MIRIAM OSBORN MEMORIAL HOME ASSOCIATION AND STERLING HOME CARE, INC. COMBINED FINANCIAL STATEMENTS AND AUDITOR S REPORT DECEMBER 31, 2013 AND 2012

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1 MIRIAM OSBORN MEMORIAL HOME ASSOCIATION COMBINED FINANCIAL STATEMENTS AND AUDITOR S REPORT

2 TABLE OF CONTENTS Independent Auditor s Report Exhibit A - Combined Balance Sheets B - Combined Statements of Operations C - Combined Statements of Cash Flows Notes to Combined Financial Statements Schedule 1 - Schedule of Other Revenues 2 - Schedule of Resident and Client Services and Facilities and Property Expenses 3 - Schedule of Administration, Marketing and Finance, and Other Expenses 4 - Schedule of Employee Benefits

3 Independent Auditor s Report The Board of Trustees Miriam Osborn Memorial Home Association Report on the Combined Financial Statements We have audited the accompanying combined financial statements of Miriam Osborn Memorial Home Association, which comprise the combined balance sheets as of December 31, 2013 and 2012 and the related combined statements of operations and cash flows for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these 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 combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 combined financial statements.

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Miriam Osborn Memorial Home Association and Sterling Home Care, Inc. as of December 31, 2013 and 2012, and the results of their operations, changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the combined financial statements as a whole. The information contained in Schedules 1 through 4 is presented for purposes of additional analysis and is not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole. Emphasis of Matter As discussed in Note 13 to the financial statements, Miriam Osborn Memorial Home Association adopted new accounting guidance in accordance with ASC Topic , as amended by Accounting Standards Update ( ASU ) Our opinion is not modified with respect to this matter. 2. April 28, 2014

5 EXHIBIT A MIRIAM OSBORN MEMORIAL HOME ASSOCIATION COMBINED BALANCE SHEETS ASSETS Current assets Cash and cash equivalents $ 4,044,989 $ 3,270,450 Cash and marketable securities segregated for resident deposits 13,042 22,991 Investments (Note 2) 48,741,672 42,639,207 Accounts receivable (net of allowances of $208,000 for 2013 and $158,000 for 2012) 2,259,717 2,059,521 Other receivables 105, ,744 Waiting list deposits held in escrow 1,069, ,688 Prepaid expenses 746, ,991 Cash surrender value of life insurance policies 1,776,821 1,480,439 Total current assets 58,757,682 51,332,031 Long-term assets Escrow funds (Note 4) 5,686,569 9,340,381 Fixed assets - net (Note 3) 115,318, ,684,562 Bond issuance costs 960, ,452 Total long-term assets 121,965, ,995,395 Total assets $ 180,723,089 $ 173,327,426

6 EXHIBIT A -2- COMBINED BALANCE SHEETS LIABILITIES AND NET ASSETS Current liabilities Accounts payable and accrued expenses $ 4,782,324 $ 5,020,573 Accrued compensation payable (Note 8) 3,863,374 3,101,695 Current portion of mortgages payable (Note 4) 1,755,000 1,390,000 Current portion of accrued pension (Note 5) 1,500,000 Current portion of accrued postretirement benefits other than pension (Note 6) 66,512 69,779 Resident deposits 13,042 22,991 Waiting list deposits 1,069, ,688 Total current liabilities 11,549,812 12,006,726 Long-term liabilities Refundable entrance fees (Notes 1 and 13) 139,142, ,575,086 Mortgages payable (Note 4) 41,970,000 43,725,000 Premium on bond payable (Note 4) 1,983,114 2,052,697 Long-term portion of accrued pension (Note 5) 3,157,345 11,374,682 Long-term portion of accrued postretirement benefits other than pension (Note 6) 729, ,048 Total liabilities 198,532, ,621,239 Unrestricted net assets (Exhibit B) (17,809,746) (29,293,813) Total liabilities and net assets $ 180,723,089 $ 173,327,426 See independent auditor's report. The accompanying notes are an integral part of these statements.

