autumn woods residential health care facilitynote i -nature of business and significant accounting...

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Autumn Woods Residential Health Care Facility

Financial Report with Additional Information

December 31, 20 I I


Contents

Report Letter 1-2

Financial Statements

Balance Sheet 3

Statement of Operations 4

Statement of Members' Equity 5

Statement of Cash Flows 6

Notes to Financial Statements 7-13

Additional I nformation 14

Report Letter 15

Schedule of Patient Service Revenue 16

Schedule of Other Operating Revenue 17

Schedule of Departmental Expenses 18-19

Schedule of Departmental Wages 20

Statistical Analysis of Occupancy 21

Rlante moran

To the Members Autumn Woods Residential

Health Care Facility

Independent Accountant's Review Report

Plante & Moran, PLLC 27400 Northwestern Highway

PO. Box 307

Southfield, M148037-0307

Tel: 24R352.2500

Fax: 248.352.0018

plantemoran.com

We have reviewed the accompanying balance sheet of Autumn Woods Residential Health Care Facility (the "Facility") as of December 31, 20 I I and 20 I 0 and the related statements of operations, members' equity, and cash flows for the years then ended. A review includes primarily applying analytical procedures to management's financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

The management of Autumn Woods Residential Health Care Facility is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of financial statements.

Our responsibility is to conduct the reviews in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. We believe that the results of our procedures provide a reasonable basis for our report.

Based on our reviews, with the exception of the matter discussed in the following paragraph pertaining to the 20 II and 20 I 0 financial statements, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

Consolidation of variable interest entities is required for conformity with accounting principles generally accepted in the United States of America. The 20 I I and 20 I 0 financial statements exclude an entity that, in our opinion, should be consolidated as a variable interest entity for which the Facility is the primary beneficiary. The effect of this departure from accounting principles generally accepted in the United States of America on the Facility's financial position, results of operations, and cash flows is disclosed in Note 7.

Praxlij;:; MEMBER "

BLOtlAL ALLlAUGf OF INlIErUHlHH FIRMS

To the Members Autumn Woods Residential

Health Care Facility

Because the significance and pervasiveness of the matter discussed above make it difficult to assess the impact of this departure on the financial statements taken as a whole, users of the 20 II financial statements should recognize that they might reach different conclusions about the Facility's financial position, results of operations, and cash flows if they had access to financial statements prepared in conformity with accounting principles generally accepted in the United States of America.

AprilS, 2012

2


Assets

Current Assets Cash $ Accounts receivable - Net (Note 2) Other receivables Other current assets:

Prepaid expenses and other assets Replacement reserve and escrow deposits (Note 5)

Total current assets

Property and Equipment - Net (Note 3)

Total assets $

Balance Sheet

December 3 I , 2011

465,148 2,781,249

332,573

165,005 635,599

4,379,574

1,651,137

6,030,711

December 3 I , 2010

$ 1,474,256 2,064,754

178,320

131,772 512,768

4,361,870

1,305,079

$ 5,666,949

Liabilities and Members' Equity

Current Liabilities Accounts payable Agency cost settlements payable Accrued liabilities and other (Note 4)

Total current liabilities

Members' Equity

Total liabilities and members' equity

See Notes tbFinancial Statements and Independent Accountant's Review Report. 3

$ 730,090 $ 404,907

1,059,333

2,194,330

3,836,381

726,665 309,918 975,025

2,011,608

3,655,341

$ 6,030,71 I $ 5,666,949


Statement of Operations

Year Ended December 31

2011 2010

Operating Revenue Net service revenue $ 20,034,465 $ 20,915,560 Other operating revenue 51,673 50,434

Total operating revenue 20,086,138 20,965,994

Operating Expenses Nursing 5,651,703 6,058,355 Ancillary services 1,175,260 1,114,472 Dietary 1,593,272 1,644,556 Laundry and housekeeping 968,616 938,705 Plant operation 3,444,979 3,595,082 Employee welfare 1,965,727 2,081,941 Administrative 2,503,679 2,163,562 Provision for bad debts 120,000 120,000 Depreciation and amortization 260,424 337,773

Total operating expenses 17,683,660 18,054,446

Operating Income - Before prior year third-party payor settlement adjustments 2,402,478 2,911,548

Prior Year Third-party Payor Settlement Adjustments (184,609) (156,032)

Operating Income 2,217,869 2,755,516

Other Revenue (Expense) Interest income 1,046 6,778 Loss on asset disposal (18,621) (10,922)

Total other expense (17,575) (4,144)

Income - Before income tax expenses 2,200,294 2,751,372

Provision for Income Taxes (Note 8) (123,145) 238,494

Net Income $ 2,323,439 $ 2,512,878

See Notes to Flnahcial Statements and Independent Accountant's Review Report. 4


Statement of Members' Equity

Additional Retained Paid-in Ca~ital Earnings Total

Balance - January I, 20 I 0 $ 10,000 $ 4,062,863 $ 4,072,863

Net income 2,512,878 2,512,878

Dividends declared (2,930,400) (2,930,400)

