LONGHORN VILLAGE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2012 AND 2011

FINANCIAL STATEMENTS YEARS ENDED

TABLE OF CONTENTS YEARS ENDED INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS BALANCE SHEETS 3 STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS 4 STATEMENTS OF CASH FLOWS 5 6

INDEPENDENT AUDITORS' REPORT Board of Directors Longhorn Village Austin, Texas We have audited the accompanying financial statements of Longhorn Village (a nonprofit organization), which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of operations and changes in net assets 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. Auditors 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 auditors 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 opinions. An independent member of Nexia International (1)

Board of Directors Longhorn Village Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Longhorn Village as of December 31, 2012 and 2011, 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. CliftonLarsonAllen LLP Dallas, Texas March 19, 2013 (2)

BALANCE SHEETS ASSETS 2012 2011 CURRENT ASSETS Cash and Cash Equivalents $ 3,864,046 $ 468,252 Accounts Receivable, Net 1,325,690 834,905 Notes Receivable 162,859 4,204,960 Other Current Assets 272,790 341,547 Current Portion of Assets Limited As to Use 13,401,645 5,119,510 Total Current Assets 19,027,030 10,969,174 OTHER ASSETS Assets Limited as to Use, Less Current Portion 13,427,626 13,778,275 Property and Equipment, Net 116,249,626 121,480,870 Deferred Development, Marketing and Financing Costs 11,289,972 13,757,794 Total Other Assets 140,967,224 149,016,939 Total Assets $ 159,994,254 $ 159,986,113 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Current Maturities of Long-Term Debt $ 9,537,693 $ 4,938,398 Accounts Payable 567,672 4,102,304 Accrued Expenses 530,615 2,154,464 Accrued Interest Payable 3,687,174 181,112 Total Current Liabilities 14,323,154 11,376,278 LONG-TERM DEBT, Net of Current Maturities and Discount 101,239,748 102,066,102 OTHER LONG-TERM LIABILITIES Entrance Fee Deposits 672,689 1,360,404 Deferred Revenue from Entrance Fees, Net 87,439,799 78,593,307 Interest Rate Swap Agreement - 2,148,245 Long Term Fees Payable 3,353,753 - Total Other Long-Term Liabilities 91,466,241 82,101,956 Total Liabilities 207,029,143 195,544,336 UNRESTRICTED NET ASSETS (DEFICIT) (47,034,889) (35,558,223) Total Liabilities and Net Assets $ 159,994,254 $ 159,986,113 See accompanying Notes to Financial Statements. (3)

STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS YEARS ENDED 2012 2011 REVENUE, GAINS AND OTHER SUPPORT Independent Living Revenue $ 9,066,681 $ 7,090,253 Health Care Revenue 5,581,672 3,801,444 Amortization of Entrance Fees 4,071,145 3,220,361 Other Charges and Miscellaneous Revenue 377,152 290,790 Total Revenue, Gains and Other Support 19,096,650 14,402,848 OPERATING EXPENSE Residential Services 4,854,169 3,923,344 Housekeeping and Laundry 593,551 537,405 Food Service 2,787,007 2,410,905 Plant and Maintenance 2,584,825 2,585,063 Administrative 3,377,854 3,643,193 Depreciation and Amortization 6,921,376 7,387,864 Interest Expense 6,935,116 5,373,181 Total Operating Expense 28,053,898 25,860,955 OPERATING LOSS (8,957,248) (11,458,107) OTHER INCOME (LOSS) Investment Income 364,859 404,586 Other Income 1,000,000 - Change in Fair Value of Interest Rate Swap 190,802 1,234,968 Loss on Refinancing (4,075,079) - Total Other Income (Loss) (2,519,418) 1,639,554 CHANGE IN UNRESTRICTED NET ASSETS (11,476,666) (9,818,553) Unrestricted Net Assets - Beginning of Year (35,558,223) (25,739,670) UNRESTRICTED NET ASSETS - END OF YEAR $ (47,034,889) $ (35,558,223) See accompanying Notes to Financial Statements. (4)

