PRESBYTERIAN RETIREMENT VILLAGE OF RAPID CITY, INC. AND WESTHILLS VILLAGE FOUNDATION

Transcription

1 PRESBYTERIAN RETIREMENT VILLAGE OF RAPID CITY, INC. AND WESTHILLS VILLAGE FOUNDATION INDEPENDENT AUDITOR S REPORT, COMBINED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION SEPTEMBER 30, 2012 AND 2011 RAPID CITY, SOUTH DAKOTA GILLETTE, WYOMING

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3 Table of Contents September 30, 2012 and 2011 PAGE Independent Auditor s Report COMBINED FINANCIAL STATEMENTS Combined Statements of Financial Position Combined Statements of Operations... 6 Combined Statements of Changes in Net Assets... 7 Combined Statements of Cash Flows Notes to the Combined Financial Statements SUPPLEMENTAL INFORMATION Combining Statement of Financial Position - Assets Combining Statement of Financial Position - Liabilities and Net Assets Combining Statement of Operations Combining Statement of Changes in Net Assets

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5 Independent Auditor s Report To the Board of Directors Presbyterian Retirement Village of Rapid City, Inc. Rapid City, South Dakota We have audited the accompanying combined statements of financial position of Presbyterian Retirement Village of Rapid City, Inc. (nonprofit organizations) as of September 30, 2012 and the related combined statements of operations, changes in net assets, and cash flows for the year then ended. These combined financial statements are the responsibility of each Organization s management. Our responsibility is to express an opinion on these combined financial statements based on our audit. The prior year summarized comparative information has been derived from Presbyterian Retirement Village of Rapid City, Inc. s combined financial statements and, in the audit report from prior auditors dated December 19, 2011, an unqualified opinion was expressed on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Presbyterian Retirement Village of Rapid City, Inc. and Westhills Village Foundation as of September 30, 2012, and the combined results of their operations, the changes in their combined net assets and their combined cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

6 Our audit was conducted for the purpose of forming an opinion on the combined financial statements taken as a whole. The combining information, presented as supplemental information on pages 28 to 35, is presented for purposes of additional analysis of the combined financial statements and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole. Casey Peterson & Associates, Ltd. Rapid City, South Dakota December 18,

7 FINANCIAL STATEMENTS

8 Combined Statements of Financial Position September 30, 2012 and ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 1,175,545 $ 756,100 Funds Held by Trustee, Current Portion 699, ,146 Service and Health Care Fees Receivable, Net of Allowance $13, and ,870 1,054,285 Contributions Receivable, Current Portion 89,750 25,000 Other Receivables 1,200 - Supplies and Prepaid Expenses 286, ,047 Total Current Assets 3,233,672 2,491,578 OTHER ASSETS Contributions Receivable, Long-term Portion 101,400 75,000 Deferred Bond Issue Costs, Net of Accumulated Amortization ( $389,029, $263,114) 444, ,135 Investment Securities 959, ,654 Funds Held by Trustee, Less Current Portion 41,966,635 32,842,101 Total Other Assets 43,472,249 33,989,890 PROPERTY AND EQUIPMENT Buildings and Building Improvements 37,071,675 34,140,478 Furniture, Fixtures and Equipment 6,158,307 5,784,620 Land Improvements 2,175,000 2,144,224 Land 1,012,584 1,012,584 Construction in Progress 6,928,219 5,238,989 53,345,785 48,320,895 Less Accumulated Depreciation (23,667,958) (21,827,370) Total Property and Equipment 29,677,827 26,493,525 TOTAL ASSETS $ 76,383,748 $ 62,974,993 The accompanying notes are an integral part of the financial statements. 4

9 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Current Maturities of Long-term Debt $ 1,443,702 $ 1,334,156 Accounts Payable 296, ,399 Accounts Payable - Construction in Progress 944, ,432 Accrued Expenses: Interest 96,188 81,847 Salaries, Payroll Taxes and Insurance 317, ,565 Vacation 454, ,738 Other 623, ,971 Deferred Revenue 148,624 - Refundable Resident Contracts and Deposits 1,685, ,233 Total Current Liabilities 6,010,058 4,191,341 LONG-TERM LIABILITIES AND DEFERRED AMOUNTS Refundable Residence Fees 9,796,944 9,954,242 Deferred Residence Fees, Less Refundable Portion 8,481,057 8,445,276 Long-term Debt, Less Current Maturities 24,976,635 17,753,548 Total Long-term Liabilities and Deferred Amounts 43,254,636 36,153,066 Total Liabilities 49,264,694 40,344,407 NET ASSETS Unrestricted 26,620,954 22,288,162 Temporarily Restricted 492, ,169 Permanently Restricted 5,255 5,255 Total Net Assets 27,119,054 22,630,586 TOTAL LIABILITIES AND NET ASSETS $ 76,383,748 $ 62,974,993 The accompanying notes are an integral part of the financial statements. 5