7 EXHIBIT B COMBINED STATEMENTS OF OPERATIONS YEARS ENDED Revenues Resident and client fees $ 46,167,818 $ 42,356,867 Bad debt expense (89,367) (103,628) Net resident and client fees 46,078,451 42,253,239 Interest and dividends (Note 2) 223, ,827 Contribution and trust income 286, ,147 Other (Schedule 1) 747, ,597 Total revenues 47,336,168 43,690,810 Expenses Resident and client services (Schedule 2) 29,023,199 26,456,030 Facilities and property (Schedule 2) 4,264,190 4,388,494 Administration, marketing and finance (Schedule 3) 5,106,005 4,499,497 Other (Schedule 3) 4,019,457 3,862,762 Depreciation and amortization of bond issuance costs 7,050,382 6,274,348 Interest 1,690,945 2,502,061 Total expenses (Note 10) 51,154,178 47,983,192 Operating loss (3,818,010) (4,292,382) Nonoperating Realized and unrealized gains on investments (Note 2) 8,082,049 3,677,785 Increase in cash surrender value of life insurance policies 245, ,778 Loss on bond extinguishment and unamortized issuance costs (Note 4) (500,159) Change in net assets before other changes 4,509,744 (959,978) Cumulative effect of change in accounting policy (Note 13) (31,917,577) Adjustment to minimum pension and postretirement benefit liability (Notes 5 and 6) 6,974,323 (2,000,749) Change in net assets (Exhibit C) 11,484,067 (34,878,304) Net assets - beginning of year (29,293,813) 5,584,491 Net assets - end of year (Exhibit A) $ (17,809,746) $ (29,293,813) See independent auditor's report. The accompanying notes are an integral part of these statements.

8 EXHIBIT C MIRIAM OSBORN MEMORIAL HOME ASSOCIATION COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED Cash flows from operating activities Change in net assets (Exhibit B) $ 11,484,067 $ (34,878,304) Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation 7,016,278 6,257,900 Amortization of bond issuance costs 34,104 16,448 Amortization of bond premium (69,583) (34,791) Loss on bond extinguishment and unamortized issuance costs 500,159 Cumulative effect of change in accounting policy 31,917,577 Realized and unrealized gains on investments (8,082,049) (3,677,785) Increase in cash surrender value of life insurance policies (245,705) (154,778) Decrease (increase) in assets Accounts receivable (200,196) (305,296) Other receivables 59,063 43,549 Prepaid expenses 46, ,357 Increase (decrease) in liabilities Accounts payable, accrued expenses and compensation payable 523,430 2,115,931 Accrued pension and postretirement benefits (9,877,768) 444,597 Net cash provided by operating activities 688,432 2,556,564 Cash flows from investing activities Investment in life insurance policies (50,677) 1,258 Proceeds from sales of investments 10,548,428 14,652,733 Purchases of investments (8,568,844) (17,343,385) Cash paid for capital acquisitions (10,650,056) (8,706,002) Decrease (increase) of escrow funds 3,653,812 (3,812,240) Net cash used by investing activities (5,067,337) (15,207,636)

9 EXHIBIT C -2- COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED Cash flows from financing activities Refundable entrance fee deposits $ 6,567,594 $ 6,222,266 Additional mortgage 7,170,000 Repayment of mortgage (1,390,000) Bond issuance cost (24,150) (986,900) DASNY bond premium 2,087,488 Net cash provided by financing activities 5,153,444 14,492,854 Net change in cash and cash equivalents 774,539 1,841,782 Cash and cash equivalents - beginning of year 3,270,450 1,428,668 Cash and cash equivalents - end of year $ 4,044,989 $ 3,270,450 Supplemental disclosure of cash flow information Cash paid during the year for interest $ 1,760,528 $ 2,536,852 See independent auditor's report. The accompanying notes are an integral part of these statements.

