MERCY HOME FOR CHILDREN, INC. FINANCIAL STATEMENTS AND AUDITOR'S REPORT JUNE 30, 2014 AND 2013

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1 FINANCIAL STATEMENTS AND AUDITOR'S REPORT

2 TABLE OF CONTENTS Independent Auditor's Report Exhibit A - Balance Sheet B - Statement of Activities and Changes in Net Assets C - Statement of Functional Expenses D - Statement of Cash Flows Notes to Financial Statements

3 LOEB & TROPERLLP Independent Auditor's Report Board of Directors Mercy Home for Children, Inc. Report on the Financial Statements We have audited the accompanying financial statements of Mercy Home for Children, Inc., which comprise the balance sheet as of June 30, 2014 and 2013, and the related statements of activities and changes in net assets, functional expenses, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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. Auditm:-s and Consultants 655 Third Avenue, 12th Floor, New York, NY Sectors (212) /Fax (212) /

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercy Home for Children, Inc. as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 2. November 18, 2014 g LOEB & TROPERLLP

5 EXHIBIT A MERCY HOME FOR CHILDREN, INC. BALANCE SHEET ASSETS Current assets Cash and cash equivalents $ 4,187,331 $ 4,008,818 Investments at fair value (Note 3) 9,824,391 8,873,798 Accounts receivable - Medicaid 1,938,996 1,838,522 Prepaid expenses and other assets 320, ,433 Total current assets 16,270,728 15,138,571 Other assets Investments at fair value (Note 3) 1,021, ,533 Fixed assets - net (Note 4) 3,629,084 3,893,280 Bond issuance costs 37,383 48,493 Debt service reserve fund - cash 375, ,320 Custodial funds - cash (Note 2) 173, ,052 Total other assets 5,236,331 5,181,678 Total assets $ 21,507,059 $ 20,320,249

6 EXHIBIT A -2- BALANCE SHEET LIABILITIES AND NET ASSETS Current liabilities Accounts payable and accrued expenses $ 1,307,034 Accrued salaries payable and related payables 623,644 Mortgages payable (Note 5) 316,413 Due to New York State OPWDD 3,510,214 Capital lease payable (Note 6) 225,000 Total current liabilities 5,982,305 Long-term liabilities Mortgages payable (Note 5) 2,528,305 Capital lease payable (Note 6) 160,000 Custodial funds (Note 2) 173,289 Total long-term liabilities 2,861,594 Total liabilities 8,843,899 Net assets (Exhibit B) Unrestricted 11,991,379 Temporarily restricted (Note 7) 671,781 Total net assets 12,663,160 Total liabilities and net assets $ 21,507,059 $ $ 1,622, , ,189 2,463, ,000 5,140,459 2,844, , ,052 3,394,076 8,534,535 11,153, ,562 11,785,714 20,320,249 See independent auditor's report. The accompanying notes are an integral part of these statements.

7 EXHIBITB STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS YEARS ENDED Temporarily Temporarily Unrestricted Restricted Total Unrestricted Restricted Total Operating revenues Intermediate care facilities $ 12, 171, 153 $ 12,171,153 $ 11,547,537 $ 11,547,537 Individualized residential alternatives 5,579,951 5,579,951 5,254,370 5,254,370 Saturday respite program 154, , , ,844 Medicaid service coordination 201, , , ,930 Day habilitation program 185, , , ,424 Net assets released from restrictions (Note 7) 120,781 $ (120,781) 127,421 $ (127,421) Total operating revenues 18,413,053 (120,781) 18,292,272 17,421,526 (127,421) 17,294,105 Operating expenses (Exhibit C) Program services Intermediate care facilities 11,901,134 11,901,134 11,310,668 11,310,668 Individualized residential alternatives 5,400,390 5,400,390 5,406,163 5,406,163 Saturday respite program 133, , , ,354 Mitsui & JPS creative arts program 82,386 82,386 77,256 77,256 Medicaid service coordination 198, , , ,984 Day habilitation program 170, , , ,704 Total program services 17,886,923 17,886,923 17,250,129 17,250,129 Supporting services Management and general 1,698,518 1,698,518 1,992,121 1,992, 121 Fund raising 36,460 36,460 26,635 26,635 Total supporting services 1,734,978 _1,734,978 2,018,756 2,018,756 Total operating expenses 19,621,901 19,621,901 19,268,885 19,268,885 Change in net assets from operations ( 1,208,848) (120,781) (1,329,629) (1,847,359) (127,421) (1,974,780)

