OTTERBEIN HOMES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2013 AND 2012

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1 CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED

2 TABLE OF CONTENTS YEARS ENDED INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED STATEMENTS OF UNRESTRICTED ACTIVITIES 5 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS 6 CONSOLIDATED STATEMENTS OF CASH FLOWS 7 NOTES TO FINANCIAL STATEMENTS 9 CONSOLIDATING INFORMATION CONSOLIDATING BALANCE SHEETS 34 CONSOLIDATING STATEMENTS OF UNRESTRICTED ACTIVITIES 38 CONSOLIDATING STATEMENTS OF CHANGES IN NET ASSETS 40

3 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS' REPORT Board of Trustees Otterbein Homes Lebanon, Ohio We have audited the accompanying consolidated financial statements of Otterbein Homes, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of unrestricted activities, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. An independent member of Nexia International (1)

4 Board of Trustees Otterbein Homes Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Otterbein Homes as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating balance sheet, statement of unrestricted activity and statement of changes in net assets is presented for purposes of additional analysis and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 consolidated financial statements as a whole. St. Louis, Missouri April 21, 2014 CliftonLarsonAllen LLP (2)

5 CONSOLIDATED BALANCE SHEETS ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 3,239,879 $ 2,765,686 Accounts Receivable 7,920,271 7,265,363 Contributions Receivable 202,821 - Investments 88,671,254 76,518,231 Supplies and Prepaids 734, ,021 Current Portion of Assets Limited as to Use 3,557,281 2,063,805 Total Current Assets 104,325,894 89,241,106 ASSETS LIMITED AS TO USE Unexpended Bond Proceeds and Sinking Funds 3,489,648 2,002,538 Resident Funds 67,633 61,267 Total Assets Limited as to Use 3,557,281 2,063,805 Less: Current Portion Shown Above 3,557,281 2,063,805 Total Assets Limited as to Use (Net of Current Portion) - - PROPERTY AND EQUIPMENT Buildings 181,343, ,978,497 Land Improvements 17,356,982 16,920,219 Equipment 39,774,978 37,878,525 Land 9,068,009 7,049,761 Construction in Progress 9,338,947 12,530,906 Total 256,882, ,357,908 Less: Accumulated Depreciation 112,932, ,537,848 Total Property and Equipment (at Depreciated Cost) 143,949, ,820,060 OTHER ASSETS Investments 1,068,769 1,115,756 Investments - Restricted 19,637,259 18,452,557 Contributions Receivable 844, ,661 Notes Receivable 10,156 15,251 Other Property, Rights and Trusts 786, ,338 Land and Property Available For Sale 2,525,756 3,036,188 Unamortized Finance Costs, Net 1,014,956 1,530,730 Total Other Assets 25,888,073 25,461,481 Total Assets $ 274,163,885 $ 252,522,647 See accompanying Notes to Consolidated Financial Statements. (3)

6 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 5,046,140 $ 10,312,195 Accounts Payable 4,021,562 3,763,745 Accrued Payroll and Benefits 4,390,193 4,384,556 Accrued Expenses 4,127,215 3,218,904 Resident Advance Deposits 742, ,267 Resident Funds 67,633 61,267 Current Portion of Refundable Advance Deposits 845, ,019 Current Portion of Split Interest Agreements 249, ,937 Total Current Liabilities 19,490,263 23,536,890 LONG-TERM LIABILITIES Long-Term Debt 71,839,435 67,223,225 Accrued Pension Benefits 10,647,982 17,326,983 Refundable Advance Deposits 16,457,369 11,531,175 Split-Interest Agreements 1,672,903 1,860,051 Deferred Cost of Interest Rate Swap 569,872 1,697,364 Total Long-Term Liabilities 101,187,561 99,638,798 DEFERRED REVENUE Deferred Refundable Advance Deposits 6,906,457 8,038,878 Total Deferred Revenue 6,906,457 8,038,878 Total Liabilities 127,584, ,214,566 NET ASSETS Unrestricted 125,911, ,989,158 Temporarily Restricted 4,068,430 3,596,587 Permanently Restricted 16,599,734 15,722,336 Total Net Assets 146,579, ,308,081 Total Liabilities and Net Assets $ 274,163,885 $ 252,522,647 (4)

