lifespire,inc. and subsidiary consolidated financial ... inc 2011.pdf · mbaf certified public...

LIFESPIRE, INC. AND SUBSIDIARY(a Not-for-Profit Organization)

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

Independent Auditors' Report

Consolidated Financial Statements:

UFESPIRE, INC. AND SUBSIDIARY(a Not-for-Profit Organization)

CONTENTSJune 30, 2011

Page

1

Consolidated Statement of Financial Position

Consolidated Statement of Activities

Consolidated Statement of Changes in Net Assets

Consolidated Statement of Functional Expenses

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

2

3

4

5

6

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MBAFCERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS

MBAF-ERE CPAs, LLC

400 Columbus Avenue, Ste 200EValhalla, NY 10595-3311Tel: 914.741.0800Fax: 914.741.1034

www.mbafcpa.com

An Independent Member of Baker TiIIy International

INDEPENDENT AUDITORS' REPORT

To the Board of DirectorsLifespire, Inc. and Subsidiary

We have audited the accompanying consolidated statement of financial position of Lifespire, Inc.and Subsidiary (a not-for-profit organization) as of June 30, 2011, and the related consolidatedstatements of activities, changes in net assets, functional expenses, and cash flows for the yearthen ended. These consolidated financial statements are the responsibility of the Lifespire, Incand Subsidiary's management. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Lifespire, Inc. and Subsidiary as ofJune 30, 2011, and the consolidated changes in their net assets and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in the United States ofAmerica.

New York, NYNovember 29, 2011

1

lIFESPIRE, INC. AND SUBSIDIARY(a Not-for-Profit Organization)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

June 30, 2011

Assets:Cash and cash equivalentsInvestmentsAccounts receivable, netAccrued income receivableDue from related partiesSecurity deposits and prepaid expensesAssets restricted to investment in property and equipmentProperty, plant and equipment, netDeferred charges, net

Total Assets

Liabilities and Net Assets:

Liabilities:Accounts payable and accrued expensesAccrued payrollAccrued compensated absencesRecoupments payableDeferred incomeDue to funding sourcesMortgages payable - DASNYUnderfunded pension obligationUnderfunded health insurance obligationLine of creditBond payable - DASNYBonds payable - IDA

Total Liabilities

Net Assets:Unrestricted - undesignatedUnrestricted - board-designated - program expansionUnrestricted - board-designated - facilitiesUnrestricted - board-designated - related party transactionsUnrestricted - board-designated - pension

Total Unrestricted Net Assets

Temporarily restricted

Total Net Assets

Total Liabilities and Net Assets

$ 22,407,9852,685,460

149,87215,053,506

1,246,3941,362,7749,080,357

18,555,1751,210,515

$ 71,752,038

$ 8,209,4746,189,1163,431,6314,995,3092,281,470

243,6843,237,2373,805,8494,423,1921,172,9196,125,0009,025,000

53,139,881

6,238,777821,082

4,987,5771,246,3945,261,004

18,554,834

57,323

18,612,157

$ 71,752,038

The accompanying notes are an integral part of the financial statements.

2


CONSOLIDATED STATEMENT OF ACTIVITIES

Year ended June 30, 2011

Revenue - program operations:Program service feesParticipants' share of room and boardSubcontractMCFAA and DASNY bond fees

Subtotal - revenue - program operations

Net assets released from restrictions

Total revenue - program operations

Expenses:Program servicesManagement and administration

Total expenses

Change in unrestricted net assets before support revenue, prior period income, andother pension benefit-related changes other than net periodic benefit expense

Support revenue:Investment returnContributions and fundraisingMiscellaneous

Total support revenue

Change in unrestricted net assets before prior period income, andother pension benefit-related changes other than net periodic benefit expense

Prior period income

Change in unrestricted net assets before pensionbenefit-related changes other than net periodic benefit expense

Change in temporarily restricted net assets:DonorsGrantsFundraisingNet assets released from restrictions

Change in temporarily restricted net assets

Change in net assets before pensionbenefit-related changes other than net periodic benefit expense

Pension benefit-related changes other than netperiodic benefit expense

Change in net assets

Net assets - beginning of year

Net assets - end of year

$ 98,840,5543,129,222

445,675747,535

103,162,986

18,876

103,181,862

93,557,9709,045,575

102,603,545

578,317

131,8277,713

12,672

152,212

730,529

(407,581)

322,948

3,3508,000

19,919(18,876)

12,393

335,341

5,261,0045,596,345

13,015,812

$ 18,612,157


3

LlFESPIRE, INC. AND SUBSIDIARY(a Not-for-Profit Organization)

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


Unrestricted net assets - beginning of year

Increase in unrestricted net assets

Unrestricted net assets - end of year

Temporarily restricted net assets - beginning of year

Increase in temporarily restricted net assets

$ 12,970,882

5,583,952

18,554,834

44,930

12,393

Temporarily restricted net assets· end of year $ 57,323


4

L1FESPIRE, INC. AND SUBSIDIARY(a Not-for-Profit Organization)

CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES

Year ended June 30,2011

Program ServicesTotal Management

Waiver Vocational Mental Other Program and TotalServices Services Residential Health Programs Services Administration Expenses

Salaries $ 19,108,849 $ 61,693 $ 19,205,104 $ 987,847 $ 3,050,465 $ 42,413,958 $ 2,659,533 $ 45,073,491Payroll taxes and benefits 6,024,449 23,227 5,599,468 231,466 881,873 12,760,483 3,699,940 16,460,423

Total personnel costs 25,133,298 84,920 24,804,572 1,219,313 3,932,338 55,174,441 6,359,473 61,533,914

Professional fees and contracted services 732,708 879 1,050,671 48,370 3,680,668 5,513,296 502,461 6,015,757General and professional liability insurance 484,317 47,929 242,307 50,939 38,814 864,306 235,206 1,099,512

