Rlante. moran. Porter Hills Presb rian Village, Inc. Obligated Group. Combined Financial Report with Additional Information June 30,

Transcription

1 Porter Hills Presb rian Village, Inc. Obligated Group Combined Financial Report with Additional Information June 30, ) 1. J 1. i I _ J Rlante ~,-=---- moran ~ : J

2 Porter Hills Presbyterian Village, Obligated Group Contents Report Letter 1-2 Special Purpose Combined Financial Statements Balance Sheet Statement of Activities Statement of Changes in Net Deficiency Statement of Cash Flows Notes to Combined Financial Statements Additional Information Combining Balance Sheet Combining Statement of Activities

3 plante moran - Plante & Moran, PLLC Suite Front Avenue N.W. Grand Rapids, MI Tel: Fax: plantemoran.com Independent Auditor's Report To the Board of Directors Porter Hills Presbyterian Village, Inc. Obligated Group We have audited the accompanying special purpose combined balance sheet of Porter Hills Presbyterian Village, Inc. Obligated Group (the "Organization") (as defined in the master trust indenture, amended and restated, as of November I, 20 I0, between the Organization and U.S. Bank, as master trustee) as of June 30, 2012 and 20 II and the related combined statements of activities, changes in net deficiency, and cash flows for the years then ended. These combined financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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. The accompanying special purpose combined financial statements of the Organization (as defined in the master trust indenture, amended and restated, as of November I, 20 I0, between the Organization and U.S. Bank, as master trustee) have been prepared solely for reporting under the master trust indenture and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America. In our opinion, the special purpose combined financial statements referred to above present fairly, in all material respects, the special purpose combined financial position of Porter Hills Presbyterian Village, Inc. Obligated Group (as defined in the master trust indenture, amended and restated, as of November I, 20 I0, between the Organization and U.S. Bank, as master trustee) at June 30, 2012 and 20 I I and the combined results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note I. Prexitv: MEMBER, GLOBAL ALlIAIJCE OF ItlDEPENOErlT FIRMS

4 To the Board of Directors Porter Hills Presbyterian Village, Inc. Obligated Group We have audited the special purpose combined financial statements of Porter Hills Presbyterian Village, Inc. Obligated Group as of and for the years ended June 30, 2012 and 20 I I. Our audits were conducted for the purpose of forming an opinion on the special purpose combined financial statements as a whole. The combining information is presented for the purpose of additional information rather than to present the financial position and results of operations of the individual entities and is not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audits of the special purpose combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the special purpose combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the special purpose combined financial statements as a whole. This report is intended solely for the information and use of the board of directors and management of Porter Hills Presbyterian Village, Inc. Obligated Group, U.S. Bank, as master trustee under the master trust indenture, and bondholders and is not intended to be and should not be used by anyone other than these specified parties. P/..Lc' September 21,

5 Combined Balance Sheet Assets June 30, 2012 June 30, 20 II Current Assets Cash and cash equivalents $ 89,093 $ 493 Resident accounts receivable (Note 2) 2,263,261 2,954,847 Accounts receivable - Affiliates 119, ,535 Assets limited as to use (Note 3) 3,390,147 7,722,100 Other current assets 202, ,685 Total current assets 6,064,492 10,914,660 Assets Limited as to Use - Net (Note 3) 17,921,417 13,710,943 Property and Equipment - Net (Note 4) 63,768,706 66,543,647 Deferred Financing Costs - Net 1,437,420 1,523,039 Other Noncurrent Assets (Note 5) 2,557, ,926 Total assets $ 91,749,774 $ 93,468,215 Liabilities and Net Assets (Deficiency) Current Liabilities Checks issued in excess of bank balance $ $ 382,362 Accounts payable 1,585,472 1,083,988 Current portion of long-term debt (Note 7) 1,365,000 1,260,000 Current portion of refundable advances on lifeleases 1,940,300 1,837,000 Charitable gift annuities 84, ,922 Accrued liabilities and other 2,376,583 2,067,969 Total current liabilities 7,352,202 7,003,241 long-term Debt - Net of current portion (Note 7) 48,745,000 50,110,000 Lines of Credit (Note 6) 4,538,227 4,253,178 Other long-term Liabilities Deferred life lease income 10,623,866 10,844,980 Refundable advances on life leases 21,972,539 22,241,202 Charitable gift annuities 335,954 1,628,877 Fair value of interest rate swap agreements (Note 8) 5,438,794 2,329,412 Net Assets (Deficiency) Unrestricted (9,970, 162) (7, 157,622) Temporarily restricted (Note II) 2,263,317 1,764,910 Permanently restricted (Note 12) 450, ,037 Total net deficiency (7,256,808) (4,942,675) Total liabilities and net assets $ 91,749,774 $ 93,468,215 See Notes to Combined Financial Statements. 3