10 Combined Statements of Operations For the Years Ended September 30, 2012 and Operating Revenues: Health Care Fees $ 6,561,517 $ 7,060,457 Service Fees 3,163,718 3,066,864 Therapy 2,187,609 2,267,285 Residence Fees Earned 1,708,880 1,801,710 Assisted Living Fees 1,193,076 1,035,271 Home Health Care Fees 1,040,521 1,089,806 Villa Fees 293, ,650 Contributions 137, ,333 Net Assets Released from Restrictions 65,229 24,093 Other 541, ,504 Total Operating Revenues 16,892,979 17,346,973 Expenses: Nursing 3,745,864 3,531,710 General and Administrative 2,811,836 2,579,389 Dietary 1,826,814 1,752,612 Interest 1,107, ,813 Therapy 1,020,204 1,077,886 Plant Operation 948, ,838 Home Health Care 858, ,523 Assisted Living 833, ,305 Housekeeping and Laundry 692, ,901 Villa 528, ,353 Resident Activities 247, ,049 Marketing 195, ,795 Other 268, ,039 Total Expenses 15,083,910 14,290,213 Operating Income 1,809,069 3,056,760 Nonoperating Revenues (Expenses): Unrealized Gain on Funds Held by Trustee 1,882,506 57,348 Interest and Dividend Income 858, ,714 Realized Gain on Sale of Investment Securities 1, Unrealized Gain (Loss) on Investment Securities 71,838 (17,832) Realized Loss on Sale of Funds Held by Trustee (290,439) (44,819) Total Nonoperating Revenues (Expenses) 2,523, ,765 Net Income / Increase in Unrestricted Net Asssets $ 4,332,792 $ 3,791,525 The accompanying notes are an integral part of the financial statements. 6

11 Combined Statements of Changes in Net Assets For the Years Ended September 30, 2012 and CHANGES IN UNRESTRICTED NET ASSETS Increase in Unrestricted Net Assets $ 4,332,792 $ 3,791,525 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Contributions Received 220, ,802 Net Assets Released from Restrictions (65,229) (24,093) Increase in Temporarily Restricted Net Assets 155, ,709 INCREASE IN NET ASSETS 4,488,468 3,917,234 NET ASSETS - BEGINNING OF YEAR 22,630,586 18,713,352 NET ASSETS - END OF YEAR $ 27,119,054 $ 22,630,586 The accompanying notes are an integral part of the financial statements. 7

12 Combined Statements of Cash Flows For the Years Ended September 30, 2012 and CASH FLOWS FROM OPERATING ACTIVITIES Increase in Net Assets $ 4,488,468 $ 3,917,234 Adjustments to Reconcile Increase in Net Assets to Net Cash Provided by Operating Activities Depreciation 1,842,729 1,749,644 Amortization of Deferred Bond Issue Costs 125,915 32,511 Amortization of Original Issue Premium on Debt, Net (46,618) (6,728) Unrealized (Gain) Loss on Investment Securities (71,838) 17,832 Realized Gain on Sale of Investment Securities (1,205) (354) Unrealized Gain on Funds Held by Trustee (1,882,506) (57,348) Realized Loss on Sale of Funds Held by Trustee 290,439 44,819 Amortization of Deferred Residence Fees (1,708,880) (1,801,710) Loss (Gain) on Resident Contract Terminations 33,536 (578,148) Amortization of Villa Modification Fees (32,360) (32,359) Gain on Disposal of Villa Modifications - (17,392) Working Capital Changes Increasing (Decreasing) Cash: Receivables, Net 71,215 (256,396) Contributions Receivable (91,150) - Supplies and Prepaid Expenses (172,222) (46,076) Accounts Payable and Accrued Expenses 73,881 66,393 Deferred Revenue 148,624 - Residence Fees Received, Including Refundable Deposits 3,748,296 3,904,754 Refunds of Residence Fees (1,130,882) (878,092) Net Cash Provided by Operating Activities 5,685,442 6,058,584 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Investment Securities (185,676) (223,927) Proceeds from Sale of Investment Securities 98, ,335 Purchases of Property and Equipment (4,571,592) (5,155,414) Purchases of Funds Held by Trustee (17,113,227) (25,467,174) Proceeds from Sale and Maturity of Funds Held by Trustee 9,423,868 26,012,762 Net Cash Used by Investing Activities (12,347,687) (4,641,418) The accompanying notes are an integral part of the financial statements 8