7 CONSOLIDATED STATEMENTS OF UNRESTRICTED ACTIVITIES YEARS ENDED Percent of Percent of Amount Revenue Amount Revenue OPERATING REVENUE Net Resident Service Revenue $ 90,492, % $ 87,281, % Departmental Revenue 3,578, ,222, Total Operating Revenue 94,070, ,503, OPERATING EXPENSES Salaries and Benefits 46,501, ,088, Contract Services 6,384, ,992, Supplies and Food 9,147, ,960, Equipment Purchases, Leasing and Maintenance 2,871, ,599, Utilities, Insurance and Taxes 8,505, ,999, Administration and Other 3,474, ,486, Depreciation and Amortization 8,196, ,582, Refundable Life Use Fee Credits 534, ,166, Interest Expense and Other Finance Costs 3,182, ,829, Total Operating Expenses 88,798, ,704, OPERATING INCOME 5,272, ,798, OTHER INCOME (EXPENSE) Contributions and Bequests 872, , Change in Unrealized Gains on Trading Investments 3,486, ,514, Net Assets Released from Restrictions 24,822-99, Development and Fundraising Expenses (682,044) (0.7) (730,134) (0.8) Investment Income 9,528, ,211, Other Expenses (3,748,149) (4.0) (1,441,193) (1.6) Contributions to Others (25,333) - (13,408) - Change in Fair Value of Interest Rate Swap 1,127, Total Other Income (Expense) 10,584, ,597, EXCESS OF NET REVENUE OVER EXPENSE 15,856, ,396, Change in Fair Value of Interest Rate Swap - 1,207,261 Change in Minimum Pension Liability 7,155,755 (2,844,539) Capital Contributions 909, ,084 Net Assets Released from Restrictions - Capital - 2,658,859 CHANGE IN UNRESTRICTED NET ASSETS $ 23,922,282 $ 15,146,810 See accompanying Notes to Consolidated Financial Statements. (5)

8 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED UNRESTRICTED NET ASSETS Excess of Net Revenue Over Expenses $ 15,856,725 $ 13,396,145 Change in Fair Value of Interest Rate Swap - 1,207,261 Change in Minimum Pension Liability 7,155,755 (2,844,539) Capital Contributions 909, ,084 Net Assets Released from Restrictions - Capital - 2,658,859 Change in Unrestricted Net Assets 23,922,282 15,146,810 TEMPORARILY RESTRICTED NET ASSETS Contributions and Bequests 790, ,725 Change in Unrealized Gains on Investments 159, ,529 Change in Value of Split Interest Agreements (626,990) (640,573) Investment Income 174, ,885 Net Assets Released from Restrictions - Operating (24,822) (99,540) Net Assets Released from Restrictions - Capital - (2,658,859) Change in Temporarily Restricted Net Assets 471,843 (2,362,833) PERMANENTLY RESTRICTED NET ASSETS Contributions and Bequests 239, ,933 Change in Unrealized Gains on Investments 89, ,090 Investment Income 548,856 90,575 Change in Permanently Restricted Net Assets 877,398 1,073,598 TOTAL CHANGE IN NET ASSETS 25,271,523 13,857,575 Net Assets - Beginning of Year 121,308, ,450,506 NET ASSETS - END OF YEAR $ 146,579,604 $ 121,308,081 See accompanying Notes to Consolidated Financial Statements. (6)

9 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED CASH FLOWS FROM OPERATING ACTIVITIES Changes in Net Assets $ 25,271,523 $ 13,857,575 Adjustments to Reconcile Changes in Net Assets to Net Cash Provided by Operating Activities: Depreciation and Amortization 8,196,637 7,582,362 Loss on Disposal of Property and Equipment 208, ,439 Loss on Refinance 1,484,433 - Change in Unrecognized Pension Obligation (7,155,755) 2,844,539 Amortization of Life Use Fees (1,710,281) (1,243,721) Realized Gain on Sale of Investments (8,518,110) (2,399,090) Change in Unrealized Gains on Investments (3,735,137) (6,048,147) Proceeds from Sale of Current Investments 72,971,435 40,837,767 Purchases of Current Investments (74,157,500) (43,917,658) Change in Value of Split-Interest Agreements (388,273) (208,002) Change in Deferred Cost of Interest Rate Swap (1,127,493) (1,207,261) Capital Contributions (909,802) (729,084) Permanently Restricted Contributions Received (239,143) (760,933) Increase (Decrease) in Cash Arising from Change in Assets and Liabilities: Accounts Receivable (654,908) (314,236) Pledges Receivable (519,999) (134,115) Supplies and Prepaids (106,367) 59,108 Accounts Payable 257, ,654 Other Liabilities 1,367,230 (773,092) Net Cash Provided by Operating Activities 10,535,013 8,587,105 CASH FLOWS FROM INVESTING ACTIVITIES Property and Equipment Additions (13,823,994) (18,204,895) Change in Bond Funds (1,487,110) (79,976) Repayment of Notes Receivable 5,095 4,725 Net Cash Used by Investing Activities (15,306,009) (18,280,146) CASH FLOWS FROM FINANCING ACTIVITIES Receipt of Life Use Fees 7,600,800 7,072,846 Refund of Life Use Fees (1,959,149) (1,007,381) Principal Payments on Long-Term Debt (4,673,006) (4,339,929) Proceeds from Issuance of Debt 2,833,843 5,650,000 Proceeds from Sale of Other Investments 1,512,825 1,688,894 Purchases of Other Investments (728,521) (362,088) Payment of Financing Costs (490,548) - Capital Contributions 909, ,084 Permanently Restricted Contributions Received 239, ,933 Net Cash Provided by Financing Activities 5,245,189 10,192,359 NET INCREASE IN CASH AND CASH EQUIVALENTS 474, ,318 Cash and Cash Equivalents - Beginning of Year 2,765,686 2,266,368 CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,239,879 $ 2,765,686 See accompanying Notes to Consolidated Financial Statements. (7)

