Berkshire Retirement Community, Inc. Years Ended December 31, 2015 and 2014 With Report of Independent Auditors

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION Berkshire Retirement Community, Inc. Years Ended December 31, 2015 and 2014 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information Years Ended December 31, 2015 and 2014 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations and Changes in Net Assets (Deficit)...4 Consolidated Statements of Cash Flows...5 Notes to Consolidated Financial Statements...6 Supplementary Information Consolidating Balance Sheet...22 Consolidating Statement of Operations and Changes in Net Assets (Deficit)...23

3 Ernst & Young LLP 200 Clarendon Street Boston, MA Tel: Fax: ey.com The Board of Trustees Berkshire Retirement Community, Inc. Report of Independent Auditors We have audited the accompanying consolidated financial statements of Berkshire Retirement Community, Inc., which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations and changes in net assets (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Berkshire Retirement Community, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and changes in net assets (deficit), and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating balance sheet and consolidating statement of operations and changes in net assets (deficit) are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. May 25, A member firm of Ernst & Young Global Limited

5 Consolidated Balance Sheets Assets Current assets: Cash and short term investments 11,934,670 December $ $ 11,064,517 Investments 7,829,760 3,960,894 Current portion of assets whose use is limited 7,111,530 11,040,722 Accounts receivable, less allowance for uncollectible accounts of approximately $20,000 and $1,000 in 2015 and 2014, respectively 618, ,703 Prepaid expenses and other current assets 275, ,868 Due from third-party payors 136, ,811 Total current assets 27,906,709 27,032,515 Property, plant and equipment, net 21,303,626 21,842,630 Assets whose use is limited 5,225,579 7,440,911 Other long-term assets 756, ,400 Total assets $ 55,192,395 $ 56,928,456 Liabilities and net assets (deficit) Current liabilities: Accounts payable $ 725,403 $ 761,115 Accrued expenses 652, ,572 Accrued salaries and related withholdings 612, ,827 Other current liabilities 673, ,677 Due to Berkshire Health Systems, Inc. 47,335 46,391 Due to affiliates 66, ,500 Current portion of long-term obligations 615,000 1,750,000 Total current liabilities 3,392,401 4,831,082 Deferred revenue and refundable entrance fees 40,397,965 40,038,309 Long-term obligations bonds payable, less current portion 14,240,960 16,145,066 Net assets (deficit) (2,838,931) (4,086,001) Total liabilities and net assets (deficit) $ 55,192,395 $ 56,928,456 See accompanying notes. 3

6 Consolidated Statements of Operations and Changes in Net Assets Revenues: Resident services, including amortization of entrance fees of approximately $456,000 and $507,000 in 2015 and 2014, respectively 8,119,801 Year Ended December $ $ 8,077,641 Assisted living revenue 4,424,452 4,401,169 Patient revenue from nursing care center 7,258,153 6,633,679 Other operating revenue 781,253 1,019,320 Total revenues 20,583,659 20,131,809 Expenses: Administrative and general 3,549,364 3,603,225 Dining and nutritional services 1,965,244 1,862,694 Environmental services 2,634,451 2,554,788 Health care center 4,601,646 4,111,272 Assisted living 2,795,987 2,823,579 Depreciation 2,150,836 2,155,255 Amortization 41,718 73,100 Interest 801,884 1,064,306 Provision for uncollectible accounts 70,105 (85,535) Total expenses 18,611,235 18,162,684 Excess of revenues over expenses before loss on bond refinancing 1,972,424 1,969,125 Loss on bond refinancing (534,345) Excess of revenues over expenses 1,438,079 1,969,125 Net unrealized losses on assets whose use is limited (191,009) (32,725) Increase in net assets 1,247,070 1,936,400 Net assets (deficit) at beginning of year (4,086,001) (6,022,401) Net assets (deficit) at end of year $ (2,838,931) $ (4,086,001) See accompanying notes. 4