8 STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS EXHIBITB -2- YEARS ENDED Temporarily Temporarily Unrestricted Restricted Total Unrestricted Restricted Total Nonoperating revenues, expenses, gains and other support Interest and dividends $ 317,771 $ 317,771 $ 303,264 $ 303,264 Unrealized gain on investments 565, , , ,123 Realized gain on investments 477, , , ,808 Grants and contributions 316,209 $ 160, , ,496 $ 169, ,036 Special events revenue 461, , , ,780 Direct cost of special events (122,773) (122,773) (102,833) (102,833) Miscellaneous 30,938 30,938 27,507 27,507 Total nonoperating revenues, expenses, gains and other support 2,047, ,000 2,207,075 1,532, ,540 1,701,685 Change in net assets (Exhibit D) 838,227 39, ,446 (315,214) 42,119 (273,095) Net assets - beginning of year 11,153, ,562 11,785,714 11,468, ,443 12,058,809 Net assets - end of year (Exhibit A) $ 11,991,379 $ 671,781 $ 12,663,160 $ 11,153,152 $ 632,562 $ 11,785,714 See independent auditor's report. The accompanying notes are an integral part of these statements.

9 EXHIBITC STATEMENT OF FUNCTIONAL EXPENSES YEARS ENDED 2014 Program Services SU(!(!Orting Services Intermediate Individualized Saturday Mitsui&JPS Medicaid Day Management Direct Cost Care Residential Respite Creative Arts Service Habilitation and Fund of Special Facilities Alternatives Program Program Coordination Program Total General Raising Total Events Total Salaries $ 4,951,836 $ 2,990,688 $ 69,094 $ 11,026 $ 137,798 $ 125,060 $ 8,285,502 $ 772,850 $ 772,850 $ 9,058,352 Payroll taxes 455, ,926 3,630 1,068 17,593 15, ,842 56,340 56, ,182 Benefits 1,814,449 1,041, ,596 13,634 2,909, , ,750 3,063,071 Total salaries and related expenses 7,221,300 4,330,348 73,632 12, , ,304 11,985, , ,940 12,968,605 Professional fees and contracted services 155,355 49,991 1,236 44, , ,048 $ 2, , ,044 Utilities and other occupancy costs 135,658 94, ,158 35, , ,055 Rent (Note 8) 442,266 23,676 12,600 22, ,542 55,400 55, ,942 Maintenance and repairs 65,083 46, ,646 34, , ,155 Equipment 17,597 13,573 31,170 7,080 8,980 16,060 47,230 Employee travel 2,016 3, ,349 1,676 1,676 8,025 Telephone 19,592 20,995 40,587 24,322 24,322 64,909 Office supplies and postage 17,375 7, ,054 43,773 24,376 68,149 $ 6, ,549 Rental of office equipment 22,142 22, ,272 26,072 26,072 71,344 Medical supplies 45,037 25,884 70,921 70,921 Dues, subscriptions and conferences 44, ,058 45,058 Interest 33, , , ,844 Vehicle operating expenses 102,067 93,999 40,592 1,937 11, ,337 24,186 24, ,523 Staff training 4,128 2, , ,434 4,689 4,689 13,123 Insurance 45,807 27,059 1, ,623 76,961 18,081 18,081 95,042 Food 237, ,408 1, , , ,011 Household supplies 83,634 54, , ,966 Employment recruitment 14,861 14, ,118 3,447 3,447 33,565 Clothing 16,756 11,738 28,494 28,494 Client services 2,382,588 2,382,588 2,382,588 Client activities 14,683 12,757 1, ,642 29,642 Medicaid facility assessment 690, , ,663 Depreciation and amortization 75, , , , , ,022 Real estate taxes 53,735 53,735 53,735 Event catering costs 116, ,427 Investment fees 90,946 90,946 90,946 Miscellaneous 2, ,209 16,037 16,037 19,246 Total expenses 11,901,134 5,400, ,402 82, , ,951 17,886,923 1,698,518 36,460 1,734, ,773 19,744,674 Less direct cost of special events (122,773) (122,773) Total expenses reported by function on the statement of activities (Exhibit B) $ 11,901,134 $ 5,400,390 $ 133,402 $ 82,386 $ 198,660 $ 170,951 $ 17,886,923 $ 1,698,518 $ 36,460 $ 1,734,978 $ $ 19,621,901