10 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED RECONCILIATION OF NON CASH ACTIVITES Capital Lease Financing $ 734,673 $ 1,975,040 Property and Equipment Additions (734,673) (1,975,040) Issuance Procceeds 65,327,523 - Bond Principal and Interest Paid-Off (64,770,000) - Cost of Financing (557,523) - Land and Property Available for Sale (125,298) (411,713) New Split-Interest Agreements 125, ,713 Total Non Cash Activities $ - $ - SUPPLEMENTAL CASH FLOW INFORMATION Interest Paid $ 1,272,365 $ 1,715,096 See accompanying Notes to Consolidated Financial Statements. (8)

11 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Otterbein Homes (the Organization ) is a United Methodist related not-for-profit corporation headquartered in Lebanon, Ohio. Otterbein Homes operates five Ohio continuing care retirement communities (CCRC) providing multiple levels of care for older persons, five small house skilled nursing and rehabilitation facility neighborhoods also within Ohio, as well as a Medicare certified home health agency and hospice agency. Otterbein is currently constructing two additional small house skilled nursing and rehabilitation neighborhoods also within Ohio, with two more in the planning stage. Otterbein Homes is the sole member (owner) of Otterbein Cridersville, Otterbein Lebanon, Otterbein St. Mary s, Otterbein Portage Valley and Otterbein North Shore, not-for-profit, continuing care retirement communities in west central, southwest and northwest Ohio. Otterbein Homes also owns a for-profit corporation called Otterbein Service Corporation that provided construction and construction management services to affiliated organizations. Otterbein Service Corporation is currently inactive. Various entities were formed for the purpose of the development of new facility locations including the small house skilled nursing facility neighborhoods. Otterbein Homes is the sole member of Otterbein Home Health, LLC, Otterbein Hospice, LLC, Otterbein Independent Living Services, LLC, Otterbein Clear Creek, LLC, Otterbein Middletown, LLC, Otterbein Holdings, LLC and Otterbein Properties, LLC. Otterbein Holdings, LLC is the sole member of Otterbein Monclova, LLC, Otterbein Perrysburg, LLC, Otterbein Batavia, LLC, Otterbein Gahanna, LLC, Otterbein New Albany, LLC, Otterbein Loveland, LLC, and Otterbein Maineville, LLC. Otterbein Properties, LLC was formed for the purpose of potential future development at the Lebanon campus location and had limited activity during the years ended December 31, 2013 and Each of these entities is a single member limited liability company and all of their respective Articles were filed and formed in the State of Delaware and are registered with the State of Ohio. Principles of Consolidation The consolidated financial statements include all the accounts of Otterbein Homes including all of the related parties identified above in the nature of operations. Intercompany transactions and balances have been eliminated in the consolidation. Financial Statement Presentation Contributions received are recorded as an increase in unrestricted, temporarily restricted or permanently restricted support, depending on the existence or nature of any donor restrictions. Accordingly, net assets of the Organizations and changes therein are classified and reported as follows: Unrestricted Those resources over which the Board of Trustees has discretionary control. Designated amounts represent those assets which the Board of Trustees has set aside for a particular purpose. (9)

12 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial Statement Presentation (Continued) Temporarily Restricted Those resources subject to donor imposed restrictions which will be satisfied by actions of the Organizations or passage of time. Permanently Restricted Those resources subject to a donor imposed restriction that they be maintained permanently by the Organizations. The donors of these resources permit the Organizations to use all or part of the income earned, including capital appreciation for unrestricted or temporarily restricted purposes. Unconditional promises to give cash and other assets are accrued at estimated fair value at the date each promise 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 is satisfied, net assets are released and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same reporting period as received are recorded as unrestricted contributions. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Resident Services Revenue Resident services revenue includes rent, room charges and ancillary services to residents and is recorded at established billing rates net of contractual adjustments resulting from agreements with third-party payors, if applicable. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the amounts accrued and the subsequent settlements are recorded into operations in the year of settlement. Third-Party Reimbursement Agreements Medicaid Otterbein Homes' services rendered to Medicaid program beneficiaries are paid under a pricing fee methodology by the State of Ohio with adjustments based on acuity and geographic location. (10)