13 CASH FLOWS FROM FINANCING ACTIVITIES Principal Payments on Long-term Debt (1,284,730) (1,270,454) Proceeds from Long-term Debt 7,945,000 - Payments for Debt Issue Costs (297,561) - Proceeds from Bond Premium Issued 718,981 - Net Cash Provided (Used) by Financing Activities 7,081,690 (1,270,454) INCREASE IN CASH AND CASH EQUIVALENTS 419, ,712 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 756, ,388 CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,175,545 $ 756,100 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Payments for Interest, Net of Interest Capitalized ( $73,710; $51,928) $ 1,166,411 $ 1,039,709 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Accounts Payable Incurred for Resident Fee Refunds $ - $ 294 Costs Incurred for Construction in Progress Included in Accounts Payable $ 944,863 $ 489,424 Long-term Debt Refinanced $ 7,720,000 $ - The accompanying notes are an integral part of the financial statements. 9

14 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities Presbyterian Retirement Village of Rapid City, Inc. (the Village) (the Foundation) (Jointly, the Organization) are nonprofit corporations. The Village operates a campus and retirement community to provide care to the elderly, including housing, nursing, cultural and recreational services under the name Westhills Village Retirement Community. The Village also operates, as a separate division, a nursing home facility known as Clarkson Health Care. The Foundation is organized for charitable purposes limited exclusively to carrying out and furthering the purposes and functions of Presbyterian Retirement Village of Rapid City, Inc. The Board of Directors of the Foundation is elected by the Board of Directors of Presbyterian Retirement Village of Rapid City, Inc. Basis of Presentation The Organization reports all contributions received, including unconditional promises to give, as revenue in the period received at their fair values. Contributions received are distinguished between those that increase permanently restricted, temporarily restricted and unrestricted net assets. The classification of net assets, revenue and expenses, and gains and losses is based on the existence of absence of donor-imposed restrictions. Amounts for each of the three classes of net assets (permanently restricted, temporarily restricted and unrestricted) are displayed in the Combined Statements of Financial Position, and the amounts of the change in each of the three classes of net assets is displayed in the Combined Statements of Changes in Net Assets. When a donor restriction expires, that is when the stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Combined Statements of Changes in Net Assets as net assets released from restrictions. Principles of Combination The financial statements of the Foundation have been combined with the financial statements of the Village. All material inter-organization balances and transactions have been eliminated in combination. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The amortization of residence fees into income by the straight-line method over the estimated life expectancy of the respective resident is an estimate that is particularly susceptible to changes in the near term. Cash and Cash Equivalents For purposes of reporting cash flows, the Organization considers all money market accounts with banks and brokerage firms and all certificates of deposit with an original maturity of three months or less to be cash equivalents, except for funds restricted for long-term use and other funds held by the trustee. 10

15 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Organization maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. In addition, the Organization s money market accounts with brokerage firms are not federally insured with respect to loss of principal. The Organization has not experienced any losses in such accounts, and management believes the Organization is not exposed to any significant credit risk on cash and cash equivalents. Service and Health Care Fees Receivable and Other Receivables Receivables are carried at original invoice less an estimate made for doubtful receivables, as necessary, based on review of all outstanding amounts on a periodic basis. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. At September 30, 2012 and 2011, there was approximately $158,000 of receivables over 90 days past due which were primarily due from third-party payers. Supplies Inventories of drugs and other supplies are stated at the lower of cost (first-in, first-out) or market. Funds Held by Trustee and Investment Securities Investments in equity securities, which include funds held by Trustees and all investments in debt securities, are reported at fair value. Amortization of premiums and accretion of discounts are computed by the interest method over the contractual lives of the securities. Unrealized gains and losses are included in the Combined Statements of Operations. Realized gains and losses, determined on the basis of the amortized cost of specific securities sold, are also included in the Combined Statement of Operations. Deferred Bond Issue Costs Costs incurred related to bond issues have been capitalized and are being amortized over the terms of the related bonds using the interest method. Property and Equipment Property and equipment are stated at cost. Westhills Village Retirement Community utilizes a $1,000 capitalization policy, while Clarkson Health Care utilizes a $500 capitalization policy. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets as follows: Years Land Improvements 5-25 Buildings and Improvements 5-40 Furniture, Fixtures and Equipment 3-20 Expense Allocations The costs of providing various programs and activities require certain estimates of allocations of costs among the programs and supporting administrative services. Income Taxes The Village and the Foundation are exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. In addition, the Internal Revenue Service has determined that the Foundation is not a private foundation as defined in Section 509(a)(2). 11