7 Consolidated Statements of Cash Flows Year Ended December Operating activities Increase in net assets $ 1,247,070 $ 1,936,400 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 2,192,554 2,228,355 Amortization of bond premium and cost of issuance (43,051) Amortization of entrance fees (455,586) (506,783) Unrealized losses on assets whose use is limited 191,009 32,725 Loss on bond refinancing 534,345 Effects of changes in assets and liabilities: Accounts receivable (99,699) (60,410) Prepaid expenses and other current assets 43,289 (31,698) Due from third-party payors 7,006 (6,770) Due to affiliates (152,563) 79,347 Accounts payable (35,712) 120,933 Accrued expenses 371,017 (148,356) Accrued salaries and related withholdings (77,629) 20,177 Other current liabilities 95,808 79,681 Due to Berkshire Health Systems, Inc. 944 (9,996) Net cash provided by operating activities 3,818,802 3,733,605 Investing activities Purchases of property, plant, and equipment, net (1,787,777) (1,398,673) Net purchases of investments (3,868,866) (3,960,894) Change in assets whose use is limited (excluding bond refinancing) (2,276,952) 391,085 Net cash used in investing activities (7,933,595) (4,968,482) Financing activities Payments on long-term obligations (1,645,000) Proceeds from bond refinancing 14,923,500 Proceeds from trustee held funds due to bond refinancing 8,230,366 Advance refunding of bonds (18,480,510) Payment of cost of bond issuance (450,871) Refundable and nonrefundable fees received, net of refunds 762,461 1,364,052 Net cash provided by (used in) financing activities 4,984,946 (280,948) Increase (decrease) in cash and short term investments 870,153 (1,515,825) Cash and short term investments at beginning of year 11,064,517 12,580,342 Cash and short term investments at end of year $ 11,934,670 $ 11,064,517 Supplemental disclosure of cash flow information Interest paid $ 1,026,055 $ 1,117,518 See accompanying notes. 5

8 Notes to Consolidated Financial Statements December 31, Organization Berkshire Retirement Community, Inc. (the Retirement Community) is a subsidiary of Berkshire Healthcare Systems, Inc. (BHCS), its sole corporate member. These consolidated financial statements include the accounts of the Retirement Community and its controlled subsidiary, Berkshire Extended Care Services, Inc. (BECS). The following is a summary of the organizations included in the accompanying consolidated financial statements: Organization Nature and Purpose Kimball Farms at Walker Street Facilities consisting of 150 residential units and 48 assisted living units organized to provide independent and assisted living services within a continuing care retirement community environment. In addition, there are 26 Life Enrichment Program units which offer specialized assisted living services to residents with Alzheimer s and other forms of dementia. Services are provided to residents primarily from western Massachusetts, New York and Connecticut. Berkshire Extended Care Services, Inc. (d/b/a Kimball Farms Nursing Care Center at Sunset Avenue) A 74-bed skilled nursing facility organized to provide post-acute services to residents of the Walker Street facilities, as well as residents of the local Berkshire County community. Retirement Community residents pay a one-time entrance fee and monthly service fee which entitles the resident to a residential unit, assisted living care, nursing home care, one meal daily, and other services for as long as they are able to occupy the unit. Prospective residents are required to pay an initial fee of $2,500, of which $2,000 is a refundable priority fee and $500 is an application fee. Upon acceptance of their application, a Residence and Care Agreement is executed and 10% of the entrance fee, less the priority fee, is due. The balance of the entrance fee is due prior to occupancy. 6

9 1. Organization (continued) Retirement Community residents are entitled to a minimum refund of 90% of their entrance fee upon termination of the Residence and Care Agreement. The refundable amount is payable in part upon termination of the Residence and Care Agreement and the remainder upon reoccupation of the vacated unit. The monthly service fee is based upon the size and type of residential unit and the number of occupants. Monthly service fees are subject to increase upon providing 60 days advance notice. Non-community residents who enter directly through assisted living enter into a 12-month lease with monthly service fees based upon the size and type of assisted living unit and number of occupants. Subsequent lease terms are for a 12-month period. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been presented in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The consolidated financial statements include the accounts of the above-named entities. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Short-Term Investments Cash and short-term investments include investments in highly liquid debt instruments with original maturities of one year or less, excluding amounts whose use is limited by Board of Trustees (the Board) designation, loan agreements, or bond indentures. 7