10 STATEMENT OF FUNCTIONAL EXPENSES EXHIBITC -2- YEARS ENDED 2013 Program Services Su~~orting Services Intermediate Individualized Saturday Mitsui& JPS Medicaid Day Management Direct Cost Care Residential Respite Creative Arts Service Habilitation and Fund of Special Facilities Alternatives Program Program Coordination Program Total General Raising Total Events Total Salaries $ 5,092,181 $ 3,014,379 $ 68,579 $ 12,076 $ 121,061 $ 98,154 $ 8,406,430 $ 879,275 $ 2,224 $ 881,499 $ 9,287,929 Payroll taxes 493, ,612 9,084 1,155 15,555 12, ,522 67,708 67, ,230 Benefits 1,765,475 1,012, ,011 16,512 2,835, , ,640 3,015,752 Total salaries and related expenses 7,351,358 4,321,192 78,576 13, , ,080 12,068,064 1,127,623 2,224 1,129,847 13,197,911 Professional fees and contracted services 92,691 45,145 1,025 49, , , , ,761 Utilities and other occupancy costs 122, , ,289 26,734 26, ,023 Rent (Note 8) 384,909 23,543 12,600 12, ,052 65,400 65, ,452 Maintenance and repairs 78,349 24, ,974 41,133 1,386 42, ,493 Equipment 5,129 4,095 9,224 1,849 1,849 11,073 Employee travel 2,582 2, ,301 1,992 1,992 7,293 Telephone 18,715 20,318 39,033 23,194 23,194 62,227 Office supplies and postage 51,055 12, ,211 54,156 23,010 77,166 $ 6, ,694 Rental of office equipment 20,031 22,134 42,165 18,166 18,166 60,331 Medical supplies 41,263 25, ,691 66,691 Dues, subscriptions and conferences , ,090 26,540 Interest 44, , , ,763 Vehicle operating expenses 102,473 95,947 42,039 1,082 5, ,910 23,450 23, ,360 Staff training 3,837 3,342 1, ,826 30,209 30,209 39,035 Insurance 39,441 27,287 1, ,601 70,747 17,853 17,853 88,600 Food 237, ,667 1,872 2, , ,486 Household supplies 89,944 48, , ,838 Employment recruitment 8,150 9, ,556 27,373 27,373 44,929 Clothing 20,733 12,401 33,134 33,134 Client services 1,770,448 1,770,448 1,770,448 Client activities 19,780 20, ,483 42,483 Medicaid facility assessment 601, , ,897 Depreciation and amortization 151, , , , , ,357 Real estate taxes 48,322 48,322 48,322 Event catering costs 96,516 96,516 Investment fees 77,832 77,832 77,832 Miscellaneous 2, ,098 48,131 48,131 51,229 Total expenses 11,310,668 5,406, ,354 77, , ,704 17,250,129 1,992,121 26,635 2,018, ,833 19,371,718 Less direct cost of special events (102,833) (102,833) Total expenses reported by function on the statement of activities (Exhibit B) $ 11,310,668 $ 5,406,163 $ 138,354 $ 77,256 $ 179,984 $ 137,704 $ 17,250,129 $ 1,992,121 $ 26,635 $ 2,018,756 $ $ 19,268,885 See independent auditor's report. The accompanying notes are an integral part of these statements.