Balance - December 3 I, 20 I 0 10,000 3,645,341 3,655,341

Net income 2,323,439 2,323,439

Dividends declared (2,142,399) (2,142,399)

Balance - December 3 I, 20 I I $ 10,000 $ 3,826,381 $ 3,836,381

See Notes toFinanCialStatements and Independent Accountant's Review Report. 5


statement of Cash Flows

Year Ended December 3 I , December 31 ,

2011 2010

Cash Flows from Operating Activities Net income $ 2,323,439 $ 2,512,878 Adjustments to reconcile net income to net cash from

operating activities: Depreciation and amortization 260,424 337,773 Bad debt expense 120,000 120,000 Loss on asset disposals 18,621 10,922 Changes in assets and liabilities which provided

(used) cash: Accounts receivable (990,748) (269,039) Prepaid expenses (33,233) 161,088 Accounts payable 3,425 306,067 Accrued liabilities 84,308 (129,365) Cost report settlements 94,989 235,384

Net cash prOVided by operating activities 1,881,225 3,285,708

Cash Flows from Investing Activities Purchase offixed assets (653,291) (266,471) Proceeds from disposal offixed assets 28,188 Net deposit to escrows (122,831) (71,220)

Net cash used in investing activities (747,934) (337,691)

Cash Flows from Financing Activities - Distributions to members (2,142,399) (2,930,400)

Net (Decrease) Increase in Cash (1,009,108) 17,617

Cash - Beginning of year 1,474,256 1,456,639

Cash - End of year $ 465,148 $ 1,474,256

See Notes to Financial Statements and Independent Accountant's Review Report. 6


Notes to Financial Statements December 3 I, 20 I I and 20 I 0

Note I - Nature of Business and Significant Accounting Policies

Autumn Woods Residential Health Care Facility (the "Facility") is a 330-bed nursing care facility located in Warren, Michigan providing housing, long-term health care, and other services related primarily to residents in southeastern Michigan.

Cash - Cash balances held in the bank exceed the federal depository insurance limit. The Facility's cash is only insured up to the federal depository insurance limit.

Accounts Receivable - Accounts receivable are stated at net invoice amounts. An allowance for uncollectible accounts is established on an aggregate basis. The allowance is computed using loss rate factors based on historical loss experience and adjusted for economic conditions and other trends affecting the Facility's ability to collect outstanding amounts. Uncollectible amounts are written off against the allowance for doubtful accounts in the period they are determined to be uncollectible.

Net Service Revenue - The Facility's principal activity is operating a long-term health care facility for the elderly. Revenue is derived from participation in the Medicaid and Medicare programs, as well as from private-pay residents. Revenue is recorded at standard billing rates and differences between billing rates and amounts paid under these programs are recorded as contractual adjustments. Amounts earned under the Medicaid and Medicare programs make up a significant portion of revenue earned during each year, as follows:

Percent of revenue: Medicaid Medicare

2011

58% 34%

2010

59 % 30%

The payment methodology and amounts earned related to these programs are based on cost and clinical assessments that are subject to review and final approval by Medicaid and Medicare. Any adjustment that is a result of this final review and approval will be recorded in the period in which the adjustment is made. In the opinion of management, adequate provision has been made for any adjustments that may result from such third-party review.

Services rendered to Medicare program beneficiaries are paid at prospectively determined rates based upon clinical assessments completed by the Facility.

Medicaid reimburses the Facility for in-resident routine service costs, on a per diem basis, prospectively determined. The Medicaid payment is a cost-based reimbursement system that also includes a Quality Assurance Supplement (QAS). The QAS is a reimbursement based on Medicaid occupancy and is related to the provider tax assessed to nursing homes.

See Independent Accountant's Review Report. 7


Notes to Financial Statements December 31, lOll and lOIO

Note I - Nature of Business and Significant Accounting Policies (Continued)

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoings. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

The Medicare program has initiated a recovery audit contractor (RAC) initiative, whereby claims subsequent to October I, 2007 will be reviewed by contractors for validity, accuracy, and proper documentation. A demonstration project completed in several other states resulted in the identification of potential significant overpayments. The RAe program began for Michigan in 2009. The Facility is unable to determine if it will be audited and, if so, the extent of liability for overpayments, if any. If selected for audit, the potential exists for significant overpayment of claims liability for the Facility at a future date.

Property and Equipment - Property and equipment amounts are recorded at cost. Depreciation is computed principally on the straight-line basis over the estimated useful lives of the assets.

Statement of Operations - For the purpose of display, transactions deemed by management to be ongoing, major, or central to the provision of nursing home services are reported as operating revenue and expenses. Peripheral or incidental transactions are reported as other revenue (expense).

Per Resident Day Amount - Per resident day amounts are calculated based on the actual resident days of the Facility, which were 92,254 and 98,789 for the years ended December 31, 20 II and 20 I 0, respectively.

Income Taxes - The Facility is a limited liability company that has elected not to be taxed at the entity level. Accordingly, no federal tax provision is recorded in the accompanying financial statements since income or loss is required to be allocated to the members and reported on their respective income tax returns.