6 Combined Statement of Activities Year Ended June 30, June 30, 20 I I Operating Revenue Netservice revenue $ 22,682,205 $ 25,611,902 Investment income 559,618 2,230,128 Life lease income 1,971,836 2,160,324 Maintenance fees 1,665,655 1,936,880 Contributions 2,182, ,849 Supplemental charges and miscellaneous 2,350,480 2,368,660 Total operating revenue 31,412,386 34,843,743 Operating Expenses Salaries and wages 11,667,108 14,676,237 Employee benefits and payroll taxes 2,268,614 2,285,205 Operating supplies and expenses 2,142,446 2,593,343 Professional services and consultant fees 4,385,468 4,641,363 Repairs and maintenance 714, ,975 Travel 87, ,207 Utilities 1,166,594 1,206,943 Depreciation and amortization 3,630,448 3,641,063 Interest 2,620,960 2,479,703 Real estate taxes 380, ,043 Quality assurance assessment 486, ,043 Other (Note 4) 1,510,701 1,078,895 Total operating expenses 31,061,028 34,638,020 Operating Income 35 I, ,723 Other Loss Net unrealized loss on investments (313,462) (409,086) Change in fair value of interest rate swap agreements (Note 8) (3,109,382) (293,474) Loss from extinguishment of debt (Note 7) (319,447) Total other loss (3,422,844) (1,022,007) Deficiency of Revenue Over Expenses (3,071,486) (816,284) Transfer to Affiliates (Note 17) (394,233) (9,124) Net Gain (loss) of Joint Ventures (Note 10) 429,691 (37,713) Net Assets Released from Restriction 223, ,049 Decrease in Unrestricted Net Assets $ (2,812,540) $ (555,072) See Notes to Combined Financial Statements. 4

7 In Village, Inco Obligated Group ltatement of Changes in Net Deficiency Year Ended June 30, 2012 June 30, $ (3,071,486) $ (816,284) 429,691 (37,713) (394,233) (9,124) 223, ,049 (2,812,540) (555,072) 685,212 70,224 tments 36,683 15,437 (223,488) (308,049) ricted Net Assets 498,407 (222,388) (2,314,133) (777,460) (4,942,675) (4,165,215) $ (7,256,808) $ (4,942,675) 5

8 Combined Statement of Changes in Net Deficiency Year Ended June 30, 2012 June 30, 20 I 1 Unrestricted Net Assets Deficiency of revenue over expenses $ (3,071,486) $ (816,284) Net gain (loss) of affiliated entities 429,691 (37,713) Transfer to affiliates (394,233) (9,124) Net assets released from restriction 223, ,049 Decrease in Unrestricted Net Assets (2,812,540) (555,072) Temporarily Restricted Net Assets Restricted contributions 685,212 70,224 Net realized and unrealized gains on investments 36,683 15,437 Net assets released from restriction (223,488) (308,049) Increase (Decrease) in Temporarily Restricted Net Assets 498,407 (222,388) Decrease in Net Assets (2,314,133) (777,460) Net Deficiency - Beginning of year (4,942,675) (4,165,215) Net Deficiency - End of year $ (7,256,808) $ (4,942,675) See Notes to Combined Financial Statements. 5

9 Porter Hills Presbyterian Village,.nee Obligated Group Combined Statement of Cash Flows Cash Flows from Operating Activities Decrease in net assets Adjustments to reconcile decrease in net assets to net cash from operating activities: Depreciation and amortization Realized net gains Unrealized net losses Change in value of gift annuities Provision for bad debts Amortization of deferred life lease income (Gain) loss of joint ventures Loss on interest rate swap agreements Loss from extinguishment of debt Station Point impairment loss Changes in assets and liabilities which provided (used) cash: Resident accounts receivable Accounts receivable - Affiliates Other current assets Other noncurrent assets Accounts payable Accrued and other liabilities Net cash provided by (used in) operating activities Year Ended June 30, 2012 June 30, 20 II $ (2,314,133) $ 3,630,448 (238,732) 276,779 (1,422,730) 56,402 (1,971,836) (429,691) 3,109, , ,184 (17,942) (66,829) (614,509) 501, ,614 1,717,424 (777,460) 3,641,063 (1,984,919) 393, ,364 76,069 (2, 160,324) 37, , ,447 (386,408) (110,702) 32,792 ( 192,457) (854,972) 178,572 ( 1,226,099) Cash Flows from Investing Activities Purchase of property and equipment Purchase of assets limited as to use Proceeds from assets limited as to use Issuance of notes receivable to affiliate Net cash (used in) provided by investing activities Cash Flows from Financing Activities Net change in checks issued in excess of bank balance Net change in lines of credit Proceeds from issuance of long-term debt Repayments of long-term debt Proceeds from life lease obligations Refund of life lease obligations Issuance of gift annuities Payments to annuitants Deferred financing costs Settlement of interest rate swap agreements Net cash provided by (used in) financing activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents - Beginningof year (1,045,421) (15,681,738) 15,765,170 (737,613) (I,699,602) (382,362) 285,049 (1,260,000) 3,344,485 (1,759,126) (157,268) 70,778 88, (2,154,848) (76,437,646) 83,325,638 4,733, , ,503 26,426,287 (28,380,000) 3,877,007 (1,751,033) 3,305 (371,724) (640,858) (3,395,000) (3,610,288) (103,243) 103,736 Cash and Cash Equivalents - End of year Supplemental Cash Flow Information - Cash paid for interest $ $ 89,093 s ,622,317 $ 2,463,228 ~=~~= See Notes to Combined Financial Statements. 6