13 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Third-Party Reimbursement Agreements (Continued) Medicare The Organization s nursing facilities participate in the Medicare program. This federal program is administered by the Centers for Medicare and Medicaid Services (CMS). The participants are paid under the Medicare Prospective Payment System (PPS) for residents who are Medicare Part A eligible and meet the coverage guidelines for skilled nursing facility services (SNFs). The PPS is a per diem price-based system. Annual cost reports are required to be submitted to the designated Medicare Administrative Contractor; however, they do not contain a cost settlement. Cash and Cash Equivalents The Organization considers all highly liquid debt instruments and money market funds with a maturity of three months or less to be cash equivalents. Accounts Receivable The Organization accounts for uncollectible accounts by using management s judgment. Resident services are provided on an unsecured basis and payment is required upon receipt of the invoice. Accounts past due more than 90 days are individually analyzed for collectability. In addition, an allowance is estimated for other accounts based on the historical experience of the Organization. The allowance for uncollectible accounts was approximately $1,080,000 and $926,000 at December 31, 2013 and 2012, respectively. Accounts receivable is uncollateralized. Investments Investments are reported at fair value. Investment income (including interest and dividends net of investment expenses and realized and unrealized gains and losses) is included in the consolidated statements of unrestricted activities unless restricted by the donor. Investments are classified as trading. Investments consist, primarily, of equity and debt securities that are managed by an unrelated third party with specific guidance from the Organization s Investment Committee as to the types of investments allowed. Under the classification of trading, unrealized gains and losses are included in the excess of net revenue over expenses. The cost of securities sold is based on the specific identification method. Assets Limited as to Use Unexpended bond proceeds and sinking funds are deposited with a trustee under terms of the bond indentures for debt service and construction projects and are classified as assets limited as to use. Resident funds are deposits held under a fiduciary responsibility and are required by state regulation. (11)

14 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives by the straight-line method of depreciation. Unamortized Finance Costs Costs incurred in connection with the issuance of debt are capitalized and amortized over the term of the related indebtedness using the effective interest method. Otterbein had incurred $2,465,596 in costs related to the Series 1998A, 1998B, 2007, and 2009 Bonds and were included net of accumulated amortization of $942,364 at December 31, The consolidated balance sheet also included $7,498 of unamortized annual letter of credit fees at December 31, During 2013 the Organization refunded the Series 1998A, 1998B, 2007, and 2009 Bonds with the issuance of the Series 2013A and 2013B Bonds (see Note 5). The Organization wrote off $1,484,433 of unamortized financing costs which is included in other expenses on the consolidated statement of unrestricted activities. Otterbein incurred $1,046,145 in costs related to the Series 2013A and 2013B Bonds and are included net of accumulated amortization of $31,189 at December 31, Amortization of finance costs was $79,412 and $96,436 for the years ended December 31, 2013 and 2012, respectively. Bond Premium The Series 2013A Bonds were issued at a premium totaling $2,569,970. The premium is included net of accumulated amortization of $102,878 at December 31, Otterbein amortizes the premium using the effective interest method over the life of the bonds. Bond premium amortization totaled $102,878 for the year ended December 31, Refundable Advance Deposits and Life Use Fees Refundable advance deposits and life use fees, as shown on the consolidated balance sheets, represent one-time advance payments by certain residents. Most of these advance fees have refund provisions as part of the agreement with the resident. In previous years and during construction of independent housing, these advances were used in the financing of the construction. In most instances currently, the advances are invested. These advance deposit fees are amortized over the life expectancy of each resident and the sum of all amortized deposit fees is included as a component of net resident service revenue. For the years ended December 31, 2013 and 2012, amortized deposit fees were approximately $1,710,000 and $1,244,000, respectively. Under these contractual arrangements, residents who pay a refundable advance deposit fee receive a fixed credit applied to their monthly charge for services. The sums of all credits that are applied are reported in the statement of unrestricted activities. Advance deposits and life use fees subject to refund are reported in the consolidated balance sheets as current, long-term or deferred revenue, based upon Otterbein Homes' experience with refund requests and requirements under the contracts signed with residents. Refundable life use fee agreements with residents state that Otterbein Homes solely reserves the right to delay cash refunds up to the later of one year after the units have been vacated or until new residents occupy the vacated units. (12)