16 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounting standards prescribe a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. At September 30, 2012 and 2011, the Village and Foundation believe that there are no significant uncertain tax positions or liabilities, or interest and penalties associated with uncertain tax positions. In accordance with the applicable statute of limitations, the Village and Foundation could be audited by the Internal Revenue Service for the year ended September 30, 2009 to Net Income Changes in unrestricted net assets which are excluded from net income, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers of assets to and from affiliates or for other than goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Deferred Residence Fees, Refundable Deposits and Revenue Recognition The Village enters into a contractual agreement with each resident of Westhills Village Retirement Community and Villas, whereby the Village agrees to provide certain services and grants to the resident the right to occupy a residential unit upon payment of a residence fee and certain monthly service fees. The monthly service fee is assessed to cover the resident s allocated share of the estimated operating costs of the campus and retirement community. The contracts obligate the Village to provide medical care to the residents over their lifetimes, even in the event a resident becomes unable to pay the fees for such services. Management reviews this amount on an annual basis and at September 30, 2012 has considered any liability for such services to be insignificant. The Village offers two types of residence contracts. Under contract type A, the residence fee is refundable during the first five years of occupancy on a pro rata basis less the application deposit. After five years, there are no refund provisions. Under contract type D, the resident pays a higher residence fee plus a monthly surcharge. This entitles the resident to the same refund provisions as in contract A if the resident chooses to move out of the Village. In addition, it entitles the resident to a seventy-five percent refund of the residence fee less application deposit and certain other adjustments if death occurs at any time after fifteen months of occupancy. Prior to 1992, the Village offered contract type C, which offered the same refund provisions as contained in contract type D. Residents with refundable type C and D contracts who permanently transfer to the health care facility and who elect to continue their residence contract receive monthly credits against health care facility expenses for their lifetime. A portion of the residence fee, called the application deposit, is collected upon the signing of a residence contract. These refundable application deposits, along with partial payments received prior to occupancy, are included in Refundable Resident Contracts and Deposits on the accompany Combined Statement of Financial Position. The remainder of the residence fee is due at the earlier of (a) sixty days after signing a residence contract, or (b) occupancy. The applicants have the option of signing a deferred waiting list agreement in addition to the residence contract at the time of application. Under the deferred waiting list arrangement, the remainder of the residence fee is not due until occupancy. However, these applicants will be required to pay the residence fee rates in effect at the date of occupancy rather than the rates which were in effect when they signed the residence contract. The Organization also has an accelerated wait list option allowing applicants to pay the total residence fee for an apartment and be given preference on the waiting list, giving them first option to move in when residences become available. 12

17 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Refundable portions of residence fees are reported as Refundable Residence Fees (Note 5). The estimated amounts that will not be refunded are reported as Deferred Residence Fees and are amortized to income on the straight-line method over the remaining life expectancy of the respective resident, determined actuarially and re-evaluated annually. The Village offers lease contracts on certain residential units. Under the terms of the lease contracts, the Village collects a deposit from the resident at the inception of the lease, which is reported in refundable residence fees in the Combined Statements of Financial Position. The leases have an initial term of six months and then continue on a month-to-month basis at the option of both parties. The lease contracts do not include an obligation by the Village to provide medical care to the residents in the event the resident becomes unable to pay the fees for such services. Investment Fees Investment purchases are reported net of related investment expenses in the Combined Statements of Operations. The amount of expense netted with interest and dividend income was approximately $65,400 and $71,900 for the years ended September 30, 2012 and Charity Care The Village provides care to patients who meet certain criteria under its charity care policy at amounts less than its established rates. Eligibility for charity care is determined subsequent to admission based on criteria described in Village s charity care policy. The Organization determines the costs associated with providing charity care by aggregating the applicable direct and indirect costs, including salaries, wages and benefits, supplies, and other operating expenses, based on data from its costing system. In August 2010, the FASB issued guidance, Accounting Standards Update (ASU) No Health Care Entities (Topic 954): Measuring Charity Care for Disclosure, that requires health care entities to use cost as the measurement basis for charity care disclosures and defines cost as the direct and indirect costs of providing charity care. The amended disclosure requirements are effective for fiscal years beginning after December 15, 2010 and must be applied retrospectively. The Village adopted the amended disclosure requirements on October 1, Note 14 - Charity Care reflects the amended disclosure requirements. Since the new guidance amends disclosure requirements only, its adoption did not impact the Village s Combined Statements of Financial Position, Combined Statements of Operations, Combined Statements of Changes in Net Assets or the Combined Statements of Cash Flows. Reclassifications Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to confirm to the presentation in the 2012 financial statements. New Accounting Pronouncements In August 2010, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Health Care Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies that a health care entity should not net insurance recoveries against a related claim liability for malpractice claims. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The Village adopted ASU No during the year ended September 30, The adoption of ASU No did not have a material impact on the Village s financial statements. 13