STATEMENTS OF CASH FLOWS YEARS ENDED 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Change in Net Assets $ (11,476,666) $ (9,818,553) Adjustments to Reconcile Change in Net Assets to Net Cash Used by Operating Activities: Depreciation and Amortization 6,921,376 7,387,864 Loss on Refinancing 4,075,079 - Amortization of Entrance Fees (4,071,145) (3,220,361) Change in Fair Value of Interest Rate Swap (190,802) (1,234,968) Change in Current Assets and Current Liabilities Accounts Receivable and Other Current Assets (422,028) (664,828) Accounts Payable and Accrued Expenses (1,719,014) 1,360,690 Accrued Interest Payable 3,506,062 (30,974) Net Cash Used by Operating Activities (3,377,138) (6,221,130) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Property and Equipment (218,589) (253,960) Change in Assets Limited as to Use (7,931,486) 7,131,653 Proceeds on Notes Receivables 4,042,101 65,411 Net Cash Provided (Used) by Investing Activities (4,107,974) 6,943,104 CASH FLOWS FROM FINANCING ACTIVITIES Principal Payments on Long-Term Debt (107,004,500) (24,205,250) Proceeds on Refinancing 110,493,503 - Proceeds from Entrance Fees and Deposits 16,982,808 24,725,536 Refunds of Entrance Fees and Deposits (4,752,886) (954,463) Payment of Deferred Financing Costs (2,325,019) (78,384) Interest Rate Swap and Line of Credit Termination Fees (2,513,000) - Net Cash Provided (Used) by Financing Activities 10,880,906 (512,561) NET INCREASE IN CASH AND CASH EQUIVALENTS 3,395,794 209,413 Cash and Cash Equivalents - Beginning of Year 468,252 258,839 CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,864,046 $ 468,252 SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid for Interest, Including Capitalized Interest $ 10,441,178 $ 5,342,207 Property and Equipment Additions in Accounts Payable $ 129,192 $ 1,713,356 See accompanying Notes to Financial Statements. (5)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Longhorn Village (the Company) is a non-profit corporation under the laws and regulations of the state of Texas that operates a continuing care retirement community (CCRC) in Austin, Texas. The CCRC consists of 214 independent living units (including 173 apartments and 41 patio homes), and a healthcare facility consisting of 20 assisted living units, 16 special care dementia units, and 60 skilled nursing beds. Income Taxes The Company is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. The Company s income tax returns are subject to review and examination by federal, state, and local authorities. The Company is not aware of any activities that would jeopardize its tax-exempt status. The Company is not aware of any activities that are subject to tax on unrelated business income or excise or other taxes. The tax returns for the years 2009 to 2011 are open to examination by federal, local, and state authorities. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. Financial Statement Presentation Contributions received are recorded as an increase in unrestricted, temporarily restricted or permanently restricted support, depending on the existence or nature of any donor restrictions. Accordingly, net assets of the Company and changes therein are classified and reported as follows: Unrestricted Those resources over which the boards of directors have discretionary control. Designated amounts represent those revenues that the board has set aside for a particular purpose. Temporarily Restricted Those resources subject to donor imposed restrictions that will be satisfied by actions of the Company or through the passage of time. Permanently Restricted Those resources subject to a donor imposed restriction that they be maintained permanently by the Company. Generally, the donors of these assets permit the Company to use all or part of the income earned on related investments for program purposes. (6)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial Statement Presentation (Continued) Unconditional promises to give cash and other assets are accrued at estimated fair market value at the date each promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction is satisfied, net assets are released and reported as an increase in unrestricted net assets. Income earned on temporarily or permanently restricted support, including realized capital appreciation is recognized in the period earned. Donor-restricted contributions whose restrictions are met within the same reporting period as received are recorded as unrestricted contributions. At December 31, 2012 and 2011, the Company did not have any temporarily or permanently restricted net assets. Cash and Cash Equivalents For financial statement purposes, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash restricted for long-term purposes (project costs or debt service reserves) are not considered cash for purposes of the statements of cash flows. Accounts Receivable The Company provides an allowance for uncollectible accounts based on the allowance method using management s judgment. Residents are not required to provide collateral for services rendered. Payment for services is required within 30 days of receipt of invoice or claim submitted. Accounts past due more than 90 days are individually analyzed for collectability. In addition, an allowance is estimated for other accounts based on the historical experience of the Company. When all collection efforts have been exhausted, the account is written off. At December 31, 2012 and 2011, the allowance was approximately $121,000 and $93,000 respectively. Notes Receivable Notes receivable represent amounts that are due from residents for payment of entrance fees. The Company previously offered an entrance fee deferral program under which the Company may defer receipt of up to 50% of a resident s entrance fee, which is due one year after the residency agreement was signed by the residents. Under this program, the aggregate outstanding balance of the deferred entrance fees could not exceed $5,000,000. In January 2012, this program was discontinued and all entrance fees are now due upon settlement of the resident agreement. As of December 31, 2012 and 2011, the aggregate balance of deferred entrance fees receivable by the Company under this program was $162,859 and $4,204,960 respectively. At December 31, 2012 and 2011, the allowance was $-0- as there are no doubts to collectability. (7)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Assets Limited as to Use Assets limited as to use include assets held by trustees under bond indenture agreements and deposits of entrance fees paid by residents. Amounts required to meet current liabilities of the Company are included in current assets. These assets held include equity securities with readily determinable fair values. All investments in debt securities are measured at fair value in the balance sheet. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in revenues in excess of expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from revenues in excess of expenses. Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives by the straight-line method of depreciation. Construction in progress costs are deferred until the projects are completed and placed into service at which times these costs are depreciated over the useful life of the asset. Gifts of long-lived assets such as land, buildings or equipment are reported as additions to unrestricted net assets, and are excluded from revenues in excess of expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when donated or when acquired long-lived assets are placed in service. The Company reviews its property and equipment periodically to determine potential impairment. If determined that the carrying value exceeds the fair value, an impairment loss is recognized. Interest Capitalization Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets, and depreciated over the estimated useful lives by the straight-line method of depreciation. Deferred Finance Costs Costs incurred for the issuance of the Series 2008 bonds totaling $6,119,723 were capitalized and amortized on the effective interest method over the life of the bonds. During 2012, the Series 2008 bonds were refinanced with proceeds received from the Series 2012 bonds. At that time, the remaining net unamortized amount of the deferred financing costs for the Series 2008 bonds of $3,659,151 were written off and is included in loss on refinancing on the statement of operations and changes in net assets. (8)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred Finance Costs (Continued) Costs incurred upon the issuance of the Series 2012 bonds of $3,225,936 were capitalized and are being amortized on the effective interest method over the life of the bonds. Accumulated amortization on bond issuance costs was $67,677 and $1,928,340 at December 31, 2012 and 2011, respectively. Total amortization of bond issue costs was $183,147 and $818,372 for the years ended December 31, 2012 and 2011, respectively. Deferred Marketing Costs Advertising and marketing costs incurred in connection with acquiring initial continuing-care contracts are capitalized during the start up phase of the retirement community. One year following the completion of construction or when occupancy is stabilized, whichever occurs first, these capitalized marketing cost will be amortized to expense on a straight-line basis over the average expected remaining lives of the residents under contract. Total marketing costs capitalized as of December 31, 2012 and 2011 totaled $10,874,076. Accumulated amortization on marketing costs capitalized was $2,742,363 and $1,407,130 at December 31, 2012 and 2011, respectively. Total amortization of marketing costs capitalized was $1,144,640 for the years ended December 31, 2012 and 2011. Entrance Fee Deposits Each prospective resident is required to pay an entrance fee deposit. Entrance fee deposits are maintained in an escrow account at a financial institution. These funds will be applied to each prospective resident s total entrance fee due upon occupancy. Each prospective resident s entrance fee deposit is subject to refund at any time prior to occupying his/her unit. The escrowed funds are recorded as assets limited as to use. Entrance Fees The Company offers prospective residents two types of Entrance Fee plans: (1) a 95% Refundable Plan, under which the resident would receive, upon termination of the Residency Agreement, a refund equal to the amount of the entrance fee paid, less a 5% nonrefundable fee, or (2) a traditional plan which after 48 months has no refund. Fees paid by a resident upon entering a continuing care contract, net of the portion thereof that is refundable to the resident, are recorded as deferred revenue and are amortized to income using the straight-line method over the estimated remaining life expectancy of the resident, which is updated annually for the resident. The refundable portion is refundable from proceeds received upon reoccupancy of the vacant or similar unit, and is amortized to income using the straight-line method over the estimated remaining life of the unit, which is consistent with the estimated useful lives used for depreciation. (9)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Obligation to Provide Future Services The Company has calculated the present value of the net cost of future services and use of facilities to be provided to current residents and compared that amount with the balance of deferred revenue from advance fees. If the present value of the net cost of future services and use of facilities exceeds the deferred revenue from advance fees, a liability is recorded (obligation to provide future service) with the corresponding charge to income. The obligation is discounted at 6% as of December 31, 2012 and 2011. The Company s calculation indicated no liability needed to be recorded as of December 31, 2012 and 2011. Interest Rate Swap Agreement The Company records all derivative instruments, currently consisting of an interest rate swap agreement, on the balance sheet at their respective fair values and all changes in fair value in the statement of operations and changes in net assets as change in fair value of interest rate swap. This swap agreement was terminated in 2012 at the time of refinancing. Resident Services Revenue Resident services revenue includes room charges and ancillary services to residents and is recorded at established billing rates net of contractual adjustments resulting from agreements with third-party payors. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in revenue in the year of settlement. Third Party Reimbursement Agreements Medicaid The Company participates in the Texas Medicaid program administered by the Texas Health and Human Services Commission. The Company is required to file annual Medicaid cost report which is subject to audit by the Texas Health and Human Services Commission. Adjustments to this report may retroactively affect payment rates. Medicare The Company participates in the Medicare program, which is administered by the United States Centers for Medicare and Medicaid Services (CMS). The Medicare program pays on a Prospective Payment System (PPS), a per diem price based system. Cost reports must be filed annually with no cost settlement provision. Nursing facilities licensed for participation in the Medicare and Medical Assistance programs are subject to annual licensure renewal. If it is determined that a nursing facility is not in substantial compliance with the requirements of participation, CMS may impose sanctions and penalties during the period of noncompliance. Such a payment ban would have a negative impact on the revenues of the Company. (10)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Change in Unrestricted Net Assets The statement of operations and changes in net assets includes change in unrestricted net assets, which is referred to as the performance indicator. Changes in unrestricted net assets which are excluded from the performance indicator, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers of assets to and from affiliates for other than goods and services, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). Fair Value of Financial Instruments Fair value measurement applies to reported balances that are required or permitted to be measured at fair value under an existing accounting standard. The Company emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows: Level 1 Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 3 Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity s own assumptions, as there is little, if any, related market activity. Subsequent to initial recognition, the Company may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually results when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. (11)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments The Company also adopted the policy of valuing certain financial instruments at fair value. This accounting policy allows entities the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on an instrumentby-instrument basis. The Company has not elected to measure any existing financial instruments at fair, however may elect to measure newly acquired financial instruments at fair value in the future. Subsequent Events In preparing these financial statements, the Company has considered events and transactions for potential recognition or disclosure through March 19, 2013, the date the financial statements were available to be issued. Reclassifications Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation for comparative purposes with no effect on previously reported change in net assets. NOTE 2 ASSETS LIMITED AS TO USE Assets limited as to use are comprised of funds held by the trustee under the indenture agreements, and deposits held in escrow on behalf of prospective residents of the Company. Assets limited as to use that are required for obligations classified as current liabilities are reported in current assets and are recorded at their estimated market value. Deposits in Escrow on Behalf of Residents These funds are held for deposits made by future residents into the Project. These deposits are held by the Company, and represent 10% of the entrance fees required to be paid for occupancy into the independent living units. These deposits are fully refundable. Held by Trustee Under Indenture Agreement The Bond Trust Indenture agreements require that Longhorn Village maintain accounts held by the trustee. These funds consist of an interest fund, entrance fee fund, working capital fund, and a revenue fund. These funds are invested in guaranteed investment contracts (GIC), which are recorded at contract cost, and money market funds and short-term cash and cash equivalents, which are recorded at fair value. As of December 31, 2012 and 2011, total assets held under bond indenture were $26,162,382 and $17,567,123, respectively. (12)