15 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Resident Advance Deposits Resident advance deposits range from approximately $1,000 to $2,000 and are required for each resident entering an independent or assisted living facility within the various Otterbein campus locations. The deposits are treated as security deposits and are refunded at the time the premises are vacated. Split-Interest Agreements The Organization has established a gift annuity program whereby donors may contribute assets to the Organization in exchange for the right to receive a fixed dollar annual return during their lifetime. The Organization has also established a pooled income gift (charitable remainder trust) program whereby donors may fund an irrevocable trust that is held by the Organization during their lifetime. In both programs, a portion of the transfer is considered to be a charitable contribution. The difference between the amounts provided for the gift annuity or pooled income gift and the present value of the liability for future payments is recognized as temporarily restricted contributions at the date of the gift as specified by the donor on the contribution component. The Organization uses published mortality rate tables adopted by the United States Internal Revenue Service. The split-interest liability is revalued annually based upon computed present values. Total split-interest charitable gift annuities and pooled income gift payables as of December 31, 2013 and 2012 was $1,922,013 and $2,184,988, respectively. The current portion of these split-interest agreements payable as of December 31, 2013 and 2012 was $249,110 and $324,937, respectively. Contributions and Bequests Contributions, which generally include unconditional promises to give (pledges), are recognized as revenues in the period they become receivable and the amounts can be determined. Pledges that are expected to be collected in future years are recorded at the present value of the amount expected to be collected. Discounts on those amounts are computed using an imputed interest rate of 7% for the years ended December 31, 2013 and Amortization of the discount is included in contributions revenue. At December 31, 2013 and 2012, total pledges receivable amounted to $1,047,660 and $527,661, respectively. The Organization provides for an allowance for estimated uncollectible pledges. At December 31, 2013 and 2012, no pledges receivable of a material amount were deemed uncollectible. Otterbein Homes has been notified that it will be the recipient of bequests from a number of estates, the bequest amounts of which are currently unknown. Income related to these future receipts has not been recognized in the financial statements. Derivative Instruments Otterbein Homes utilizes derivative financial instruments to reduce interest rate risks. Otterbein Homes records all derivative instruments, currently consisting of interest rate swap agreements, on the balance sheet at their respective fair values and all changes in fair value in the consolidated statement of operations as gain (loss) on derivative financial instruments. (13)

16 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Defined Benefit Pension Plan Employers are required to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through unrestricted net assets. Charity Care The mission of the Organization is to enhance the quality of life and holistic growth of older persons. The mission is furthered and sustained through years of charitable giving. Generous donors have provided for a benevolent care fund to assist Otterbein community members who no longer have the financial resources to provide for their home and health care costs. The Organization provides care to residents who meet certain criteria under its benevolent assistance policy without charge or at reduced rates. Key elements used to determine eligibility include a resident s demonstrated inability to pay. Because the Organization does not pursue collection of amounts determined to qualify for financial assistance, they are not reported as revenue. Otterbein Homes maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services and supplies furnished under its benevolent assistance policy, the estimated cost of those services and supplies, and equivalent service statistics. The Organization has estimated its direct and indirect costs of providing charity care under its benevolent assistance policy. In order to estimate the cost of providing such care, management calculated a cost-to-charge ratio based upon historical operating margins. This ratio is applied to the charity care charges foregone to calculate the estimated direct and indirect cost of providing charity care. Using this methodology, the Organization has estimated the costs foregone for services and supplies furnished under the Organization s benevolent assistance policy aggregated approximately $480,000 and $536,000 for the years ended December 31, 2013 and 2012, respectively. The Organization utilizes earnings from the general endowment to subsidize the costs of providing charity care under its benevolent assistance policy. Total earnings and contributions received for benevolent assistance were approximately $953,000 and $1,083,000 for the years ended December 31, 2013 or 2012, respectively. Uncompensated Balances The Organization provides nursing care to residents under the Medicaid program for which the costs to provide such care exceeds reimbursement. The Organization funds this difference through its operations. The shortfall associated for care provided under this program for the years ended December 31, 2013 and 2012 was approximately $13,917,000 and $13,428,000, respectively. (14)

17 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contributed Services and Goods A substantial number of volunteers have donated a significant number of hours to Otterbein Homes programs during the year; however, these donated services are not reflected in the consolidated financial statements since the services do not meet the criteria under accounting standards that permit recognition. Materials and other assets received as donations are recorded and reflected in Otterbein Homes consolidated financial statements at their fair values at the date of receipt. Performance Indicator The consolidated statement of unrestricted activities includes a measurement of excess of net revenue over expenses as a performance indicator. Changes in unrestricted net assets which are excluded from this performance indicator, consistent with industry practice, include the change in fair value of effective interest rate swaps, the change in minimum pension liability, capital contributions and net assets released from restriction capital. Advertising Advertising costs are charged to operations when incurred. Advertising expense was approximately $1,495,000 and $1,569,000 for the years ended December 31, 2013 and 2012, respectively. Income Taxes The Organizations, except for Otterbein Service Corporation, qualify as tax-exempt corporations described in Section 501 (c)(3) of the Internal Revenue Code. Accordingly, the Organizations are not subject to federal income taxes under Section 501 (c)(3) of the Code. The Organizations are classified as publicly supported charitable organizations under the Code and contributions to the Organizations qualify as charitable tax deductions for the contributor. The entity files as a tax-exempt organization. Should that status be challenged in the future, all years since inception could be subject to review by the IRS. The Organizations 2012, 2011, and 2010 tax years are open for examination by the IRS. Otterbein Service Corporation is an inactive for-profit corporation, and is liable for income taxes on its taxable income. Fair Value of Financial Instruments Fair value measurement applies to report balances that are required or permitted to be measured at fair value under existing accounting standards. The Organization emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy. (15)