10 Notes to Combined Financial Statements June 30,2012 and 2011 I... Nature of Business and Significant Accounting Policies The accompanying special purpose combined financial statements represent the financial position and results of operations of Porter Hills Presbyterian Village, Inc. Obligated Group (the "Organization") as defined below. The special purpose combined financial statements have been prepared on a basis of accounting as required by the master trust indenture between U.S. Bank, as the current trustee, and the Organization. The basis differs from accounting principles generally accepted in the United States of America in that it only includes accounts of entities that comprise the Organization as defined below. Porter Hills Presbyterian Village, Inc. Obligated Group, as defined by the master trust indenture, amended and restated as of November I, 20 I0, includes the accounts of the following entities: CD Porter Hills Corporate was established to provide management support for the Organization and affiliated entities. It functions under Porter Hills Presbyterian Village, Inc.'s federal ID. The operating costs and capital needs for Porter Hills Corporate are allocated to the individual business units. Porter Hills Home Health Services was established during the year ended June 30, 1997 to provide home health care to residents of the western Michigan area. As described in Note 17, a transfer to affiliates occurred during 2012 to set up a separate entity, Porter Hills Home Health Services East, to provide private duty home care services to residents. Porter Hills Home Health Services was renamed to Porter Hills Home Health Services West and provides skilled home care to residents. The Porter Hills Foundation was established during the year ended June 30, Its primary purpose is to provide funds to the Organization for benevolent uses. CD Cook Valley Estates was established during the year ended June 30, 1999 to provide independent housing for the elderly in Grand Rapids, Michigan. CookValley Estates functions under Porter Hills Presbyterian Village, Inc.'s federalld. It Meadowlark Retirement Community was purchased during the year ended June 30, 1998 to provide assisted-living care and independent living for the elderly in Sparta, Michigan. The Organization's operations consist of providing suites, apartments, duplexes, licensed nursing care, home services, transportation, and other healthcare services for the elderly in the Grand Rapids, Michigan area. 7

11 Notes to Combined Financial Statements June 30, 2012 and 201 I I... Nature Business and Significant Accounting Policies (Continued) Accrual Basis - The accompanying special purpose combined financial statements have been prepared on the accrual basis of accounting, whereby revenue is recognized when earned and expenditures are recognized when the related liabilities are incurred and certain measurement and matching criteria are met. All significant intercompany balances and transactions have been eliminated in combination. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. The Organization routinely invests its surplus operating funds in money market mutual funds. These funds generally invest in highly liquid U.S. government and agency obligations. Accounts Receivable - Accounts receivable for residents, insurance companies, and governmental agencies are based on net charges. An allowance for uncollectible accounts is established on an aggregate basis by using historical write-off rate factors applied to unpaid accounts based on aging. Loss-rate factors are based on historical loss experience and adjusted for economic conditions and other trends affecting the Organization's ability to collect outstanding amounts. Uncollectible amounts are written off against the allowance for doubtful accounts in the period they are determined to be uncollectible. Assets Limited as to Use - Assets limited as to use primarily include assets held by trustees under indenture agreements and designated assets set aside by the board of trustees for future capital improvements and benevolent care funding, over which the board retains control and may, at its discretion, subsequently use for other purposes. Investments - Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the combined balance sheet. Fair value is based on quoted market prices. Investment income or loss, including realized and unrealized gains and losses on investments, interest, and dividends, is included as a component of deficiency of revenue over expenses, unless the income or loss is restricted by donor or law. 8

12 Notes to Combined Financial statements June 30, 2012 and 20 I I NC.1:e I.. Nature Business and Significant Accounting Policies (Continued) Property and Equipment - Property and equipment amounts are recorded at cost. Donated property and equipment are recorded at the estimated fair market value at the time of donation. Depreciation is computed principally on the straight-line basis over the estimated useful lives of the assets. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Costs of maintenance and repairs are charged to expense when incurred. Intangible Assets - In 2012, the Organization acquired intangible assets totaling $303,507 in the form of skilled nursing facility bed licenses (Licenses) recorded as an other noncurrent asset. The Licenses will be used in operations of a future joint venture. Ownership of the Licenses will be retained by the Organization and will not be transferred to the joint venture. The Licenses are not subject to amortization and are tested for impairment at least annually. No impairment charge was recognized during Deferred Financing Costs - Certain financing costs associated with the issuance of debt are deferred and amortized over the term of the related debt balances. In conjunction with the refinancing of debt during fiscal 20 II, the unamortized amount of the related deferred financing costs of $1, 100,734 was included in the loss from extinguishment of debt in the combined statement of activities. The deferred financing costs written off were offset by other transactions associated with the refinancing, as disclosed in Note 6. Deferred financing costs of $640,858 were incurred during the issuance of Series 20 I0 bonds in November 20 IO. Amortization expense charged to operations was $85,619 and $94,999 in 2012 and 20 I I, respectively. Checks Issued in Excess of Bank Balance - By arrangement with its financial institution, collected funds are adjusted daily between the Organization's checking account and the available line of credit. As a result, the recorded book balance of the Organization's checking account may reflect a negative cash balance, although the bank balance remains positive. Interest Rate Swap - Interest rate swaps are recognized as assets or liabilities at fair value. Realized gains and losses on interest rate swaps are classified as a component of deficiency of revenue over expenses. 9