Notes to Financial Statements December 31, 2011 and 2010

Note I • Nature of Business and Significant Accounting Policies (Continued)

A current State of Michigan income tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial reporting and tax accounting. A valuation allowance is provided against deferred tax assets for which future recovery is not considered more likely than not. Interest and penalties associated with income taxes are recognized as interest expense and operating expense, respectively. The Facility classifies interest and penalties associated with tax liabilities as income taxes in the accompanying financial statements. There were no interest or penalties associated with tax liabilities recognized in 20 II and 20 I O.

The Facility files income tax returns in the United States and is not currently under examination by the Internal Revenue Service or any state or local tax authorities in relation to its open tax years. The Facility is not currently subject to examination by taxing authorities for the years prior to 2008.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events - The financial statements and related disclosures include evaluation of events up through and including April 5, 2012, which is the date the financial statements were available to be issued.

Note 1 • Accounts Receivable

Details of accounts receivable balances are as follows:

Private Medicaid Medicare Blue Cross

Total accounts receivable - Resident and third-party payors

Less allowance for doubtful accounts

Net accounts receivable - Resident and third-party payors


$

$

2011 2010

533,039 $ 415,469 979,170 782,285

1,082,195 717,976 203,885 202,104

2,798,289 2,117,834

(17,040) (53,080)

2,781,249 $ 2,064,754


Note 3 - Property and Equipment

Notes to Financial Statements December 31, 2011 and 2010

Property and equipment and depreciable lives are summarized as follows:

Depreciable 2011 2010 Life - Years

Furniture and equipment $ 1.642.167 $ 1.494.363 5-15 Vehicles 74.717 101.638 5 Leasehold improvements 1.580.452 1.461.961 5-15 Construction in progress 316.250

Total cost 3.613.586 3.057.962

Accumulated depreciation 1.962.449 1,752.883

Net carrying amount $ 1.651.137 $ 1.305.079

Note 4 - Accrued Liabilities and Other

Accrued liabilities and other consist of the following:

Wages and vacation pay Taxes and other Accrued QAS settlement

Total other current liabilities

Note 5 - Related Party and Affiliation

2011 2010

$ 623.802 $ 640.312 135.531 136,781 300.000 __ .:..:19..:..7!.:..9=.;32=-

$ I .059.333 .;..$ ~~9.;.,;75.;.;. 0.;;;,25;..,

Some of the Facility's members are involved in a partnership that leases premises and certain equipment to the Facility. The Facility is required to make monthly escrow payments for real estate taxes and hazard insurance. Tax and insurance escrow deposits of $226.260 and $203,238 were held at December 31.2011 and 2010, respectively. Additionally. the lease requires the tenant to provide for all repair and maintenance expenses. utilities. fees. levies. and real and personal property taxes. Replacement reserve deposits of $409.339 and $309.530 were held at December 31. 20 II and 20 I O. respectively. The landlord provides fire and casualty insurance and comprehensive general public liability insurance. The tax and insurance escrow deposits and the replacement reserve deposits are held in cash equivalents at December 3 I. 20 I I and 2010.



Notes to Financial Statements December 3 I, 2.0 I I and 2.0 I 0

Note 5 - Related Party and Affiliation (Continued)

During the year ended December 31, 20 I I, the lease expired and is now on a month-to-month basis. Under the terms of the lease, annual minimum lease payments under the operating lease total $2,260,000 for the years 20 I 0 and 20 II. This amount includes rent and the amounts that the Facility is required to remit monthly for tax escrow and replacement reserve payments.

Rent expenses included in the minimum lease payments were $2,038,591 for each of the years ended December 31, 20 I I and 20 I O.

The Facility has also recognized management service expenses of $22,087 for 20 II and $17,330 for 20 I 0 for management services provided by employees of an affiliate.

The Facility also has an amount due from the landlord of $72,148 and $27,145 at December 3 I, 20 I I and 20 I 0, respectively, for a true-up of state income taxes paid.

Note 6 - Retirement Plan

The Facility has adopted a 40 I (k) retirement savings plan. Contributions by the Facility are determined on a discretionary basis by the members. In 20 I I and 20 I 0, the Facility's contributions totaled $31,721 and $15,519, respectively.

Note 7 - Unconsolidated Affiliate

The Facility is the primary beneficiary of an affiliated entity that qualifies as a variable interest entity. Accordingly, the assets and liabilities and revenue and expenses of the affiliated entity should be consolidated in these financial statements. These amounts are not included in the accompanying financial statements, which is a departure from accounting principles generally accepted in the United States of America.