11 EXHIBITD STATEMENT OF CASH FLOWS YEARS ENDED Cash flows from operating activities Change in net assets (Exhibit B) $ 877,446 $ (273,095) Adjustments to reconcile change in net assets to net cash provided (used) by operating activities Depreciation and amortization 566, ,357 Net realized and unrealized gain on investments (1,043,355) (605,931) Decrease (increase) in assets Accounts receivable - Medicaid (100,474) 347,661 Prepaid expenses and other assets 97,423 32,040 Increase (decrease) in liabilities Accounts payable and accrued expenses (315,519) 424,002 Accrued salaries payable and related payables (16,934) 12,570 Due to New York State OPWDD 1,047,075 (2,278,968) Net cash provided (used) by operating activities 1, 111,684 (1,638,364) Cash flows from investing activities Increase in debt service reserve fund (7,142) (4,124) Fixed asset acquisitions (290,716) (53,678) Purchase of investments (2,294, 739) (3,395,231) Proceeds from sale of investments 2,072,921 3,170,023 Net cash used by investing activities (519,676) (283,010) Cash flows from financing activities Proceeds from mortgages 1,650,000 Principal payments on mortgages (303,495) (1,740,165) Principal payments on capital lease (110,000) (105,000) Net cash used by financing activities (413,495) (195,165) Net change in cash and cash equivalents 178,513 (2, 116,539) Cash and cash equivalents - beginning of year 4,008,818 6,125,357 Cash and cash equivalents - end of year $ 4,187,331 $ 4,008,818 Supplemental disclosure of cash flow information Cash paid for interest $ 135,844 $ 168,763 See independent auditor's report. The accompanying notes are an integral part of these statements.

12 MERCY HOME FOR cmldren, INC. NOTE 1 - NATURE OF ENTITY Mercy Home for Children, Inc. (Mercy Home) operates group homes in Brooklyn and Queens, offers Medicaid Service Coordination, a small Day Habilitation Program for those who cannot tolerate working in larger groups, the Mercy-Mitsui Creative Arts Center, JPS Creative Arts Program and four (4) Respite programs (2 for adults and 2 for children/teens). Mercy Home was founded by the Sisters of Mercy in Thus, Mercy Home has a long history of caring for New Yorkers very much in need of nurturance and special care. Since the 1970s, the mission of Mercy Home has been to support those living with intellectual disabilities (autism, mental retardation and cerebral palsy). Prior to that, Mercy Home offered emergency placement to abused and neglected children in our residential treatment center. The change was a natural evolution, as there were more and more children with significant disabilities who needed the structure and programming we had developed for them. It is the mission of Mercy Home to assure a quality of life for persons with developmental disabilities through the recognition of each person's inherent dignity and absolute right to a life filled with learning and love. Mercy Home is exempt from federal income tax under Internal Revenue Code Section 501(c)(3), and is primarily funded by Medicaid through the NYS Office for People with Developmental Disabilities (OPWDD). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting - The financial statements are prepared on the accrual basis of accounting. Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents - Cash and cash equivalents include investments in highly liquid instruments with original maturities when acquired of three months or less.

13 2. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investments - Investments are recorded at fair value. Investment securities, in general, are exposed to various risks such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term, based on the markets' fluctuations, and that such changes could materially affect the amounts reported in the financial statements. Accounts receivable, allowance for doubtful accounts and revenue recognition - Mercy Home records receivables and revenue based on established third-party reimbursement rates, including estimated retroactive adjustments, under reimbursement agreements with third-party payors. Management determines whether an allowance for uncollectible accounts should be provided for accounts receivable. Mercy Home has determined that no allowance for uncollectible accounts receivable is necessary as of June 30, 2014 and Such estimate is based on the aged basis of its receivables, subsequent cash receipts, as well as current economic conditions and historical collection information. Interest is not charged on outstanding receivables. Fixed assets - Fixed assets are stated at cost. Acquisitions with a cost in excess of $1,000 and an estimated useful life of greater than one year are capitalized. Depreciation is recorded on the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is recorded on the straight-line method over the shorter of the useful life of the leasehold improvement or the term of the lease. Bond issuance costs - The costs associated with the issuance of the New York City Industrial Development Agency Bonds have been deferred and are being amortized on the straight-line method over the term of the bonds. Debt service reserve funds - These amounts represent cash which is set aside under the terms of the bond agreements to be used for future debt payments. Custodial funds - Custodial funds are held in separate bank accounts in the names of the individual consumers. Due to New York State OPWDD - Liabilities relating to the recoupment of Medicaid facility assessment tax and maintenance grants, as well as overpayments by OPWDD. These amounts are repaid through rate recoupments.