13 Notes to Combined Financial Statements lune 30,2012 and 2011 Nellte I.. Nature of Business and Significant Accounting Policies (Continued) Deferred Revenue from life lease Agreements - Deferred life lease income represents advance fees paid by a tenant upon entering into a life lease agreement and is amortized to income using the straight-line method over the estimated remaining life expectancy of the tenant. The State of Michigan requires fees to be amortized over 66 2/3 months. Advance fees that have not satisfied the State of Michigan requirements totaled $4,482,906 and $4,354,380 as of June 30, 2012 and 20 I I, respectively. Advance fees amortized into income during 2012 and 20 II totaled $1,971,836 and $2,160,324, respectively. Refundable Advance Fees - Refundable advance fees represent the refundable portion of the life lease agreements paid to tenants of the garden apartments, town homes, and Cook Valley Estates. The refundable notes are noninterest-bearing and are refundable within 45 days after the tenant vacates the premises. Charitable Gift Annuities - The Organization is obligated to make annual payments to beneficiaries of charitable gift annuities over the life of the donor. The donor transfers cash to the Organization and the Organization promises to pay a fixed annual amount to the donor over the donor's lifetime. The Organization's liability represents the present value of the annuity payments based on life expectancy. The balance of the liability is realized as income when the charitable gift annuity matures. The face value of the charitable gift annuities on June 30, 2012 and 20 II is $981, 107 and $4,053,061, respectively, of which $420,80 I and $2,000,799, respectively, is remaining as a liability to be amortized over the life of the donor. Annuity payments for 2012 and 20 I I totaled $157,268 and $371,724, respectively. During 2012, a donor passed away that was holding charitable gift annuities with a face value of approximately $3,000,000. Due to the donor's death, the Organization was able to recognize approximately $1,500,000 in contribution revenue for the relief of the obligation to make annual payments to beneficiaries. Net Service Revenue - The Organization's principal activity is providing a continuum of healthcare services for the elderly, including operating a multicampus continuing care retirement community for the elderly. Revenue is derived from participation in the Medicaid and Medicare programs, as well as from residents paying for services privately. Amounts earned under the Medicaid and Medicare programs are subject to review and audit by the third-party payors and made up 47 and 43 percent of net service revenue earned for the years ended June 30, 2012 and 20 I I, respectively. 10

14 Notes to Combined Financial Statements June 30,2012 and 2011 NClI1:e I '" Nature of Business and Significant Accounting Policies (Continued) The payment methodology and amounts earned related to these programs are based on cost and clinical assessments that are subject to review and final approval by Medicaid and Medicare. Any adjustment that is a result of this final review and approval will be recorded in the period in which the adjustment is made. In the opinion of management, adequate provision has been made for any adjustments that may result from such thirdparty review. Services rendered to Medicare program beneficiaries are paid at prospectively determined rates based upon clinical assessments completed by the Organization that are subject to review and final approval by Medicare. Medicaid reimburses the Organization for resident routine service costs on a per diem basis, prospectively determined. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoings. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. Noncompliance with such laws and regulations may result in significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. The Medicaid system also includes a quality assurance supplement, which is a reimbursement based on Medicaid occupancy, and is related to the provider tax assessed to non-medicare skilled nursing facility days. The Medicare program has initiated a recovery audit contractor (RAC) initiative whereby claims subsequent to October I, 2007 will be reviewed by contractors for validity, accuracy, and proper documentation. A demonstration project completed in several other states resulted in the identification of potential overpayments. The RAe program began for Michigan in The Organization has estimated the extent of liability for overpayments to be approximately $25,000 and has recorded a liability for these overpayments in accrued liabilities and other on the combined balance sheet as of June 30, 2012 and 20 I I. Contributions - The Organization 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 to unrestricted net assets and reported in the combined statement of changes in net deficiency as net assets released from restrictions. II