18 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments (Continued) The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows: Level 1 Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Organization has the ability to access. Level 2 Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 3 Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Trading Securities Trading securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Securities valued using Level 1 inputs include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government that are traded by dealers or brokers in active over-the-counter markets. Securities valued using Level 2 inputs include private collateralized mortgage obligations, municipal bonds, mutual funds and corporate debt securities. The Organization does not have any securities that are valued using Level 3 inputs. Derivatives Quoted market prices are available and used for exchange-traded derivatives, such as certain interest rate futures and option contracts; such derivatives are classified as using Level 1 inputs. The Organization s swap agreement s fair value is determined using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities, and, accordingly, are classified as using Level 2 and Level 3 inputs. Subsequent Events In preparing these financial statements, the Organization has evaluated events and transactions for potential recognition or disclosure through April 21, 2014, the date the financial statements were available to be issued. (16)

19 NOTE 2 CONCENTRATION OF CREDIT RISK The Organization grants credit without collateral to its various facility residents or their families, many of whom are local residents and who are insured under third-party payor agreements. The mix of receivables from residents and third-party payors at December 31, 2013 and 2012 was as follows: Resident Fees for Service: Private Pay and Insurance $ 4,649,379 $ 3,646,556 Medicare 1,825,304 1,485,694 Medicaid and Hospice 1,803,176 2,254,779 Allowance for Doubtful Accounts (1,079,733) (925,979) 7,198,126 6,461,050 Other Accounts Receivable 722, ,313 Total $ 7,920,271 $ 7,265,363 The Organization maintains a cash balance at financial institutions which management believes has strong credit ratings and that the credit risk related to these deposits is minimal. Accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times, deposits may exceed FDIC limits. NOTE 3 ASSETS LIMITED AS TO USE Assets limited as to use, at estimated fair value, are classified as follows at December 31: Externally Restricted Under Residency Agreements $ 67,633 $ 61,267 Externally Restricted Under Bond Indenture Agreement 3,489,648 2,002,538 Total Assets Limited as to Use $ 3,557,281 $ 2,063,805 Funds held under bond indenture agreements are invested in money market funds and government securities. NOTE 4 INVESTMENTS Investments, at estimated fair value, are classified as follows: Investments - Current $ 88,671,254 $ 76,518,231 Investments - Long-Term 1,068,769 1,115,756 Investments - Long-Term - Restricted 19,637,259 18,452,557 Total $ 109,377,282 $ 96,086,544 (17)

20 NOTE 4 INVESTMENTS (CONTINUED) Investments classified as long-term assets relate to temporarily and permanently restricted net assets. Investments are comprised of the following as of December 31: 2013 Unrealized Cost Gains/(Losses) Fair Value Cash Equivalents $ 3,191,693 $ - $ 3,191,693 Equity Securities and Mutual Funds 79,603,252 12,735,053 92,338,305 Debt Securities 14,634,361 (787,077) 13,847,284 Total $ 97,429,306 $ 11,947,976 $ 109,377, Unrealized Cost Gains Fair Value Cash Equivalents $ 5,245,111 $ - $ 5,245,111 Equity Securities and Mutual Funds 71,076,684 6,241,090 77,317,774 Debt Securities 13,355, ,293 13,523,659 Total $ 89,677,161 $ 6,409,383 $ 96,086,544 Investment income and net realized gains on cash equivalents, equity and debt securities is comprised of the following for the years ending December 31, 2013 and 2012: Interest and Dividends (Net of Investment Expenses) $ 1,733,472 $ 2,061,290 Net Realized Gains 8,518,110 2,399,090 Total $ 10,251,582 $ 4,460,380 Investment income and realized gains are classified as follows for the years ended December 31, 2013 and 2012: Unrestricted $ 9,528,289 $ 4,211,920 Temporarily Restricted 174, ,885 Permanently Restricted 548,856 90,575 Total $ 10,251,582 $ 4,460,380 Risk and Uncertainties The Organization provides for investments in a variety of investment funds. In general, investments are exposed to various risks, such as interest rate, credit and overall market volatility risk. Due to the level of risk associated with certain investments, it is reasonably possible that changes in the values of the investments will occur in the near term and that such changes could materially affect the investment balances and the amounts reported in the balance sheets. (18)