10 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Miriam Osborn Memorial Home Association (the Association ) is a not-forprofit charitable organization incorporated in New York State in The Association operates a retirement facility in Westchester County, New York, which consists of 188 entrance fee independent living units, 97 assisted living units and/or independent apartments, an 84-bed skilled nursing home and 13 memory care units were completed in The Association derives its revenues primarily from fees charged to its residents. Sterling Home Care, Inc. ( Sterling Home Care ) was organized as a charitable organization to provide home care services. Sterling Home Care is a membership organization. Sterling Home Care derives its revenues from client fees. In 2006, the Board approved Sterling Home Care, Inc. to do business as Osborn Home Care. The Association and Sterling Home Care, Inc. are tax-exempt organizations pursuant to Section 501(c)(3) of the Internal Revenue Code and, accordingly, are not subject to income taxes. On April 6, 2013, The Osborn Network was incorporated as a not-for-profit organization. All board members of The Miriam Osborn Memorial Home Association and Sterling Home Care, Inc. are appointed by The Osborn Network. Prior to that date, Miriam Osborn Memorial Home Association was the sole member of Sterling Home Care, Inc. The Osborn Network is in the process of filing an application with the Internal Revenue Service to be classified as tax-exempt. The accompanying combined financial statements include the Association and Sterling Home Care. Basis of financial statements - The financial statements are prepared on the accrual basis of accounting. Principles of combination - All material intercompany transactions and balances are eliminated upon combination. 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

11 2. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and cash equivalents - Cash and cash equivalents include highly liquid investments with original maturities, when acquired, of three months or less. Investments - Investments are recorded at fair value. The Association invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term, based upon the markets fluctuations, and that such changes could materially affect the Association s financial statements. Accounts receivable - Accounts receivable are recorded when services are billed. Interest is not charged on outstanding receivables. Allowance for doubtful accounts - The Association and Sterling Home Care determine whether an allowance for uncollectibles should be provided for accounts receivable. Such estimates are based on management s assessment of the aged basis of its sources, current economic conditions, subsequent receipts and historical information. Accounts receivable are written off against the allowance for doubtful accounts when all reasonable collection efforts have been exhausted. Waiting list deposits held in escrow - Waiting list deposits held in cash escrow accounts are held on behalf of future residents. Cash surrender value of life insurance policies - The cash surrender value of life insurance policies represents the liquid value of insurance policies at year end. Fixed assets - Fixed assets whose useful lives exceed one year and whose cost exceeds $500 are capitalized. Depreciation of fixed assets is recorded on the straight-line method over the estimated useful lives of the assets. Resident and client service fees - charity care - The Association and Sterling Home Care charge residents and clients a daily or monthly rate for their care and related services. Resident and client service fees net of contractual allowances and discounts of $46,167,818 and $42,356,867 include third-party payors of $5,047,397 and $4,701,103 and self pay of $41,120,421 and $37,655,764, for the years ended December 31, 2013 and 2012, respectively. Charity care not billed or collected at market rates was $1,155,240 and $1,571,865 in 2013 and 2012, respectively. The estimated cost of providing charity care was $1,251,127 in 2013 and $1,721,002 in 2012.

12 3. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Bond issuance costs and bond premium - Bond issuance costs and bond premium are amortized on the straight-line basis over the term of the related debt. The amortization on the bond premium is netted against interest expense. Contributions - Contributions, including unconditional promises to give, are recorded at fair value at the date the contribution is received. The gifts are recorded 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 to unrestricted net assets and reported in the statements of operations as net assets released from restrictions. Rental income - Rental income is generated from rent on an investment in real estate. Refundable entrance fees - The Association charges a refundable entrance fee to a defined section of the Association s Sterling Park at The Osborn units pursuant to a schedule, by apartment. The Osborn is obligated to refund the full amount of the original entrance fee to the extent the unit is vacated and released and a replacement entrance fee is collected. Operating revenues and expenses - Operating revenues and expenses include all income and expenses except gains and losses on investment transactions and adjustment to minimum pension and postretirement benefits, change in cash surrender of value of life insurance policies, loss on bond extinguishment and unamortized issuance costs, and cumulative effect of change in accounting policy. Functional expenses - The costs of providing the Association and Sterling Home Care s services have been summarized on a functional basis. Accordingly, certain costs have been allocated between the programs and supporting services benefited.

