens measures its investments and assets whose use is limited 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 Montgomery 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. 12

15 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 December 31, 2013 and 2012: Carrying Value 2013 Quoted Prices in Active Markets Fair Value (Level 1) Other Observable Inputs (Level 2) Reported at fair value Cash and cash equivalents $ 2,448,110 $ 2,448,110 $ 2,448,110 $ - U.S. government obligations 4,826,030 4,826,030 4,826,030 Fixed income mutual funds 11,542,953 11,542,953 11,542,953 - Equity mutual funds 14,616,314 14,616,314 14,616,314 - Other 6,446 6,446 6,446 - Total $ 33,439,853 $ 33,439,853 $ 28,613,823 $ 4,826,030 Disclosed at fair value: Cash and cash equivalents $ 2,834,797 $ 2,834,797 $ 2,834,797 $ - Long-term debt $ 35,865,000 $ 35,865,000 $ 35,865,000 $ - The assets are included on the balance sheet at December 31, 2013 as follows: 2013 Current portion of assets whose use is limited $ 409,086 Investments 26,374,867 Assets whose use is limited 6,655,900 Total $ 33,439,853 13

16 Carrying Value 2012 Quoted Prices in Active Markets Fair Value (Level 1) Other Observable Inputs (Level 2) Reported at fair value Cash and cash equivalents $ 4,062,258 $ 4,062,258 $ 4,062,258 $ - U.S. government obligations 6,415,255 6,415,255-6,415,255 Fixed income mutual funds 9,813,636 9,813,636 9,813,636 - Equity mutual funds 12,949,518 12,949,518 12,949,518 - Other 23,127 23,127 23,127 - Total $ 33,263,794 $ 33,263,794 $ 28,848,539 $ 6,415,255 Disclosed at fair value: Cash and cash equivalents $ 1,402,372 $ 1,402,372 $ 1,402,372 $ - Long-term debt $ 37,070,000 $ 37,070,000 $ 37,070,000 $ - The assets are included on the balance sheet at December 31, 2012 as follows: 2012 Current portion of assets whose use is limited $ 361,954 Investments 26,626,179 Assets whose use is limited 6,275,661 Total $ 33,263,794 Financial Instruments The carrying amount of cash and cash equivalents approximates fair value at December 31, 2013 and 2012 due to the short-term nature of these instruments. 14

17 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 U.S. government obligations, mutual funds 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. 4. Property and Equipment Property and equipment consist of the following at December 31: Land and land improvements $ 2,184,775 $ 1,947,296 Buildings and improvements 76,201,180 74,958,754 Furniture and fixtures 4,778,529 4,552,412 Equipment 1,398,944 1,347,821 Total 84,563,427 82,806,283 Less accumulated depreciation 47,850,138 44,330,494 Construction-in-progress 25, ,686 Property and equipment, net $ 36,738,553 $ 39,160,475 Depreciation expense was $3,651,108 and $3,630,582 for the years ended December 31, 2013 and 2012, respectively. During 2012 certain property and equipment was disposed of, reducing accumulated depreciation by $131, Transactions with Affiliates Amounts due (to) from other affiliates consist of the following at : Springpoint Senior Living, Inc. $ 139,594 $ - Springpoint at Montgomery, Inc. (114,427) - Total $ 25,167 $ - The affiliates periodically advance funds for shared operating costs. Interest is not charged and there are no fixed repayment terms on these advances. The amounts are settled monthly, or as funds become available. The balance due from Springpoint at Montgomery was paid in full in January

18 SSL pays certain expenses on behalf of Winchester Gardens. Winchester Gardens reimburses SSL for all amounts paid by SSL on its behalf. 16

19 6. 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 $ 28,535,000 $ 29,435,000 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 (.40% at December 31, 2013), determined weekly by prevailing market conditions, a letter of credit fee (.80% per annum), and a remarketing fee (.085% per annum) 7,330,000 7,635,000 Total 35,865,000 37,070,000 Less: Unamortized original issue discount 56,949 60,145 Current maturities 1,260,000 1,205,000 Long-term debt $ 34,548,051 $ 35,804,855 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. 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 28, The loan agreement requires that the letter-of-credit be maintained through maturity of the 2004B Bonds. Scheduled principal payments for the next five years and thereafter are as follows: 2004A Bonds 2004B Bonds Total 2014 $ 945,000 $ 315,000 $ 1,260, , ,000 1,320, ,060, ,000 1,390, ,120, ,000 1,460, ,185, ,000 1,535,000 17

20 Thereafter 2,025,000 26,875,000 28,900,000 Total $ 7,330,000 $ 28,535,000 $ 35,865,000 Under the terms of the above agreements, Winchester Gardens is required to maintain certain financial ratios and to be in compliance with other restrictive covenants. Winchester Gardens was in compliance with all financial covenants at. 7. Retirement Plans Winchester Gardens sponsors a defined contribution 401(k) retirement plan. Winchester Gardens contributions to the plan were approximately $131,963 in 2013 and $116,000 in Winchester Gardens sponsored an executive retirement plan (the Plan ) for the benefit of Winchester Gardens Chief Executive Officer ( CEO ). The Plan was 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. As a result of a restructuring related to the change in control of Winchester Gardens the CEO position was eliminated and the plan was terminated. Funds under the plan in the amount of $1,906,806 were fully vested and distributed in August The accrued liability at was $0 and $1,644,498, respectively, and is included in other liabilities in the balance sheet. 8. Contingencies Senior Living Services Industry The senior living services industry is subject to numerous laws, regulations, and administrative directives of federal, state, and local governments and agencies. Compliance with these laws, regulations, and administrative directives is subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. Government activity has continued to increase with respect to investigations and allegations concerning possible violations by healthcare providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties as well as significant repayments for resident services previously billed. Management is not aware of any material incidents of noncompliance. 9. 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. 18

21 Winchester Gardens has complied with all funding requirements. The Ward Fund had a balance of $2,408,299 and $2,038,128 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 $2,077,135 and $1,880,722 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. 19

22 10. 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 that it is not subject to any significant credit risk on its cash accounts. Winchester Gardens grants credit without collateral to its residents, primarily related to providing residential and healthcare related services. 11. 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 $ 18,735,591 $ 18,314,124 Administrative 3,887,995 3,544,286 Total $ 22,623,586 $ 21,858,409 20