18 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In May 2011, the FASB issued ASU The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board ( IASB ) to develop a single, converged fair value framework - that is, converged guidance on how, not when, to measure fair value and on what disclosures to provide about fair value measurements. There are few differences between the ASU and its international counterpart, International Financial Reporting Standard ( IFRS ) 13. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820 s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments are being made to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some could change how the fair value measurement guidance in Accounting Standards Codification ( ASC ) 820 is applied and the disclosures made. The adoption of ASU No is effective for the Village beginning October 1, The Village is currently evaluating the potential impact of ASU , but it is not expected to have a material impact on the Village s financial statements. In July 2012, the FASB issued ASU The ASU affects, among others, Accounting Standards Codification ( ASC ) Topic 954, Health Care Entities, specifically accounting for refundable entrance fees. The ASU requires that a continuing care retirement community recognize a deferral of revenue when a contract between a continuing care retirement community and a resident stipulates that (1) a portion of the advanced fee is refundable if the contract holder's unit is reoccupied by a subsequent resident, (2) the refund is limited to the proceeds of reoccupancy, and (3) the legal environment and the entity's management policy and practice support the withholding of refunds under condition (2). This ASU will become effective for the Village on October 1, Management does not believe the impacts of this ASU will have a significant impact on the Village s financial statements as a result of management s policies and history of not requiring reoccupancy prior to refunding advanced fees. In July 2011, the FASB issued ASU This ASU requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This ASU will be effective for the Village on October 1, Management does not believe the impacts of this ASU will have a significant impact on the Village s financial statements as a result of management s policies of assessing all resident s ability to pay prior to admission. 14

19 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 2 - CONTRIBUTIONS RECEIVABLE Contributions receivable at September 30, 2012 and 2011 were as follows: Receivable in Less Than One Year $ 89,750 $ 25,000 Receivable in One to Five Years 101,400 75,000 Total Unconditional Promises to Give 191, ,000 Less Unamortized Discounts to Net Present Value - - Net Contributions Receivable $ 191,150 $ 100,000 As shown above no discount was recorded on long-term contributions receivable as of September 30, 2012 and 2011 due to the amount not being significant. NOTE 3 - INVESTMENT SECURITIES Investment securities include those securities not held by a trustee and consisted of the following at September 30: 2012 Fair Cost Value Certificates of Deposit $ 331,987 $ 331,987 Mutual Funds 534, ,432 Money Market Funds 54,014 54,014 $ 920,964 $ 959, Fair Cost Value Certificates of Deposit $ 255,891 $ 255,891 Mutual Funds 536, ,424 Money Market Funds 40,339 40,339 $ 833,025 $ 799,654 Income and losses from the above investment securities was as follows for the years ended September 30, 2012 and 2011: Interest and Dividend Income $ 16,126 $ 15,911 Unrealized Gain (Loss) on Investment Securities 71,838 (17,832) Realized Gain on Sale of Investment Securities 1, $ 89,169 $ (1,567) 15

20 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 4 - FUNDS HELD BY TRUSTEE Certain funds were held in trust at September 30, 2012 and The funds held by the trustee consisted of the following: 2012 Fair Cost Value Money Market Mutual Funds $ 6,917,433 $ 6,917,433 Certificates of Deposit 4,165,812 4,232,494 Asset Backed Securities 420, ,461 Corporate Bonds 4,202,179 4,500,650 Mutual Funds 8,130,588 8,902,458 U.S. Treasury and Government Agency Obligations Including Mortgage-Backed Securities 17,148,857 17,675,177 $ 40,985,121 $ 42,665, Fair Cost Value Money Market Mutual Funds $ 7,197,547 $ 7,197,547 Certificates of Deposit 4,401,850 4,401,850 Asset Backed Securities 446, ,040 Corporate Bonds 2,553,203 2,657,815 Mutual Funds 5,732,943 5,255,182 U.S. Treasury and Government Agency Obligations Including Mortgage-Backed Securities 13,058,073 13,342,813 $ 33,390,383 $ 33,384,247 The amortized cost and fair values of debt securities as of September 30, 2012, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are not included in the maturity categories in the following summary: Amortized Fair Cost Value Due in One Year or Less $ 4,223,367 $ 4,242,865 Due After One Year Through Five Years 5,805,408 6,061,154 Due After Five Years Through Ten Years 3,194,945 3,370,337 Due After Ten Years 1,165,148 1,311,545 Mortgage-Backed Securities Maturing in Installments Over Various Periods of Time 11,548,204 11,722, $ 25,937,072 $ 26,708,238

21 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 4 - FUNDS HELD BY TRUSTEE (CONTINUED) Funds held in trust at fair value consisted of the following accounts at September 30, 2012 and 2011: CURRENT ASSETS Restricted Under Debt Covenants: Interest Accounts $ 177,325 $ 192,101 Sinking Fund Reserve Account 119, ,025 Board Designated: Refund Account 250, ,827 Charitable Trust Account 151,300 41, , ,146 NONCURRENT ASSETS Restricted Under Debt Covenants: 2006 Project Fund - 1,520, Project Fund 4,325,884 - Debt Service Fund 2,395,058 1,997,897 Trustee Insurance Proceeds Fund 155,900 - Renewal and Replacement Fund - 769,553 Board Designated: Agency Account 25,831,104 27,126,030 Clarkson Fund 1,787,908 1,034,458 Deferred Retirement Fund 333, ,383 Expansion Fund 2,999,432 - Capital Fund 2,499,909 - Renewal and Replacement Fund 1,004,975 - Clarkson Insurance Reserve Fund 25,011 25,010 Clarkson Renewal and Replacement Fund 608, ,039 41,966,635 32,842,101 $ 42,665,673 $ 33,384,247 Income from the above funds was as follows for the years ended September 30, 2012 and 2011: Interest and Dividend Income $ 842,487 $ 723,803 Unrealized Gain on Funds Held by Trustee 1,882,506 57,348 Realized Loss on Sale of Funds Held by Trustee (290,439) (44,819) $ 2,434,554 $ 736,332 17