13 4. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value Measurements Fair Value Measurements establishes a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below. Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Association has the ability to access. Level 2 inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 as compared to those used at December 31, Money market funds - Valued at the net asset value (NAV) reported on the active market on which the individual securities are traded. Equity funds - Valued either at the NAV of shares held at year end or valued based on comparable securities. Hedge funds and diversified investment partnership - Valued at the NAV of shares held at year end using similar investments in comparable markets or as determined by investment managers.

14 5. NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value Measurements (continued) The following criteria have been used to determine fair value by the investment managers: (a) Performing comparisons with prices of comparable or similar securities; (b) obtaining valuation-related information from issuers; and/or (c) other analytical data relating to the investment and using other available indications of value. However, because of the inherent uncertainty of valuation, the estimated fair values for the aforementioned securities and interests may differ from the values that would have been used had a ready market for the investments existed, and the differences could be material. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Association believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Subsequent events - Subsequent events have been evaluated through April 28, 2014, which is the date the report was issued. Uncertainty in income taxes - The Association and Sterling Home Care have determined that there are no material uncertain tax positions that require recognition or disclosure in the financial statements. Periods ending December 31, 2010 and subsequent remain subject to examination by applicable taxing authorities.

15 6. NOTE 2 - INVESTMENTS 2013 Level 1 Level 2 Level 3 Total Money market funds $ 6,020,213 $ 6,020,213 Equity funds - domestic 21,253,830 21,253,830 Equity funds - international $ 5,201,023 5,201,023 Hedge funds - multi-strategy 14,191,851 $ 2,074,755 16,266,606 Total $ 27,274,043 $ 19,392,874 $ 2,074,755 $ 48,741, Level 1 Level 2 Level 3 Total Money market funds $ 5,286,122 $ 5,286,122 Equity funds - domestic 17,164,011 17,164,011 Equity funds - international $ 6,059,080 6,059,080 Hedge funds - multi-strategy 12,409,739 $ 1,720,255 14,129,994 Total $ 22,450,133 $ 18,468,819 $ 1,720,255 $ 42,639, (Level 3) 2012 (Level 3) Beginning balance $ 1,720,255 $ 1,553,064 Total unrealized gains relating to assets still held at the reporting date 354, ,191 Ending balance $ 2,074,755 $ 1,720,255

16 7. NOTE 2 - INVESTMENTS (continued) The hedge funds are multi-strategy. As such, they are designed to produce a consistent return with volatility comparable to a diversified fixed-income portfolio. There are no unfunded commitments. The funds have various redemption requirements as follows: Amount Amount Redemption Frequency Redemption Period Notice $ 801,496 $ 569,215 Quarterly 60 days 291, ,640 Quarterly 90 days 696, ,158 Quarterly 45 days 285, ,242 Anniversary 60 days $ 2,074,755 $ 1,720,255 Investment income earned is as follows: Interest and dividends on unrestricted investments $ 217,196 $ 378,327 Escrow funds 6,142 7,500 Total interest and dividends $ 223,338 $ 385,827 Realized and unrealized gains on investments $ 8,082,049 $ 3,677,785

17 8. NOTE 3 - FIXED ASSETS Estimated Useful Lives Land - at nominal value $ 1 $ 1 Construction in progress 60,783 1,679,494 Land improvements 1,681,759 1,281, years Building and improvements 162,539, ,625, years Fixed equipment 4,663,774 4,331, years Movable equipment 6,167,412 4,536,968 5 years Furniture and fixtures 19,175,114 14,201, years Vehicles 604, ,347 5 years 194,893, ,243,198 Less accumulated depreciation (79,574,914) (72,558,636) $ 115,318,340 $ 111,684,562 NOTE 4 - MORTGAGES PAYABLE In September 2012, $45,115,000 of Series 2012 bonds were issued by The Dormitory Authority of the State of New York (the Authority) to refinance the outstanding debt as well as to finance refurbishing projects. The Series 2012 bonds bear interest at annual fixed rates of 1.20% to 5.00%. An escrow fund has been established to service the semiannual bond payments by the bond holders. The Osborn will make annual principal payments through July In conjunction with the issuance of the above bonds, the Association has entered into a loan agreement with the Authority. The obligation is secured by a mortgage on the real property and security in certain fixtures, furnishings and equipment. The required payments are as follows: Mortgage Principal Mortgage Interest Total 2014 $ 1,755,000 $ 1,749,025 $ 3,504, ,775,000 1,727,388 3,502, ,810,000 1,693,313 3,503, ,845,000 1,659,456 3,504, ,890,000 1,615,075 3,505,075 Thereafter 34,650,000 15,126,291 49,776,291 $ 43,725,000 $ 23,570,548 $ 67,295,548