NOTE 2 ASSETS LIMITED AS TO USE (CONTINUED) Held by Trustee Under Indenture Agreement (Continued) Assets limited as to use consist of the following at December 31, 2012 and 2011: 2012 2011 Deposits in Escrow on Behalf of Residents $ 666,889 $ 1,330,662 Held by Trustee Under Indenture Agreement 26,162,382 17,567,123 Assets Limited as to Use 26,829,271 18,897,785 Less: Current Portion (13,401,645) (5,119,510) Assets Limited as to Use, Less Current Portion $ 13,427,626 $ 13,778,275 Money Market and Cash and Cash Equivalents $ 19,925,219 $ 12,001,818 Guaranteed Investment Contracts 6,904,052 6,895,967 Total Assets Limited as to Use $ 26,829,271 $ 18,897,785 The Company earned total investment income of $364,859 and $337,283 for the years ended December 31, 2012 and 2011, respectively. NOTE 3 PROPERTY AND EQUIPMENT Property and equipment and related accumulated depreciation consist of the following at December 31, 2012 and 2011: 2012 2011 Land and Land Improvements $ 6,879,357 $ 6,899,357 Buildings and Building Improvements 123,686,718 123,683,328 Furniture, Fixtures and Equipment 4,070,647 3,921,162 Total 134,636,722 134,503,847 Less: Accumulated Depreciation (18,387,096) (13,022,977) Property and Equipment, Net $ 116,249,626 $ 121,480,870 Depreciation expense for the years ended December 31, 2012 and 2011 was $5,364,119 and $4,516,054, respectively. (13)

