Lutheran Social Ministries at Crane's Mill, Inc.

Transcription

1 Lutheran Social Ministries at Crane's Mill, Inc. Financial Statements and Supplementary Information

2 Table of Contents Page Independent Auditors' Report Financial Statements Balance Sheet 2 Statement of Operations and Changes in Net Deficit 3 Statement of Cash Flows 4 5 Supplementary Information Independent Auditors' Report on Supplementary Information 23 Schedule of Revenues in Excess of Expenses 24

3 l pp;rentebeard Independent Auditors' Report Board of Trustees Lutheran Social Ministries at Crane's Mill, Inc. We have audited the accompanying balance sheet of Lutheran Social Ministries at Crane's Mill, Inc. (the "Corporation") as of, and the related statements of operations and changes in net deficit and cash flows for the years then ended. These financial statements are the responsibility of the Corporation 's management. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lutheran Social Ministries at Crane's Mill, Inc. as of December 31, 2011 and 2010, 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 March 30,

4 Balance Sheet Assets Liabilities and Net Deficit Current Assets Cash and cash equivalents $ 3,117,895 $ Investments 3,433,050 Assets restricted under loan and trust agreements 1,334,692 Accounts receivable, residents, net 684,307 Accounts receivable, entrance fees 643,744 Prepaid expenses and other current assets 369,509 Current Liabilities 5,011,635 Current maturities of long-term debt 3,439,510 Accounts payable: 1,142,203 Trade 787,557 Refundable entrance fees - Accrued expenses 414,719 Due to Lutheran Social Ministries of New Jersey, Inc. Revenue received in advance Refundable entrance fees $ 2,012,018 $ 4,054,124 1,075, ,085 1,222, ,450 1,069,832 1,103,438 31,260 1, , ,035 3,433,050 3,439,510 Total current assets 9,583,197 Investments 14,707,024 Assets Restricted Under Loan and Trust Agreements 2,353,874 Property and Equipment, Net 76,782,001 Deferred Financing Costs, Net 801,352 Costs of Acquiring Initial Continuing-Care Contracts, Net 1,286,064 10,795,624 Total current liabilities 18,031,951 Long-Term Debt Refundable Entrance Fees and Deposits 6,689,077 Deferred Revenue from Entrance Fees 77,195,762 Resident Security Deposits 949,917 Derivative Financial Instruments 1,300,812 Total liabilities 9,175,770 10,545,597 46,948,236 52,944,391 4,771,745 5,582,109 52,759,131 51,418, , , , , ,148, ,109,414 Resident Security Deposits 261, ,792 Net Deficit Unrestricted net deficit Temporarily restricted net assets (8,372,743) (5,832, 779) 1,300 Total net deficit (8,372,743) (5,831,479) Total $ 105,775,309 $ 115,277,935 Total $ 105,775,309 $ 115,277,935 See notes to financial statements 2

5 Statement of Operations and Changes in Net Deficit Years Ended Changes in Unrestricted Net Deficit Unrestricted revenues: Net resident service revenues Other revenues Net assets released from restrictions $ 25,956,689 36,582 1,300 $ 24,154,592 91,989 1,020 Total unrestricted revenues 25,994,571 24,247,601 Expenses: Plant operations Health care Dietary General and administrative Rehabilitation Housekeeping and laundry Social services and activities Provision for (recovery of) doubtful collections Depreciation Amortization Interest 5,084,743 4,561,662 4,035,161 3,741,176 1,374, , ,284 1,786 3,325, ,841 2,080,321 4,984,173 4,447,222 3,697,871 3,293,946 1,262, , ,375 (23,479) 2,837, ,920 2,051,128 Total expenses 25,889,140 24,219,420 Operating income 105,431 28,181 Other income: Investment income Unrestricted contributions Change in fair value of derivative financial instruments 352,856 28,949 72,800 1,605,607 24, ,295 Revenues in excess of expenses 560,036 1,866,733 Transfer to affiliate (3, 1 00,000) Change in unrestricted net deficit (2,539,964) 1,866,733 Changes in Temporarily Restricted Net Assets Net assets released from restrictions (1,300) (1,020) Change in Net Deficit (2,541,264) 1,865,713 Net Deficit, Beginning (5,831,479) (7,697,192) Net Deficit, Ending See notes to financial statements 3 $ (8,372,743) $ (5,831,479)