18 9. NOTE 4 - MORTGAGES PAYABLE (continued) Escrow funds held in cash accounts are as follows: Debt service reserve $ 2,927,700 $ 2,956,656 Debt service 1,783, ,105 Construction fund 975,328 5,389,620 $ 5,686,569 $ 9,340,381 As a result of the refinancing, $500,159 of unamortized issuance costs relating to the previous mortgage were written off. Prior to the refinancing discussed above, $44,965,000 of Series 2000B bonds were issued by the Authority in March The Series 2000B bonds bear interest at annual fixed rates of 5.3% to 6.375%. An escrow fund was established to service the semiannual bond payments. Series B were secured by a municipal bond issuance policy from American Capital Access Financial Guaranty Corporation (ACA). The 2000B bonds were recalled in September In conjunction with the issuance of the above bonds, the Association had entered into a loan agreement with the Authority and ACA. The obligation was secured by a mortgage on the real property and security in certain fixtures, furnishings and equipment. NOTE 5 - DEFINED BENEFIT PENSION PLAN Miriam Osborn Memorial Home Association and Sterling Home Care have a noncontributory defined benefit pension plan which covers substantially all employees. Effective June 30, 2011, the plan was frozen and benefits ceased to accrue as of that date.

19 10. NOTE 5 - DEFINED BENEFIT PENSION PLAN (continued) The following table sets forth the net periodic pension cost and the plan s funded status as of December 31, 2013 and 2012: Projected benefit obligation $ (33,050,706) $ (37,104,158) Plan assets at fair value 29,893,361 24,229,476 Funded status $ (3,157,345) $ (12,874,682) Pension cost $ 789,737 $ 825,723 Employer contributions 3,650,000 2,324,834 Benefits paid 1,188,513 2,074,338 Weighted average assumptions used for net pension cost: Discount rate 3.9% 4.5% Expected return on plan assets 5. 5% 5. 5% Rate of compensation increase N/A N/A Weighted average assumptions used for pension obligations: Discount rate 4.9% 3.9% Rate of compensation increase N/A N/A

20 11. NOTE 5 - DEFINED BENEFIT PENSION PLAN (continued) Additional Disclosure Information 1. Expected benefit payments (a) During fiscal year ending December 31, 2014 $ 1,637,049 (b) During fiscal year ending December 31, ,753,975 (c) During fiscal year ending December 31, ,774,455 (d) During fiscal year ending December 31, ,838,401 (e) During fiscal year ending December 31, ,914,687 (f) During fiscal years ending December 31, 2019 through December 31, ,225, Employer contributions required to be paid during fiscal year ending December 31, Expected amortization amounts during fiscal year ending December 31, 2014 (a) Amortization of net prior service credit - (b) Amortization of net loss 403,641 Plan Assets The fair values of the pension plan assets, by asset category, are as follows: 2013 Asset Category Level 1 Level 2 Total Money market funds $ 9,444,551 $ 9,444,551 Diversified investment partnership $ 20,448,810 20,448,810 Total $ 9,444,551 $ 20,448,810 $ 29,893,361

21 12. NOTE 5 - DEFINED BENEFIT PENSION PLAN (continued) As of December 31, 2013 and 2012, there are no unfunded commitments Asset Category Level 1 Level 2 Total Money market funds $ 7,007,332 $ 7,007,332 Diversified investment partnership $ 17,222,144 17,222,144 Total $ 7,007,332 $ 17,222,144 $ 24,229,476 NOTE 6 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLAN The Association provides a limited postretirement medical benefit plan for approximately 40 current employees. The following table sets forth the plan s combined unfunded status and amounts recognized in the balance sheets at December 31, 2013 and 2012: Components of Net Periodic Cost for the Years Ending December 31, 2013 and 2012 Service cost $ 7,098 $ 7,997 Interest cost 35,929 40,260 Net gain amortization (27,854) (45,084) Net periodic postretirement benefit cost (income) $ 15,173 $ 3,173