NOTE 4 LONG-TERM DEBT Long-term debt consists of the following as of December 31, 2012 and 2011: Description 2012 2011 Series 2008 Tax-Exempt Bonds $ - $ 107,004,500 Series 2012 Tax-Exempt Bonds 112,955,000 Subtotal - Bonds Payable 112,955,000 107,004,500 Less: Current Maturities (9,537,693) (4,938,398) Less: Unamortized Discount on Bonds (2,177,559) - Long-Term Debt, Net of Current Maturities $ 101,239,748 $ 102,066,102 In January 2008, the Company issued tax-exempt bonds in the amount of $166,330,000 which were used to refinance certain preconstruction debt and pay for the acquisition, construction, equipping, and furnishing of the CCRC. The bonds bear interest at a variable rate payable monthly with principal payment due in varying annual payments and were schedule to mature in July 2037. Due to the structure of these bonds, the bonds were able to be called on a daily basis by the bond holders; however, the Company had entered into a remarketing agreement with an underwriter that provides for a best efforts remarketing of the bonds. In connection with the remarketing agreement, the Company paid a remarketing fee based on.09% of the weighted average principal amount outstanding for each three month period. The bonds were secured by a letter of credit in the original amount of $168,426,214. The letter of credit fee was 2.40%, and paid quarterly based upon the outstanding letter of credit balance. In the event of a major event of default, the rate of the letter of credit could rise to 4.40%. The letter of credit agreement was terminated in March 2012 in connection with the refinancing of the Series 2008 bonds. As a part of this termination, a fee of $750,000 was payable to the letter of credit bank and in the statement of operations and is included in loss on refinancing in the statement of operations and changes in net assets for the year ended December 31, 2012. On March 29, 2012, the Company refinanced the Series 2008 bonds with the Series 2012 bonds. These bonds, which amount to $112,955,000, consist of four separate series of bonds; of which $97,955,000 are fixed rate and $15,000,000 are adjustable rate bonds. The fixed rate bonds are broken into three separate series of bonds; $76,455,000 Series 2012A, $16,500,000 Series 2012C-1 and $5,000,000 Series 2012C-2. The Series 2012A bonds carry an interest rate ranging from 6.00% to 7.125% with semi-annual interest payments beginning July 2012 and semi-annual principal payments beginning January 2015 and through maturity in January 2046. The Series 2012C-1 bonds are temporary five year bonds with an interest rate of 5.50%, interest due semi-annually beginning July 2012 and principal payments due from proceeds received on initial sales of independent living units through maturity in 2013. The Series 2012C-2 bonds are taxable bonds with an interest rate of 6.00%, interest due semi-annually beginning July 2012 and principal payments due from (14)