See Independent Accountant's Review Report. II


Notes to Financial Statements December 3 I, 2.0 I I and 2.0 I 0

Note 7 - Unconsolidated Affiliate (Continued)

The following is financial information of the affiliated leasing entity as of and for the years ended December 31, 20 II and 20 I 0:

2011 2010

Assets: Current assets $ 594,215 $ 375,852 Property and equipment 1,033,456 1,091,356 Other assets 1,220,256 1,104,540

Total assets 2,847,927 2,571,748

Liabilities: Current liabilities 1,192,020 996,430 Long-term liabilities 5,173,823 5,558,718

T otalliabilities 6,365,843 6,555,148

Deficiency in assets $ (3,517,91 62 $ (3,983,4002

Revenue $ 2,040,547 $ 2,041,353 Expenses (795,7432 (826,4122

Net income $ 1,244,804 $ 1,214,941

If the affiliated leasing entity had been consolidated as required by accounting principles generally accepted in the United States of America, assets and liabilities, net of eliminations at December 31,2011 and 2010 of $707,747 and $539,913, respectively, would increase by the amounts reported in the table above. Revenue, net of eliminations, would increase for the years ended December 31, 20 II and 20 I 0 by $1,956 and $2,762, respectively. Expenses, net of eliminations, would decrease for the years ended December 31, 20 II and 20 I 0 by $1,242,848 and $1,212,179, respectively. Consolidated net income would increase for the years ended December 31, 20 I I and 20 I 0 by $1,244,804 and $1,214,941, respectively. The equity of the affiliated leasing entity would have been reported as a noncontrolling interest.

Note 8 - Income Taxes

The components of the income tax provision included in the statement of operations are all attributable to continuing operations and are detailed as follows:

Current income tax (recovery) expense Deferred income tax (recovery) expense

Total income tax (recovery) expense


2011 2010

$ (122,148)$ 237,497 ______ ~(9~97~2 ______ ~9~97~

$ (123, 1452 ,b$ ~..;;2;;;.;38;.:.,4;.;.94.;,.


Note 8 - Income Taxes (Continued)

Notes to Financial Statements December 3 I, 20 I I and 20 I 0

Deferred tax liabilities result from the cumulative effect of timing differences between financial and tax methods of revenue and expense recognition. The Facility's deferred tax asset results primarily from a deduction created under the Michigan business tax to offset the effects associated with the initial adoption of the accounting standard referred to above.

Effective January I, 2012, the MBT was eliminated through legislation and as such, there were no deferred tax assets or deferred tax liabilities as of December 3 I, 20 I I. Deferred tax assets and deferred tax liabilities were $3,192 and $4,189, respectively, as of December 3 I, 20 I O.


Additional Information

14

Rlante Thoran

To the Members

Independent Accountant's Report on Additional Information


Plant. & MQran, PLLC 2740t> Northwestern Highway

P.O. Box 307

'Southfield, MI48037-0307 Tel: 248.3!,)2.2500

Fro:: 248.352.0018

plantemomn.CCim

We have reviewed the financial statements of Autumn Woods Residential Health Care Facility as of and for the years ended December 31, 20 II and 20 I O. The accompanying schedules of patient service revenue, other operating revenue, departmental expenses, departmental wages, and statistical analysis of occupancy are presented for the purpose of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the same inquiries and analytical procedures applied in the review of the basic financial statements but was compiled from information that is the representation of management, without audit or review. Accordingly, we do not express an opinion or provide any other form of assurance on the additional information.

AprilS, 2012

15

Praxiij/; MEMBER"

GLOIIAt ALLIANCE Of INDEPHIDElIT FIflMS


Schedule of Patient Service Revenue


2011 2010

Per Patient Per Patient

Amount Day Amount Day

Skilled Nursing Services

Daily net room revenue: Medicaid - Daily rate $ 9,704,458 $ 144.50 $ 10,353,949 $ 143.74 Medicare 6,704,048 379.96 6,295,143 362.25 Private-pay and other 1,728,610 244.40 2,164,639 230.82

Total daily net room revenue 18,137,116 197.41 18,813,731 190.44

Ancillary revenue 64,937 0.71 66,261 0.67

Net skilled nursing services revenue 18,202,053 198.12 18,879,992 191.11

Medicaid - QAS program 1,832,412 27.29 2,035,568 28.26

Net Service Revenue $ 20,034,465 $ 225.41 $ 20,915,560 $ 219.37

See Independent Accountant's Report on Additional Information. 16


Schedule of Other Operating Revenue


2011 2010

Per Patient Per Patient Amount Day Amount Day

Barber and beauty; Income $ 56,712 $ 0.61 $ 66,015 $ 0.77 Cost (42,860) (0.46) (55,507) (0.56)

Net barber and beauty 13,852 0.15 10,508 0.21

Room reserve charges 31,300 0.34 33,587 0.34 Other 6,521 0.07 6,339 0.06

Net room reserve charges and other 37,821 0.41 39,926 0.40

Total other operating revenue w Net $ 51.673 $ 0.56 $ 50.434 $ 0.51



Schedule of Departmental Expenses (Continued)

Employee welfare: Payroll taxes Workers' compensation insurance

Employee benefits

Total employee welfare

Administrative: Salaries and wages:

Administrator Office

Advertising and promotion Provision for bad debts Computer services Contracted services Dues and subscriptions General insurance Legal fees Management services Medicaid provider tax Taxes Office expense Repairs and maintenance Seminars and education Telephone and communications Travel and auto Other

Total administrative

Total departmental expenses

See Independent Accountant's Report on Additional Information.