22 13. NOTE 6 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLAN (continued) Change in Prepaid (Accrued) Benefit Cost Accrued benefit cost at beginning of fiscal year $ (1,184,928) $ (1,241,969) Net periodic benefit income (cost) for fiscal year (15,173) (3,173) Employer contributions paid during fiscal year 58,355 60,214 Accrued benefit cost at fiscal year end (1,141,746) (1,184,928) Additional asset 345, ,101 Net balance sheet liability $ (796,396) $ (956,827) Change in accumulated postretirement benefit obligation (APBO) APBO at prior measurement date $ 956,827 $ 927,824 Service cost 7,098 7,997 Interest cost 35,929 40,260 Actuarial loss (gain) (145,103) 40,960 Benefits paid (58,355) (60,214) APBO at current measurement date $ 796,396 $ 956,827 Additional Disclosure Information Expected benefit payments (a) During fiscal year ending December 31, 2014 $ 66,512 (b) During fiscal year ending December 31, ,233 (c) During fiscal year ending December 31, ,146 (d) During fiscal year ending December 31, ,394 (e) During fiscal year ending December 31, ,402 (f) During fiscal years ending December 31, 2019 through December 31, ,311

23 14. NOTE 6 - POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLAN (continued) Development of +1%/-1% Trend Sensitivities 2013 Trend Baseline (+1%) Trend (-1%) Service cost plus interest cost $ 43,027 $ 44,224 $ 41,841 Assumed trend is 7.5% for 2013 reducing by.5% per year until the ultimate trend in 2018 of 5%. Assumptions and Measurement Dates Benefit obligations Discount rate 4.90% 3.90% Measurement date 12/31/13 12/31/12 Census data snapshot date 01/01/14 01/01/13 Net periodic postretirement benefit cost Discount rate 3.90% 4.50% Census data snapshot date 01/01/14 01/01/13 The estimated payments for 2014 are $66,512. NOTE 7 - DEFINED CONTRIBUTION PENSION PLAN In conjunction with the freezing of benefits under the defined benefit plan as of June 30, 2011, the Association formed a defined contribution pension plan covering all employees 21 years and older with at least 90 days of employment. The Association contributes 3% of all employees salaries and matches 50% of employee contributions up to 1.5% of salary. Employees who were vested in the defined benefit plan are automatically vested in the defined contribution plan. All other employees become vested after 3 years of full-time (1,000 hours) service. The defined contribution pension expense for the year ended December 31, 2013 was $995,249 and for the year ended December 31, 2012 was $908,041.

24 15. NOTE 8 - ACCRUED COMPENSATION PAYABLE Accrued compensation payable consists of accrued vacation, wages and deferred compensation. As of December 31, 2013 and 2012, vacation and accrued wages were $961,099 and $750,025, respectively. A deferred compensation plan was established to provide deferred compensation to certain key personnel. The Association has substantially funded this liability with the cash value of life insurance policies. The Association deposited into the fund, net of premiums, $50,677 in 2013 and ($1,258) in The liability as of December 31, 2013 and 2012 was $2,902,275 and $2,351,670, respectively, which is reflected in accrued compensation payable. NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments as reported on the balance sheets of the Association approximate their fair value.

25 16. NOTE 10 - FUNCTIONAL EXPENSES The Association and Sterling Home Care provide resident care services. Expenses related to providing these services are as follows: Resident care services Resident service (Schedule 2) $ 29,023,199 $ 26,456,030 Facility and property (Schedule 2) 4,264,190 4,388,494 Depreciation and amortization 7,050,382 6,274,348 Interest 1,690,945 2,502,061 Real estate taxes 1,944,516 1,871,405 Total resident care services 43,973,232 41,492,338 Management and general Administration, marketing and finance (Schedule 3) 5,106,005 4,499,497 Investment management fees 364, ,876 Insurance costs - fire, liability and other 493, ,532 Legal fees 242, ,786 Fees and maintenance 309, ,168 Cash receipts assessment 666, ,995 Total management and general 7,180,946 6,490,854 Total $ 51,154,178 $ 47,983,192 NOTE 11 - REAL ESTATE TAXES The Association settled a dispute over its real estate taxes. The settlement covers the assessment periods of 2007 through 2015.