6 Statement of Cash Flows Years Ended December 31, 2011 and Cash Flows from Operating Activities Change in net deficit Adjustments to reconcile change in net deficit to net cash provided by operating activities: Provision for (recovery of) doubtful collections Depreciation and amortization Amortization of bond premium Amortization of bond discount Change in fair value of derivative financial instruments Net realized and unrealized loss (gain) on investments Proceeds from entrance fees and deposits, existing units Amortization of entrance fees Transfer to affiliate Changes in assets and liabilities: Accounts receivable, residents Prepaid expenses and other current assets Due from I to Lutheran Social Ministries of New Jersey, Inc. Accounts payable, trade Accrued expenses Revenue received in advance $ (2,541,264) 1,786 3,577,937 (23, 182) 9,594 (72,800) 113,807 3,796,421 (3,373,329) 3,100, ,464 45,210 29, ,132 (33,606) (124,112) $ 1,865,713 (23,479) 3,019,790 (15,443) 7,196 (208,295) (1 '127,978) 4,226,780 (2, 789,398) (80,027) (28,445) 144,346 (684,408) 412,112 (60,291) Net cash provided by operating activities 4,822,363 4,658,173 Cash Flows from Investing Activities Net sales of investments and assets restricted under loan and trust agreements Payment of costs of acquiring initial continuing-care contracts Purchases of property and equipment 7,360,294 (89,528) (2,911,335) 7,338,877 (890,544) (4, 173,468) Net cash provided by investing activities 4,359,431 2,274,865 Cash Flows from Financing Activities Proceeds from long-term debt Payment of long-term debt Payment of accounts payable, construction Payment of accrued interest, capitalized Proceeds from entrance fees and deposits, new units Refunds of entrance fees Transfer to affiliate (8,024,673) 3,862,921 (3,813,782) (3, 1 00,000) 868,676 (12,242,351) (3,066,015) (543,855) 12,647,753 (2,719,632) Net cash used in financing activities (11,075,534) (5,055,424) Net (Decrease) Increase in Cash and Cash Equivalents (1,893, 7 40) 1,877,614 Cash and Cash Equivalents, Beginning 5,011,635 3,134,021 Cash and Cash Equivalents, Ending $ 3,117,895 $ 5,011,635 Supplemental Disclosure of Cash Flow Information Interest paid $ 2,078,539 $ 1,597,851 See notes to financial statements 4

7 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Lutheran Social Ministries at Crane's Mill, Inc. (the "Corporation") operates a continuing care retirement community providing housing, health care, and other related services to residents on a campus containing 281 independent living units, 48 assisted living units, 18 assisted living dementia units, and a 66-bed skilled nursing facility. The Corporation's operations are located in West Caldwell, New Jersey. Lutheran Social Ministries of New Jersey, Inc. ("LSMNJ") is the sole member of the Corporation and has the right, among others, to appoint trustees, approve major expenditures, and approve long-term borrowings. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments purchased with an original maturity of three months or less, excluding investments and assets restricted under loan and trust agreements. Residents Accounts Receivable, Net Residents accounts receivable are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management's assessment of individual accounts. The allowance for doubtful collections is estimated based upon a periodic review of individual accounts and was approximately $39,000 and $59,000 at, respectively. Investments, Assets Restricted Under Loan and Trust Agreements, and Investment Risk Investments include assets set aside for the general use and purposes of the Corporation. Investments that are reasonably expected to be realized in cash in the Corporation's next operating cycle have been classified as current assets in the balance sheet. Assets restricted under loan and trust agreements are held by the trustees for the 2008 Bonds and 2005 Bonds (Note 5). Amounts available to meet current liabilities have been classified as current assets in the balance sheet. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheet. The fair value of substantially all securities is determined by quoted market prices. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) is included in revenues in excess of expenses unless the income or loss is restricted by donor or law. Interest income is measured as earned on the accrual basis. Dividends are measured on the ex-dividend date. Purchases and sales of securities and realized gains and losses are recorded on the trade date. 5

