Presbyterian Villages of Michigan Obligated Group. Combined Financial Report December 31, 2013

Transcription

1 Presbyterian Villages of Michigan Obligated Group Combined Financial Report December 31, 2013

2 Contents Report Letter 1-2 Combined Financial Statements Balance Sheet 3 Statement of Operations 4 Statement of Changes in Net Assets 5 Statement of Cash Flows

3 Independent Auditor's Report To the Board of Directors and Trustees Presbyterian Villages of Michigan Obligated Group We have audited the accompanying special purpose combined balance sheet of Presbyterian Villages of Michigan Obligated Group (the "Organization") (as defined in the Master Trust Indenture between Presbyterian Villages of Michigan and the Bank of New York Mellon Trust Company, National Association) as of and the related special purpose combined statements of operations, changes in net assets, and cash flows for the years then ended. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 1

4 To the Board of Directors and Trustees Presbyterian Villages of Michigan Obligated Group Opinion In our opinion, the special purpose financial statements referred to above present fairly, in all material respect, the assets and liabilities of as of and the combined results of its operations, changes in net assets, and cash flows for the years then ended in accordance with the basis of accounting described in Note 1. Emphasis of Matter As described in Note 1, these special purpose financial statements were prepared in accordance with the accounting requirements set forth in 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. Restriction on Use This report is intended solely for the information and the use of the board of directors, the trustees, and management of, the Bank of New York Mellon Trust Company, National Association, and the Michigan State Hospital Finance Authority and is not intended to be and should not be used by anyone other than these specified parties. April 7,

5 Combined Balance Sheet December 31, 2013 December 31, 2012 Assets Current Assets Cash $ 2,163,517 $ 823,151 Resident accounts receivable - Net (Note 2) 2,986,187 2,029,155 Due from related organizations - Net (Note 10) 1,171,263 1,156,299 Pledges receivable (Note 3) 1,224, ,664 Other receivables 249, ,307 Investments and assets limited as to use - Current portion (Note 5) 194, ,514 Accrued interest receivable 81,758 52,438 Prepaid expenses and other current assets 684, ,513 Total current assets 8,756,618 5,977,041 Land, Buildings, and Equipment - Net (Note 4) 25,535,190 26,661,085 Investments and Assets Limited As to Use - Net of current portion (Note 5) 16,742,203 16,779,413 Other Assets Beneficial interest in assets held by third parties (Note 6) 282, ,066 Pledges receivable - Net of current portion (Note 3) 232, ,955 Investment in and amounts due from related organizations - Net (Note 10) 9,836,468 7,686,835 Bond issue costs - Net 549, ,129 Total assets $ 61,934,578 $ 58,376,524 Liabilities and Net Assets Current Liabilities Accounts payable $ 1,671,185 $ 1,921,549 Current portion of note payable and line of credit (Note 7) 434, ,177 Current portion of bonds payable (Note 8) 740, ,000 Accrued payroll and related liabilities 1,143,360 1,050,777 Liability under split-interest agreements (Note 9) 28,946 37,568 Other current liabilities 390, ,397 Total current liabilities 4,408,490 4,417,468 Long-term Liabilities Note payable and line of credit - Net of current portion (Note 7) 2,924,930 3,044,304 Bonds payable - Net of current portion (Note 8) 28,087,170 28,785,101 Deferred revenue from advance fees 163, ,845 Refundable advance fees 1,863,000 1,661,260 Liability under split-interest agreements - Net of current portion (Note 9) 17,224 57,205 Total liabilities 37,464,261 38,132,183 Net Assets Unrestricted (Note 14) 14,720,713 12,818,875 Temporarily restricted (Note 15) 5,642,263 3,331,462 Permanently restricted (Note 16) 4,107,341 4,094,004 Total net assets 24,470,317 20,244,341 Total liabilities and net assets $ 61,934,578 $ 58,376,524 See Notes to Financial Statements. 3

6 Combined Statement of Operations December 31, 2013 Year Ended December 31, 2012 Operating Revenue Net resident service revenue $ 32,573,160 $ 32,352,758 Management fees (Note 10) 869, ,462 Development fees (Note 10) 174, ,851 Interest and dividends 239, ,190 Contributions, gifts, and donations 496, ,361 Other 1,296,749 1,178,948 Net assets released from restrictions (Note 15) 784,544 1,076,180 Total operating revenue 36,434,221 36,858,750 Operating Expenses Employee compensation 19,417,905 19,234,232 Depreciation and amortization 2,704,323 2,649,771 Interest 1,721,697 1,743,631 Insurance 538, ,875 Other operating expenses 13,958,755 14,362,302 Total operating expenses 38,341,323 38,516,811 Loss from Operations (1,907,102) (1,658,061) Investment and Other (Loss) Income Other expense (4,198) (7,966) Other income 2,269,366 - Net realized gain on investments 598, ,261 Net unrealized gain on investments 1,137, ,628 Change in value of split-interest agreements 161,136 81,422 Change in value of equity method investment in related organizations (37,483) 264,617 Total investment and other income 4,125,010 1,464,962 Increase (Decrease) in Unrestricted Net Assets - Before net unrealized loss on split-interest agreements, net assets released from restriction for capital purposes, and equity transfer to affiliates 2,217,908 (193,099) Net Unrealized Loss on Split-interest Agreements (5,361) (1,217) Net Assets Released from Restriction (Note 15) 186, ,701 Increase in Unrestricted Net Assets Before Equity Transfer 2,398, ,385 Equity Transfer to Affiliate (Note 10) (497,007) (935,447) Increase (Decrease) in Unrestricted Net Assets $ 1,901,838 $ (392,062) See Notes to Financial Statements. 4