26 17. NOTE 12 - CONTINGENCIES - MEDICARE REIMBURSEMENT Medicare Part A services are reimbursed under a Prospective Payment System (PPS), which is a case mix system of mutually exclusive groups with varying prices. The groupings are based on patient assessment data, which is subject to audit. The Association has filed cost reports with Centers for Medicare and Medicaid Services (CMS) in connection with the Medicare program. These reports are subject to audit and retroactive adjustments. Final settlements have been received through All settlements are recorded in the period when received. No provision has been made for possible adjustments for 2013, since management does not anticipate any material adjustments based on the cost reports and in any event rates are prospectively set under PPS without regard to the Association s actual reported costs. In addition, CMS has the right to audit billings and related documentation. NOTE 13 - CHANGE IN ACCOUNTING POLICY The recognition of the liability for refundable entrance fees has been changed in accordance with ASC topic , as amended by ASU Previously, refundable entrance fees were recorded as deferred revenue and amortized as income over the remaining estimated life of the facility. Based on the revised accounting policy, the cumulative adjustment to the liability for refundable entrance fees as of January 1, 2012 was $31,917,577. In addition, the 2012 amortization eliminated was $3,622,852, for a net cumulative effect of $35,540,429.

27 SCHEDULE 1 SCHEDULE OF OTHER REVENUES YEARS ENDED Rental income $ 67,342 $ 68,470 Other resident services income 542, ,208 Other revenue 137, ,919 Total other revenues (Exhibit B) $ 747,388 $ 812,597 See independent auditor's report.

28 SCHEDULE 2 SCHEDULE OF RESIDENT AND CLIENT SERVICES AND FACILITIES AND PROPERTY EXPENSES YEARS ENDED Resident and client services Salaries $ 17,787,002 $ 15,974,066 Employee benefits 7,414,080 6,979,219 Food 1,212,739 1,132,725 Medical fees, drugs and supplies 1,961,157 1,787,203 Office and other expenses 339, ,887 Housekeeping and kitchen supplies 276, ,542 Furniture and furnishings 32,121 25,388 Total resident and client services (Exhibit B) $ 29,023,199 $ 26,456,030 Facilities and property Salaries $ 1,069,083 $ 1,062,712 Employee benefits 445, ,309 Utilities 1,376,099 1,594,073 Maintenance and security 1,373,387 1,267,400 Total facilities and property (Exhibit B) $ 4,264,190 $ 4,388,494 See independent auditor's report.

29 SCHEDULE 3 SCHEDULE OF ADMINISTRATION, MARKETING AND FINANCE, AND OTHER EXPENSES YEARS ENDED Administration, marketing and finance Salaries $ 2,594,283 $ 2,253,259 Employee benefits 1,081, ,470 Office and other expenses 1,430,358 1,261,768 Total administration, marketing and finance expenses (Exhibit B) $ 5,106,005 $ 4,499,497 Other expenses Investment management fees $ 364,000 $ 309,876 Insurance costs - fire, liability and other 493, ,532 Legal fees 242, ,786 Real estate taxes (Note 11) 1,944,516 1,871,405 Fees and maintenance 309, ,168 Cash receipts assessment 666, ,995 Total other expenses (Exhibit B) $ 4,019,457 $ 3,862,762 See independent auditor's report.

30 SCHEDULE 4 SCHEDULE OF EMPLOYEE BENEFITS YEARS ENDED Employee benefits Pension and deferred compensation $ 2,335,590 $ 2,158,040 Payroll taxes 1,631,866 1,503,812 Workers' compensation 989, ,578 Hospitalization, major medical and disability 3,538,409 3,567,057 Insurance costs - employee life 70,297 68,458 Employee meal plan 325, ,103 Employee transportation 50,290 48,950 Total employee benefits $ 8,941,065 $ 8,427,998 See independent auditor's report.