10 2. Summary of Significant Accounting Policies (continued) Investments and Assets Whose Use Is Limited The Retirement Community classifies all investments as other than trading securities, in accordance with Accounting Standards Codification 320, Investments Debt and Equity Securities Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the combined balance sheets. Assets whose use is limited consist of amounts held by trustees under financing agreements, and through Board designation for identified purposes, and over which the Board retains control. These funds are invested primarily in government-secured obligations, corporate bonds, and money market accounts and are carried at fair value in the consolidated balance sheets. The Retirement Community classifies all investments and assets whose use is limited as otherthan-trading securities. These securities are measured at fair value in the consolidated balance sheets. Investment Income Investment income, which is included in other operating revenue, consists of realized gains and losses and income generated on invested cash and cash equivalents, as well as income generated on funds whose use is limited. Investment income amounted to approximately $370,000 and $503,000 for the years ended December 31, 2015 and 2014, respectively. Property, Plant, and Equipment Property, plant, and equipment is recorded at cost or, if received by gift or bequest, at fair value when received. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives conform to the guidelines established by the American Hospital Association. Deferred Financing Costs Costs incurred in connection with the placement of long-term obligations have been deferred, and are being amortized over the term of the obligations using the effective interest method. These costs are included in other long-term assets in the accompanying consolidated balance sheets. Deferred financing costs of $471,459 were written off as part of the loss on bond refinancing in June 2015 and $450,871 was paid in June 2015 related to the new deferred financing costs. 8

11 2. Summary of Significant Accounting Policies (continued) Deferred Revenue Deferred revenue from nonrefundable fees Fees paid by Retirement Community residents, net of the refundable portion, are recorded as deferred revenue, and are amortized on a straight-line basis into income over the actuarially determined average life expectancy of the Retirement Community resident population. Refundable Entrance Fees Refundable entrance fees represent primarily the refundable portion of Retirement Community residents fees, which amounts to 90% of the total fees paid, and is payable in part upon termination of the Residence and Care Agreement, with the remainder payable upon reoccupation of the vacated unit. Resident Services Revenue Retirement Community resident services revenue is recorded when earned and includes monthly service fees, application fees, and amortization of entrance fees. Noncommunity resident services revenue is recorded when earned and includes monthly service fees and application fees. Net Patient Service Revenue Net patient service revenue generated from services provided by the Retirement Community s skilled nursing center is reported at the estimated net realizable amounts from nonresidents, third-party payors, and others for services rendered. Revenue under certain third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. Changes in estimates of prior year settlements were not significant in 2015 or Revenues from the Medicare and Medicaid programs accounted for approximately 48% and 17%, respectively, of the Retirement Community s net patient service revenues for the year ended December 31, 2015, and 39% and 26%, respectively, of the Retirement Community s net patient service revenues for the year ended December 31, Laws and regulations 9

12 2. Summary of Significant Accounting Policies (continued) governing the Medicare and Medicaid programs are complex and subject to interpretation. The Retirement Community believes that it is in compliance with all applicable laws and regulations, and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. 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. Other Operating Revenue Other operating revenue includes investment income, unrestricted contribution revenue, food and services revenue, and other non-patient revenue. During the year ended December 31, 2014, the Retirement Community received unrestricted contributions of approximately $132,000 which are reported in other operating revenue. During the year ended December 31, 2015, there were no unrestricted contributions received. Income Taxes The Retirement Community and its subsidiary are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code, and are exempt from federal income taxes on related income. Accordingly, no provision for income tax is required. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU supersedes the FASB s current revenue recognition requirements and most industry-specific guidance. The FASB subsequently issued ASU , Revenue from Contracts with Customers, which deferred the effective dates of ASU Based on ASU , the provisions of ASU are effective for the Retirement Community for annual reporting periods beginning after December 15, Early application is permitted only as of annual reporting periods beginning after December 15, The Retirement Community has not completed the process of evaluating the impact of ASU on the consolidated financial statements. 10