21 NOTE 5 LONG-TERM DEBT The following is a summary of long-term debt at December 31: Description Warren County, Ohio, Variable Rate Demand Health Care Improvement Revenue Bonds, Series 1998A, Due Serially July 1999 Through July 2021 $ - $ 14,415,000 Warren County, Ohio, Variable Rate Demand Health Care Improvement Revenue Bonds, Series 1998B, Due Serially July 2000 Through July ,705,000 Warren County, Ohio, Variable Rate Demand Health Care Improvement Revenue Bonds, Series 2007, Due Serially July 2009 Through July ,675,000 Warren County, Ohio, Variable Rate Demand Health Care Improvement Revenue Bonds, Series 2009, Due Serially July 2010 Through July ,980,000 Warren County, Ohio, Health Care Facilities Refunding Revenue Bonds, Series 2013A, Due Serially July 2014 Through July 2039, interest rates range from 3.00% to 5.75% 62,955,000 - Warren County, Ohio, Variable Rate Health Care Improvement Revenue Bonds, Series 2013B, Due Serially July 2015 Through July ,286,397 - Unsecured Note Payable, 4% Interest, $10,514 Due Monthly June 2010 Through May , ,587 Various Auto Lease Notes Payable; Collateralized by Vehicles 41,450 71,593 TESCO Transportation, LLC Vehicle Lease Agreement; Collateralized by Buses; $1 Buy-out Option at End of Lease Term 24,381 40,856 US Bancorp Oliver-Allen Technology Leases; Collateralized by Various Equipment under the leases. Varying maturities through December ,149,610 1,934,441 Macro Lease Corp., Equipment Lease Agreement; Collateralized by Fitness Equipment; $1 Buy-out Option at End of Lease Term, October ,287 74,943 (19)

22 NOTE 5 LONG-TERM DEBT (CONTINUED) Description Non-Revolving Credit Note, up to $7,000,000; Bears Interest at LIBOR plus 1% (1.21% at December 31, 2012); Interest Payable Monthly, Matures December 31, 2013; collateralized by certain investments of the Organization - 5,650,000 Total 74,418,483 77,535,420 Plus: 2013A Bond Premium 2,467,092 - Less: Current Maturities (5,046,140) (10,312,195) Net Long-Term Debt $ 71,839,435 $ 67,223,225 Series 1998A, 1998B, 2007 and 2009 Bonds The Series 1998A Bonds were issued to refund a prior bond issuance and the 1998B Bonds were issued to finance construction and remodeling primarily at the Otterbein Lebanon location. The Series 2007 Bonds were issued to provide financing to the Organization for the purpose of constructing and equipping additional facilities, funding capitalized interest on the Series 2007 Bonds for approximately 10 months, and paying certain costs and expenses incurred in connection with the issuance of the Series 2007 Bonds. On July 15, 2009 the County of Warren, Ohio issued its $20,000,000 Variable Rate Demand Health Care Facilities Improvement Revenue Bonds, Series 2009 in order to provide financing for the construction and equipping of additional small house facilities and to payoff an existing revolving line of credit. The Series 2009 Bonds were issued pursuant to the Indenture of Trust as amended and supplemented by the First, Second, and Third Supplemental Indentures of Trust dated March 1, 1998, June 1, 1998, January 1, 2007, and July 1, 2009, respectively. Upon issuance of the Series 2009 Bonds the Obligated Group entered into an Amended and Restated Reimbursement Agreement, which effectively consolidated all four Series under one agreement. The payment of principal and interest on each series of bonds was guaranteed by various irrevocable direct pay bank letters of credit. The terms of all four letters of credit were the exact same and were set to expire on July 15, The Organization terminated all four letters of credit upon issuance of the Series 2013A Bonds as discussed further below. By definition, a Variable Rate Demand Bond is a long-term tax exempt bond, the interest rate of which is indexed to a current short term market rate. At the option of Otterbein Homes for the Series 1998A, 1998B, 2007 and 2009 bonds, the bond interest rates may be converted to various interest rate modes, including a fixed interest rate. Interest is payable monthly while the bonds bear interest at the weekly, one month, or three-month modes. At December 31, 2012, the interest rate mode was weekly for all bond Series and the rate of interest was approximately 0.10% for each Series 1998A, 1998B, 2007 and 2009 bonds. A demand feature allowed the bonds to be remarketed upon 7 days notice at par value plus accrued interest. (20)