Supplies and expenses:Food, household supplies and services 134,034 1,583 2,124,395 2,637 23,409 2,286,058 342 2,286,400Rent and real estate taxes 2,980,781 273,775 2,444,101 179,269 158,892 6,036,818 835,685 6,872,503Transportation 11,130,166 167,616 1,012,988 76,722 206,810 12,594,302 176,429 12,770,731Utilities and telephone 864,044 44,632 934,914 123,917 73,698 2,041,205 154,386 2,195,591Maintenance and repair 259,809 13,343 434,357 17,872 35,550 760,931 38,693 799,624General 899,188 298,935 1,469,190 107,188 838,018 3,612,519 674,109 4,286,628

Total expenses before interest, fees and bondexpense and depreciation and amortization 42,618,345 933,612 34,517,495 1,826,227 8,988,197 88,883,876 8,976,784 97,860,660

Interest, fees and bond expense 636,504 39,353 1,771,186 - 12,014 2,459,057 14,123 2,473,180

Depreciation and amortization 912,814 84,098 1,148,094 21,318 48,713 2,215,037 54,668 2,269,705

Total Expenses $ 44,167,663 $ 1,057,063 $ 37,436,775 $ 1,847,545 $ 9,048,924 $ 93,557,970 $ 9,045,575 $ 102,603,545


5

LlFESPIRE, INC. AND SUBSIDIARY(a Not-far-Profit Organization)

CONSOLIDATED STATEMENT OF CASH FLOWS


Cash flows from operating activities:Increase in net assetsAdjustments to reconcile increase in net assets to net cash and cash equivalents

provided by operating activities:Depreciation and amortizationAmortization of bond issue costsUnrealized loss on investmentsBad debt expenseLoss on disposal of assetsPension and other postretirement benefit-related changes other than net

periodic benefit expenseChanges in operating assets and liabilities:

Decrease in accounts receivableDecrease in accrued income receivableIncrease in due from related partiesIncrease in security deposits and prepaid expensesDecrease in deferred chargesDecrease in accounts payable and accrued expensesIncrease in accrued payrollIncrease in accrued compensated absencesIncrease in underfunded health insurance obligation

Net cash prOVided by operating activities

Cash flows from investing activities:Purchases of investmentsProceeds from sales of investmentsWithdrawals for operationsIncrease in assets restricted to investment in property, plant and equipmentPurchases of property, plant and equipment

Net cash used in investing activities

Cash flows from financing activities:Repayments of mortgages payable - DASNYProceeds from line of creditRepayments of bonds payable - IDA

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents - beginning of year

Cash and cash equivalents - end of year

Non-Cash Investing and Financing Activities:

Pension adjustment

Supplemental Disclosures of Cash Flow Information:

Cash paid during the year for:InterestIncome taxes

$ 5,596,345

2,269,705104,736

16,58122,9634,603

(5,261,004)

167,8273,127,053(345,679)(571,993)

(3,039)(1,934,037)1,679,484

742,430325,176

5,941,151

(2,628,405)2,407,286

318,099(601,382)(872,986)

(1,377,388)

(486,527)10,737

(1,100,000)

(1,575,790)

2,987,973

19,420,012

$ 22,407,985

$ 5,261,004

$ 926,256$


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1. ORGANIZATION,TAX STATUS, ANDSIGNIFICANTACCOUNTINGPOLICIES:


NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2011

OrganizationLifespire, Inc. and Subsidimy (the "Agency") serves individuals with disabilitiesand their families through various programs which include, but are not limited to,residential, rehabilitation, and day programs. The Agency is funded throughgovernment programs, consumer contributions, and gifts. It is the Agency's aim toprovide individuals with disabilities the assistance and support necessary to achievea level of functional behaviors mId cognitive skills to enable them to maintainthemselves in their community in the most integrated and independent mannerpossible.

New Accounting PronouncementsIn January 2010, the Financial Accounting Standards Board ("FASB") issuedAccounting Standards Update ("ASU") No. 2010-06, Fair Value Measurementsand Disclosures: "Improving Disclosures about Fair Value Measurement", whichprovides a greater level of disaggregated information and more robust disclosuresabout valuation techniques and inputs to fair value measurements, transfers in andout of Levels 1 and 2, and the separate presentation of information in Level 3reconciliations on a gross basis rather than net. New disclosures and clarificationsof existing disclosures are effective for interim and annual reporting periodsbeginning after December 15, 2009. Level 3 disclosures are effective for fiscalyears beginning after December 31, 2010. Adoption of this accounting standardhad no effect on the Agency's consolidated financial statements.

In May 2011, the FASB issued an accounting standard update which works toachieve common fair value measurement and disclosures requirements in USGAAP and International Financial Reporting Standards. The update both clarifiesthe FASB's intent about the application of existing fair value guidance, and alsochanges certain principles regarding measurement and disclosure. The update iseffective prospectively for annual periods beginning after December 15, 2011.Early application is permitted for interim periods beginning after December 15,2011. Management believes this update will not have an impact on the Agency'sconsolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310):"Disclosure about the Credit Quality ofFinancing Receivables and the Allowancefor Credit Losses." The objective of this ASU is for an entity to provide disclosuresthat facilitate financial statement users' evaluation of the following:

• The nature of credit risk inherent in the entity's portfolio of financingreceivables;

• How that risk is analyzed and assessed in arriving at the allowance forcredit losses;

• The changes and reasons for those changes in the allowance for creditlosses.