22 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 4 - FUNDS HELD BY TRUSTEE (CONTINUED) The interest accounts, sinking fund and debt service fund are restricted by debt covenants for the benefit of the bondholders for the purpose of paying principal and interest on the bonds. The Village also had renewal and replacement funds and insurance funds restricted under debt covenants for the benefit of the residents for various purposes associated with operating the facilities. The refund account, charitable trust account (Note 14), Clarkson fund and agency account were established by the Board and are also to be used for the benefit of the residents for various purposes associated with operating the facilities. The project funds are restricted under debt covenants for various expansions and upgrades to the facility. The deferred retirement fund was established by the Board to fund retirement benefits (Note 10). The Board has also designated funds for expansion, capital, insurance, and renewal and replacements. NOTE 5 - REFUNDABLE RESIDENCE FEES Refundable residence fees consisted of the following at September 30, 2012 and 2011: Residence Contract Type A $ 3,112,644 $ 3,408,682 Residence Contract Type C 132, ,128 Residence Contract Type D 6,398,200 6,180,600 Villa Modifications 153, ,832 $ 9,796,944 $ 9,954,242 18

23 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 6 - LONG-TERM DEBT Long-term debt consisted of the following at September 30, 2012 and 2011: Note payable to South Dakota Health and Education Facilities Authority in conjunction with Revenue Bonds (Westhills Village Retirement Community Issue), Series 2012, maturing from 2013 to 2018, subject to redemption by a mandatory sinking fund, interest payable semi-annually at variable rates between 2.70% and 4.50%. $ 15,665,000 $ - Note payable to South Dakota Health and Education Facilities in conjunction with Revenue Bonds (Westhills Village Retirement Community Issue), Series 2006, maturing from 2008 to 2031, subject to redemption by a mandatory sinking fund, interest payable semi-annually at variable rates between 4.50% to 5.00% 10,030,000 10,325,000 Note payable to South Dakota Health and Education Facilities Authority in conjunction with Revenue Bonds (Westhills Village Retirement Community Issue), Series 2003, maturing from 2005 to 2023, subject to redemption by a mandatory sinking fund, interest payable semi-annually at variable rates between 5.00% and 5.65%. This note was refinanced during 2012 as part of issuing the Series 2012 Revenue Bonds. - 8,705,000 Charitable gift annuities payable to donors, sue in semiannual and quarterly installments ranging between $454 and $2,744, including interest over the lifetime of the donors. 48,651 53,381 25,743,651 19,083,381 Less Current Maturities (1,443,702) (1,334,156) Less Discounts and Premiums on Bonds 676,686 4,323 Total Long-term Debt $ 24,976,635 $ 17,753,548 The Village has pledged all future gross revenues, personal property, real property and equipment as security for the notes payable to South Dakota Health and Education Facilities Authority. The loan agreement requires the Village to charge rates and fees sufficient to pay all operating costs of the Village, to maintain certain debt services ratios, and to maintain certain restrictive funds. The Village is in compliance with these covenants at September 30,

24 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 6 - LONG-TERM DEBT (CONTINUED) Maturities on long-term debt as of September 30 are as follows: NOTE 7 - TEMPORARILY RESTRICTED NET ASSETS 2013 $ 1,443, ,184, ,229, ,279, ,329,152 Thereafter 19,278,341 $ 25,743,651 Temporarily restricted net assets held by the Organization are available for the following purposes as of September 30, 2012 and 2011: Purpose Restrictions: Care Assurance Fund $ 158,792 $ 158,292 Commons Expansion 96,191 22,055 Building Improvements and Equipment 46,712 50,334 Academic Support for Employees - 6,488 Time Restrictions: Contributions Receivable in Future Years 191, ,000 $ 492,845 $ 337,169 Net assets held by the Organization were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors as follows for the year ended September 30, 2012 and 2011: Time Restrictions Met on Contributions Receivable $ 47,100 $ - Building Improvements and Equipment 9,916 20,700 Academic Support for Employees 7,489 1,458 Care Assurance Fund 724 1,935 $ 65,229 $ 24,093 NOTE 8 - PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets held by the Foundation are restricted to the following as of September 30, 2012 and 2011: Investment in Perpetuity, the Income From Which is Unrestricted $ 5,255 $ 5,255 20