13 2. Summary of Significant Accounting Policies (continued) In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern, that will require management of public and nonpublic companies to evaluate and disclose where there is substantial doubt about an entity s ability to continue as a going concern. The standard is effective for annual periods ending after December 15, Early application is permitted. The Retirement Community does not believe this standard will have a significant effect on its financial reporting. In April 2015, the FASB issued ASU , Simplifying the Presentation of Debt Issuance Costs. ASU requires debt issuance costs related to a recognized debt liability to be presented in the statement of financial position as a direct deduction from the corresponding debt liability rather than as an asset. This change will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected. The provisions of ASU are effective for the Retirement Community for annual reporting periods beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The Retirement Community does not believe that this standard will have a significant effect on the accompanying consolidated financial statements. In February 2016, the FASB issued ASU , Leases, which will require lessees to report most leases on their statements of financial position, but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions. Lessors in operating leases continue to recognize the underlying asset and recognize lease income on either a straight-line basis or another systematic and rational basis. The provisions of ASU are effective for the Retirement Community for annual periods beginning after December 15, 2018, and interim periods in the following year. Early adoption is permitted. The Retirement Community has not completed the process of evaluating the impact of ASU on its consolidated financial statements. In January 2016, the FASB issued ASU , Recognition and Measurement of Financial Assets and Financial Liabilities, which will require business-oriented health care not-for-profit entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in the excess of revenues over expenses unless the investments qualify for a new practicability exception. Unrealized holding gains and losses on equity securities currently classified as other-than-trading will no longer be reported separately from the performance indicator. The provisions of ASU are effective for the Retirement Community for annual periods beginning after 11

14 2. Summary of Significant Accounting Policies (continued) December 15, 2018, and for interim periods within annual periods beginning a year later. Early adoption of the key provisions is permitted for annual periods beginning after December 15, 2017, and interim periods therein. Adoption of ASU would result in the reclassification of the change in unrealized gains and losses on investments other-than-trading securities from other changes in unrestricted net assets to within the performance indicator in the accompanying consolidated statement of operations. Reclassifications Certain reclassifications have been made to the fiscal year ended December 31, 2014 balances previously reported in the consolidated balance sheet in order to conform with the fiscal year ended December 31, 2015 presentation. The reclassification specifically relates to $3,960,894 of amounts previously reported in cash and short term investments that was moved to investments. The reclassification had no impact to consolidated net assets or the excess of revenues over expenses. 3. Property, Plant, and Equipment A summary of property, plant, and equipment at December 31 is as follows: Land and improvements $ 3,681,704 $ 3,551,931 Building and improvements 36,363,641 35,473,078 Furniture and equipment 14,933,044 14,495,297 Construction in progress 24,275 7,098 55,002,664 53,527,404 Less accumulated depreciation (33,699,038) (31,684,774) $ 21,303,626 $ 21,842,630 12

15 4. Investments and Assets Whose Use Is Limited Investments and assets whose use is limited, which are reported at fair value, consisted of the following at December 31: Market Cost Market Cost Cash and cash equivalents $ 14,814 $ 14,814 $ 14,814 $ 14,814 U.S. treasury obligations 7,744,801 7,801,751 10,924,282 10,968,848 Collateralized mortgage obligations 2,306,913 2,339,874 1,022,467 1,038,986 Domestic corporate bonds 9,476,551 9,695,607 7,598,480 7,647,556 Domestic equity securities 623, ,997 Guaranteed investment contracts 2,882,484 2,882,484 $ 20,166,869 $ 20,468,043 $ 22,442,527 $ 22,552,688 Management continually reviews its investment portfolio and evaluates whether declines in the fair value of securities should be considered other than temporary. Factored into this evaluation are general market conditions, management s intent and ability to hold the investments, the issuer s financial condition and near-term prospects, conditions in the issuer s industry, the recommendations of advisors, and the length of time that the market value has been less than cost. At December 31, 2015, investments that had a cost greater than fair value for longer than 12 months carried unrealized losses of $194,957 and a total fair value of $5,624,970, and investments that had a cost greater than fair value for less than 12 months carried unrealized losses of $204,120 and a total fair value of $7,030,625. At December 31, 2014, investments that had a cost greater than fair value for longer than 12 months carried unrealized losses of $202,264 and a total fair value of $5,506,152, and investments that had a cost greater than fair value for less than 12 months carried unrealized losses of $29,293 and a total fair value of $3,333,044. Management believes that, given market conditions and management s intent and ability to hold the securities, any losses recognized on the sale of such investments will not be material to the consolidated financial statements. 13