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To achieve these objectives, an entity should provide disclosures on adisaggregated basis on two defined levels: (1) portfolio segment; and (2) class offinancing receivable. The ASU makes changes to existing disclosure requirementsand includes additional disclosure requirements about financing receivables,including:

• Credit quality indicators of financing receivables at the end of the reportingperiod by class of financing receivables;

• The aging of past due financing receivables at the end of the reportingperiod by class of financing receivables; and

• The nature and extent of troubled debt restructurings that occurred duringthe period by class of financing receivables and their effect on theallowance for credit losses.

For nonpublic entities, the disclosures are effective for annual reporting periodsending on or after December 15, 2011. The Agency has not yet determined whetherthe adoption of this standard will have a material impact on its consolidatedfinancial statements.

Principles of ConsolidationThe consolidated financial statements include the accounts of the Agency and itswholly-owned subsidiary, Manhattan Management Solutions, LLC (the"Organization"). The Organization was established to provide consulting servicesto other not-for-profit organizations. The Organization is being consolidated sincethe Agency has both an economic interest in and control over the Organizationthrough a majority voting interest in its governing board. The Organization has nobalances on its balance sheet or activity in the profit and loss statement for thefiscal year ended June 30, 2011.

Tax StatusThe Agency is organized under the not-for-profit corporation law of the State ofNew York. The Agency has been granted exemption from federal income taxationpursuant to Section 501(c)(3) of the Internal Revenue Code and is deemed to be apublic charity pursuant to the Internal Revenue Service.

The Agency follows the accounting standard for uncertainty in income taxes. Thestandard prescribes a minimum recognition threshold and measurementmethodology that a tax position taken or expected to be taken in a tax return isrequired to meet before being recognized in the financial statements. It alsoprovides guidance for de-recognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

In assessing the likelihood of realization of tax benefits, management considerswhether it is more likely than not that some pOliion or all of any tax position will

8



not be realized. The ultimate realization of such tax positions is dependent upon thegeneration of future income. Management considers projected future income andtax planning strategies in making this assessment.

If applicable, the Agency would classify interest and penalties on underpayments ofincome tax as miscellaneous expenses.

The Agency does not expect a significant increase or decrease to the total amountsof unrecognized tax positions during the year ended June 30, 2011. However, theAgency may be subject to audit by tax authorities. The Agency believes that it hasappropriate support for the positions taken on its tax returns. Nonetheless, theamounts ultimately paid, if any, upon resolution of the issues raised by the taxingauthorities may differ materially from the amounts accrued for each year.Management believes that its nonprofit status would be sustained uponexamination.

The Agency files informational returns in the United States federal and New Yorkstate jurisdictions. The Agency is generally no longer subject to U.S. federal orstate income tax examinations by tax authorities for fiscal years ended before June30,2008.

Financial Statement PresentationThe accompanying consolidated financial statements have been prepared on theaccrual basis of accounting in accordance with accounting principles generallyaccepted in the United States of America.

The classification of the Agency's net assets and its support, revenues, andexpenses is based on the existence or absence of donor-imposed restrictions. Itrequires that the amounts for each of the three classes of net assets - permanentlyrestricted, temporarily restricted, and unrestricted - be displayed in a statement offinancial position and that the amounts of change in each of those classes of netassets be displayed in a statement of activities.

These classes are defined as follows:

Permanently Restricted - Net assets resulting from (a) contributions andother inflows of assets whose use by the Agency is limited by donor-imposedstipulations that neither expire by passage of time nor can be fulfilled orotherwise removed by actions of the Agency, (b) other asset enhancementsand diminishments subject to the same kinds of stipulations, and (c)reclassifications from (or to) other classes of net assets as a consequence ofdonor-imposed stipulations.

Temporarily Restricted - Net assets resulting from (a) contributions andother inflows of assets the use of which is limited by donor-imposedstipulations that either expire by passage of time or can be fulfilled andremoved by actions of the Agency pursuant to those stipulations, (b) other

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asset enhancements and diminishments subject to the same kinds ofstipulations, and (c) reclassifications to (or from) other classes of net assetsas a consequence of donor-imposed stipulations, their expiration by passageof time, or their fulfillment and removal of actions of the Agency pursuant tothose stipulations. When such stipulations end or are fulfilled, suchtemporarily restricted net assets are reclassified to unrestricted net assets andreported in the statement of activities and changes in net assets. However, if arestriction is fulfilled in the same time period in which the contributions arereceived, the Agency reports the support as unrestricted.

Unrestricted - The part of net assets that is neither pennanently restricted nortemporarily restricted by donor-imposed stipulations. Most of these net assetsare undesignated but some are designated by the Board as set forth below.

Unrestricted - Board-Designated - Program Expansion - The Board hasearmarked certain amounts for future programmatic expansion. The moniesare used to alleviate the ongoing financial pressures on the Agency due to thetiming of collections of government funding, the limitations on availablegovernment funding, and the limited fund-raising activities undertaken by theAgency. The Agency has minimum monthly operating cash requirements ofapproximately $8,550,000 to finance its program operations.

Unrestricted - Board-Designated - Facilities - The Board has designatedamounts of unrestricted net assets to cover the costs of acquisition offacilities and the associated debt.

Unrestricted - Board-Designated - Related Party Transactions - The Boardhas designated amounts of unrestricted net assets to cover the costs oftransactions with related parties who need assistance with cash flowpressures.

Unrestricted - Board-Designated - PensionThe Board has designated amounts of unrestricted net assets to cover futurepossible increases on the underfunded pension obligation.

Use of EstimatesThe preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

Subsequent EventsThe Agency has evaluated events through November 29, 2011, which is thedate the financial statements were available to be issued.

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Cash and Cash EquivalentsThe Agency considers all highly liquid investments with an original maturitydate of three months or less at the time of purchase to be cash equivalents.Included in cash and cash equivalents as of June 30, 2011 are severalamounts of restricted cash which are described in Note 2 below.