25 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 9 - PROPERTY MATTERS The Village has been granted an exemption from real estate taxes by Pennington County, State of South Dakota. The Village applies for the exemption on a yearly basis. The Village leases the land for its Clarkson Health Care Facility from the City of Rapid City, South Dakota under the terms of a 50-year lease agreement expiring April The lease requires only a nominal payment by the Village, but requires the Village to use the property for nonprofit healthcare services. If the Village were to discontinue such services on the property, the City would have the right to terminate the lease. No amount is recorded in these financial statements for the annual fair value contribution of this lease, as management has considered the contribution not to be significant. NOTE 10 - RETIREMENT PLANS The Village has a 401(k) plan which provides for salary deferrals under Section 401(k) of the Internal Revenue Code, covering substantially all of its employees. The Village also has a non-qualified deferred compensation plan, which is an unfunded plan. The plan is established under ERISA sections 201(2), 301(a)(3) and 401(a)(1). Under the provisions of the 401(k) plan, employees elect to contribute a percentage of their compensation to the plan subject to the limitations prescribed by law. The plans provide for contributions by the Village at the discretion of the Board of Directors. The Village has recorded approximately $178,000 and $159,000 in contribution expense for both retirement plans for the years ended September 30, 2012 and NOTE 11 - FUNCTIONAL EXPENSES Expenses by function for the years ended September 30, 2012 and 2011, consisted of the following: General and Administration $ 2,631,580 $ 2,449,804 Health Care Services 12,452,330 11,840,409 $ 15,083,910 $ 14,290,213 NOTE 12 - COMMITMENTS AND CONTINGENCIES Construction in Progress The Village has committed to spend approximately $8,771,000 for the Westhills Village Commons Expansion. As of September 30, 2012, the Village had incurred approximately $7,942,761 in costs related to the signed construction agreement and portions of this project have been placed into service and transferred out of construction in progress. The construction is expected to be completed June Substantially all of construction in progress as of September 30, 2012 was related to costs associated with this expansion project. The remaining costs of this project will be funded with cash reserves The Village has committed to spend approximately $2,384,000 for the Westhills Village Apartments project. As of September 30, 2012, the Village had incurred approximately $653,880 in costs related to the signed construction agreement. The construction is expected to be completed May The remaining costs of this project will be funded with cash reserves. 21

26 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Self-insured Health Insurance During the years ended September 30, 2012 and 2011, the Village employees were covered by a selfinsured health insurance plan. The Village pays premiums based upon the tier of coverage selected (family, single, etc.). After deductibles of $1,500 per individual or $3,000 per family are met, the plan has an 80% coinsurance on the first $2,500 on individual plans and $5,000 on family plans, then 100% thereafter, up to a lifetime maximum of $500,000. The administrative contract between the Village and the plan administrator is renewable annually, and administrative fees and stop-loss premiums are included in the contractual provision. The Village had a liability for incurred but not reported claims of $100,000 as of September 30, 2012 and Stop-loss coverage was in effect for individual claims exceeding $75,000. The stop-loss policy covers claims exceeding $75,000 and is effective for services incurred from January 1, 2010 to December 31, Total expenses under the self insurance program were approximately $388,000 and $564,000 for the years ended September 30, 2012 and Professional/Malpractice Liability Protection The Village has malpractice insurance coverage to provide protection for professional liability losses on a claims-made basis subject to a limit of $1 million per claim and an annual aggregate limit of $3 million. Should the claims-made policy not be renewed or replaced with equivalent insurance or if tail end coverage was not purchased, claims based on occurrences during its term, but reported subsequently, will be uninsured. NOTE 13 - CONCENTRATIONS OF CREDIT RISK The Organization grants credit without collateral to its residents in certain areas of operations. Some of these residents are insured under third-party payor agreements. The mix of receivables from residents and third-party payors at September 30, 2012 and 2011, was as follows: Medicare 79% 54% Medicaid 5% 7% Commercial 3% 20% Self Pay 13% 19% 100% 100% NOTE 14 - CHARITY CARE The estimated costs of services and supplies furnished under the Village s charity care policy aggregated $73,987 and $106,359 for the years ended September 30, 2012 and 2011, respectively. The Board of Directors has established a fund which is used to fund the costs of charity care. As of September 30, 2012 and 2011 the Village had $151,300 and $41,193, respectively in funds designated to fund the costs of providing charity care to its residents. 22