8 Investments are comprised of a variety of financial instruments. 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 possible that the amounts reported in the balance sheet could change in the future. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straightline method over the estimated useful lives of the assets. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Interest Capitalization The Corporation capitalizes the interest cost on borrowings, net of income earned on certain proceeds from the borrowings, as a component of the cost of the asset acquired or constructed. Accordingly, interest costs of $479,400 less income earned of $23,384 were capitalized in 2010 in connection with the Project (Note 5). No interest costs were capitalized in Deferred Financing Costs Costs of $1,671,809 at, respectively, incurred in connection with the issuance of long-term debt have been deferred and are amortized over the term of the related debt using the straight-line method, which approximates the effective interest method. These costs include the premium paid for the interest rate cap agreement (Note 5). Accumulated amortization was $870,457 and $721,892 at, respectively. The Corporation capitalized $39,931 of amortization during 2010 in connection with the Project (Note 5). Costs of Acquiring Initial Continuing-Care Contracts, Net The Corporation capitalized $1,390,340 and $1,300,812 of direct marketing and advertising costs associated with acquiring initial continuing-care contracts for the new independent living units (Note 4) through, respectively. These costs were capitalized through March 31, 2011, which was one year following completion of the new units, since substantial occupancy had not yet been achieved. The costs began being amortized beginning in April 2011 on a straight-line basis over ten years, which is the average expected remaining life of the residents under the contracts. Accumulated amortization was $104,276 at December 31,

9 Derivative Financial Instruments The Corporation entered into interest rate swap agreements, which are considered derivative financial instruments, to manage the variable interest rate payments due on its long-term debt (Note 5). The interest rate swap agreements are reported at fair value in the balance sheet and related changes in fair value are reported in the statement of operations and changes in net deficit. Entrance Fees Under entrance fee plans for independent living units, the Corporation receives payments in advance. Residents currently have three entrance plan options to choose from, two "refundable" options and a "nonrefundable" option. The refundable plans have a guaranteed refund component, which is either 90% or 50% of the entrance fee paid. Under the 90% plan, refunds are generally equal to 90% of the entrance fee paid. Under the 50% plan, refunds are generally equal to the entrance fee paid minus 2% of the entrance fee paid for each full or partial month of occupancy to a minimum of 50%. The nonrefundable plan has no guaranteed refund component and is refundable on a decreasing basis for 48 months, after which no refund is payable. Refunds to residents are paid 30 days after their former independent living unit has been reoccupied. However, if a resident is permanently transferred to assisted living or skilled nursing care, no refund of any portion of the entrance fee is made until the resident permanently leaves the community. Contractual refund obligations under residency agreements for the current entrance plan options approximated $57,800,000 at December 31, Management estimates the amount of refundable entrance fees to be paid the following year from sources other than proceeds from entrance fees to residents who terminate their residency agreement the following year. These amounts were $3,433,050 and $3,439,510 at, respectively, and are classified as current liabilities in the balance sheet. The guaranteed refundable component of entrance fees is amortized to income using the straight-line method over the estimated remaining useful life of the independent living buildings. The nonrefundable balance of entrance fees is amortized to income using the straight-line method over the estimated remaining life expectancies of the residents, which are adjusted annually. These unamortized entrance fees are classified as deferred revenue from entrance fees in the balance sheet. Net resident service revenues include amortization of entrance fees of $3,373,329 in 2011 and $2,789,398 in Prior to the opening of the independent living units in 1998, the Corporation offered a different "refundable" entrance plan option to certain prospective residents. This plan was similar to the current "refundable" plan, but with different refund provisions. Under this plan, refunds to residents are paid 30 days after their former independent living unit has been reoccupied or within 90 days of termination, whichever occurs first. As a result, the guaranteed refund component of entrance fees received under this plan is not amortized to income and is classified with refundable entrance fees and deposits in the balance sheet. At December 31, 2011, contractual refund obligations under this plan were $5,080,000. 7

10 The Corporation also received deposits from prospective independent living residents of $295,343 and $422,409 through, respectively. These amounts are classified with refundable entrance fees and deposits in the balance sheet. The following is a summary of the entrance fee liabilities described above: Deferred revenue from entrance fees: Refundable entrance fee plans: Refundable component Nonrefundable component Nonrefundable entrance fee plan $ 39,296,652 4,029,845 12,466,534 $ 39,616,266 4,443,839 9,994,797 55,793,031 54,054,902 Less amounts classified as current liabilities 3,033,900 2,636,550 Deferred revenue from entrance fees $ 52,759,131 $ 51,418,352 Refundable entrance fees and deposits: Contractually refundable entrance fees Entrance fee deposits $ 4,875, ,343 $ 5,962, ,409 5,170,895 6,385,069 Less amounts classified as current liabilities 399, ,960 Refundable entrance fees and deposits $ 4,771,745 $ 5,582,109 Amounts refundable to residents who terminated their residency agreements were $1,222,470 and $630,450 at, respectively. These amounts are classified as accounts payable in the balance sheet. Under the majority of existing residency agreements, independent living residents are entitled to assisted living or skilled nursing care, as needed, with minor increases in the current monthly service fee. Obligation to Provide Future Services The Corporation calculates on an annual basis the present value of the net cost of future services and use of facilities that is expected to be provided to current residents. This amount is compared to the balances of refundable entrance fees and deposits and deferred revenue from entrance fees recorded on the balance sheet. If the present value of these future costs were to exceed the liabilities on the balance sheet, an additional liability would be recorded. Because no excess was calculated, no additional liability was recorded at December 31,