NOTE 4 LONG-TERM DEBT (CONTINUED) proceeds received on initial sales of independent living units through maturity in 2014. The Series 2012B adjustable rate bonds mature in January 2047 and are priced at an initial interest rate of 5.50%, which resets in accordance with the remarketing agreement beginning in 2017. The bonds were issued at a discount of $2,461,497. Accumulated amortization on bond discount was $283,938 at December 31, 2012. Total amortization of bond discount was $283,938 for the year ended December 31, 2012.The proceeds of these bonds were applied to refund the existing Series 2008 bonds, settle the existing interest rate swap and letter of credit termination agreements, fund a portion of working capital, pay certain deferred fees from the royalty and development agreement, fund a debt service reserve fund and pay the costs of issuance. The provisions of the debt agreements of the bonds described above, and the letter of credit reimbursement agreement as effective for the year ended December 31, 2011, contain various restrictive covenants related to financial and operational matters and require certain measures of financial performance be satisfied as long as the bonds are outstanding. As of December 31, 2012, the Company was in compliance with these covenants as required in the bond and the reimbursement, credit and security agreements. Scheduled maturities of the Series 2012 bonds are as follows: Year Ending December 31, Amount 2013 $ 9,537,693 2014 11,962,307 2015 760,000 2016 805,000 2017 855,000 Thereafter 89,035,000 Total $ 112,955,000 The scheduled principal maturities due in 2013 are based upon the amount of entrance fee redemption funds held by the Company as of December 31, 2012, and will be used to pay down the Series 2012C-1 and 2012C-2 bonds. There are not any scheduled principal payments due on the Series 2012A and Series 2012B bonds in 2013. (15)