7 Combined Statement of Changes in Net Assets December 31, 2013 Year Ended December 31, 2012 Unrestricted Net Assets Increase (decrease) in unrestricted net assets - Before net unrealized loss on split-interest agreements, net assets released from restriction for capital purposes, and equity transfer to affiliates $ 2,217,908 $ (193,099) Net unrealized loss on split-interest agreements (5,361) (1,217) Net assets released from restriction - Unrestricted 186, ,701 Increase in unrestricted net assets - Before equity transfer to affiliate 2,398, ,385 Equity transfer to affiliate (497,007) (935,447) Increase (Decrease) in Unrestricted Net Assets 1,901,838 (392,062) Temporarily Restricted Net Assets Contributions 3,138,314 1,379,233 Unappropriated earnings - Endowments 143,329 56,466 Net assets released from restriction (970,842) (1,813,881) Increase (Decrease) in Temporarily Restricted Net Assets 2,310,801 (378,182) Permanently Restricted Net Assets Contributions 9,860 33,677 Change in value of outside trust 3,477 2,056 Increase in Permanently Restricted Net Assets 13,337 35,733 Increase (Decrease) in Net Assets 4,225,976 (734,511) Net Assets - Beginning of year 20,244,341 20,978,852 Net Assets - End of year $ 24,470,317 $ 20,244,341 See Notes to Financial Statements. 5

8 Combined Statement of Cash Flows December 31, 2013 Year Ended December 31, 2012 Cash Flows from Operating Activities Increase (decrease) in net assets $ 4,225,976 $ (734,511) Adjustments to reconcile increase (decrease) in net assets to net cash from operating activities: Equity transfers 497, ,447 Depreciation and amortization 2,704,323 2,649,771 Net realized and unrealized gain on investments (1,736,189) (976,551) Change in value of beneficial interest in assets held by third parties 58,853 (277) Unrealized loss on split-interest agreements 5,361 1,217 Contributions received for long-term purposes (186,298) (737,701) Resident bad debt expense - Write-offs 470, ,646 Amortization of life leases (28,798) (13,537) Loss on sale of land, building, and equipment 4,198 7,966 Changes in assets and liabilities which (used) provided cash: Resident accounts receivable (1,427,527) (56,062) Other receivables (380,306) 1,051,553 Prepaid expenses and other assets 1,043 (18,194) Liability under split-interest agreements (53,964) (12,161) Accounts payable (250,364) 177,884 Other current liabilities 103, ,127 Net cash provided by operating activities 4,007,148 2,777,617 Cash Flows from Investing Activities Purchase of investments and assets limited as to use (7,752,924) (9,078,675) Proceeds from sale and maturities of investments 9,534,043 9,015,660 Cash paid for land, buildings, equipment, and construction activity (1,487,031) (2,219,078) Investment in and amounts due from related organizations (2,661,604) (3,409,256) Net cash used in investing activities (2,367,516) (5,691,349) Cash Flows from Financing Activities Net repayments of line of credit (107,704) (227,766) Proceeds from debt 100, ,000 Payment on long-term debt (705,000) (675,000) Proceeds from refundable advance fees 227, ,648 Contributions received for long-term purposes 186, ,701 Net cash (used in) provided by financing activities (299,266) 926,583 Net Increase (Decrease) in Cash and Cash Equivalents 1,340,366 (1,987,149) Cash and Cash Equivalents - Beginning of year 823,151 2,810,300 Cash and Cash Equivalents - End of year $ 2,163,517 $ 823,151 Supplemental Cash Flow Information - Cash paid for interest $ 1,691,098 $ 1,748,726 See Notes to Financial Statements. 6