15 Porter Hills Presbyterian Village, Inc.. Obligated Group Netes to Combined Financial Statements June 30, and.10i I NCl.1:e I.. Nature Business and Significant Accounting Policies (Continued) The Organization reports gifts of property and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. 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, the Organization reports the expiration of donor restrictions when the assets are placed in service. It is the Organization's policy to record donor-restricted contributions as unrestricted support when the restrictions are met within the same period the contributions are received. Deficiency of Revenue Over Expenses - Deficiency of revenue over expenses is considered the performance indicator in these special purpose combined financial statements. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenue over expenses, consistent with industry practice, include, when applicable, net assets released from restriction, transfers to affiliates, and net gain (loss) of joint ventures. Income Taxes - The Organization is a not-for-profit as described in Section 50 I(c)(3) of the Internal Revenue Code (the "Code") and is exempt from federal income taxes on related income pursuant to Section 50 I(a) of the Code. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Organization and recognize a tax liability if the Organization has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS or other applicable taxing authorities. Management has analyzed the tax positions taken by the Organization and has concluded that as of June 30, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the special purpose combined financial statements. The Organization is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes it is no longer subject to income tax examinations for years prior to June 30,

16 Notes to Combined Financial statements June 30,2012 and 2011 I ea Nature of Business and Significant Accounting Policies (Continued) Benevolent Care - The Organization provides care to residents who meet certain criteria under its benevolent care policy without charge or at amounts less than its established rates. Because the Organization does not pursue collection of amounts determined to qualify as benevolent care, they are not reported as revenue. Benevolent care is determined based on established policies, using resident income and assets to determine payment ability. The amount reflects the cost of free or discounted health services, net of contributions and other revenue received, as direct assistance for the provision of benevolent care. The estimated cost of providing benevolent care is based on a calculation that applies a ratio of cost of charges to the gross uncompensated charges associated with providing benevolent care to residents. The ratio of cost to charges is calculated based on the Organization's total expenses (less bad debt expense) divided by gross resident service revenue. The Organization estimates that it provided approximately $350,000 and $270,000 of services to indigent residents during 2012 and 20 II, respectively. Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation, including the reclassification of $101,535 in accounts receivable - affiliates and $74,716 in other noncurrent assets, both previously reported in other current assets. A reclassification of $19,343 in gain (loss) of affiliated entities previously reported in supplemental charges and miscellaneous operating revenue was made. A reclassification of $93,200 in refundable advances on life leases previously reported in duplex-style town home deposits was made. In Note 16, a reclassification of $2,721,357 in general and administrative expenses and $415,427 in fundraising expenses, both previously reported in healthcare expenses, was made. The reclassifications identified above did not have any impact on total net assets or total change in net assets. Subsequent Events - The combined financial statements and related disclosures include evaluation of events up through and including September 21, 2012, which is the date the combined financial statements were issued. Note.2... Resident Accounts Receivable The details of resident accounts receivable are set forth below: Resident accounts receivable $ 2,328,306 $ 3,046,338 Allowance for doubtful accounts (65,045) (91,491) Net resident accounts receivable $ 2,263,261 $ 2,954,847 13

17 Porter Hills Presbyterian Village, InclI Obligated Group Notes to Combined Financial Statements June 30,1011 and Resident Accounts Receivable (Continued) The Organization provides services without collateral to its residents, most of whom are local residents and insured under third-party payor agreements. The mix of receivables from residents and third-party payors is as follows: II Medicare Medicaid Other payors Total 59 % % % 100% ===== Note 3.. Assets Limited as to Use Assets limited as to use are designated for the following uses: By board of directors for various purposes, including benevolent care, capital outlay, debt service, refundable amounts, and other $ 13,053,937 $ 11,911,440 Restricted assets - Pledges receivable and interest in charitable remainder trusts 2,165,350 1,706,443 By agreement with donors - Charitable gift annuities 358,007 2,111,549 Under indenture agreement - Held by trustee 5,734,270 5,703,611 Total assets limited as to use 21,311,564 21,433,043 Less current portion (3,390,147) (7,722, 100) Total assets limited as to use - Net of current portion $ 17,921,417 $ 13,710,943 Assets limited as to use consist of the following: Cash $ 2,361,987 $ 3,001,019 Mutual funds 9,116,953 13,370,611 Equity investments 3,621,715 2,739,60 I Debt investments 3,758, ,477 Investments in hedge funds 287, ,892 Pledges receivable 770, ,502 Interest in charitable remainder trusts 1,394,790 1,270,941 Total assets limited as to use $ 21,311,564 $ 21,433,043 14

18 Notes to Combined Financial Statements June 30, and AlSeleS Limited as Use (Continued) Pledges consist of the following unconditional promises to give at June 30, 2012 and 20 I I, discounted to net present value using the IO-year Treasury rate: Amounts due in: Less than one year One to five years Sixyears and thereafter Total pledges receivable $ $ II 84,457 $ 52, , ,560 $ 64,201 44, , ,502 ~==~= Investment income and realized and unrealized gains (losses) on investments are reported as follows for the years ended June 30,2012 and 20 II: Interest and dividend income - Unrestricted $ Net realized gains on investments - Unrestricted Operating revenue investment income Net unrealized loss on investments - Unrestricted Net realized and unrealized gains on investments Restricted Total $ 320,886 $ 245, ,732 1,984, ,618 2,230,128 (313,462) (409,086) 36,683 15, ,839 $ 1,836,479 Note 4 iii Property and Equipment Property and equipment and depreciable lives are summarized as follows: Depreciable Life - Years Land $ 4,551,462 $ 3,860,717 N/A Land improvements 2,887,914 2,882, Buildings 92,930,451 92,235, Machinery and equipment 11,128,448 11,048, Furniture and fixtures 3,932,753 3,576, Construction in progress 684,574 1,801,655 N/A Total cost I 16, I 15,602 I 15,406,053 Accumulated depreciation 52,346,896 48,862,406 Net carrying amount $ 63,768,706 $ 66,543,647 15