11 Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation has been limited by donors to specific time periods or purposes. Net Resident Service Revenues Net resident service revenues are reported at the estimated net realizable amounts from residents, third-party payors, and others for services rendered. Net resident service revenues include amortization of entrance fees of $3,373,329 in 2011 and $2,789,398 in Donor-Restricted Gifts The Corporation reports gifts of cash and other assets as 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 deficit and reported in the statement of operations and changes in net deficit as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the statement of operations and changes in net deficit. Income Taxes The Corporation 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 under a group exemption with the Evangelical Lutheran Church in America. The Corporation accounts for uncertainty in income taxes by prescribing a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold has been met. There were no tax uncertainties that met the recognition threshold in 2011 or The Corporation's federal Returns of Organization Exempt from Income Tax for the years ended December 31, 2010, 2009, and 2008 remain subject to examination by the Internal Revenue Service. 9

12 Revenues in Excess of Expenses The statement of operations and changes in net deficit includes the determination of revenues in excess of expenses. Changes in unrestricted net deficit which are excluded from revenues in excess of expenses, consistent with industry practice, include transfers to affiliate. 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 The Corporation evaluated subsequent events for recognition or disclosure through March 30, 2012, the date the financial statements were issued. Reclassifications Certain reclassifications were made to the 2010 financial statements to conform to the 2011 presentation. 2. Net Resident Service Revenues The Corporation has an agreement with the Medicare program that provides for payments at amounts different from its established rates. Nursing and ancillary services provided to Medicare Part A beneficiaries are paid at prospectively determined rates per day. These rates vary according to a resident-specific classification system that is based on clinical, diagnostic, and other factors and the reimbursement methodology is subject to various limitations and adjustments. The Corporation is reimbursed for therapy services provided to Medicare Part B beneficiaries at the lesser of a published fee schedule or actual charges. As described above, the Medicare Part A rates are based, in part, on clinical, diagnostic, and other factors. The Corporation is required to clinically assess its residents at predetermined time periods throughout the year. The documented assessments are subject to review and adjustment by the Medicare program. The Corporation also has entered into payment agreements with certain commercial insurance carriers and others. The basis for payment to the Corporation under these agreements includes prospectively determined rates per day or discounts from established charges. 10

13 3. Investments and Assets Restricted Under Loan and Trust Agreements The composition of investments and assets restricted under loan and trust agreements at was as follows: Investments: Cash and cash equivalents $ 2,368,782 $ 205,025 Marketable equity securities: Information technology 1,288,691 1,147,217 Consumer staples 1,083,185 1,004,233 Health care 977, ,177 Industrials 931, ,124 Financial 874, ,156 Energy 820, ,170 Consumer discretionary 751, ,337 Materials 219, ,096 Telecommunications 114,899 Equity mutual funds: International 1,175,932 1,472,726 Other 454, ,697 Small cap 147, ,858 Mid cap 144, ,448 Fixed income mutual fund, Intermediate term bond 1,548,910 2,393,098 Certificates of deposit 5,352,569 8,765,200 18,140,074 21,471,461 Less amounts classified as current assets 3,433,050 3,439,510 Noncurrent portion of investments $ 14,707,024 $ 18,031,951 Assets restricted under loan and trust agreements: Cash and cash equivalents $ 3,688,566 $ 7,831,280 Less amounts available to meet current liabilities (1,334,692) (1 '142,203) Noncurrent assets restricted under loan and trust agreements $ 2,353,874 $ 6,689,077 11