9 Note 1 - Nature of Business and Significant Accounting Policies (the "Organization") consists of the following not-for-profit entities: Presbyterian Villages of Michigan (PVM) Presbyterian Villages of Michigan Foundation (PVMF) Presbyterian Village Redford (PVR) Presbyterian Village East (PVE) Presbyterian Village Westland (PVW) Presbyterian Village North (PVN) The Organization s special purpose combined financial statements are prepared for the combined entities for the purpose of complying with the requirements of Section 412(b) of the master trust indenture agreement between the Bank of New York Mellon Trust Company, National Association, and the Organization as it relates to the Michigan State Hospital Finance Authority Revenue Bonds described in Note 8. For financial statement purposes, the combined financial statements exclude 10 senior housing partnerships which are variable interest entities (VIEs) with which the Organization is a primary beneficiary. The combined financial statements also exclude Perry Farm Development Co., a not-for-profit entity for which the Organization has control and economic interest. Investments in unconsolidated subsidiaries are recorded on the combined balance sheet as investments in and amounts due from related organizations and accounted for under the equity method. The exclusion of these related entities is required to comply with the special purpose nature of these combined financial statements. In order for these combined financial statements to have been in compliance with accounting principles generally accepted in the United States of America, the activity of these other entities would have to be included. As described further in Note 10, the Organization has various transactions with these and other related entities. The Organization is a comprehensive, diverse, and faith-based organization serving seniors in multiple communities since 1945, with the following mission statement: The mission of the Presbyterian Villages of Michigan organizations, guided by our Christian heritage, is to serve seniors of all faiths and to create new possibilities for quality living. Presbyterian Villages of Michigan Foundation provides philanthropic support to advance and sustain the mission of Presbyterian Villages of Michigan. This includes the solicitation and stewardship of major and planned gifts, annual giving, lines of credit for recurring operations and facilities advancement activities, loans for PVM investments in affiliates and capital projects, pledges of assets to support PVM loans, grants supporting benevolent care, wellness programs, innovative projects, and quality housing for seniors of all faiths. 7

10 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Presbyterian Villages of Michigan's traditions of benevolence and social accountability are further reflected in its statement of beliefs and values and its various operational philosophies and practices. Presbyterian Villages of Michigan provides management and other services to the Organization entities, other related entities described in Note 10, as well as certain unrelated organizations. Presbyterian Villages of Michigan Foundation engages in fundraising activities and maintains a fiduciary role over certain unrestricted, temporarily restricted, and permanently restricted cash and investments for the support and betterment of all the Presbyterian Villages of Michigan entities. Presbyterian Village Redford and Presbyterian Village East provide housing with supportive services, assisted living, health care, and other related services to residents through the operation of a continuing care retirement community in Redford Township, Michigan and Chesterfield Township, Michigan, respectively. Presbyterian Village Westland provides senior apartment housing with supportive services, assisted living, and related services in Westland, Michigan. The number of units of total capacity by village as of December 31, 2013 is as follows: Apartments Assistedliving Units Memory Loss Units Nursing Units Total Presbyterian Village Redford Presbyterian Village East Presbyterian Village Westland Total During the course of 2013, PVR closed two wings of assisted living, reducing its capacity by 30 units. At December 31, 2012, there were 728 units of total capacity, including 346 apartments, 135 assisted living units, 69 memory loss units, and 178 nursing units. Presbyterian Village North (PVN) is a general partner in a PVM affiliate, Pontiac ILF Limited Dividend Housing Association Limited Partnership (Pontiac ILF), a 150-unit affordable housing rental project for older adults. Pontiac ILF has a management agreement with the Organization, and PVN staff carry out many of these management functions. PVN continues to operate certain wellness programs for the benefit of residents of Pontiac ILF and Oakland Woods II and maintains the remaining undeveloped land on the campus. 8

11 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Presbyterian Villages of Michigan is affiliated through covenant agreements with the Presbytery of Detroit, Lake Michigan Presbytery, the Presbytery of Lake Huron, and the Presbytery of Mackinac. Neither Presbyterian Villages of Michigan nor the four Presbyteries accept any responsibility, either in whole or in part, for the financial or contractual obligations of the other respective organizations. The accompanying combined financial statements have been prepared on the accrual basis of accounting. All material intercompany activity among the members of the Organization has been eliminated in combination. Significant accounting policies are as follows: Cash and Cash Equivalents - The Organization considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Certain cash and cash equivalents held as designated funds are reported as long-term investments (see Note 5). The Organization maintains cash balances that at times may exceed Federal Deposit Insurance Corporation insurance coverage. Resident Accounts Receivable - The Organization s resident accounts receivable are stated at net invoice amounts. In addition, a portion of revenue is receivable under contractual arrangements with the Medicare and Medicaid (State of Michigan) programs. An allowance for doubtful accounts is established based on historical loss experience and adjusted for economic conditions and other trends affecting the Organization s ability to collect outstanding amounts. All amounts deemed to be uncollectible are charged against the allowance for doubtful accounts in the period that determination is made. Pledges Receivable - The Organization receives pledges of financial support from individuals and corporations. Revenue is recognized when a pledge is made. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated cash flows. An allowance for uncollectible contributions is provided based on management's judgment of potential defaults. The determination includes such factors as prior collection history, type of contribution, current economic conditions, and nature of fundraising. Investments - Investments in debt and equity securities are recorded at fair value based on quoted market prices. Realized and unrealized gains and losses are recorded in the combined statements of operations and changes in net assets. Investments in pooled insurance arrangements are recorded at cost and adjusted for any permanent impairments. 9