16 4. Investments and Assets Whose Use Is Limited (continued) In connection with certain financing agreements, the Retirement Community is required to set aside funds for specific purposes, which are held by various trustees and are reported as assets whose use is limited on the accompanying consolidated balance sheets. These funds are invested primarily in government-secured obligations, are carried at fair value, and include funds for debt service and bond reserve. The amount in the operating reserve fund previously represented 25% of annual budgeted operating expenses, excluding interest and depreciation expense, and was available for working capital needs. The operating reserve fund and the renewal and replacement fund are no longer required under the new Bond Indenture associated with the 2015 bond refinancing. The assets limited by Board designation represent amounts designated for refundable entrance fees, which are classified as current assets, and funded depreciation, which are classified as non-current assets. Also included in assets whose use is limited are patient funds held in trust. Assets whose use is limited at December 31 consisted of the following: By trustee under debt agreements: Operating reserve fund $ $ 3,699,019 Debt service fund 631,932 1,380,547 Debt service reserve fund 1,260,138 2,812,400 Renewal and replacement fund 750,000 1,892,070 8,641,966 By Board designation 10,387,390 9,781,917 Other 57,649 57,750 12,337,109 18,481,633 Less current portion (7,111,530) (11,040,722) $ 5,225,579 $ 7,440,911 Investment income on investments and assets whose use is limited was approximately $370,000 and $503,000 for the years ended December 31, 2015 and 2014, respectively. Unrealized losses on assets whose use is limited were approximately ($191,000) and ($33,000) for the years ended December 31, 2015 and 2014, respectively. 14

17 5. Transactions With Berkshire Health Systems, Inc. Management and other services are provided to the Retirement Community by BHS Management Services, Inc. (BHSMS), a subsidiary of Berkshire Health Systems, Inc. (BHS). The costs of such services were $505,620 and $494,270 in 2015 and 2014, respectively, and have been classified in the consolidated statements of operations and changes in net assets (deficit) as administrative and general expenses. Amounts due to BHSMS for such services were $47,335 and $46,391 at December 31, 2015 and 2014, respectively. 6. Deferred Revenue and Refundable Entrance Fees Deferred revenue and refundable entrance fees at December 31 consisted of the following: Deferred revenue from nonrefundable entrance fees $ 1,629,205 $ 1,606,951 Refundable entrance fees 38,725,925 38,388,422 Other 42,835 42,936 $ 40,397,965 $ 40,038, Long-Term Obligations In June 2015, the Retirement Community entered into a Second Amended Mortgage and Indenture of Trust and Agreement with the Massachusetts Development Finance Agency (MDFA) and issued First Mortgage Revenue bonds (2015 Bonds) with a face value of $13,680,000. The proceeds were used to advance refund the outstanding principal amounts of the 1994 Bonds, the 1999 Bonds, and the 2001 Bonds, to fund a deposit to the Bond Reserve Fund, and to pay costs of issuance of the 2015 Bonds. The 2015 Bonds were issued with a premium of $1,243,500. The bonds bear interest rates ranging from 1.25% to 5.00% per annum with a final maturity date of July 1, 2031 and $6,350,000 of the bonds are redeemable prior to maturity after June 30, 2025 at 0% premium at the option of the Retirement Community. As part of the 2015 Bond transaction, the Retirement Community recorded a loss on bond refinancing to write-off the remaining balance of deferred costs of issue related to the 1994, 1999, and 2001 bonds of $534,