14 Assets restricted under loan and trust agreements at were as follows: Bonds (Note 5): Debt service reserve fund $ 1,211,249 $ 1,211,249 Debt service fund 629, ,586 Working capital fund 1,736,615 Project fund 1,462,292 Capitalized interest funds 1,072,663 Other funds 15,360 1,840,816 6,010, Bonds (Note 5): Debt service reserve fund 1 '142,625 1 '142,645 Debt service funds 663, ,414 Other funds 41,463 41,456 1,847,750 1,820,515 Total assets restricted under loan and trust agreements $ 3,688,566 $ 7,831,280 The New Jersey Continuing Care Retirement Community Regulation and Financial Disclosure Act requires continuing-care retirement communities to establish liquid reserves. At December 31, 2011, the liquid reserve requirement was no more than $3,600,000, which is equal to 15% of the Corporation's budgeted operating expenses for 2012, excluding depreciation and amortization. Because not all of the residents of the Corporation are covered under entrance fee plans, the actual amount of the reserve requirement is equal to the proportionate share of expenses for residents under entrance fee plans at December 31, The liquid reserve requirement is satisfactorily funded with the debt service reserve funds above and investments. Investment income for 2011 and 2010 was comprised of the following: Interest and dividends $ 466,663 $ 477,629 Net unrealized (loss) gain on investments (1,294,817) 1,038,504 Net realized gain (loss) on sales of investments 1,181,010 89,474 Total $ 352,856 $ 1,605,607 12

15 4. Property and Equipment Property and equipment at was comprised of the following: Land and land improvements Buildings and building improvements Furniture and equipment $ 13,620,186 $ 13,648,441 77,953,818 75,870,537 7,136,261 6,426,848 98,710,265 95,945,826 Less accumulated depreciation 22,011,313 18,929,663 76,698,952 77,016,163 Construction-in-progress 83, ,599 Property and equipment, net $ 76,782,001 $ 77,195, Long-Term Debt 2008 Bonds In July 2008, the New Jersey Economic Development Authority (the "Authority") issued, on behalf of the Corporation, $16,255,000 of Fixed Rate Revenue Bonds, Series 2008A (the "2008A Bonds") and $22,400,000 of Variable Rate Revenue Bonds, Series 2008B (the "2008B Bonds") (collectively, the "2008 Bonds"). The proceeds from the 2008 Bonds were primarily used to finance part of the cost of an expansion and renovation project (the "Project"). The Project included the acquisition of land and construction of 65 independent living apartment units, with 53 underground parking spaces, 10 independent living cottage units, the addition of a new wing establishing an assisted living dementia unit, the creation of an assisted living dementia courtyard, and the renovation of existing common areas. 13

16 December31, 2011 and2010 The 2008A Bonds are due in varying annual installments beginning in 2012 through 2038, plus interest payable semi-annually at rates ranging from 5.5% to 6%. The 2008B Bonds are due in However, the Corporation is required to apply the entrance fee proceeds received from residents of the new independent living apartment units to the outstanding balance of 2008B Bonds until they are paid in full. Through December 31, 2011, the Corporation received entrance fee proceeds on the new independent living apartment units of approximately $15,380,000 and made payments of $14,820,000 on the 2008B Bonds. The remaining entrance fees received of approximately $560,000 were used to make additional payments on the 2008B Bonds in The amount paid in 2012 is classified as a current liability in the balance sheet at December 31, As of March 30, 2012, 34 of the 65 new independent living apartment units and 5 of the 10 new independent cottages were occupied. Interest on the 2008B Bonds is payable monthly at a variable rate (0.09% at December 31, 2011 ). The Corporation has the option to convert the interest rate on the 2008B Bonds to a fixed rate mode. Under no circumstances shall the variable rate exceed an annual rate of 10% Bonds In June 2005, the Authority issued, on behalf of the Corporation, $15,290,000 of Fixed Rate Revenue Refunding Bonds, Series 2005A (the "2005A Bonds") and $15,310,000 of Variable Rate Revenue Refunding Bonds, Series 2005B (the "2005B Bonds") (collectively, the "2005 Bonds"). The proceeds from the 2005 Bonds were primarily used to refinance the Authority's Fixed Rate Bonds, Series 1997 A and Adjustable Rate Bonds, Series 1997B. The 2005A Bonds are due in varying annual installments through 2027, plus interest payable semi-annually at rates ranging from 5% to 5.1 %. The 2005B Bonds are due in varying annual installments through 2027, plus interest payable monthly at a variable rate (0.09% at December 31, 2011 ). The Corporation has the option to convert the interest rate on the 2005B Bonds to a fixed rate mode. Under no circumstances shall the variable rate exceed an annual rate of 10%. Construction Loan Agreement In July 2008, the Corporation entered into a $4,000,000 construction loan agreement. The proceeds from the construction loan were used to finance the construction of 10 independent living cottage units. Interest on the outstanding construction loan balance was payable monthly at a rate equal to the one-month LIBOR plus 175 basis points. The construction loan was paid in full in