Investment Valuations and Income RecognitionInvestments are reported at fair value. Fair value is the price that would be receivedto sell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. See Note 4 for a discussion of fairvalue measurements.

Purchases and sales of securities are recorded on a trade-date basis. Interest incomeis recorded on the accrual basis; dividends are recorded on the ex-dividend date.The Agency presents in the accompanying consolidated statement of activities thenet appreciation in the fair value of its investments, which consists of realized gainand losses and the unrealized appreciation/depreciation on those investments.Income from investments is considered unrestricted net assets unless restricted by adonor. Management reviews its investments for declines other than temporary.

Accounts Receivable - NetAll known uncollected accounts receivable have been written down to thecollectible value as of June 30, 2011. In addition, there exists a reserve for doubtfulaccounts of $7,437 as of June 30, 2011 for accounts receivable. The allowance fordoubtful accounts is established through provisions charged against income and ismaintained at a level believed adequate by management to absorb estimated baddebts based on current economic conditions. Management uses 5% of totalsubcontract accounts receivable as the basis for the calculation of allowance fordoubtful accounts.

Accrued Income Receivable and Program Service FeesThe Agency receives a major portion of its program service fees from Medicaid inconjunction with the New York State Office for People With DevelopmentalDisabilities ("OPWDD"). Program service fees are also received from the SocialSecurity Administration and directly from the OPWDD. Rates of reimbursementderived from cost-based methodologies are established annually by the OPWDD.Substantially all of the accrued income receivables of $15,053,506 are due fromthese governmental agencies.

There is no provision within these financial statements for any possible contingentliability that may result from any disallowances as a result of reimbursement rateadjustments for program service fees relating to the year ended June 30, 2011.Although such possible disallowances could be substantial in amount, in theopinion of management, any actual disallowance would be immaterial.

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Property, Plant, and EquipmentProperty, plant, and equipment are recorded at cost, or at fair market value ifdonated. Maintenance and repairs are charged to expense as incurred; majorimprovements are capitalized in accordance with funding source guidelines.Depreciation is computed using the straight-line method over the estimated usefullives of the respective assets. Leasehold improvements are amortized over thelesser of the term of the lease or the estimated useful life of the asset. Theseamounts do not purport to represent replacement of realizable values. For thoseitems that are not paid for by funding sources, the Agency maintains a policy tocapitalize those costing in excess of $5,000.

The Agency follows the provision of the fair value measurements standards forceliain non-financial assets and liabilities. Under this standard, the Agency reviewslong-lived assets to determine whether there has been any permanent impairmentwhenever events or circumstances indicate the carrying amount of an asset may notbe recoverable. If the sum of the expected future undiscounted cash flows is lessthan the carrying amount of the assets, the Agency recognizes an impairment loss.No impairment loss was recognized for the year ended June 30, 2011.

Deferred IncomeThe Agency records unearned advances to fee for service revenue as deferredrevenue until it is expended for the purpose of the funding source, at which time itis recognized as revenue. The balance in deferred revenue as of June 30, 2011represents amounts received for various programmatic operations that will berecognized as revenue in the future, as it is earned.

Revenue RecognitionSuppOli and revenue is recognized on a fee for service basis for servicearrangements with various consumers and/or customers. Revenue is recognizedcontingent to services being rendered. The reimbursements received from celiainfunding sources are subject to reconciliations. The funding sources may requestreturn of reimbursements for noncompliance.

Contributions

Contributions - Contributions are considered to be available for unrestricteduse unless specifically raised for special purposes or designated by the donor.

Restricted Contributions - The Agency repOlis gifts of cash and other assets asrestricted support if they are received with donor stipulations that limit the useof the donated assets. When a donor restriction expires, that is, when astipulated time restriction ends or purpose restriction is accomplished,temporarily restricted net assets are reclassified to unrestricted net assets andreported in the same statement of activities as net assets released fromrestrictions. If the restriction will be satisfied within one year, then the Agencywould record the contribution as temporarily restricted net assets and reallocateto unrestricted net assets when the restriction is satisfied.

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In-Kind ContributionsIn-kind contributions consist of property and services donated by state agencies andindividuals. The value placed by the state agencies and individuals are used forvaluing the contribution received. These properties were recorded as unrestrictedand the related depreciation taken was recorded as unrestricted. If no value isprovided by donor, an estimated value is placed by the Agency.

Contributed ServicesTime is donated to the Agency by various volunteers. The value of this time isdeemed to be immaterial, and therefore has not been reflected in the accompanyingconsolidated financial statements.

Start-Up CostsCertain costs related to the organization of a new entity, a new business line, orproduct or location, are expensed as incurred. This position is followed by theAgency and the funding source which governs the program for which such start-upexpenses were incurred.

AdvertisingAdvertising costs are expensed as incurred. Advertising expense totaled $16,773for the year ended June 30, 2011, and is included in general expenses in theaccompanying consolidated statement of functional expenses.

Special EventsThe direct costs of special events include expenses for the benefit of the donor. Forexample, meals and facilities rental are considered direct costs of special events.During the fiscal year ended June 30, 2011, the Agency did not incur any specialevents expenses.

Bond CostsBond costs, which reflect bond premiums and discounts, are amortized over the lifeof the bonds. Amortization expense of these costs for the year ended June 30,2011is $104,736. These costs are included in interest, fees and bond expense of$2,473,180 shown in the accompanying consolidated statement of functionalexpenses.

Functional Allocation of ExpensesExpenses that can be directly identified with the program or supporting service towhich they relate are charged accordingly. Other expenses by function have beenallocated among program and supporting service classifications based uponbenefits received.