19 Notes to Combined Financial Statements June 30,2012 and 2011 Depreciation expense on property and equipment totaled $3,544,829 and $3,546,064 in 2012 and 20 I I, respectively. During 2012, the Organization determined to discontinue the Station Point proposed construction project and recorded an impairment loss of $275,533, representing initial costs of the project. The impairment loss was recognized in other operating expenses. Note 5... other Noncurrent Assets Other noncurrent assets consist of the following: Notes receivable from affiliates Investment in joint ventures (Note 10) Skilled nursing home bed licenses Other noncurrent assets Total Note 6... Lines of Credit $ $ 1,401,731 $ 557, , , , ,486 29,000 2,557,739 $ 775,926 The Organization has line of credit agreements with a local bank in the amount of $4,800,000 for the years ended June 30, 2012 and 20 II. Borrowings under the agreements are collateralized up to $1,800,000 and uncollateralized for an additional $3,000,000. The agreements expire on June 5, 2015, at which time all outstanding principal is due. The collateralized balance of the line of credit agreement is secured by substantially all assets of the Organization. Borrowings are at 65 percent of 320 basis points above the one-month L1BOR, plus 25 basis points, with an effective rate of 2.49 and 2.45 percent at June 30, 2012 and 20 I I, respectively. As of June 30, 2012 and 20 I I, the outstanding balance on the line of credit agreements totaled $4,538,227 and $4,253,178, respectively. 16

20 Notes to Combined Financial Statements June 30,2012 and '" Long-term Long-term debt at June 30, 2012 and 20 I I is as follows: Revenue bonds payable Series, collateralized by certain mortgages and first security interests in certain revenue, accounts, contract rights, general intangibles, and personal property of the Organization, principal due in semi-annual installments ranging from $95,000 to $205,000, with the last payment due July I, Interest paid semi-annually with interest rates per annum ranging from 5.30 to percent $ 2,475,000 $ 2,615,000 Revenue bonds payable Series, collateralized by certain mortgages and first security interests in certain revenue, accounts, contract rights, general intangibles, and personal property of the Organization, principal due in semi-annual installments ranging from $840,000 to $930,000 with the last payment due July I, Interest paid semi-annually with interest rate per annum of 5.20 percent 2,650,000 3,445,000 Revenue bonds payable Series, collateralized by certain mortgages and first security interests in certain revenue, accounts, contract rights, general intangibles, and personal property of the Organization, principal due in annual installments ranging from $225,000 to $450,000, with the last payment due July I, Interest paid monthly with variable interest rates based on 67 percent of the one-month L1BOR (effectively 0.16 and 0.13 percent at June 30, 2012 and 20 II, respectively). Two interest rate swaps have been entered into related to these bonds to essentially fix the interest rate at 5.48 percent. One interest rate swap is based on 67 percent of the one-month L1BOR, expiring on July I, 2028 and the other interest rate swap is based on percent of the one-month L1BOR, expiring July I, ,250,000 5,425,000 17

21 Notes to Combined Financial Statements lune 30, 2012 and 20I I 7.. Long-term (Continued) Revenue bonds payable Series, collateralized by certain mortgages and first security interests in certain revenue, accounts, contract rights, general intangibles, and personal property of the Organization, principal due in annual installments ranging from $150,000 to $850,000, with the last payment due July I, Interest paid monthly with variable interest rates based on 67 percent of the one-month UBOR (effectively 0.16 and 0.13 percent at June 30, 2012 and 20 I I, respectively). Two interest rate swaps have been entered into related to these bonds to essentially fix the interest rate at 5.55 percent. One interest rate swap is based on 67 percent of the one-month UBOR, expiring on July I, 2033 and the other interest rate swap is based on percent of the one-month UBOR, expiring July I, 2015 $12,975,000 $ 13,125,000 Revenue bonds payable - 20 I0 Series, collateralized by a bank qualified note, interest-only payments due on the bonds through 2015, with principal due in annual installments ranging from $1 14,546 to $294,441 starting on July I, 2015, with the last payment due July I, Interest paid monthly with variable interest rates based on 65 percent of 320 basis points above the one-month UBOR, plus 25 basis points (effectively 2.49 percent and 2.45 percent at June 30, 2012 and 20 I I, respectively). The bank qualified note is collateralized by certain building, land, and investments of the Organization. The revenue bonds payable - 20 I0 Series are subject to a mandatory tender of the bonds on June 5, An interest rate swap was entered into related to these bonds to essentially fix the interest rate at 1.31 percent. The interest rate swap is based on 65 percent of the onemonth UBOR, expiring on July I, ,968,000 4,968,000 18