17 Security The Corporation entered into a letter-of-credit and reimbursement agreement with a bank to secure the 2008B Bonds and 2005B Bonds. The agreement is scheduled to expire in July At December 31, 2011, the available balances under the letters of credit are $20,341,137, which amounts to the 2008B Bonds and 2005B Bonds outstanding plus 53 days of interest on such outstanding bonds at an interest rate not to exceed 10%. The Corporation is obligated to pay annual letter of credit fees not to exceed.75%. The 2008A Bonds, 2005A Bonds, the Corporation's obligations under the letter-of-credit and reimbursement agreement for the 2008B Bonds and 2005B Bonds, and borrowings under the construction loan agreement are equally and ratably secured by a first mortgage lien on and security interest in the Corporation's property and equipment and a security interest in the Corporation's gross revenues, as defined in the applicable agreements. Interest Rate Swap Agreements In October 2010, the Corporation entered into an interest rate swap agreement for the 2008B Bonds. In September 2011, this agreement expired and was replaced with a new interest rate swap agreement that had an initial notional amount of $8,775,000 ("Swap #1 "). In December 2008, the Corporation entered into an interest rate swap agreement for $7,060,000 of the 2005B Bonds ("Swap #2"). Swap #1 and Swap #2 are scheduled to expire in September 2012 and July 2013, respectively. According to the terms of the agreements, if the USD-SIFMA Municipal Swap Index (the "SIFMA Index") (0.09% at December 31, 2011) is less than the fixed rates of 0.63% for Swap #1 and 2.9% for Swap #2, the Corporation must make a monthly payment to the counterparty to the agreements. Conversely, if the SIFMA Index is more than the fixed rates, the counterparty to the agreements must make a monthly payment to the Corporation. The monthly payments are calculated by multiplying the notional amount ($6,581,250 for Swap #1 and $6,310,000 for Swap #2 at December 31, 2011) by the difference between the SIFMA Index and the fixed rates. The payments to or from the counterparty to the agreement are generally classified as a component of interest expense in the statement of operations and changes in net deficit. However, the payments for Swap #1 and the interest rate swap agreement that expired in October 2010 were capitalized through March 2010 as a component of the Project (Note 5). As a result of the swap agreements, interest expense was increased by approximately $196,000 in 2011 and $324,000 in The fair value of the agreements is estimated to be the amount the Corporation would be required to pay if the agreements were terminated at. The Corporation estimates that it would have been liable to pay $231,373 and $304,173 on, respectively, if the agreements were terminated. These amounts are classified as derivative financial instruments in the balance sheet. Changes in the fair value of the agreements are included in revenues in excess of expenses since the agreements are not designated as hedging instruments. The change in fair value is classified as change in fair value of derivative financial instruments in the statement of operations and changes in net deficit and was $72,800 in 2011 and $208,295 in

18 Interest Rate Cap Agreement In June 2005, the Corporation entered into an 8-year interest rate cap agreement for a portion of the 2005B Bonds, which required the Corporation to make a one-time premium payment to the counterparty to the agreement. If, during the term of the agreement, the SIFMA Index exceeds a fixed rate of 4%, the counterparty to the agreement is required to make monthly payments to the Corporation for the differential in the two rates. These payments, if made, will be classified as a reduction of interest expense in the statement of operations and changes in net deficit. The counterparty to the agreement was not required to make any payments to the Corporation during 2011 or At December 31, 2011, the notional amount under the agreement was $6,160,000. The fair value of this agreement does not materially differ from the unamortized premium of $34,000 and $58,000 at, respectively. The unamortized premium is classified as deferred financing costs, net, in the balance sheet. Long-Term Debt- Other In 2003, the Township of West Caldwell (the "Township") issued a special assessment on the Corporation totaling $414,588 (the "Assessment"). The Assessment is related to infrastructure improvements made by the Township. The Assessment was paid in full in In 2011, the Corporation financed the purchase of a bus through a loan for $56,775. The loan is payable over 5 years in monthly installments of $1,087, which includes interest. Long-Term Debt Summary A Bonds 2008B Bonds 2005A Bonds 2005B Bonds Bus loan Construction loan Township of West Caldwell Assessment $ 16,255,000 7,580,000 12,805,000 12,470,000 55,126 $ 16,255,000 13,875,000 13,270,000 13,000, ,903 82,896 49,165,126 57,189,799 Plus unamortized bond premium, net, 2005A Bonds Less unamortized bond discount, 2008A Bonds Less current maturities (204,872) (2,012,018) 23,182 (214,466) (4,054, 124) Long-term debt $ 46,948,236 $ 52,944,391 16