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2. CASH AND CASHEQUIVALENTS:



Cash and cash equivalents are held in interest-bearing checking and savingsaccounts at financial institutions. As of June 30, 2011, total cash and cashequivalents of $22,407,985 included restricted cash amounts comprised of thefollowing:

Restricted cashTemporarily restricted contributions403(b) tax sheltered mlliuity planHealth Reimbursement Accounts

$

$

57,32375,860

3,657,3783,790,561

3. INVESTMENTS:

4. FAIR VALUEMEASUREMENTS:

For the year ended June 30, 2011, total investments at fair market value comprisedof bank certificates of deposit and money market funds valued at $2,685,460.Investment activity for the year consisted of the following:

Cost Fair ValueBank Certificates of Deposit:

Bank of America $ 1,070,000 $ 1,070,000Smith Barney 1,174,000 1,172,877Chase 368,918 363,921

Total Bank Certificates of Deposit 2,612,918 2,606,798

HSBC Money Market Funds 78,662 78,662$ 2,691,580 $ 2,685,460

June 30, 2011Fair market value - beginning of year $ 2,799,021

Investment activity:Purchases 2,599,365Sales (at cost) (2,407,286)Investment returns 29,040Withdrawals for operations (318,099)

2,702,041Net decrease in fair value of investments:

Unrealized loss (16,581)Fair market value - end of year $ 2,685,460

FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurementsand Disclosures, provides the framework for measuring fair value. That frameworkprovides a fair value hierarchy that prioritizes the inputs to valuation techniquesused to measure fair value. The hierarchy gives the highest priority to unadjustedquoted prices in active markets for identical assets or liabilities (level 1measurement) and the lowest priority to unobservable inputs (level 3measurements). The three levels of the fair value hierarchy under FASB ASC 820are described as follows:

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Level I - Inputs to the valuation methodology are unadjusted quoted prices foridentical assets or liabilities in active markets that the plan has the ability to access.

Level 2 - Inputs to the valuation methodology include:

• quoted prices for similar assets of liabilities in active markets;

• quoted prices for identical or similar assets of liabilities 111 inactivemarkets;

• inputs other than quoted prices that are observable for the asset or liability;

• inputs that are derived principally from or corroborate by observablemarket data by correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must beobservable for substantially the full term of the asset or liability.

Level 3 - Inputs to the valuation methodology are unobservable and significant tothe fair value measurement.

The asset's or liability's fair value measurement level within the fair value hierarchyis based on the lowest level of any input that is significant to the fair valuemeasurement. Valuation techniques used need to maximize the use of observableinputs and minimize the use of unobservable inputs.

There have been no changes in the methodologies used at June 30, 2011.

The preceding methods described may produce a fair value calculation that may notbe indicative of net realizable value or reflective of future fair values. Furthermore,although the Agency believes its valuation methods are appropriate and consistentwith other market participants, the use of different methodologies or assumptionsto determine the fair value of certain financial instruments could result in differentfair value measurement at the reporting date.

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5. DUE FROM RELATEDPARTIES:



The following table presents, by level within the fair value hierarchy, the Agency'sinvestment assets at fair value, as of June 30,2011.

QuotedMarket

Prices inActive OtherMarket Significant Significant

Identical Observable UnobservableAssets hlputs Inputs

Total (Levell) (Level 2) (Level 3)Certificatesof deposit $ 2,606,798 $ 2,606,798 $ - $Moneymarketfunds 78,662 78,662

$ 2,685,460 $ 2,685,460 $ $

Following is a description of the valuation methodologies used for assets as fairvalue:

Certificates of deposit: The market value of a certificate of deposit is estimatedusing a matrix based on interest rates.

Money market funds: Prices are received from various pricing services. Instanceswhere pricing sources are not readily available, estimated prices may be generatedby a matrix system or market-driven pricing model.

Change in Fair Value LevelsThe availability of observable market data is monitored to assess the appropriateclassification of financial instruments within the fair value hierarchy. Changes ineconomic conditions or model-based valuation techniques may require the transferof financial instruments from one fair value level to another. In such instances, thetransfer is reported at the beginning of the reporting period. For the year endedJune 30, 2011, there were no transfers in or out of levels 1, 2, or 3.

The Agency is owed several amounts from three not-for-profit related parties asfollows:

The first is an amount of $159,124 due from its Housing Urban Development("HUD") affiliate and includes $18,921 of non-interest bearing loans used foroperational purposes. The Agency also has a note receivable of $140,203 due fromthis related party dating back a number of years. Based on discussion with HUDofficials, the Agency was not permitted to charge interest. The Agency expects tobe repaid when the entity has sufficient cash flow available. The Agency is arelated party in that certain staff members of the Agency are also Board members

16



of this other not-for-profit HOD organization. The entire balance owed from thisentity is included in due from related parties presented in the accompanyingconsolidated statement of financial position.

For the second entity, there is a note receivable which was executed on April 30,2010 in an amount of $689,901. This amount represented the aggregate principaland interest as of April 30, 2010, which was previously loaned to the entity by theAgency. There is no fmther interest to be charged after April 30, 2010. The entityis obligated to pay the outstanding indebtedness in twenty-five equal annualinstallments of $27,596 on or before April 30th of each year. During the currentfiscal year, the required payment of $27,596 was made to the Agency. The totaloutstanding balance of the note due to the Agency as of June 30, 2011 amounted to$634,709. There is also a loan amount of $55,500 due from this entity as of June30,2011 which accrues interest at a rate of 6% per annum. As ofJune 30,2011, therelated accrued interest owed to the Agency amounted to $12,116. On August 13,2010, $80,000 was also loaned to the entity to fund various operational items. Theprincipal balance of the loan, which accrued interest at a rate of 6% per annum, wassubsequently repaid in full in July 2011. However, as of June 30, 2011, relatedaccrued interest of $4,245 was still owed to the Agency. Additionally, on June 16,2011, $300,000 was loaned to the entity, accruing interest at a rate of 6% perannum. As of June 30, 2011, this balance remains outstanding, as well as relatedaccrued interest of $700. The Agency is a related party in that the Board membersof the entity are also Board members of the Agency. The entire balance owed fromthis entity is included in due from related parties presented in the accompanyingconsolidated statement offinancial position.