12 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Risks and Uncertainties - The Organization invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes could materially affect the amounts reported in the combined balance sheet. Investments in and Amounts Due from Related Organizations - Investments in and amounts due from related organizations represent development and working capital advances, developer fees receivable, equity investments, and notes receivable which are recorded at estimated net collectible value. Investments in related entities are accounted for on the equity method. Amounts advanced to and equity received from related organizations are accounted for as an equity transfer to or from affiliate in the year it is made. Project development costs incurred toward new projects are recorded as project development costs until a related entity is formed. Upon establishment of the new entity, amounts are classified as due from related organizations. Project development costs recorded at transactional value include pre-development advances for land, infrastructure, and due diligence on projects in anticipation of a related entity being formed. The Organization expects to recover these costs after the related party entity has been formed. Land, Buildings, and Equipment - Land, buildings, and equipment are recorded at cost when purchased and at estimated fair market value when donated. Depreciation is computed principally on a straight-line basis over the estimated useful lives of the assets, which range from 5 years to 40 years. Costs of maintenance and repairs are charged to expense when incurred. Bond Issue Costs - Bond issue costs include financing costs related to the issuance of Michigan State Hospital Finance Authority Revenue and Refunding Bonds, Series The revenue bonds are being amortized over the term of each bond issue. Amortization expense on the new bonds was $21,486 and $21,485 for the years ended, respectively. Accumulated amortization was $183,710 and $162,224 at, respectively. Original Issue Discount - Discounts related to the issuance of Michigan State Hospital Finance Authority Series 2005 Revenue Bonds are reported as a reduction of the bond principal amount outstanding and are amortized using the interest method over the life of the bonds. 10

13 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Advance Fees - Presbyterian Villages East entered into advance fee contracts with certain residents. Under the terms of the advance fee contracts, 90 percent of the contract amount is refundable to the resident at the termination of the contract and is recorded as a refundable entrance fee recorded in long-term liabilities in the combined balance sheet. The remaining 10 percent that is not refundable is recorded as deferred revenue and amortized over the life expectancy of the resident on a straight-line basis. At, the Organization had refundable advance fees totaling $1,863,000 and $1,661,260, respectively. Classification of Net Assets - Net assets of the Organization are classified as permanently restricted, temporarily restricted, or unrestricted depending on the presence and characteristics of donor-imposed restrictions limiting the Organization s ability to use or dispose of contributed assets or the economic benefits embodied in those assets. Donor-imposed restrictions that expire with the passage of time or that can be removed by meeting certain requirements are recorded as temporarily restricted net assets. Earnings, gains, and losses on temporarily restricted net assets are classified as unrestricted unless specifically restricted by the donor or by applicable state law. The Organization reports investment income and gains on permanently restricted donations as unrestricted or temporarily restricted activity as applicable by state law. Unrestricted Net Assets - Unrestricted net assets are comprised of undesignated and board-designated net assets. Board-designated net assets are intended to be used for resident needs, benevolence, leadership development, and various capital items and program initiatives in the Organization and related organizations. In addition, the Organization has a board-designated endowment fund. Assets invested by the Organization for the purpose of these designations are included in long-term investments. Net Resident Service Revenue - Net resident service revenue is recorded at established rates. Allowances are provided to adjust revenue to the reimbursable amounts expected to be received, including amounts receivable under contractual arrangements with Medicare and Medicaid. Private-pay revenue includes adjustments for benevolent care for residents that qualify under the Organization s established policies. The Organization makes every effort to assist residents when their assets have been depleted and services may include financial assistance to maintain a resident in their current Presbyterian Village home or assistance in finding resources in their community. The Medicare payment methodology is based on clinical assessments that are subject to review and final approval. Any adjustment resulting from this final review and approval will be recorded in the period in which the adjustment is made. 11

14 Note 1 - Nature of Business and Significant Accounting Policies (Continued) The Medicaid payment system is a cost-based reimbursement system that also includes a quality assurance supplement (QAS). The QAS is a reimbursement based on Medicaid occupancy and is related to the provider bed tax assessed to nursing homes. Laws and regulations governing the Medicare and Medicaid programs are complex and change 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, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Significant sources of net resident service revenue as a percentage are summarized as follows: Percent Medicaid 21 % 21 % Medicare Private and other Total 100 % 100 % Contributions, Gifts, and Donations - Contributions, gifts, and donations of cash and other assets, including unconditional promises to give in the future, are reported as revenue when received, measured at fair value. Donor promises to give in the future are recorded at the present value of estimated future cash flows. Contributions, gifts, and donations without donor-imposed restrictions and contributions with donor-imposed time or purpose restrictions that are met in the same period as the gift are both reported as unrestricted support. Other restricted gifts are reported as restricted support and temporarily or permanently restricted net assets. 12

15 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Performance Indicator Defined - The combined statement of operations includes increase (decrease) in unrestricted net assets - before net unrealized loss on splitinterest agreement, net assets released from restriction for capital purposes, and equity transfers to affiliates. Changes in unrestricted net assets which are excluded from increase (decrease) in unrestricted net assets - before net unrealized loss on splitinterest agreement, net assets released from restriction for capital purposes, and equity transfers to affiliates, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers of assets to and from affiliates for other than goods and services, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). Collective Bargaining Agreement - Certain employees of Presbyterian Village Redford are subject to a collective bargaining agreement that expires on December 31, These employees comprise approximately 20 percent and 17 percent of the employees of the Organization for 2013 and 2012, respectively. Federal Income Taxes - The entities that comprise the Organization are exempt from federal income tax under Internal Revenue Code Section 501(c)(3). Accordingly, no tax provision is recorded in the combined financial statements. 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 Internal Revenue Service or other applicable taxing authorities. Management has analyzed the tax positions taken by the Organization and has concluded that as of, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the 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 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. 13