18 7. Long-Term Obligations (continued) In May 2001, the Retirement Community entered into a Third Supplemental Indenture of Trust and Agreement with MDFA and issued First Mortgage Revenue Bonds (Edgecombe Project Series 2001A) with a face value of $4,425,000 and First Mortgage Revenue Bonds (Edgecombe Project Series 2001B) with a face value of $3,000,000. Proceeds of the Revenue Bonds were used to advance refund $2,290,000 of MHEFA, Berkshire Extended Care Services, Inc., Series E-2 Revenue Bonds, and renovate the Nursing Care Center. The issue established a debt service fund, bond reserve fund, and an operating reserve fund. The Series 2001A bonds bear interest rates ranging from 5.15% to 6.75% per annum, with a final maturity date of July 1, The Series 2001B bonds mature on July 1, On January 1, 2006, the Series 2001B bonds were reset as fixed rate bonds with a weighted-average rate of 5.125%. The balance of the 2001 bonds was $5,910,000 at December 31, The 2001A bonds and 2001B bonds were extinguished in conjunction with the issuance of the 2015 bonds. In March 1999, the Retirement Community entered into an amended Indenture of Trust and Agreement with the MDFA and issued First Mortgage Revenue Bonds (Berkshire Retirement Community, Lenox, 1999 Issue) with a face value of $9,000,000 and original issue discount of $78,871; these bonds bear interest rates ranging from 4.500% to 5.625% per annum, with a final maturity date of July 1, Proceeds of the Revenue Bonds were used to finance the construction and equipment of 48 assisted living units which opened June 1, The issue established a debt service fund, bond reserve fund, renewal and replacement fund, and an operating reserve fund. The balance of the 1999 bonds was $6,400,000 at December 31, The 1999 bonds were extinguished in conjunction with the issuance of the 2015 bonds. In February 1994, the Retirement Community entered into a loan agreement with the MDFA and issued First Mortgage Revenue Bonds (Berkshire Retirement Community Lenox, 1994 Issue) with a face value of $19,425,000 and original issue discount of $24,812. MDFA was granted a mortgage lien on property, plant, and equipment and a security interest in the Retirement Community s revenues, including entrance fees and accounts receivable. Annual sinking fund payments began in 1995, and range from $175,000 to $1,540,000. These bonds can be redeemed at the option of the Retirement Community at par. Additionally, the issue requires a renewal and replacement fund, bond reserve fund, and an operating reserve fund. 16

19 7. Long-Term Obligations (continued) The Series 1994A Revenue Bonds have a face value of $15,425,000, and bear interest at rates ranging from 6.375% to 6.625% per annum, with a final maturity date of July 1, The Series 1994B Revenue Bonds have a face value of $4,000,000 and mature on July 1, On January 1, 2006, the Series 1994B Revenue Bonds were remarketed as fixed rate bonds with a weighted-average rate of 4.80%. The balance of the 1994 bonds was $5,650,000 at December 31, The 1994 bonds were extinguished in conjunction with the issuance of the 2015 bonds. Financial debt covenant compliance requires the Retirement Community to achieve a quarterly debt service coverage ratio of at least The Retirement Community was in compliance with this requirement as of December 31, 2015 and Aggregate maturities subsequent to December 31, 2015, are as follows: 2015 Bonds 2016 $ 615, , , , ,000 Thereafter 10,390,000 13,680,000 Plus unamortized premium on bonds 1,175,960 $ 14,855, Professional Liability Insurance Through March 31, 2003, the Retirement Community maintained professional and general liability insurance under claims-made basis policies through commercial insurance companies. Effective April 1, 2003, BHCS self-insures the professional and general liability risk of the Retirement Community on a claims-made basis through Berkshire Indemnity Company, SPC, Ltd. (BICSPC), a Cayman Islands segregated portfolio insurance captive. BHCS owns 50% of BICSPC, with the remaining 50% owned by Berkshire Health Systems, Inc. The liability risk associated with BHCS and its subsidiaries is segregated in the BHCS Segregated Portfolio (the 17