The third entity provides space to the Agency for the operation of one of itscommunity rehabilitation programs. The Agency purchases inventory, at cost, fromthis entity. During the fiscal year ended June 30, 2011, purchases of $581,109 weremade from the entity. Additionally, as of fiscal year-end, approximately $62,000 ofaccounts payable was due to the related entity. This amount is included in accountspayable and accrued expenses in the accompanying consolidated statement offinancial position. The Agency also receives payment from the entity for theoutsourced labor provided to assist with the processing and packaging of theinventory items. During the fiscal year ended June 30, 2011, the Agency receivedlabor fees of $108,474 from the related entity. Additionally, as of June 30, 2011,$7,915 was owed to the Agency for outstanding labor fees. This amount is includedin accounts receivable, net in the accompanying consolidated statement of financialposition. The Agency also received $24,202 from the entity for reimbursement ofits proportion of fringe benefits and insurance costs paid on behalf of three of theAgency's employees who provide services to the entity. The Agency is a relatedpatty in that certain staff members of the Agency are also Board members of thisother not-for-profit corporation.

Management periodically reviews the related party accounts to determine if anallowance is necessary. The related party receivables have been adjusted for allknown uncollectible accounts. For the year ended June 30, 2011, no allowance was

17



necessary because the related party receivables were determined to be fullycollectible.

As of June 30, 2011, the Agency had the following assets restricted to investmentin property, plant and equipment:

6. ASSETS RESTRICTEDTO INVESTMENT INPROPERTY, PLANTAND EQUIPMENT: Debt Service Reserve - MCFFA (DASNY)

Debt Service Reserve/Escrow Balance - IDA - Bond 2002Debt Service Reserve/Escrow Balance - IDA - Bond 2004Debt Service Reserve/Escrow Balance - IDA - Bond 2008Debt Service Reserve - DASNY - Bond 2010Cash - Recoupments Payable

$ 401,875875,754

1,268,794707,818830,807

4,995,309$ 9,080,357

The Debt Service Reserve - MCFFA (DASNY) amount of $401,875 represents aportion of the loan proceeds retained by the New York State Medical CareFacilities Finance Agency ("MCFFA") under the terms and conditions in the loanagreement.

The monies are designated to be applied to scheduled debt service payments in thefuture. In 1996, the debt service reserve amounts were transferred to the DormitoryAuthority of the State ofNew York ("DASNY").

The Debt Service Reserve/Escrow Balance - IDA - Bond 2002 amount of$875,754 represents a portion of the loan proceeds, in addition to subsequentpayments made by the Agency, that were deposited into accounts setup with theBank of New York. The Agency's monthly payments are deposited into one ofthese accounts until payments to the bondholders are required pursuant to theagreement (refer to Note 14 for more detail).

The Debt Service Reserve/Escrow Balance - IDA - Bond 2004 amount of$1,268,794 represents a portion of the loan proceeds, in addition to subsequentpayments made by the Agency, that were deposited into accounts setup with theBank of New York. The Agency's monthly payments are deposited into one ofthese accounts until payments to the bondholders are required pursuant to theagreement (refer to Note 14 for more detail).

The Debt Service Reserve/Escrow Balance - IDA - Bond 2008 amount of$707,818 represents a portion of the loan proceeds, in addition to subsequentpayments made by the Agency, that were deposited into accounts setup with theBank of New York. The Agency's monthly payments are deposited into one ofthese accounts until payments to the bondholders are required pursuant to theagreement (refer to Note 14 for more detail).

The Debt Service Reserve - DASNY - Bond 2010 amount of $830,807 representsthe pOliion of loan proceeds retained by the DASNY Inter-Agency Council Pooled

18

7. PROPERTY, PLANTAND EQUIPMENT:



Loan Program under the terms and conditions in the loan agreement.

The cash amount of $4,995,309 represents various amounts received from fundingsources that will be used to pay amounts included within recoupments payable.

As of June 30, 2011, property, plant and equipment, at cost, consisted of thefollowing:

LandConstruction in progressBuildings and improvementsFurniture and equipmentVehiclesLeasehold improvements

Less: accumulated depreciation andamortization

$Cost

4,509,267324,679

23,209,8432,825,221

611,6188,267,914

39,748,542

(21,193,367)

EstimatedUseful Lives

5-20 years5 years4 years

Life of lease

8.

9.

RECOUPMENTSPAYABLE:

DEFERRED INCOME:

$ 18,555,175

The above amounts include land and buildings which were donated to the Agencyby the OPWDD. The Agency is subject to adherence of certain terms, conditions,and restrictions as to the use and ultimate disposition of these properties as furtherdelineated in the disposition and subordination agreements entered into with thefunding source.

Depreciation and amortization expense for the year ended June 30, 2011 IS

$2,269,705.

The amount of $4,995,309 consists of amounts of reimbursement received £i·omcertain funding sources, which are in excess of amounts earned, and amounts forwhich the scheduled recoupment differs from the actual recoupment made throughJune 30, 2011. The funding sources are expected to recover these amounts in thefuture through the recoupment process.

DefelTed income of $2,281,470 include amounts received from various fundingsources over the years for various programmatic operations but not earned asrevenue as of June 30, 2011. Some of these liabilities relate to the OPWDD. Theseliabilities do not bear interest and will be recognized as revenue periodically in thefuture as it is deemed to be earned.

10. DUE TO FUNDINGSOURCES:

The due to funding sources amount of $243,684 includes an amount of $8,966,which represents various maximum potential contested liabilities for proposedcontract adjustments with celiain funding sources for prior periods.