16 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Resident Benevolence Program - The Organization provides care to residents who meet certain criteria under its benevolence program without charge or at amounts less than established rates. Because the Organization does not pursue collection of amounts determined to qualify as benevolence, they are not reported as net resident service revenue. The amount reflects the cost of free or discounted assisted living and health services, net of contributions and other revenues received, as direct assistance for the provision of benevolent care. The value of benevolence services provided was $652,938 and $681,446 for the years ended, respectively, and is based upon data derived from the Organization's cost accounting system. Subsequent Events - The combined financial statements and related disclosures include evaluation of events up through and including April 7, 2014, which is the date the combined financial statements were issued. Note 2 - Resident Accounts Receivable The details of resident accounts receivable at December 31 are set forth below: Resident accounts receivable $ 3,463,123 $ 2,347,593 Less allowance for uncollectible accounts (476,936) (318,438) Net resident accounts receivable $ 2,986,187 $ 2,029,155 Bad debt expense was $470,495 and $370,646 for the years ended December 31, 2013 and 2012, respectively. The allowance for doubtful accounts represents 14 percent of gross resident accounts receivable at. Accounts receivable in percentage at December 31 of each year were due from the following: Percent Medicaid 34 % 29 % Medicare Private Other Total 100 % 100 % 14

17 Note 3 - Pledges Receivable Pledges receivable consist of the following unconditional promises to give as of December 31: Pledges receivable: Due within one year $ 1,328,320 $ 873,019 Due in one to five years 217, ,955 Due after five years 15,251 - Total pledges receivable 1,560,692 1,222,974 Less discount (25,537) (32,436) Allowance for estimated uncollectible amounts (78,035) (39,919) Total 1,457,120 1,150,619 Less current portion (1,224,749) (800,664) Long-term portion $ 232,371 $ 349,955 Note 4 - Land, Buildings, and Equipment The cost of land, buildings, and equipment is summarized as follows at December 31: Land $ 2,266,089 $ 2,266,089 Land improvements 6,150,034 6,123,609 Buildings and additions 38,517,391 38,542,348 Building improvements 9,633,787 9,185,577 Departmental equipment 11,425,091 10,884,793 Transportation equipment 444, ,989 Furniture and fixtures 65,182 61,212 Computer software and equipment 1,537,230 1,355,685 Construction in progress 86,801 18,774 Total cost 70,126,594 68,883,076 Less accumulated depreciation 44,591,404 42,221,991 Net carrying amount $ 25,535,190 $ 26,661,085 For the years ended, depreciation expense was $2,608,728 and $2,549,711, respectively. 15

18 Note 5 - Investments and Assets Limited As to Use Pooled insurance arrangement is recorded at cost. Remaining investments are recorded at fair value. Investments consist of the following at December 31: Cash and cash equivalents $ 1,863,772 $ 2,456,513 Corporate bonds 3,566,122 3,773,546 U.S. government and agency issues 3,615,615 3,169,169 Fixed-income mutual funds 144, ,915 Common stocks 7,211,898 6,896,236 Pooled insurance arrangement 535, ,548 Total investments $ 16,937,125 $ 16,971,927 At, Presbyterian Village North did not have any investments Presbyterian Villages of Michigan Presbyterian Villages of Michigan Foundation Presbyterian Village Redford Presbyterian Village East Presbyterian Village Westland Total Investments: Assets limited as to use: Debt service reserve $ 47,056 $ - $ 829,369 $ 788,187 $ 858,985 $ 2,523,597 Endowment assets - 4,107, ,107,341 Pooled income assets - 155, ,198 Advance fee reserve , ,250 Board-designated assets 122,683 8,992, ,115,191 Pooled insurance arrangement 535, ,548 Total investments 705,287 13,255, ,369 1,288, ,985 16,937,125 Current portion 2,929-64,766 60,879 66, ,922 Long-term portion $ 702,358 $ 13,255,047 $ 764,603 $ 1,227,558 $ 792,637 $ 16,742,203 16