14 3. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Unrestricted net assets - Unrestricted net assets include funds having no restrictions as to use or purpose imposed by donors. Temporarily restricted net assets - Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Contributions - Unconditional contributions, including promises to give cash and other assets, are reported at fair value at the date the contribution is received. The gifts are reported as temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Revenue recognition - Revenue is recorded at the estimated net realizable amounts due for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Operating leases - Operating lease payments are charged to rent expense. Rent expense has been recorded on the straight-line basis over the life of the lease. Deferred rent, when material, is recorded for the difference between the fixed payment and the rent expense. Functional expenses - The costs of providing Mercy Home's services have been summarized on a functional basis. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Operating indicator - Changes in net assets from operations include all revenues and expenses for the reporting period except for investment income, grants and contributions, special events revenue, direct cost of special events and miscellaneous revenue. Fair Value Measurements Fair Value Measurements establishes a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below. Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that Mercy Home has the ability to access. Level 2 inputs to the valuation methodology include:

15 4. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value Measurements (continued) Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation methodologies used for assets measured at fair value at June 30, 2014 and There have been no changes in the methodologies used at June 30, 2014, as compared to those used at June 30, Money market, government and government agency obligations, corporate obligations and common stock - Valued at the closing price reported on the active market on which the individual securities are traded. Mutual funds - Valued at the net asset value (NA V) of shares held by Mercy Home at year end. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Mercy Home believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Uncertainty in income taxes - Mercy Home has determined that there are no material uncertain tax positions that require recognition or disclosure in the financial statements. Periods ending June 30, 2011 and subsequent remain subject to examination by applicable taxing authorities. Subsequent events - Subsequent events have been evaluated through November 18, 2014, which is the date the financial statements were available to be issued.

16 5. NOTE 3 - INVESTMENTS (Level 1) (Level 1) Goldman Sachs Money Market $ 119,560 $ 620,880 Goldman Sachs Mutual Funds - Domestic 1,080, ,992 Government and government agency obligations Federal Farm Credit Bureau 266, ,785 Federal Home Loan Bank bonds 111, ,195 U.S. Treasury Bonds 500, ,353 U.S. Treasury Notes 142, ,730 1,021, ,063 Corporate obligations Bottling Group 226, ,718 CBS Corporation 125, ,495 Cigna Corporation 109, ,380 Cisco Systems 110, ,680 CVS Caremark Corp. 112, ,881 Dominion Resources 138, ,875 DuPont 140, ,941 European Investment Bank 182, ,325 Harris Corp. 155,610 HSBC 138,474 Jefferies Group 164, ,750 Kraft Foods Inc. 201, ,464 Manitoba 149, ,669 Omnicom Group Inc. 162, ,989 Ontario 165, ,178 Shell International 76,040 Starbucks Corporation 143, ,124 Starwood Hotels 205, ,913 Symantec Corp. 153, ,661 2,706,426 2,710,653

17 6. NOTE 3 - INVESTMENTS (continued) 2014 (Level 1) 2013 (Level 1) Common stock U.S. equity Non-U.S. equity $ 4,607,291 1,310,203 $ 3,408, ,692 5, , Total $ 10,845,504 $ 9,580,331 The following represents the approximate distributions as a percentage of market value: Money market funds 1% 7% Mutual funds Government agency obligations 9 9 Corporate obligations Common stock ~ AQ 100% 100% Investment fees were $90,946 and $77,832 for the years ended June 30, 2014 and 2013, respectively.

18 MERCY HOME FOR CIDLDREN, INC. 7. NOTE 4 - FIXED ASSETS Land $ 470,050 $ 470,050 Building and improvements 4,882,842 4,872,885 Leasehold improvements 3,192,490 3,177,202 Furniture and equipment 497, Useful Lives 5-15 years 4-20 years 3-5 years 9,042,641 8,984,005 Accumulated depreciation and amortization (5,898,207) (5,343,295) 3,144,434 3,640,710 Construction in progress 484, ,570 $ 3,629,084 $ 3,893,280 The 4th Avenue construction is expected to be completed in 2015 at an estimated total cost of $3, 100,000. Building and improvement costs of $1,448,335 as of June 30, 2014 and 2013 and associated accumulated amortization of $1,193,469 and $1,118,195 as of June 30, 2014 and 2013, respectively, are subject to capital lease agreements as described in Note 6. NOTES-MORTGAGES PAYABLE First Central Savings Bank In October of 2012, Mercy Home obtained a mortgage for $1,650,000. The mortgage bears interest at the rate of 3.00% per annum and is payable in monthly installments of principal and interest until the maturity date, which is October The property encumbered is the Keating and McGivney residences. The outstanding balance on the mortgage at June 30, 2014 and 2013 was $1,409,266 and $1,555,306, respectively. Total mortgages outstanding Less current portion Long-term portion $ 1,409,266 (151,011) $ 1.258,255