19 Scheduled principal payments on long-term debt are as follows: Years ending December 31: 2012 $ 2,012, ,360, ,431, ,497, ,570,595 Thereafter 41,293,200 Total $ 49,165, Accrued Expenses Accrued expenses at were as follows: Interest Future employee leave costs Payroll and related expenses Other accrued expenses $ 553, , ,648 83,878 $ 538, , ,225 95,985 Total $ 1,069,832 $ 1 '103, Retirement Plan The Corporation sponsors a defined contribution retirement plan. The Corporation's contributions to the plan were $193,407 in 2011 and $202,414 in Related Party Transactions LSMNJ provides management, administrative, and other services to the Corporation. The fee charged by LSMNJ to the Corporation for these services was $1,288,712 in 2011 and $1,227,377 in LSMNJ also charges the Corporation for administrative and other expenses directly related to the Corporation's operations; these charges were $258,522 in 2011 and $292,483 in Total fees charged are included in general and administrative expenses in the statement of operations and changes in net deficit. At, the Corporation owed LSMNJ $31,260 and $1,955, respectively. During 2011, the Corporation's Board of Trustees authorized the transfer of $3,100,000 of equity to LSMNJ, which was used for development and other purposes. 17

20 9. Medical Malpractice Claims Coverage The Corporation maintains professional liability coverage on a claims-made basis through a commercial insurance carrier. Other than for premiums paid under this policy, no provision has been made for estimated losses. Management believes no incidents occurred or will be asserted that will exceed the Corporation's insurance coverages or will have a material adverse effect on the financial statements. 10. Concentrations of Credit Risk The Corporation grants credit without collateral to its residents, some of whom are insured under third-party payor arrangements, primarily with Medicare and various commercial insurance companies. The Corporation maintains cash and cash equivalents and certificate of deposit accounts, which, at times, may exceed federally insured limits. The Corporation has not experienced any losses from maintaining cash and cash equivalents and certificate of deposit accounts in excess of federally insured limits. Management believes it is not subject to any significant credit risk on its cash and cash equivalents and certificate of deposit accounts. 11. Contingency 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 continues 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; however, the possible future financial effects of this matter, if any, cannot be known with certainty. 12. Functional Expenses The Corporation provides housing, healthcare, and other related services to residents within its geographic location. Expenses related to providing these services were as follows: Resident services General and administrative $ 22,146,178 3,742,962 $ 20,948,953 3,270,467 Total $ 25,889,140 $ 24,219,420 18

21 13. Fair Value Measurements and Financial Instruments Fair Value Measurements The Corporation measures its investments, assets restricted under loan and trust agreements, and derivative financial instruments at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to dispose of a liability in an orderly transaction between market participants at the measurement date. Fair value is measured using a hierarchy that prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows: Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation 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. 19

22 The fair values of the Corporation's investments, assets restricted under loan and trust agreements, and derivative financial instruments were measured with the following inputs at : December 31, 2011 Level 1 Level2 Assets: Cash and cash equivalents Marketable equity securities: Information technology Consumer staples Health care Industrials Financial Energy Consumer discretionary Materials Equity mutual funds: International Other Small cap Mid cap Fixed income mutual fund, Intermediate term bond Certificates of deposit $ 6,057,348 $ 1,288,691 1,083, , , , , , ,372 1 '175, , , ,939 1,548,910 5,352,569 Total $ 16,476,071 $ 5,352,569 Liability, Derivative financial instruments $ $ 231,373 20