19 Note 5 - Investments and Assets Limited As to Use (Continued) 2012 Presbyterian Villages of Michigan Presbyterian Villages of Michigan Foundation Presbyterian Village Redford Presbyterian Village East Presbyterian Village Westland Total Investments: Assets limited as to use: Debt service reserve $ 46,995 $ - $ 828,004 $ 786,903 $ 857,585 $ 2,519,487 Endowment assets - 4,046, ,046,690 Pooled income assets - 160, ,559 Advance fee reserve , ,933 Board-designated assets 52,699 9,120, ,172,710 Pooled insurance arrangement 535, ,548 Total investments 635,242 13,327, ,004 1,323, ,585 16,971,927 Current portion 2,893-63,966 60,127 65, ,514 Long-term portion $ 632,349 $ 13,327,260 $ 764,038 $ 1,263,709 $ 792,057 $ 16,779,413 Assets limited as to use, required by a third party, include funds held by the bond trustee to fund a required debt reserve account, the balance of the fixed-income portfolio (as disclosed in Note 8), endowment assets related to the permanently restricted net assets (as disclosed in Note 16), pooled income assets held by Presbyterian Villages of Michigan Foundation related to the split-interest agreements (as disclosed in Note 9), and an advance fee reserve held for refundable entrance fee contracts. Effective November 6, 2002, the Organization converted from traditional insurance coverage for general and professional liability to participation in a pooled insurance arrangement. Participation in the pooled insurance arrangement required contributions totaling $535,548 between 2002 and Effective November 6, 2007, the pooled insurance arrangement converted to a stockholder-owned risk retention group. The Organization accounts for its investment in the pooled insurance arrangement under the cost method, which is included in investments and assets limited as to use. Premiums and expenses related to actual liability claims made to the fund related to the Organization will be recorded as insurance expense. At, the Organization's subscriber account savings balance was $607,916 and $472,209, respectively. The subscriber account is an asset of the pooled-insurance plan; therefore balances are not reflected in the Organization's investments and assets limited as to use on the combined balance sheet. The Organization's premium expense was $320,592 and $313,652 during 2013 and 2012, respectively. 17

20 Note 6 - Beneficial Interest in Assets Held by Third Parties Beneficial interest in assets held by third parties consists of the following: Contributions receivable from remainder trust $ 2,898 $ 1,060 Beneficial interest in perpetual trust 52,443 51,053 Beneficial interest in charitable gift annuities 14,872 76,953 Beneficial interest in trust 212, ,000 Total $ 282,213 $ 341,066 Contributions receivable from remainder trust consist of donations made to the Presbyterian Foundation, a nonaffiliated organization, the principal of which will be given to the Organization upon the donor's death. The Organization has a beneficial interest in a perpetual trust sponsored by the Community Foundation of Southeastern Michigan (CFSEM), a nonaffiliated organization. The purpose of the trust is to provide unrestricted operating and Green House support for the Organization from trust earnings. In addition, certain funds donated by outside donors for the benefit of the Organization are held and managed by CFSEM. Such contributions are subject to variance power maintained by CFSEM. During 2013 and 2012, there were contributions by outside donors. The fair values of these funds were $1,753,052 and $1,745,574 at December 31, 2013 and 2012, respectively. Earnings are available for distribution to the Organization for operations at the discretion of CFSEM; therefore, interest and principal balances are not reflected in the combined financial statements. Beneficial interest in charitable gift annuities consists of gift annuities that are held in trusts by a financial institution and will be given to the Organization upon the donor's death. Beneficial interest in trust consists of donated funds held by a third party until 2021, when the principal will be given to the Organization. Note 7 - Note Payable and Line of Credit The Organization has a financing agreement with Huntington National Bank. Under the terms of the agreement, the Organization originally had access to three credit facilities (collectively, the HNB credit facilities): 18

21 Note 7 - Note Payable and Line of Credit (Continued) A revolving loan note was established to fund working capital expenses of the Organization. The revolving loan note was amended in October 2011 to a $500,000 line of credit. On January 31, 2014, the line of credit was amended to extend the due date to May 5, Payments of interest are due monthly. The line of credit carried a balance of $350,000 and $242,218 at, respectively. A draw loan note was established to finance investments in proposed affiliate organizations and capital expenditures in the Organization. The draw loan note was amended in October 2011 to a $2,182,000 draw loan note. Interest on the unpaid balance accrues monthly, with payments of $15,097 due monthly beginning November 2012 through May 2015, when remaining unpaid principal and interest are due. The outstanding balance was $2,047,810 and $2,163,296 at, respectively. A revolving construction loan note was established to finance construction of units of the planned expansion of Presbyterian Village East, with an available borrowing amount of $1,000,000 subject to appraised loan to value ratio of 80 percent, of which $961,967 was outstanding at both. Payments of interest are due monthly, with remaining unpaid principal and interest due in May Interest on the HNB credit facilities accrues at a floating rate of interest based on LIBOR plus an applicable margin based on the Organization's credit bond rating (3.50 percent at December 31, 2013). The HNB credit facilities are collateralized by a pledged fund included in investments limited as to use, and are subject to certain financial covenants. For the line of credit, draw loan note, and revolving construction loan note, minimum required principal is due as follows: Note 8 - Bonds Payable 2014 $ 434, ,924,930 Total $ 3,359,777 During 2005, the Organization consummated financing arrangements through the Michigan State Hospital Finance Authority, providing for the issuance of $34,640,000 of Series year revenue and refunding bonds, which were issued at a discount. The bonds are collateralized by identified real and personal property, contracts, and future revenue of each entity within the Organization. Interest payments are due biannually on May 15 and November 15, with rates on the bonds ranging from 4.45 percent to 5.50 percent. Remaining annual principal payments range from $740,000 to $2,180,000 and are due each November 15 through The first call date for the bonds is November 15,