The balance of $234,718 represents a liability due to the OPWDD as a result of

19

11. MORTGAGESPAYABLE - DASNY:



certain "desk-audits" performed on certain programs by the OPWDD. These "deskaudits" were the result of a statewide requirement by the OPWDD and othergovernmental agencies, due to the clarification and revisions of certain policies andprocedures set forth by the OPWDD and these other governmental agencies.

Mortgages payable - DASNY amounting to $3,237,237 represents self-liquidatingterm-notes owed to the DASNY, which has as its agent, the OPWDD. Some of thenotes were originally related to the New York State MCFFA improvement bondsloaned to the Facilities Development Corporation ("FDC"). The DASNY is thesuccessor to the MCFFA, and in 1996 FDC projects were transferred to DASNY.In 1996, the MCFFA bonds were refunded by the issuance of DASNY MentalHealth Services Facilities Improvement Revenue Bonds.

Periodic recoupments are expected to continue to be made by OPWDD from theAgency, for remittance to FDC to satisfy the debt service and administration fees.The payments are first applied to interest and then to principal. The Agency willreceive additional amounts of reimbursement as an increase to its per diem rates torepay these recoupments. The notes are collateralized by (l) the real propertylocated at each of the sites, (2) all accounts receivable generated from billingsrelated to the respective locations, and (3) all personal property owned by theAgency located at each of the sites. The Agency is entitled to credits in an amountequal to the past accrued interest earned on the debt service reserve fund for someof the above-mentioned liabilities. When such credits are determined and applied tothe corresponding mortgages, then those mortgage liabilities will be reducedaccordingly.

Additional information for the mortgages payable - DASNY is reflected below.

Maturity FixedProject Name Date Interest Rate Total2081h Street 8/15/2010 5.81% $ 29,59094th Street 8/15/2010 5.81% 5,399Esplanade 2/15/2011 5.44% 10,450Racal Court 2/15/2013 7.37% 95,000South Avenue 8/15/2015 7.68% 131,491213-233 48th Street (Sunset I) 2/15/2018 7.34% 649,46087-21 121 st Street (Queens) 2/15/2018 6.41% 1,676,500Jumel 8/15/2018 6.41% 639,347Total mortgages payable - DASNY $ 3,237,237

The mortgage balances for the 213-233 48th Street and 87-21 121 st Street locationsare for the Day Treatment and Day Habilitation Programs, respectively.Commencing with the fiscal year ended June 30, 2004, OPWDD allocates a portionof the bond (mortgage) payable to a separate Day Habilitation MedicaidManagement Information System ("MMIS") Provider number for debt recoverypurposes. However, the total indebtedness does not change.

20

12. LINE OF CREDIT:

13. BOND PAYABLEDASNY:



The Agency has a line of credit agreement with J.P. Morgan Chase for a maximumof $5,000,000 which expires on March 14,2012. The proceeds of the line of creditare to be used for operating expenses. Interest is charged to the line of credit at thebank's floating rate of prime plus 0.5% and is secured by a lien on the Agency'sgovernment receivables. These government receivables totaled $15,053,506 at June30,2011. There was no outstanding balance as of June 30,2011.

Under the terms of a line of credit agreement with Bank of America on March 31,2011, the Agency may borrow up to $5,000,000 at the bank's prime interest rateplus 0.5% through March 31, 2012, when the agreement expires. The Agency'sproperty has been pledged as collateral against any advances on the line of credit.As of June 30, 2011, there was an outstanding balance of $1, 172,919. Total interestpaid during the fiscal year amounted to $44,492.

In March 2010, the bond payable - DASNY was issued in the amount of$6,125,000 and is related to the DASNY Inter-Agency Council Pooled LoanProgram Revenue Bond Resolution, Series 2010A, subseries 2010A-l, and 2010A2 (the "Bonds").

The Agency used the proceeds from the Bonds to refinance $5,485,795 ofindebtedness on seven properties. The interest rate is not to exceed 7.5% on theSeries 201 OA Bonds. The interest is payable to the bondholders on a semi-annualbasis commencing on August 1,2010. The cost of the bond issuance amounted to$318,265 of which $25,044 was amortized as of June 30, 2011.

Payments of interest and principal under the loan agreement are to be mademonthly on the 10111 day of each month into the debt service reserve Fund by theAgency. On August 1,2010, the principal amount of $470,000 was paid in full bythe Agency, as well as all interest and fees associated with the payment, to thebondholders. The Agency satisfied these obligations during June 30, 2011 byvirtue of periodic recoupments made by OPWDD from its rates of reimbursementfor those programs that are operated at these sites. The principal payment of theconsolidated debt owed to the bondholders is as follows:

PrincipalDue Date DueJuly 1,

2011 $ 470,0002012 470,0002013 475,0002014 495,0002015 410,000

Thereafter 3,805,000$ 6,125,000

21

14. BONDS PAYABLEIDA:



The Series 2010A Bonds will be secured ratably by each applicable mortgage, thepledge and assignment to the Trustee of the Revenues, and the DASNY's securityinterest in the pledged revenues subject to prior pledges.

The bond payable - DASNY requires the Agency to maintain certain financialcovenants. At June 30, 2011, the Agency was determined to be in compliance withthese covenants.

Bonds payable - IDA totaling $9,025,000 are made up of the following bondspayable at June 30, 2011:

Series Due Date2002 C-l July 1,20172004 A-I and B-1 July 1,20232004 C-l July 1,20142008 A-I and A-2 July 1,2033Total IDA Bonds Payable

Principal Due$ 2,200,000

3,245,000475,000

3,105,000$ 9,025,000

Bonds payable - IDA - 2002 amounting to $2,200,000 represent amounts owedrelating to Industrial Development Agency Financing (Special Needs FacilityPooled Program) with the New York City Industrial Development Agency Series2002 C-l.