2011

Amount

$ 780,591 $ 168,976

1,016,160

1,965,727

277,829 716,548 60,039

120,000 23,488 27,806 20,081 59,000

107,986 22,087

935,361 8,563

107,412 8,920 9,056

76,072 37,531 5,900

2,623,679

$17,683,660 $

19


2010

Per Patient Per Patient Day Amount Day

8.50 $ 832,161 $ 8.42 1.83 295,826 2.99

11.06 953,954 9.66

21.39 2,081,941 21.07

3.01 275,773 2.79 7.80 693,229 7.02 0.65 20,382 0.21 1.30 120,000 1.21 0.25 20,934 0.21 0.30 34,842 0.35 0.22 20,069 0.20 0.64 1.17 57,777 0.58 0.24 17,552 0.18

10.18 756,244 7.09 0.09 10,007 0.10 1.16 82,310 0.83 0.10 21,621 0.22 0.10 12,715 0.13 0.82 78,538 0.80 0.41 48,186 0.49 0.06 13,383 0.14

28.50 2,283,562 22.55

192.37 $18,054,446 $ 182.15


Schedule of Departmental Wages


2011 2010 Per Patient Per Patient

Amount Da~ Amount Day Payroll Analysis

Nursing salaries and wages: Certified nurse aides $ 2,563,968 $ 27.91 $ 2,855,471 $ 28.90 Licensed practical nurses 1,466,432 15.40 1,614,182 16.34 Registered nurses 588,607 6.41 587,552 5.95 Directors of nursing 399,050 4.33 366,374 3.71 Diversional activities 138,850 1.51 170,136 1.72 Social workers 127,529 1.38 113,200 1.15

Total nursing salaries and wages 5,284,436 56.94 5,706,915 57.77

Other salaries and wages: Ancillary services 507,829 5.53 444,136 4.50 Dietary 914,170 9.95 940,010 9.52 Laundry 211,931 2.30 228,023 2.31 Housekeeping 501,917 5.46 483,833 4.90 Maintenance 465,017 5.06 568,025 5.75 Administration 994,377 10.82 969,002 9.81

Total other salaries and wages 3,595,241 39.12 3,633,029 36.79

Other related expenses - Payroll taxes, workers' compensation insurance, and benefits 1,965,727 21.40 2,081,941 21.07

Total payroll and related expenses $ 10,845,404 $ 117.46 $ 11,421,885 $ 115.63

Percent of total expenses 61.3 63.3

Percent of other related expenses to total salaries and wages 18,1 18.2



Statistical Analysis of Occupancy

Classification Private Medicaid

Medicare

Available Occupancy

Occupancy Percentage

Billable Patient Days

7,073 67,158 17,644

91,875

104,100

88.3

See Independent Accountant's Report on

2011

Percent

7.7 73.1 19.2

100.0


Net Daily Billable Room Patient

Revenue Days

$ 244.40 9,378 144.50 72,033 379.96 17,378

197.41 98,789

117,278

84.2

Additional Information. 21

2010

Net Daily

Room Percent Revenue

9.5 $ 230.82 72.9 143.74 17.6 353.60

100.0 190.44

COMPARATIVE FINANCIAL STATEMENTS

FRIENDSHIP ASSOCIATES (A LIMITED PARTNERSHIP)

DECEMBER 31,2011 and 2010 WITH

INDEPENDENT AUDITORS' REPORT

FRIENDSHIF ASSOClATES (A LIMITED PARTNERSHIP)

CONTENTS

Independent Auditors' Report ............................................................................................... ..

Financial Statements:

Balance Sheets ..................................................................................................................... ..

Statements of Income .......................................................................................................... ..

2

3

Statements of Partners' Deficiency......................................................... ....... ........................ 4

Statements of Cash Flows.............................. ............................ ...................................... ...... 5

Notes to the Financial Statements ........................................................................................... . 6 - 10

The Partners of Friendship Associates (A Limited Partnership)

ZAVREL & O'DONNELL, CPAS, P.C CERTIFIED PUBLIC ACCOUNTANTS

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying balance sheets of Friendship Associates (A Limited Partnership) as of December 31, 2011 and 2010, and the related statements of income, patlners' def1ciency, and cash flows for the years then ended. TheSe financial statements are the responsibility of the Company's management. 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 audits to obtain reasonable assurance about whether the f1nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence suppOlting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall finatlCial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements refelTed to above present fairly, in all material respects, the financial position of Fricndship Associates as of December 31,2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accolU1ting principles generally accepted in the United States of Amel'ica.