22 Note 8 - Bonds Payable (Continued) The bonds require funding of a debt service reserve, which is included in investments as assets limited as to use (as disclosed in Note 5). The bonds are subject to certain restrictive financial and other covenants. Future minimum principal payments on bonds payable to maturity as of December 31, 2013 are as follows: 2014 $ 740, , , , ,000 Thereafter 25,055,000 Note 9 - Split-interest Agreements Subtotal 29,125,000 Less original issue discount (297,830) Total long-term debt 28,827,170 Less current portion (740,000) Total long-term debt - Net of current portion $ 28,087,170 The Organization is a beneficiary of various split-interest agreements held in a pooled income trust. Assets contributed under these agreements are held at Presbyterian Villages of Michigan Foundation. Donors to this pooled income trust receive payments based on interest earned on amounts donated during their lifetimes. The value of the split-interest agreements was $271,376 and $432,362 at, respectively. Of these amounts, Presbyterian Village East has borrowed funds totaling $116,178 and $271,803 from Presbyterian Villages of Michigan Foundation at, respectively, related to the pooled interest trust under mortgage loans at an interest rate of 8.75 percent. Principal amounts of the mortgages are reduced with proceeds available upon a donor s death. The mortgage loans are collateralized by land and buildings with a net carrying amount of $700,427 at December 31, 2013 and $854,282 at December 31, The remaining balance of $155,198 and $160,559 at, respectively, is recorded by the Organization as pooled income assets (see Note 5). The present value of the estimated future payments to the donors, using 8.75 percent as of, has been recorded as a liability of the Organization. As of, the total liability under these split-interest agreements was $46,170 and $94,773, respectively. 20

23 Note 10 - Related Party Transactions The Organization has an interest in certain affiliate entities. Certain directors and officers of the Organization are also trustees of the following sponsorship interests: Bethany Presbyterian Manor (Bethany) Brush Park Senior Housing Development Corp. (Brush Park) Harmony Village Senior Nonprofit Housing Corp. (Harmony) Our Saviour s Manor Senior Nonprofit Housing Corp. (OSM) Peace Presbyterian Village Nonprofit Housing Corp. (Peace) Presbyterian Village Holly Nonprofit Housing Corp. (Holly 1) Presbyterian Village Holly Phase II Nonprofit Housing Corp. (Holly II) First Presbyterian Church Housing Corp. (Warren Glenn) Oakman Village Manor Senior Housing Development Corp. (Oakman) Hampton Farms Senior Housing Corp. (Hampton Meadows) Mill Creek Senior Housing Corp. (Mill Creek) St. Martha's Senior Housing Corp. (St. Martha's) Hillside Apartments Phase II (Hillside II) Perry Farm Development Co. (PFDC) Perry Farm Village Association (PFVA) Harbor Area Housing (Hillside I) Spring Meadows II Senior Nonprofit Housing Corp. (Spring Meadows II) PVM Kalamazoo Senior Nonprofit Housing Corp. (Sage Grove) Rivertown Senior NP Housing Corp., Inc. (Rivertown Senior Living) In addition, the Organization has a direct ownership interest in the following entities, which are accounted for under the equity method: Blackman LDHA LP (Spring Meadows) Alpena Pines, LDHA, LP (Pines) TESSS Hartford-PVM, LLC (Hartford PVM) St. Martha's Commons Project, LLC (St. Martha's Commons) Center for Senior Independence (CSI) East Jefferson Neighborhood Condominium Association (Rivertown Association) PVM EJNP Real Estate Company, LLC (Rivertown) Detroit Affordable Assisted Living, LDHA, LP (Rivertown Assisted Living) PVM East St. Clair, LLC (East Harbor St. Clair) Lake Huron Woods Associates LDHA, LP (Lake Huron Woods) Oakland Woods LDHA, LP (Oakland Woods II A) Pontiac ILF LDHA, LP (Oakland Woods) Gibraltar Manor LDHA, LP (Gibraltar) 21

24 Note 10 - Related Party Transactions (Continued) Woodbridge ILF LDHA, LP (Woodbridge) Alpena Village, LLC (Alpena) Redford Manor LDHA, LP (Villa at Redford) Redford Cottages LDHA, LP (Cottages at Redford) Community Connections, Inc. (Community Connections) 5221 Lakeshore LLC (Lakeshore) Your Aging Well Advisors, LLC PVM has an equity interest in general partner entities associated with various limited dividend housing associations as follows: PV North, LLC; Redford Manor, LLC; PVM Jefferies, LLC; PV North II, LLC; PV West, LLC; PVM Detroit AAL, Inc., and PVM EJNP AAL, LLC. PVM is also a 50 percent owner of Gibraltar Manor Development, Inc. Investments in and Amounts Due from Related Organizations Transactions with affiliated organizations are reflected in the accompanying combined balance sheet in the investment in and amounts due from related organizations, as follows: Noninterest-bearing development advances $ 492,074 $ 457,641 Noninterest-bearing development fees 228, ,156 Noninterest-bearing operating advances: Due from 552, ,977 Less reserve (285,000) (230,000) Note receivable and accrued interest - PFDC (PVM) 4,050 18,692 Note receivable and accrued interest - PFDC (PVMF) 95, ,000 Less allowance on note receivable and accrued interest - PFDC (PVMF) (95,000) (95,000) Note receivable and accrued interest - Other 812, ,760 Less allowance (125,927) (95,464) Project development advances 832, ,744 Equity investment in CSI 2,112,824 2,360,024 Equity investment in Rivertown 3,167,275 1,234,992 Equity investments in senior housing and service organizations 3,270,612 2,591,935 Less allowance (55,322) (115,323) Total 11,007,731 8,843,134 Less current portion (1,171,263) (1,156,299) Total - Less current portion $ 9,836,468 $ 7,686,835 22