NOTE 4 LONG-TERM DEBT (CONTINUED) As part of the Series 2008 bond financing, the Company entered into an interest rate swap agreement for the purpose of aligning its over-all exposure to interest rate fluctuations and the effect these changes in interest rates have on interest income and interest expense. The Company does not enter into derivative instruments for any purpose other than risk management purposes. The derivative financial instruments expose the Company to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contracts. When the fair value of the derivative contract is positive, the counterparty owed the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and therefore does not possess credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Management also mitigates risk through periodic reviews of the Company s derivative positions in the context of its total blended cost of capital. The swap agreement was not designated as a hedging instrument. During 2012, and as a component of the refinancing of the Series 2008 bonds, the interest rate swap agreement was terminated. In order to terminate this agreement, the Company paid a $1,763,000 termination fee, which was funded from proceeds received from the Series 2012 bonds. The notional value of the interest rate swap agreement was $74,330,000, which was scheduled to decline to $-0- through maturity of the agreement in January 2013. As part of this agreement, the Company paid a fixed rate of 2.954% and received a rate equal to the SIFMA rate index. Prior to termination of the interest rate swap agreement, and as included in the financial statement as of December 31, 2011, the fair value of the interest rate swap agreement was ($2,148,245) and included in other liabilities on the balance sheet. In addition, the change in fair value of the interest rate swap agreement was $1,234,968 and included in other income in the statement of operations and changes in net assets for the year ended December 31, 2011. Due to the termination of this interest rate swap agreement in March 2012, the Company recognized a gain of $188,802, which is comprised of the liquidated market value of the interest rate swap agreement of $2,148,245, and the termination payment of $1,763,000 as noted previously. This gain is included in loss on refinancing in the statement of operations and changes in net assets for the year ended December 31, 2012. (16)

NOTE 5 DEVELOPMENT AND MANAGEMENT AGREEMENT In June 2003, the Company entered into a management and marketing agreement with CRSA Management, LLC (CRSA), and a development agreement with CRSA and Rees Associates, Inc. (Rees). In May 2005, the development agreement was amended and restated in part to eliminate Rees as a party in the agreement. In addition to these agreements, in August 2005, the Company entered into an advertising agreement with CRSA. In April 2010, CRSA and its affiliates sold certain of their assets to CRSA Acquisition, LLC, and its wholly owned subsidiary CRSA/LCS Management, LLC (CRSA/LCS). As part of this transaction, the development, management, advertising and marketing agreements were assigned to CRSA/LCS. In February 2012, all agreements entered into between CRSA and the Company were assigned to CRSA/LCS. Management Agreement Under the terms of a management agreement, the operations of the Company including staffing, accounting and general administrative services were performed by CRSA/LCS. In addition, as part of this agreement, the Company s executive director is an employee of LCS and all salaries, including benefits and other expenses are to be reimbursed from the Company to LCS. All services performed up to 12 months prior to the opening of the Company were paid based on the development consulting agreement (as previously discussed). The term of this agreement is until the last day of the 60th month after the month in which the Company admits its first independent living unit occupant (August 2009), but may be renewed thereafter on mutually agreeable terms for such period as agreed upon by the Company and CRSA/LCS. The management agreements calls for a base monthly management fee of $18,750 per month, which will be inflated annually based upon the consumer price index (CPI). Marketing Agreement Under the terms of a marketing agreement with CRSA/LCS, the Company engaged CRSA as marketing agent to develop and conduct a comprehensive sales and marketing program, and to provide direction and supervision of the marketing and sales effort of the Company. The term of this agreement is from June 19, 2003 through the date the independent living units of the Company are 95% occupied, unless terminated earlier. A commission equal to 3% of the sales price (entrance fee) of an independent living unit (subject to a minimum of $2,000 per unit) will be earned based on the following criteria: (a) 50% upon receipt of the required entrance fee deposit and the executed residency agreement on each unit reserved; and (b) 50% upon the total entrance fee payment of each unit. (17)