23 NOTE 5 LONG-TERM DEBT (CONTINUED) Series 1998A, 1998B, 2007 and 2009 Bonds (Continued) Under the terms of the Indenture of Trust as amended and supplemented, Otterbein Homes leases its facilities from Warren County for an annual amount sufficient to meet principal and interest payments on the bonds. Under the terms of the leases, Otterbein Homes pays all expenses incident to the ownership of the properties and, upon repayment of the bonds, may purchase the properties for a nominal amount. For accounting purposes, the leased properties are considered Otterbein Homes' assets and the related bonds are treated as long-term debt. The bonds are collateralized by the underlying mortgages and gross receipts of the obligated group. Series 2013A and 2013B Bonds In July 2013 the Series 2013A $62,955,000 County of Warren, Ohio Healthcare Facilities Refunding Revenue Bonds were issued to refund the outstanding Series 1998A, 1998B, 2007 and 2009 Bonds and to pay certain costs associated with the issuance of the Series 2013A Bonds. At the same time, the Series 2013B Variable Rate (1.07% at December 31, 2013) County of Warren, Ohio Healthcare Facilities Improvement Revenue Bonds were authorized in an amount not to exceed $36,815,000. The Series 2013B Bonds are privately placed bonds pursuant to a purchase contract to be issued incrementally in tranches. The proceeds from the initial issuance were used to refinance the non-revolving credit note which financed the construction of the Lebanon Life Enrichment Center, reimburse Otterbein for sums over and above its equity contribution for the construction of certain small house neighborhoods and certain costs associated with the current and future issuances of the Series 2013B Bonds. Future purchases of additional tranches by the private placement purchaser will be used to reimburse Otterbein for costs associated with construction of additional small house neighborhoods. As of December 31, 2013 $8,286,397 of the total authorized bonds had been issued. The Series 2013A and 2013B Bonds were issued pursuant to the Master Trust Indenture as supplemented by the First Supplemental Indenture dated July 1, Under the terms of the Indenture as supplemented, Otterbein Homes leases its facilities from Warren County for an annual amount sufficient to meet principal and interest payments on the bonds. Under the terms of the leases, Otterbein Homes pays all expenses incident to the ownership of the properties and, upon repayment of the bonds, may purchase the properties for a nominal amount. For accounting purposes, the leased properties are considered Otterbein Homes' assets and the related bonds are treated as long-term debt. The bonds are collateralized by the underlying mortgages and gross receipts of the obligated group. (21)

24 NOTE 5 LONG-TERM DEBT (CONTINUED) Scheduled annual principal payments of long-term debt as of December 31, 2013 are as follows: Year Ending December 31, Payments 2014 $ 5,046, ,760, ,850, ,689, ,627,726 Thereafter 46,444,282 Total $ 74,418,483 Amounts currently due to or from interest rate swap counterparties and the previous annual letter of credit fees are recorded as adjustments to bond finance cost in the period in which they accrue. Interest expense was $2,481,309 in 2013 compared to $1,700,138 in 2012, including payments to the swap counterparties of $1,185,741 and $1,592,035 for 2013 and 2012, respectively. The Organization also incurred $1,828,189 and $1,129,107 of financing related costs during the years ended December 31, 2013 and 2012, respectively, and are included in Interest Expense and Other Financing Costs on the Consolidated Statements of Unrestricted Activities. Restrictive Covenants The provisions of the debt agreements of the bonds described above contain various restrictive covenants related to financial and operational matters and require certain measures of financial performance be satisfied as long as the bonds are outstanding. NOTE 6 PENSION PLANS Otterbein Homes has a defined benefit pension plan (the Plan ) that covers various employees. The plan benefits are based on years of service and the employees' average compensation during the highest five years of the last ten years of covered employment. Otterbein Homes' funding of the plan is based upon actuarially determined normal costs and past service costs. Otterbein Homes also has an unfunded supplemental executive retirement plan ( SERP ). The SERP provides for benefits to supplement those of the defined benefit pension plan. Employers are required to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through unrestricted net assets. (22)

25 NOTE 6 PENSION PLANS (CONTINUED) The following table summarizes the benefit obligations, the fair value of assets and the funded status at December 31: Pension Benefits Other Benefits CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year $ 39,058,221 $ 34,389,749 $ 5,209,987 $ 4,081,043 Service Cost 440, ,213 82,489 25,483 Interest Cost 1,776,861 1,724, , ,300 Actuarial (Gain) Loss (2,878,671) 3,942,989 (356,509) 1,210,249 Benefits Paid (1,672,816) (1,455,152) (308,631) (306,088) Benefit Obligation at End of Year $ 36,724,310 $ 39,058,221 $ 4,847,368 $ 5,209,987 CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Year $ 26,941,225 $ 23,347,531 $ - $ - Actual Return on Plan Assets 4,535,286 3,142, Employer Contributions 1,120,000 1,906, , ,088 Benefits Paid (1,672,816) (1,455,152) (308,631) (306,088) Fair Value of Plan Assets at End of Year $ 30,923,695 $ 26,941,225 $ - $ - Under Funded Status $ (5,800,615) $ (12,116,996) $ (4,847,368) $ (5,209,987) The accumulated benefit obligation for the pension plan was $35,881,050 and $37,907,717 as of December 31, 2013 and 2012, respectively. The Plan invests in a variety of investment securities. The investment policy for the Plan is to balance risk and return through a diversified portfolio of high-quality equity and fixed income securities. The Organization retains outside investment advisors to manage plan investments within the parameters outlined by the Organization. Targeted allocations are detailed below. The weighted-average return on assets assumption is based on historical performance of the types of assets in which the Plan invests. The measurement date for the calculation was December 31, The Plan s asset allocation by asset category is as follows at December 31: Equity Securities 63 % 65 % Debt Securities Other 3 4 Total 100 % 100 % (23)