22 Notes to Combined Financial Statements June 30, 2012 and 201I MCltte '1... Longmoterm (Continued) Revenue bonds payable - 20 I0 Series, collateralized by a bank qualified note, interest-only payments due on the bonds through 2015, with principal due in annual installments ranging from $502,454 to $1,291,559 starting on July I, 2015, with the last payment due July I, Interest paid monthly with variable interest rates based on 65 percent of 320 basis points above the one-month L1BOR, plus 25 basis points (effectively 2.49 and 2.45 percent at June 30, 2012 and 20 II, respectively). The bank qualified note is collateralized by certain building, land, and investments of the Organization. The revenue bonds payable - 20 I0 Series are subject to a mandatory tender of the bonds on June 5, An interest rate swap was entered into related to these bonds to essentially fix the interest rate at 1.31 percent. The interest rate swap is based on 65 percent of the onemonth L1BOR, expiring on July 1,2015 Total Less current portion Long-term portion $21,792,000 $21,792,000 50, 110,000 51,370,000 (1,365,000) (1,260,000) $48,745,000 $50, 110,000 On November I, 20 I0, the Organization tendered approximately 60 percent of the outstanding balance of the 2003 revenue bonds at 96 percent of the face value of the bonds by issuing the 20 Iarevenue bonds. The Organization incurred a loss from the extinguishment of the 2003 revenue bonds of approximately $315,000, which included unamortized deferred financing costs, issuance costs, and a gain on the tender. The Organization also terminated a portion of the swap agreements on the 2003 revenue bonds, which resulted in a termination payment of $3,395,000. Under the terms of the bond indenture, the Organization is required to maintain certain deposits with a trustee. Such deposits are included in assets limited as to use. In addition, the bond indenture includes certain covenants with respect to liquidity, additional indebtedness, debt service coverage, and others. As of June 30, and 20 I I, the Organization was in compliance with these covenants. 19

23 Notes to Combined Financial statements lune 30, 1011 and 10I I (Continued) The Organization follows the policy of capitalizing interest as a component of the cost of assets of major building projects constructed for its facility. In 2012 and 20 I I, total interest incurred was $2,592,079 and $2,479,703, respectively. No capitalized interest was recorded during 2012 and 20 II. Maturities of long-term debt are as follows: Thereafter $ 1,365,000 1,385,000 1,495,000 1,542,000 1,60 I,000 42,722,000 Total $ 50,110,000 Subsequent to June 30, 2012, the Organization completed a transaction to buy back a portion of the 2003 revenue bonds from a current bondholder. The bondholder sold to the Organization $875,000 in outstanding bonds. The Organization was able to purchase those bonds for approximately $569,000, realizing a gain on the transaction of approximately $306,000 and netted the bonds that were repurchased against the outstanding liability, consistent with accounting for a debt extinguishment. Note 8.. Derivative Financial Instruments The Organization is exposed to certain risks in the normal course of its business operations. The Organization manages risks relating to the variability of future cash flows through the use of derivatives. The only derivative instruments used by the Organization are interest rate swaps. Interest rate swaps are used by the Organization to manage the risk associated with interest rates on variable rate borrowings. In some cases, multiple interest rate swaps exist for the purpose of managing the risk associated with interest rates of a single debt issuance. Hedge accounting is not used for the interest rate swaps held by the Organization. All interest rate swaps are reported in the combined balance sheet at fair value and all gains and losses recognized on interest rate swaps are included in deficiency of revenue over expenses. As of June 30, 2012 and 20 I I, the Organization held interest rate swap agreements, on which the Organization received variable rates and paid fixed rates, with details identified in the tables below. The Organization has recorded the fair value of the interest rate swap agreements, which resulted in a liability of $5,438,794 and $2,329;412 at June 30, 2012 and 20 I I, respectively. During 20 I I, a portion of two interest rate swap agreements was settled by the Organization paying the counterparty $3,395,000 to terminate the agreements. 20

24 Notes to Combined Financial Statements June 30, and 2.01 I NClI'te 8.. Derivative Financial Instruments (Continued) A summary of interest rate swap agreements as ofjune 30, 2012 is as follows: Notional Fixed Rate Counterparty Amount Paid Variable Rate Received Maturity Date Wells Fargo $ 5,233, % 67% of I-Month L1BOR July 1,2028 Wells Fargo 12,993, % of I-Month L1BOR July 1,2033 Huntington Bank 4,968, % of I-Month L1BOR July 1,2015 Huntington Bank 21,792, % of I-Month L1BOR July 1,2015 Huntington Bank 5,233, % of I-Month L1BOR July 1,2015 Huntington Bank 12,993, % of I-Month L1BOR July 1,2015 A summary of interest rate swap agreements as ofjune 30, 20 I I is as follows: Notional Fixed Rate Counterparty Amount Paid Variable Rate Received Maturity Date Wells Fargo $ 5,425, % 67% of I-Month L1BOR July 1,2028 Wells Fargo 13,140, % of I-Month L1BOR July 1,2033 Huntington Bank 4,968, % of I-Month L1BOR July 1,2015 Huntington Bank 21,792, % of I-Month L1BOR July 1,2015 Huntington Bank 5,425, % of I-Month L1BOR July 1,2015 Huntington Bank 13,140, % of I-Month L1BOR July 1,2015 The amount of loss recognized in the decrease in unrestricted net assets for derivatives not designated as hedging instruments is as follows: Change in fair value $ 3,109,382 $ 293,474 Interest expense 1,242,966 1,197,781 Settlement payment 3,395,000 Reported in Combined Statement of Operations as Change in fair value of interest rate swap agreements Interest expense Loss on extinguishment of debt Total loss $ 4,352,348 $ 4,886,255 Note 9.. Retirement Plans The Organization maintains a defined contribution 40 I (k) plan for all full-time employees who meet certain qualifications. Under the plan, the Organization matches employee contributions. As ofjuly I, 2009, the matching contribution was suspended. 21