NOTE 5 DEVELOPMENT AND MANAGEMENT AGREEMENT (CONTINUED) Adverting Agreement Under the terms of the advertising agreement with CRSA/LCS, the Company will receive advertising services for the project. The initial agreement is for one year and automatically renews for subsequent one year periods unless terminated earlier. This agreement may be terminated upon 90 days prior written notice. In consideration for its services, CRSA/LCS received a retainer of $10,000 for the first six months and $7,000 per month, for each and every month thereafter during the term of the advertising agreement. Development Agreement The Company, CRSA/LCS and Rees Associates, Inc. (Rees) entered into a development agreement in June 2003, which was amended and restated in May 2005 in part to eliminate Rees as a party in the agreement. The term of the agreement is from June 17, 2003 through the earlier of December 31, 2012 or the final installment of the development fee is paid. The development consulting fee will be paid as follows: one-half of the fee at the time of closing of the permanent construction financing, one-fourth of the fee paid in equal monthly installments during the construction period as determined by the number of months of construction anticipated by the Project Contractor and change orders thereto, and onefourth of the fee paid upon the attainment of 85% occupancy of the independent living units. Management assumes that total fees payable under the development agreement approximate $5,102,000 to CRSA and $2,041,000 to Rees for total fees of approximately $7,143,000. CRSA is also assumed to be reimbursed for related expenses under the development agreement totaling approximately $432,000. As part of the Series 2012 bond issuance, $847,580 of bond proceeds were used to repay deferred marketing, advertising, management and development fees due to CRSA/LCS. For the years ended December 31, 2012 and 2011, the Company incurred expenses of $484,387 and $1,018,147 related to the management, marketing and advertising agreements. In addition, the Company incurred $1,713,357 of development fees during the year ended December 31, 2011. As of December 31, 2011, all development fees had been fully incurred. In conjunction with the Series 2012 bonds, a payment deferral and subordination agreement was executed with specific requirements that must be met prior to payment of the CRSA/LCS deferred fees. According to the agreement, the Company must have (a) average stable occupancy of independent living units of at least 85%; (b) full payment of the 2012C bonds; (c) no event of default has occurred or is occurring; (d) the payment will not cause the Company to be out of covenant compliance of the Series 2012 bonds; (e) the payment will not cause the Company to have less that 200 days cash on hand. Based upon this agreement, the deferred fees due to CRSA/LCS are shown as a long-term liability on the balance sheet. (18)

NOTE 5 DEVELOPMENT AND MANAGEMENT AGREEMENT (CONTINUED) Development Agreement (Continued) At December 31, 2012 and 2011, the Company owed to CRSA approximately $2.4 million and $2.9 million, respectively, which is included in long term fees payable on the balance sheet for the services provided above, some of which have been deferred in accordance with the reimbursement, credit and security agreement. NOTE 6 ROYALTY AGREEMENT The Company has a Royalty Agreement with the Ex-Students Association of the University of Texas (Texas-Exes) whereby the Company has rights to utilize business products and trademarks of Texas-Exs for a fee of 1.5% of the revenues of the Company which includes the sale and resale of real estate units, maintenance fee revenues and all other income. Past due amounts accrue interest at 1% per month. For the years ended December 31, 2012 and 2011, the amount earned under the Royalty Agreement was approximately $458,000 and $447,000, respectively. In conjunction with the Series 2012 bonds, a payment deferral and subordination agreement was executed with specific requirements that must be met prior to payment of the Texas- Exes deferred royalty and interest costs. According to the agreement, the Company must have (a) average stable occupancy of independent living units of at least 85%; (b) full payment of the 2012C bonds; (c) no event of default has occurred or is occurring; (d) the payment will not cause the Company to be out of covenant compliance of the Series 2012 bonds; (e) the payment will not cause the Company to have less that 200 days cash on hand. Based upon this agreement, the deferred fees due to Texas-Exes are shown as a long-term liability on the balance sheet. As of December 31, 2012 and 2011, $205,975 and $1,486,006, respectively, including interest on past due accounts, was unpaid and included as a liability under long term fees payable on the balance sheet. (19)