20 8. Professional Liability Insurance (continued) Portfolio). BHCS owns 100% of the Portfolio, and reports the Portfolio s assets, liabilities, revenues and expenses in its consolidated financial statements. The Retirement Community pays to BHCS its share of the professional liability insurance premium necessary to cover its estimated incurred losses. BHCS establishes reserves for claims incurred but unpaid with the assistance of consulting actuaries. Management believes these reserves are adequate; however, no assurance can be given that the ultimate settlement of losses may not vary materially from the liability recorded. Future adjustments to the amounts recorded resulting from the continual review process, as well as differences between estimates and ultimate payments, will be reflected in the consolidated statements of operations and changes in net assets of future years through future premium adjustments when such adjustments, if any, become known. 9. Workers Compensation Insurance Through October 31, 2005, the Retirement Community maintained workers compensation insurance under a claims-made policy through a commercial insurance company. Effective November 1, 2005, the Retirement Community self-insured its workers compensation risk in Massachusetts under a BHCS program approved by the Commonwealth of Massachusetts Department of Industrial Accidents. The program is secured by a surety bond in the amount of $3,520,000. BHCS reinsures losses in excess of $500,000 per claim. BHCS establishes reserves with the assistance of third-party administrators for losses incurred. Management believes these reserves are adequate; however, no assurance can be given that the ultimate settlement of losses may not vary materially from the liability recorded. Future adjustments to the amounts recorded resulting from the continual review process, as well as differences between estimates and ultimate payments, will be reflected in the consolidated statements of operations and changes in net assets (deficit) of future years when such adjustments, if any, become known. 18

21 10. Concentrations of Credit Risk The Retirement Community grants credit without collateral to its patients, some of whom are insured under third-party payor agreements. At December 31, percentages of accounts receivable from patients and third-party payors, exclusive of estimated settlements, consisted of the following: Medicare 38% 37% Medicaid Patients and other % 100% 11. Fair Value Measurements The Retirement Community applies the methods of calculating fair value defined in ASC 820 to value its financial assets and liabilities, where applicable. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value. ASC 820 applies to other accounting pronouncements that require or permit fair value measurements and does not require new fair value measurements. Fair value measurements are applied based on the unit of account from the reporting entity s perspective. The unit of account determines what is being measured by reference to the level at which the asset or liability is aggregated (or disaggregated) for purposes of applying other accounting pronouncements. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable inputs that are based on inputs not quoted in active markets, but corroborated by market data. 19

22 11. Fair Value Measurements (continued) Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, the Retirement Community uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers nonperformance risk in its assessment of fair value. Financial assets carried at fair value as of December 31, 2015, are classified in the table below in one of the three categories described above: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 10,055,314 $ $ $ 10,055,314 U.S. treasury obligations 7,906,536 7,906,536 Collateralized mortgage obligations 2,306,913 2,306,913 Certificates of deposit 1,732,435 1,732,435 Domestic equity securities 623, ,790 Domestic corporate bonds 9,476,551 9,476,551 $ 18,585,640 $ 13,515,899 $ $ 32,101,539 Financial assets carried at fair value as of December 31, 2014, are classified in the table below in one of the three categories described above: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 9,291,215 $ $ $ 9,291,215 U.S. treasury obligations 10,982,623 10,982,623 Collateralized mortgage obligations 1,022,467 1,022,467 Certificates of deposit 1,729,775 1,729,775 Guaranteed investment contracts 2,882,484 2,882,484 Domestic corporate bonds 7,598,480 7,598,480 $ 20,273,838 $ 13,233,206 $ $ 33,507,044 20

23 11. Fair Value Measurements (continued) The following is a description of the Retirement Community s valuation methodologies for assets and liabilities measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers, and brokers. The Retirement Community s long-term debt obligations are reported in the accompanying consolidated balance sheets at carrying value, which totaled approximately $14,856,000 at December 31, The fair value of these obligations at December 31, 2015, as estimated based on quoted market prices for related bonds, totaled approximately $16,357,000 and is classified by the Retirement Community in Level 2 of the valuation hierarchy. 12. Subsequent Events The Retirement Community evaluated the impact of subsequent events through May 25, 2016, representing the date at which the consolidated financial statements were issued. There were no material subsequent events through this date. 21