27 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 15 - RESIDENT SERVICE FEES The Organization is a provider under the Medicare, Medicaid and other programs in certain areas of operations. A summary of these programs are as follows: Medicaid: Medicaid operates as a vendor payment program. Within broad national guidelines, which the Federal government provides, each of the States establishes its own eligibility standards, determines the type, amount, duration and scope of services, sets the rate of payment for services and administers its own program. The Organization must accept Medicaid payment rates as payment in full. Medicaid program beneficiaries are paid at prospectively determined rates per day. These rates vary according to a resident classification system that is based on clinical, diagnostic, and other factors Medicare: Under Section 4432(a) of the Balanced Budget Act of 1997 the Organization is paid on the basis of a prospective payment system. The prospective payment system rates are adjusted according to case mix and geographic variation in wages and covers all costs of furnishing covered skilled nursing facility services (routine, ancillary, and capital-related costs). Other Payors: The Organization has payment agreements with certain other carriers. These arrangements call for payment of charges, discounts from charges, or amounts agreed to in advance for services rendered. The percentage of net revenues from resident service fees from each major payor class for the years ended September 30, 2012 and 2011 were as follows: Medicare 36% 42% Medicaid 7% 9% Commercial 2% 2% Self Pay 55% 47% 100% 100% NOTE 16 - INSURANCE PROCEEDS During the year ended September 30, 2012, the Village received insurance proceeds of $1,158,000 from a hail storm that occurred during the year. The proceeds from insurance have been netted against the costs of the related repairs within the Combined Statements of Operations. As of September 30, 2012 the Village had $148,624 in insurance proceeds which have not yet been spent. These unspent proceeds are recorded as Deferred Revenue within the Combined Statements of Financial Position. Accordingly, the receipt of these insurance proceeds and related costs of repairs associated with the insurance claims has no impact on amounts reported in the Combined Statements of Operations. NOTE 17 - FAIR VALUE MEASUREMENTS The Village and Foundation use a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect estimates about market data. 23

28 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 17 - FAIR VALUE MEASUREMENTS (CONTINUED) The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level I - Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments which would generally be included in Level I include listed equities and listed derivatives. To the extent that it holds such investments, the Organization does not adjust the quoted price of these investments. Level II - Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level I. Fair value is determined through the use of models or other valuation methodologies. Investments which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives. Level III - Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, debt funds, hedge funds, distressed debt and non-investment grade residual interests in securitizations and collateralized debt obligations, and collateralized debt obligations. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Organization s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. The following methods and assumptions were used to estimate fair value: Mutual Funds and Money Market Funds: The fair values are based on quoted market values. Government Bonds: The fair value is generally based on quoted prices in active markets. Municipal Bonds: The fair value is estimated using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond-or-credit default swap spreads and volatility. Mortgage-Backed, Asset-Backed, Agency and Treasury Securities: The fair value is based on an external price/spread data. Corporate Bonds: The fair value is determined using recently executed transactions, market price quotations and bond spreads. Certificates of Deposit: The fair value is based on amortization tables and stated interest rates. The following tables present assets carried at fair value as of September 30, 2012 on the accompanying Combined Statements of Financial Position by fair value hierarchy, as previously described. All are measured on a recurring basis. The Organization carried no other assets or liabilities measured at fair value on a recurring or non-recurring basis. 24

29 Notes to the Combined Financial Statements September 30, 2012 and 2011 NOTE 17 - FAIR VALUE MEASUREMENTS (CONTINUED) The fair value of each financial instrument in the table below was measured using FAS ASC Topic 820 input guidance and valuation techniques. The following table sets forth the inputs used and the estimated fair values of financial instruments at September 30, 2012: Level I Level II Level III Total Asset-Backed Securities Below Investment Grade $ - $ 69,908 $ - $ 69,908 Investment Grade - 73,061-73,061 US Government Agency - 294, ,492 Equities: Financial Sector 64, ,258 Basic Materials 3, ,297 Certificates of Deposit: FDIC Insured 893,987 3,670,494-4,564,481 Corporate Bonds: Below Investment Grade - 39,570-39,570 Investment Grade - 3,001,178-3,001,178 Tax Free Municipal Bond - Investment Grade - 221, ,332 Taxable Municipal Bonds: Below Investment Grade - 43,902-43,902 Investment Grade - 1,194,668-1,194,668 US Treasury Securities - 1,358,762-1,358,762 US Government Agency Securities - 4,640,120-4,640,120 Mutual Funds: Emerging Markets 574, ,127 Foreign Large Value 916, ,242 Large Blend 2,318, ,318,930 Large Growth 868, ,457 Large Value 2,733, ,733,906 Mid-Cap Blend 600, ,850 Small Blend 399, ,154 Bond Fund 996, ,669 Mortgage-Backed Securities: Private Label Below Investment Grade - 497, ,438 Private Label Investment Grade - 380, ,141 US Government Agency Mortgage-Backed Securities - 7,662,251-7,662,251 US Government Agency-Collateralized Mortgage Obligation - 3,136,465-3,136,465 Money Market Funds 6,971, ,971,447 $ 17,341,324 $ 26,283,782 $ - $ 43,625,106 25