25 Note 10 - Related Party Transactions (Continued) Advances to related party entities are uncollateralized and repayment is subject to the ability of the related party entity to generate adequate cash flow to meet its existing obligations and repay the Organization. Note receivable and accrued interest were established to fund capital improvements and working capital needs. All notes are unsecured. A note of $155,000 carries an interest rate of 3.50 percent. All notes are repayable from excess operating cash flows. No repayments were made in 2013 and In 2007, Presbyterian Villages of Michigan Foundation made a loan to Perry Farm in the amount of $519,000, net of a discount of $106,000. The balance, net of discount and after an equity transfer, was $95,000 and $342,000 as of, respectively, and is included in the due from related organizations receivable in the table above. Equity transfers to affiliate totaled $247,000 and $0 at December 31, 2013 and 2012, respectively. Cumulative equity transfers totaled $247,000 at December 31, The note is noninterest-bearing. The balance of the loan is to be repaid with the proceeds from land sales (related to the initial cottage and apartment unit sales). In 2007, Presbyterian Villages of Michigan established a note receivable from Perry Farm for amounts that were previously recorded as noninterest-bearing advances. The note is subordinated and unsecured, carries an interest rate of 4 percent, and is repayable from excess operating cash flows. No repayments were made in 2013 or The note calls for any additional working capital advanced to Perry Farm to be added to the note balance in the subsequent year. At December 31, 2013, the outstanding note receivable net of allowance was $4,050, after an equity transfer to affiliate. Equity transfers to affiliate totaled $250,007 and $635,447 at, respectively. Cumulative equity transfers totaled $1,599,254 at December 31, At December 31, 2012, the outstanding receivable was $18,692. Revenue and Expenses The Organization also received fees for management services and financial services provided to certain of these related organizations totaling $859,477 and $815,166 for the years ended, respectively, which are included in management fees in the combined statement of operations. The Organization recognized developer fees totaling $174,273 and $291,851 for the years ended, respectively, in relation to complying with development contracts for related entity projects. The Organization also provided technology services to related parties in the amount of $774,118 and $491,838 for the years ended, respectively, which is included in other operating revenue. The Organization made grant allocations to certain of these related organizations totaling $160,930 and $213,329 for the years ended December 31, 2013 and 2012, respectively. 23

26 Note 10 - Related Party Transactions (Continued) Equity Transfers to and from Affiliates For the years ended, the Organization conducted certain transactions with related parties which were accounted for as equity transfers on the combined statement of activities, as follows: Transfer of operating development advances to PFDC outside of the Organization $ (497,007) $ (635,447) Transfer of operating development advances to Alpena outside of the Organization - (300,000) Net equity transfers to related parties $ (497,007) $ (935,447) Guarantees The Organization has guaranteed debt for related organizations as follows: In 2007, PFDC obtained tax-exempt bonds to finance its projects. The Organization guaranteed 50 percent and 25 percent of the outstanding principal and interest amount of the bond at the time payment is demanded as of, respectively. At December 31, 2013, the outstanding principal balance of the bonds was $1,420,301. The amount of the guarantee was $355,075 and $500,000 at December 31, 2013 and 2012, respectively. Full repayment of the bonds is due by PFDC on June 1, In 2008, Alpena obtained two construction loans to finance its projects in the amount of $1,500,000 and $775,000. The Organization is a co-borrower of the loans. At, the outstanding loan balance of the two construction loans was $922,024 and $1,129,857, respectively. In 2011, the Organization agreed to fund the operating assurance escrow with letters of credit from Lake Huron Woods Associates LDHA, LP totaling $150,000. Presbyterian Villages of Michigan is the sole member of Lakewood, the general partner of Lake Huron Woods Associates LDHA, LP. Additionally, the Organization has pledged future contributions of $135,000 to operating assurance reserve if certain conditions are not met. All conditions were met in 2013 and In 2012, Rivertown obtained a $2,467,200 construction loan to finance the construction of Condominium Unit 1. The Organization fully guaranteed the outstanding principal and interest amount of the loan at the time payment is demanded. At December 31, 2013 and 2012, the outstanding principal balance of the construction loan was $1,342,153 and $1,522,983, respectively. The principal balance of the construction loan converted to a permanent loan with a balance of $1,071,080 on January 31,