24 Supplementary Information

25 Consolidating Balance Sheet December 31, 2015 Assets Current assets: Kimball Farms Kimball Farms Nursing Care Eliminations Berkshire at Center at and Retirement Walker Street Sunset Avenue Reclassifications Community, Inc. Cash and short term investments $ 9,748,373 $ 2,186,297 $ $ 11,934,670 Investments 7,829,760 7,829,760 Current portion of assets whose use is limited 7,108,698 2,832 7,111,530 Accounts receivable, net 15, , ,402 Prepaid expenses and other current assets 239,169 36, ,542 Due from third-party payors 0 140,992 (4,187) 136,805 Due from affiliates 3,485,355 (3,485,355) - Total current assets 24,941,454 6,454,797 (3,489,542) 27,906,709 Property, plant and equipment, net 16,842,899 5,048,121 (587,394) 21,303,626 Assets whose use is limited 5,225,579 5,225,579 Other long-term assets 5,899,087 (5,142,606) 756,481 Total assets $ 52,909,019 $ 11,502,918 $ (9,219,542) $ 55,192,395 Liabilities and net assets (deficit) Current liabilities: Accounts payable $ 395,884 $ 329,519 $ $ 725,403 Accrued expenses 383, , ,043 Accrued salaries and related withholdings 360, , ,198 Other current liabilities 542, , ,485 Due to Berkshire Health Systems, Inc. 28,764 18,571 47,335 Due to third-party payors 4,187 (4,187) Due to affiliates 3,552,292 (3,485,355) 66,937 Current portion of long-term obligations 615, ,000 (190,000) 615,000 Total current liabilities 5,882,975 1,188,968 (3,679,542) 3,392,401 Deferred revenue and refundable entrance fees 40,397,965 40,397,965 Long-term obligations bonds payable, less current portion 14,240,960 5,540,000 (5,540,000) 14,240,960 Net assets (deficit) (7,612,881) 4,773,950 (2,838,931) Total liabilities and net assets (deficit) $ 52,909,019 $ 11,502,918 $ (9,219,542) $ 55,192,395 22

26 Consolidating Statement of Operations and Changes in Net Assets Year Ended December 31, 2015 Kimball Farms Kimball Farms Nursing Care Eliminations Berkshire at Center at and Retirement Walker Street Sunset Avenue Reclassifications Community, Inc. Revenues: Resident services, including amortization of entrance fees of approximately $456,000 $ 8,944,996 $ $ (825,195) $ 8,119,801 Assisted living revenue 4,424,452 4,424,452 Patient revenue from nursing care center 6,432, ,195 7,258,153 Lifecare funding 1,958,996 (1,958,996) Other operating revenue 1,041, ,892 (386,478) 781,253 Total revenues 14,411,287 8,517,846 (2,345,474) 20,583,659 Expenses: Administrative and general 2,138,920 1,410,444 3,549,364 Dining and nutritional services 1,409, ,254 1,965,244 Environmental services 1,969, ,892 2,634,451 Health care center 324,805 4,276,841 4,601,646 Lifecare funding 1,958,996 (1,958,996) Assisted living 2,795,987 2,795,987 Depreciation 1,752, ,967 (42,378) 2,150,836 Amortization 41,718 41,718 Interest 801, ,100 (344,100) 801,884 Provision for uncollectible accounts 2,840 67,265 70,105 Total expenses 13,196,946 7,759,763 (2,345,474) 18,611,235 Excess of revenues over expenses before loss on bond refinancing 1,214, ,083 1,972,424 Loss on bond refinancing (358,398) (175,947) (534,345) Excess of revenues over expenses 855, ,136 1,438,079 Net unrealized loss on assets whose use is limited (191,009) (191,009) Increase in net assets 664, ,136 1,247,070 Net assets (deficit) at beginning of year (8,277,815) 4,191,814 (4,086,001) Net assets (deficit) at end of year $ (7,612,881) $ 4,773,950 $ $ (2,838,931) 23

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