25 Porter Hills Presbyterian Village,.neED Obligated Group Notes to Combined Financial Statements June 30,2012 and 2011 N01ce 10 '" Joint Ventures The Organization is a 50 percent member in Porter Hills Rehabilitation, LLC in a joint venture agreement with Rehabilitation Professionals, LLC. This venture provides rehabilitation services to the general public. The Organization accounts for the joint venture as an asset using the equity method. An initial investment of $50,000 was made by the Organization to start up the joint venture. At June 30, 2012 and 20 II, the Organization had an equity investment recorded as an other asset of approximately $82,000 and $156,000, respectively. During the years ended June 30, 2012 and 20 I I, the Organization paid the joint venture approximately $1,824,000 and $2,181,000, respectively, for rehabilitation services, which are recorded in operating expenses. The Organization is a 53.2 percent member in LifeCircles, Inc. (LifeCircles) in a joint venture agreement with Trinity Health Systems and Senior Resources, noting LifeCircies is not identified as a member of the Obligated Group (as defined in the master trust indenture, amended and restated, as of November I, 20 I0, between the Organization and U.S. Bank, as master trustee). This venture operates as a Program of All-inclusive Care for the Elderly (PACE). Once an individual has been enrolled in the PACE program, all of his or her medical needs must be provided, according to the patient plan, through the staff of LifeCircies and its network of providers. The Organization accounts for the joint venture as an asset using the equity method. An initial investment of $1,250,000 was made by the Organization to start up the joint venture. At June 30, 2012 and 20 I I, the Organization had an equity investment recorded as an other asset of approximately $510,000 and ($42,000), respectively. At June 30, 20 II, the Organization had outstanding accounts receivable from affiliates of $58,023 due from LifeCircies. During the years ended June 30, 2012 and 20 II, the Organization received $338,270 and $266,041, respectively, for management services provided to LifeCircles, which are recorded in operating revenue. The Organization is a 50 percent member in Marywood Home Health Services (Marywood HHS) in a joint venture agreement with the Dominican Sisters of Grand Rapids. This joint venture will provide home health care to residents of the western Michigan area and currently is in the development stage. The Organization accounts for the joint venture as an asset using the equity method. An initial investment of $125,000 was made by the Organization to start up the joint venture. At June 30, 2012, the Organization had an equity investment recorded as an other asset of approximately $90,000. At June 30, 2012, the Organization had outstanding accounts receivable from affiliates of $3,600 due from Marywood HHS for start-up costs paid by the Organization on behalf of Marywood HHS. 22

26 Porter Hills Presbyterian Village, InclI Obligated Group Notes to Combined Financial Statements lune 30, and '" Joint Ventures (Continued) Net gain (loss) reported in the combined statement of activities for the joint ventures is as follows for the years ended June 30, 2012 and 20 I I: Net (loss) gain from Porter Hills Rehabilitation, LLC $ Net gain (loss) from LifeCircies Net loss from Marywood HHS Start-up loss from joint venture (74,122) $ 552,094 (35,826) ( 12,455) 19,343 (57,056) Total $ 429,691 $ (37,713) ~=~~d: Note I I - Temporarily Restricted Assets Temporarily restricted net assets are available for the following purposes: Contributions restricted by donors for various purposes $ Pledges receivable Interest in charitable remainder trusts 97,967 $ 58, , ,502 1,394,790 1,270,941 Total temporarily restricted net assets 2,263,317 $~~~~= $ 1,764,910 Note 12 - Donor-restricted Endowments The Organization's endowment includes donor-restricted endowment funds. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. At June 30, 2012 and 20 II, the amount of $450,037 is held in restricted assets. 23

27 Porter Hills Presbyterian Village, Obligated Group Notes to Combined Financial Statements June 30, 1012 and 10I I Interpretation of Relevant law The board of trustees of the Organization has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (I) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Organization to retain as a fund of perpetual duration. There were no such deficiencies as of June 30, 2012 and 20 I I. Return Objectives and Risk Parameters The Organization has an investment committee made up of board members and other community advisors. The investment committee directs investment strategies through an Investment Policy Statement. Also, the Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. 24