23 December 31, 2010 Level 1 Level2 Assets: Cash and cash equivalents Marketable equity securities: Information technology Consumer staples Industrials Health care Financial Energy Consumer discretionary Materials Telecommunications Equity mutual funds: International Mid cap Other Small cap Fixed income mutual fund, Intermediate term bond Certificates of deposit $ 8,036,305 $ 1,147,217 1,004, , , , , , , ,899 1,472, , , ,858 2,393,098 8,765,200 Total Liability, Derivative financial instruments At, the Corporation did whose fair values were measured using Level 3 inputs. $ 20,537,541 $ 8,765,200 $ $ 304,173 not have any assets or liabilities Financial Instruments The carrying amounts of operating cash and cash equivalents, accounts receivable, and accounts payable approximate fair value at due to the shortterm nature of these instruments. Investments and assets restricted under loan and trust agreements are valued at fair value based on quoted market prices in active markets for cash and cash equivalents, marketable equity securities, and mutual funds and are estimated using quoted prices for similar securities for certificates of deposit and guaranteed investment contracts. The carrying amount and fair value of long-term debt, excluding bond discount and premium, was $49,165,126 and $48,835,007, respectively, at December 31, 2011, and $57,189,799 and $56,218,781, respectively, at December 31, The fair values are based on quoted market prices for the same or similar issues. 21

24 The Corporation measures its derivative financial instruments at fair value based on proprietary models of an independent third party valuation specialist. The fair value takes into consideration the prevailing interest rate environment and the specific terms and conditions of the derivative financial instruments, and considers the credit risk of the Corporation and counterparty. The method used to determine the fair value calculates the estimated future payments required by the derivative financial instruments and discounts these payments using an appropriate discount rate. The value represents the estimated exit price the Corporation would pay to terminate the agreements. It is not practicable to estimate the fair value of amounts due to related parties since terms could not be duplicated in the market and related parties can revise terms making assumptions supporting fair values potentially unreliable. 22

25 ~rente Beard Independent Auditors' Report on Supplementary Information Board of Trustees Lutheran Social Ministries at Crane's Mill, Inc. We have audited the financial statements of Lutheran Social Ministries at Crane's Mill, Inc. as of and for the year ended December 31, 2011, and have issued our report thereon dated March 30, 2012 which contained an unqualified opinion on those financial statements. Our audit was performed for the purpose of forming an opinion on the financial statements as a whole. The supplementary information on pages 24 and 25 is presented for the purposes of additional analysis and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. Philadelphia, Pennsylvania March 30,

26 Schedule of Revenues in Excess of Expenses Years Ended Unrestricted Revenues Net resident service revenues Other revenues Net assets released from restrictions $25,956,689 36,582 1,300 $ 24,154,592 91,989 1,020 Total unrestricted revenues 25,994,571 24,247,601 Expenses Plant operations: Salaries and wages Payroll taxes and employee benefits Other expenses 416,915 89,609 4,578, ,896 97,182 4,443,095 5,084,743 4,984,173 Health care: Salaries and wages Payroll taxes and employee benefits Other expenses 3,155, , ,407 3,060, , ,623 4,561,662 4,447,222 Dietary: Salaries and wages Payroll taxes and employee benefits Other expenses 16,084 (609) 4,019,686 14,072 11,066 3,672,733 4,035,161 3,697,871 General and administrative: Salaries and wages Payroll taxes and employee benefits Other expenses 873, ,151 2,606, , ,202 2,295,168 3,741,176 3,293,946 Rehabilitation, Other expenses 1,374,025 1,262,539 See notes to financial statements 24

27 Schedule of Revenues in Excess of Expenses Years Ended Housekeeping and laundry: Salaries and wages $ 504,252 Payroll taxes and employee benefits 164,339 Other expenses 129,454 $ 498, , , , ,855 Social services and activities: Salaries and wages 388,535 Payroll taxes and employee benefits 96,260 Other expenses 149, , , , , ,375 Provision for (recovery of) doubtful collections 1,786 (23,4 79) Total expenses excluding depreciation, amortization, and interest 20,230,882 19,148,502 Operating income before depreciation, amortization, and interest 5,763,689 5,099,099 Depreciation 3,325,096 Amortization 252,841 Interest 2,080,321 2,837, ,920 2,051 '128 5,658,258 5,070,918 Operating income 105,431 28,181 Other Income Investment income 352,856 Unrestricted contributions 28,949 Change in fair value of derivative financial instruments 72,800 1,605,607 24, ,295 Revenues in excess of expenses $ 560,036 $ 1,866,733 See notes to financial statements 25