March 19,2012

10545 Main Street· Clarence, New York 14031 • United States of America Telephone 716-759-6078 •• Fax 716-759-1983 • [email protected]

ASSETS

Current assets: Cash Prepaid expenses

Total current assets

Restricted deposits: Mortgage escrow Replacement reserve

Total restricted deposits

Property and equipment: Land Building Movable equipment


BALANCE SHEETS December 31, 201l and 2010

2011

$ 542,564 51,651

594,215

548,889 453,094

1,001,983

204,598 8,090,954 1,128,860 9,424,412

Less: accumulated depreciation (8,390,956) Net property and equipment 1,033,456

Other assets: Capitalized costs 1,861,255 Less: accumulated amortization (1,642,982)

Net other assets 218,273

Total assets $ 2,841,227

2010

$ 359,993 15,859

375,852

521,176 351,329 872,505

204,598 8,090,954 1,128,860 9,424,412

(8,333,056) 1,091,356

1,861,255 (l,629,220)

232,035

$ 2,m,14l!

LIABILITITES AND PARTNERS' DEFICIENCY

Current liabilities: Accounts payable Accrued interest Accrued taxes Related company payable Tenant escrow advances Current portion of long term debt

Total current liabilities

Long-term liabilities: Mortgage payable Loan payable

Total long-term liabilities

Total liabilities

Partners' deficiency: General partners Limited paliners

Total partners' deficiency

Total liabilities and partners' deficiency

2011

$ 12,888 19,620 72,000 72,148

635,595 379,769

1,192,020

4,167,418 1,006,405 5,173,823

6,365,843

(10,756) (3,507,160) (3.5 17,916)

$,_ 2,§4Z,221

2010

$ 40 20,904 75,807 27,145

512,764 359,770 996,430

4,476,147 1,082,571 5,S5S,7!.S

6,555,148

(22,332) (3,961,068) (3,983,400)

$~~2l.Z.ill

The accompanying notes arc an integral part of thcscfillancialstatements. 2

Revem\es: Rental income Interest

Total revenue

Expenses: Interest Insurance Mortgage insurance Administrative Depreciation Amortization Single business tax

Total expenses

Net income

FRIENDSHIP ASSOCIATES (A LIMITED PARTNERSHIP) STATEMENTS OF INCOME

For the Years Ended December 31, 2011 and 2010

6.l!.!!

$ 2,038,591 1,956

2,040,547

327,255 300,684 23,058 4,743

57,900 13,762 68,341

795,743

$ t,lli,B.QA

2010

$ 2,038,591 2,762

2,041.,353

347,529 295,295 24,488

9,438 57,900 13,762 78,000

826.412

$ 1,;l.11,9Al

The accompanyingnotes are an integral part of these financial stE\tel11~nts. 3

FRIENDSHIP A.SSOCIA TES (A LIMITED PARTNERSHIP)

STATEMENTS OF PARTNERS' DEFICIENCY For the Year$ Ended December 31, 2011 and 2010

General Limited Pllrtner Partners

2% 98%

Beginning balance-January 1,2010 $ (21,951) (4,064,910)

Net income 24,299 1,190,642

Draws (24,680) (1,086,800)

Ending balance - December 31,2010 (22,332) (3,961,068)

Net income 24,896 1,219,908

Draws (13.320) (766,000)

Ending balance - December 31, 2011 $ (10,156) $ (~,~Q2,160)

Total

(4,086,861 )

1,214,941

(1,111 ,480)

(3,983,400)

1,244,804

(779,320)

$ (~,.m,216)

The accompanying notes are an integral part of these financial statements. 4


STATEMENTS OF CASH FLOWS For the Years Ended December 31,2011 and 2010

Wi l!!.!Q Cash flows from operating activities:

Cash received. from tenant $ 2,161,422 $ 1,939,924 Interest received 1,956 2,762 Interest paid (328,539) (348,747) Cash paid to suppliers of goods and services (351,429) (328,237) Cash rcccived/(paid) for state income tax (27,145) 39,450

Net cash provided by operating activities 1,456,265 1,305,152

Cash flows from investing activities: Net transfer (to) from escrow (27,713) 4,822 Net transfer (to) from reserve (I01,765) (102,571}

Net cash provided/(used) by investing activities (129,478) (97,749)

Cash flows fi'om financing activities: Payments on mortgage payable (292,943) (277,964) Payments on M&T Bank loan (71,953) (66,724) Payments to paltners (779,320) (I,111,480)

Net cash used by financing activities (1,144,216) (1,456,168)

Net change in cash 182,571 (248,765)

Cash - beginning of year 359,993 608,758

Cash - end of year $ . 542,564 $~ 359,221

Reconciliation of net income to net cash provided by operating activities:

Net income $ 1,244,804 $ 1,214,941 Depreciation 57,900 57,900 Amortization 13,762 13,762 Change in miscellaneous receivable 39,450 Change in prepaid expenses (35,792) 945 Change in accounts payable 12,848 40 Change in accrued interest (1,284) (1,219) Change in accrued taxes (3,807) 50,855 Change in related party payable 45,003 27,145 Change in deferred rental income (169,883) Change in tenant escrow advances 122,831 71,216

Net cash provided by operating activities $ 1,456,265 $ 1,3Q5, 15~

The accompanying notes arc 8nintcgral part ofthesefinancialstatements; 5


NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - Friendship Associates (the Partnership) is a Michigan limited partnership owned by the general Valiner McGuire Manor, Inc., and scverallimited partners. The Pmtnership owns the land and building located at 29800 Hoover Road, Wan'en, Michigan. The property is leased to the operator of a 330-bed nursing home, an affiliate of the Partnership.