19 8. NOTE 5- MORTGAGES PAYABLE (continued) Taffee Mortgage - TD Bank In September 20 I 0, Mercy Home obtained two mortgages encumbered by the Taffee residence. The first mortgage in the amount of $3 85, 719 bears interest at 5.22% per annum, and requires interest only to be paid until the maturity date, which is October The second mortgage in the amount of $496,505 bears interest at the rate of 4.18% and is payable in monthly installments of principal and interest until the maturity date, which is October The outstanding balances on the mortgages at June 30, 2014 and 2013 was $529,523 and $631,436, respectively. Total mortgages outstanding Less current portion $ 529,523 ( ) Long-term portion $ Baldwin Mortgage - TD Bank In October 2011, Mercy Home obtained two mortgages encumbered by the Baldwin residence. The first mortgage in the amount of $24,310 bears interest at 3.92% per annum and is payable in monthly installments of principal and interest until the maturity date, which is November The second mortgage in the amount of $1,019,748 bears interest at 4.76% and is payable in monthly installments of principal and interest until the maturity date, which is November The balances on the mortgages at June 30, 2014 and 2013 was $905,929 and $961,471, respectively. Total mortgages outstanding Less current portion Long-term portion $ 905,929 (58,939) $ Combined principal payments of over the next five years and thereafter as follows: 2015 $ 316, , , , ,506 Thereafter 1,588,705 $ 2,844,718 The interest expense from mortgages payable was $98,575 and $125,584 for the years ended June 30, 2014 and 2013, respectively.

20 9. NOTE 6 - CAPITAL LEASE PAY ABLE The New York City Industrial Development Agency (NYCIDA) issued Series 1999A-l and Series 1999A-2 Bonds aggregating $550,000 maturing in 2019 with an interest rate of 6.5% and Series 2000A-l and Series 2000A-2 Bonds aggregating $1,233,000 maturing in 2015, with interest rates of 8.125% and 9.5%, respectively. The proceeds from the bonds were deposited into bond funds held by The Bank of New York, which were used for acquisition of the leased Addeo, Chrys and deporres facilities and debt service repayments. Mercy Home is required to make semiannual interest deposits into the bond funds. With respect to principal payments, Mercy Home is required to make one annual deposit of principal per the bond amortization schedules. Interest earned may be used to offset required deposits into the bond funds. As part of the agreement with NYCIDA, Mercy Home transferred to IDA the titles to the facilities. IDA has leased the facilities back to Mercy Home for a term and at an amount concurrent with the bond repayment schedules. At the conclusion of the lease terms, Mercy Home has the option to purchase all of the leased property for $1. The Bank of New York has a lien and security interest in the facility, property, equipment and furnishings, and in Mercy Home's rents and profits generated by the facility. The outstanding principal balances on the bonds at June 30, 2014 and 2013 was $385,000 and $495,000, respectively. Future minimum lease payments are as follows: Less amount representing interest Present value of net minimum lease payments Less current installment Long-term portion $ 254,071 51,305 48,645 50, $ 442,999 (57,999) 385,000 (225,000) Interest expense on the capital lease was $37,269 and $43, 179 for the years ended June 30, 2014 and 2013, respectively.