NOTE 7 FUNCTIONAL CLASSIFICATION OF EXPENSES Functional classification of expenses for the years ended December 31, 2012 and 2011 consisted of the following: 2012 2011 Program Services $ 10,819,548 $ 4,978,706 General and Administrative 17,234,350 15,652,261 Total Operating Expenses $ 28,053,898 $ 25,860,955 Fundraising expenses are immaterial and are included with Management and General Support. Salaries and related expenses are allocated based on job descriptions and the best estimates of management. Expenses, other than salaries and related expenses, which are not directly identifiable by program or supporting services, are allocated based on the best estimates of management. NOTE 8 CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. The Company has concentrated its credit risk for cash by maintaining deposits in banks which exceed Federal deposit insurance limits. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on these deposits. Additionally, the Company invests in money market funds which are secured by the underlying assets of the funds. Management has assessed the credit risk associated with the money market funds and investments held at December 31, 2012, and have determined that an allowance for potential loss due to credit risk is not necessary. NOTE 9 COMMITMENTS AND CONTINGENCIES Professional Liability Insurance The Company is not currently involved in litigation related to professional liability claims. Management believes if any claims were asserted, they would be settled within the limits of coverage, which is on a claims-made basis, with insurance limits of $1,000,000 per claim and $2,000,000 in the aggregate. The Company s professional liability insurance is a claims-made policy. Should this policy lapse and not be replaced with equivalent coverage, claims based upon occurrence during its term, but reported subsequent thereto, will be uninsured. (20)

NOTE 9 COMMITMENTS AND CONTINGENCIES (CONTINUED) Real Estate Taxes In accordance with Texas Tax Code, qualified charitable organizations including those organizations that offer independent living, assisted living and nursing services to senior citizens on one campus, such as the Company, are exempted from property taxes. The Company has been successful in obtaining exemptions for ad valorem taxes, and is not aware of any matters that would jeopardize this exemption. Litigation The Company is subject to asserted and unasserted claims encountered in the normal course of business. The Company's management and legal counsel assess such contingent liabilities and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. In 2012, the Company settled the lawsuit with the architect of the project, resulting in a settlement payment to the Company of approximately $1 million. This gain from the lawsuit is recorded as other income in 2012. NOTE 10 FAIR VALUE MEASUREMENTS The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. For additional information on how the Company measures fair value refer to Note 1 Summary of Significant Accounting Policies. Fair Value of Financial Instruments The estimated fair values of financial instruments have been derived, in part, by management's assumptions, the estimated amount and timing of future cash flows, and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the Company. As of December 31, 2012 and 2011, the fair value of all financial instruments approximated carrying value except for long-term debt. (21)

NOTE 10 FAIR VALUE MEASUREMENTS (CONTINUED) Fair Value of Financial Instruments (Continued) The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Long-Term Debt Series 2008 Tax-Exempt Bonds The fair value of the tax-exempt bonds is calculated based on the estimated trade values as of December 31, 2012 and 2011. The value is estimated using the rates currently offered for like debt instruments with similar remaining maturities. All Other The carrying value is a reasonable estimate of the fair value for all other financial instruments due to the short-term nature of those financial instruments. NOTE 11 FUTURE ACCOUNTING AND REPORTING REQUIREMENTS In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-01 Health Care Entities: Continuing Care Retirement Communities Refundable Advance Fees. The amendments in this ASU clarify that an entity should classify an advance fee as deferred revenue when a CCRC has a resident contract that provides for payment of the refundable advance fee upon reoccupancy by a subsequent resident, which is limited to the proceeds of reoccupancy by a subsequent resident. The amendments also clarify that refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability. The amendments in the ASU are effective for fiscal periods beginning after December 15, 2013 for non public) entities, as defined, with early adoption permitted. Therefore the amendments will be effective for our financial statements for the year ending December 31, 2013. The adoption of the amendment is expected to result in an adjustment decreasing net assets and increasing the liability for refundable fees by approximately $6,388,687 based on our estimate as of December 31, 2012. In addition, income from amortization of deferred revenue arising from entrance fees would be reduced by approximately $2,819,705 based upon our estimate for the year ended December 31, 2012. (22)