The Partnership has entered into a lease agreement with an affiliated company to lease the 330-bed residential nursing facility, with rent due in monthly installments, in accordance with Section 232 of the National Housing Act. HUD operating procedures regulate such projects. The regulatory agreement limits distributions of net operating receipts to "surplus cash" computed semi-annually.

Property and Equipment - Property and eq\lipment arc recorded at cost. The building was depreciated over 15 years using the straight-line depreciation method. The building addition is being depreciated over the estimated useful lives of its components using straight-line and accelerated depreciation methods. Equipment was depreciated over 5 years using the accelerated depreciation method.

Accounting Estimates - The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts.

Subsequent Events - Subsequent events were evaluated through the date of the Financial Statements which is the date the Financial Statements were issued. Soe NOTE 11.

Cash Flows - For purposes of the statements of cash flows, the Partnership considers all highly liquid debt instrwnents purchased with maturities of three months or less to be cash equivalents.

Income Taxes - The Partnership does not pay federal taxes on its income. Any taxable income or loss generated is allocated to the individual partners for inclusion in their respective income tax returns.

Concentration of Credit Risk - Financial instruments that potentially subject the Partnership to concentration of credit risk consist principally of cash and cash equivalent accounts in financial institutions. Although the cash accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions. Management reviews the financial viability of these institutions on a periodic basis.

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NOTE 2. - RESTRICTED DEPOSITS

Restricted funds represent deposits to the mortgage escrow .and replacement reserve accounts that can be used only for the payment of real estate taxes, hazard insurance, mOl1gage insw'ance, and majonepairs and replacements of fixed assets.

Restricted deposits as of December 31, consisted of the following:

2011 2010 Mortgage escrow $ 548,889 $ 521,176 Replacement reserve 453,094 351,329

$ 1 ,QQI ,283 $ S:Z2,SQ5

NOTE 3. - CAPITALIZED COSTS

Capitalized costs as of December 31, consisted of the following:

2011 2010 Capitalized construction period interest and taxes $ 786,803 $ 786,803 Deferred mortgage costs 623,444 623,444 Addition deferred m011gage costs 40,025 40,025 Addition refinancing fees 10,804 10,804 Legal costs 14,730 14,730 Accounting fees 19,890 19,890 Deferred arohitectural costs 32,231 32,231 Acquisition costs 75,000 75,000 Mortgage refinancing costs 258,328 258,328

Total capitalized costs $ 1.1l~!'25~ $1,B61,:m

Capitalized Construction Period Interest and Taxes - These costs were amortized over (9) years, beginning in 198 J.

Deferred Mortgage Costs - Legal fees relating to the bond issue, bond rllting fee, bond printing costs, trustee fees, HUD inspection fee, financing fee, letter of credit fce, HUD mortgage insurance premium, bond issue discount, title insurance, mortgage origination fees, bond rating service fee and bond premium of the original mortgage. were capitalized and were being amortized over (40) ye(lrs, the term of the bond issue. The original mortgage was refinanced in 1992, which resulted in a write-off of the unamortized mortgage costs. The mortgage refinancing costs were capitalized. in 1992 and were being amortized over tlle term of the loan, 30Vz years. These costs were written off in 2002 when the m0l1gage was refinanced for a second time.

Addition Deferred Mortgage Costs - The Project completed an addition to the building in 2002. The costs associated with obtaining financing for the addition were amortized over the 5-year term of the loan.

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FRIENDSHIP ASSOCIATES (A LIMITEn PARTNERSHIP)


NOTE 3. - CAPITALIZED COSTS (CONTINUED)

Addition Refinancing Fees - The loan for the addition was refinanced in 2006. The refinancing fees are being amortized. over the 10-year telm of loan. The amortization expenses for these costs were $1,057 in2011 ($1,057- 2010).

Legal, Accounting and Architectural Costs - These costs were fully amortized in the year incurred.

Acquisition Costs - These costs were capitalized, but cannot be amortized.

Mortgage Refinancing Costs - In 2002, the Pmtncrship refinanced the mortgage payable a second time. The mortgage refinancing costs were capitalized and are being amortized over the term of the loan, 20 years and 4 months. The amortization expenses for these costs were $12,705 in 2011 ($12,705 - 2010).

NOTE 4. - TENAN'f AnVANCES

A\ltunm Woods RHCF, LLC, the Partnership'S sole tenant that is also a related party, is responsible for the payment of real estate taxes and repairs and maintenance of the building. Prepayments for these expenses made by Autumn Woods RHCF, LLC as of December 31, 2011 amounted to $635,595 ($512,764·2010).

NOTE 5. - MORTGAGE PAYABLE

The Partnership refinanced their mortgage payable to Berkadia Commercial Mortgage Corp. on July 26, 2002. The mortgage provides for monthly installments of $44,733 including interest at 5.26% per annum through December 2022. The debt is secured by a first collateral mortgage on the underlying property and equipment located at 29800 Hoover Road, Warren, Michigan. The mortgage is fully guaranteed by the U.S. Depm1ment onrol/sing and Urban Development.