21 10. NOTE 7 - TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes: Creative arts program $ 130,165 $ 197,551 Employee training 10,104 10,104 Mentoring programs 27,500 7,500 Respite programs 173, ,175 Scholarship fund 28,187 28,187 Technology 223, ,499 Young professional 6,826 6,826 Workforce development 23,575 38,350 Plant, Grow, Give Program 48,825 33,370 $ $ Temporarily restricted net assets were released from restrictions as follows: Creative arts program $ 82,386 $ 77,381 Respite programs 14,075 17,470 Workforce development 14,775 29,400 Plant, Grow, Give Program $ 120,781 $ 127,421

22 11. NOTE 8 - OPERATING LEASE COMMITMENTS Mercy Home leases various buildings for its administrative office and program sites. These noncancelable leases have various expiration dates through March Rent expense for the years ended June 30, 2014 and 2013 was $555,942 and $498,452, respectively. Mercy Home also entered into lease agreements for vehicles and office equipment. Future minimum lease payments under these leases with remaining terms of more than one year are as follows: Office Space Vehicles Equipment 2015 $ 494,951 $ 56,081 $ 70, ,005 56,081 65, ,406 38,050 65, ,803 10,838 60, ,749 10,838 Thereafter 228,258 $ $ $ NOTE 9 - PENSION PLANS Mercy Home's nonunion employees were covered under a pension plan through the Diocese of Brooklyn. Contributions to the pension plan is based on 7.2% of the employee's salary. Pension expense was $134,956 and $186,493 for the years ended June 30, 2014 and 2013, respectively. Effective July , Mercy Home has withdrawn from participation in the Diocese of Brooklyn Pension Plan. All assets and liabilities of the plan have been transferred to the Catholic Federation of Social Services Agencies of Brooklyn and Queens for administration. Mercy Home has established a defined contribution plan for new retirement benefit accruals for future employment periods. Mercy Home's union employees are covered under a noncontributory pension plan through the 1199 Union Pension Fund. Contributions to the union pension plan are based on a percentage of covered employees' salaries, which was 15.8% for the years ended June 30, 2014 and Pension expense was $788,657 and $669,940 for the years ended June 30, 2014 and 2013, respectively.

23 12. NOTE 9 - PENSION PLANS (continued) The following information relates to Mercy Home's union-managed pension plan: Pension FIP/RP Expiration EIN/ Protection Act Status Date of Pension Zone Status Contributions Collective Pension Plan Pending/ Surcharge Bargaining Fund Number Implemented Imposed Agreement Expired 1199SEIU EIN November 30, Health Care and Employees Plan currently under Pension Fund No. 001 Green Green NIA $788,657 $669,940 No negotiation As of the date the financial statements were issued, Form 5500 was not available for the plan year ending December 31, However, the plan was certified by its actuary to be in "green zone" status - not endangered seriously nor critically endangered, as defined in the Pension Protection Act of 2006, as of January l, 2014 and NOTElO-CONCENTRATIONS Financial instruments which potentially subject Mercy Home to a concentration of credit risk consist primarily of cash accounts in financial institutions which, from time to time, exceed federal insurance limits. For the years ended June 30, 2014 and 2013, Mercy Home received approximately 97% of its operating revenues from Medicaid through OPWDD. NOTE 11 - CONTINGENCIES Mercy Home receives substantially all its revenues for services provided to approved participants from third-party reimbursement agencies, primarily OPWDD and Medicaid. These revenues are based on predetermined rates based on cost reimbursement principles and are subject to audit and retroactive adjustment by the respective third-party fiscal intermediary. In the opinion of management, retroactive adjustments, if any, would not be material to the financial position or results of operations of Mercy Home.

24 13. NOTE 11 - CONTINGENCIES (continued) Mercy Home is responsible to report to and is regulated by various governmental third parties, among which are the Centers for Medicare and Medicaid Services (CMS) and OPWDD. These agencies, as well as the New York State Office of the Attorney General's Medicaid Fraud Control Unit (MFCU), the Internal Revenue Service, the New York State Office of the Attorney General's Charities Bureau, the New York State Department of Health's Independent Office of Medicaid Inspector General (OMIG), and other agencies have the right to audit fiscal as well as programmatic compliance, i.e., clinical documentation, among other compliance requirements. The current third-party-payor programs, including Medicaid, are based upon extremely complex laws and regulations. Noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. OPWDD is currently conducting an audit of Health Care Enhancement (HCE) funds that Mercy Home received relating to fiscal years 2007 through The audit has not been completed and a report has yet to be issued. Mercy Home has not recorded a liability at this point as it cannot be determined how much Mercy Home might owe back based on the potential audit findings.