The following are the aggregate amounts of maturities of long-term debt subsequent to 2011:

2012 $ 308,729 2013 325,365 2014 342,898 2015 361,375 2016 380,849

Thereafter 2,756,931 $ ~,~ZQ,l~Z

8



NOTE 6. - LOAN PAYABLE - M & T BANK

The pa11nership refinanced their loan payable to M & T Bank on August 17,2006, The loan payable amounting to $1,077,445 at December 31" 2011 ($1,149,398 - 2010), is payable in monthly installments of$13,053 including interest at 7.48% per annum through August 1,2016, The debris secw'ed by a non-encumbrance agreement on the property located at 29800 Hoover Road, Wan'en, Michigan, a second and subordinate ussigntnent of rertts on such property, and a second and subordinate security interest in the furniture, fixtures and equipment used in connection with the operation orthe property, all of which are sl)bjeot to the first collateral mortgage described in NOTE 5, The loan is also guaranteed by Autumn Woods RHCF, LLC and personally guaranteed by the individual stockholders, partners or members of McGtlire Manor, Inc" McGuire Partnership I-A and McGuire Group loB, LLC and the beneficiary of McGuire Trust I-C, The following are the aggregate amounts of maturities subsequent to 2011:

2012 $ 71,040 2013 84,270 2014 90,794 2015 97,823 2016 105,396

Thereafter ,627,245 $ 1,oz7.44~

NOTE 7. - PARTNERS' CAPITAL DEFICIENCY

General Partner - McGuire Manor, Inc, is the only general partner,

Limited Partners - Limited partners are listed in NOTE 10, Their liability on the partnership's debts is limited to the amount of their capital contributions,

NOTE 8. - ALLOCATION OF PROFITS, LOSSES AND CASH DISTRIBUTIONS

In accordance with terms of the Partnership Agreement, all profits and losses shall be allocated 98% to the limited partners and 2% to the general partner.

Distributions are allocated 98% to the limited partners and 2% to the general partner, Distributions are limited to surplus cash available at the end of each year in accordance with the Paltnership's HUD Regulatory Agreement Surplus cash is defined in the Partnership's Regulatory Agreement as any unrestricted cash remaining after the payment of all amounts due or required to be paid under the tel'ms of any mortgage or note insured by HUD, along with all amounts required for replacement reserve funding and all other obligations of the project.

Upon the termination or liquidation of the Pat1nership, any assets remaining after paying or providing for the payment of all debts, liabilities and claims against the Partnership will be distributed 98% to the limited pa11ners and 2% to the general partner.

9

I I , \



NOTE 9. - RENTAL INCOME

Autumn Woods RHCF, LLC a 330-bed health care facility, is the only tenant in the Parlnership's building at 29800 Hoover Road, Wan'en, Michigan. The lease agreement, as amended on December 23, 201 1, extended the lease through December 31, 20 ll. The lease as amended on April 30, 2008 provides for annual rents of $2,038,$91, and an additional $99,809 for the tenant replacement reserve escrow. Rents are payable in equal monthly payments of $178,200. The net annual rent was $2,038,591 in2011 ($2,038,591 - 2010).

During the term of the lease, the tenant shall be responsible for the payment of the following expenses: water, sewer, \ltiJities, snow removal, structural repairs to the building, governmental charges, fees, etc., including local real estate and personal property taxes, All other costs of operating the business to be conducted by the tenant are also the sole responsibility of the tenant. To cover the cost of real estate taxes the lease also provides for the tenant to make monthly real estate tax escrow payments of$25,800.

NOTE 10. - RELATED PARTY TRANSACTIONS

The McGuire Partnership I-A, the McGuire Group I-B, LLC, the McGuire Trust J-C, Donald Smith Jr., Michelle Smith, Susan Smith, Lindsay Smith and Jamie Smith which are limited partners in this Partnership, are also members of the tenant, Autumn Woods RHCF, LLC. Autumn Woods RHCF, LLC is required by the lease agreement to make advances to the Palinership for the real estate taxes, repairs and replacements, see NOTES 4 and 9.

The Partnership and Autumn Woods RHCF, LLC file consolidated Michigan Business Tax returns. The Patinership's pOliion of the 2010 tax due amounted to $72,148 and is shown as a miscellaneous payable - related party on the accompanying Balance Sheet as of December 31, 20 II ($27,145 - 2010).

NOTE 11. - SUBSEQUENT EVENTS

In accordance with the subsequent events topic ofFASB ASC 855, the Entity has evaluated subsequent events through March 19,2012, the date these financial statements were available to be issued. The following subsequent events were noted for disclosure:

The Partnership has entered into a Purchase and Sale Agreement with Nationwide Health Properties, Inc. whereby they will be selling the land and building, including all improvements made by its tenant (Autumn Woods Res. Health Care Facility, LLC), for approximately $24,800,000. The transaction is expected to close in2012.

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autumn woods residential health care facilitynote i -nature of business and significant accounting...

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