The interest rate is based on a life average rate of 7.63176% on the Series 2002 C-lBond ($2,200,000). The interest is payable to the bondholders on a semi-annualbasis commencing on July 1, 2003. The principal is payable to the bondholder onan annual basis also commencing on July 1, 2003. The cost of the bond issuanceamounted to $395,027 ($380,027 was incurred when the bond closed and $15,000was incurred prior to the bond closing), of which $214,504 was amortized as ofJune 30, 2011. The costs of issuance are being amortized over the term of the bondobligations.

Payments of interest and principal under the loan agreement are to be mademonthly and deposited into one of the Agency's debt service reserve accounts(please see Note 6 for more information) until it comes due to pay the bondholdersfor interest and/or principal.

22



The principal payments of consolidated debt owed to the bondholders are asfollows:

Due DateJuly 1,

20112012201320142015

Thereafter

PrincipalDue

$ 270,000280,000280,000280,000280,000810,000

$ 2,200,000

Bonds Payable - IDA - 2004 amounting to $3,720,000 represents amounts owedrelating to Industrial Development Agency Financing (Special Needs FacilityPooled Program) with the New York City Industrial Development Agency Series2004 A-I and B-1, and Series 2004 C-l.

The Agency used the Series A-I and B-1 bond proceeds to refinance $4,112,273 ofindebtedness on four propel1ies. The interest rate is based on a life average rate of8.890508% on the Series 2004 A-I and B-1 Bonds ($3,245,000). The interest ispayable to the bondholders on a semi-annual basis commencing on July 1, 2004.The principal is payable to the bondholder on an annual basis also commencing onJuly 1, 2004.

The cost of the bond issuance amounted to $685,629 ($694,975 was incurred whenthe bond closed less $9,346 reimbursed after the bond closing), of which $252,600was amortized as of June 30, 2011. The costs of issuance are being amortized overthe term of the bond obligations.


23




Due DateJuly 1,

20112012201320142015

Thereafter

PrincipalDue

$ 360,000360,000215,000220,000220,000

1,870,000$ 3,245,000

The Agency used the Series C-I bond proceeds to finance $805,621 ofindebtedness on one property and to payoff a balance due on one line of credit.The interest rate is based on the life average rate of 5.96% on the Series 2004 C-IBond ($475,000). The interest is payable to the bondholders on a semi-annual basiscommencing on January 1,2005. The principal is payable to the bondholders on anannual basis commencing on July 1,2005. The cost of the bond issuance amountedto $50,095, of which $23,149 was amortized as of June 30, 2011. The cost of bonddiscounts amounted to $41,281, of which $30,151 was amortized as of June 30,2011. The costs of issuance and discounts are being amortized over the term of thebond obligations.




2011 $ 110,0002012 115,0002013 120,0002014 130,000

$ 475,000

Bonds payable - IDA - 2008 amounting to $3,105,000 represent amounts owedrelating to Industrial Development Agency Financing (Special Needs FacilityPooled Program) with the New York City Industrial Development Agency Series2008 A. These bonds are segregated into Series 2008 A-I and Series 2008 A-2(taxable).

24



The interest rate is based on a life average rate and is disclosed in the bondagreement. The interest is payable to the bondholders on a semi-annual basiscommencing on July 1, 2008. The principal is payable to the bondholder on anannual basis also commencing on July 1, 2008. The cost of the bond issuanceamounted to $265,634, of which $84,517 was amortized as of June 30, 2011. Thecosts of issuance are being amortized over the term of the bond obligations.Pursuant to the bond agreement, there is a first lien on the properties beingmortgaged except for the facility located at 213 48th Street, Brooklyn, which carriesa second lien.




2011 $ 265,0002012 260,0002013 260,0002014 170,0002015 170,000

Thereafter 1,980,000$ 3,105,000

The Agency expects that, periodically, OPWDD will adjust the IRA per diem rateto provide the Agency with the appropriate amount of reimbursement to repay thedebt principal, related interest, and fees. The Series 2002 C-l, 2004 A-I, B-1, andC-l, as well as Series 2008 A-I and A-2 bonds will be secured ratably by thepledge and assignment to the Trustee of the Revenues and the IDA's securityinterest in the pledged revenues, subject to prior pledges.

The bonds payable IDA requires the Agency to maintain certain financialcovenants. At June 30, 2011, the Agency was determined to be in compliance withthese covenants.

25



The sh011-tenn and long-term third-party debt is comprised of the following:15. MATURITIESOF DEBT TO THIRDPARTIES: Recoupments payable

Deferred incomeDue to funding sourcesM0l1gages payable - DASNYBond payable - DASNYBonds payable - IDALine of credit

$ 4,995,3092,281,470

243,6843,237,2376,125,0009,025,0001,172,919

$ 27,080,619

16. PRIOR PERIODREVENUE:

17. DEFINED BENEFITPENSION PLAN:

Approximate maturities of short-term and long-term third-party debt are as follows:

June 30,2012 $ 3,625,7672013 3,378,0942014 2,085,0252015 2,039,7662016 1,815,875

Thereafter 14,136,092$ 27,080,619

Total balance of $407,581 for the fiscal year ended June 30, 2011 is primarilycomprised of typical retroactive rate adjustments attributable to various programs.

The Agency has a defined benefit pension plan (the "Plan") covering all of itseligible employees. The benefits are based on years of service and the employee'shighest five years of compensation during the last ten years of employment. TheAgency's funding policy is to contribute annually the required amount that shouldbe deducted in accordance with federal income tax guidelines. The Agency'scontributions for calendar year 2010 exceeded the minimum funding requirementsof ERISA.

Contributions are intended to provide not only for benefits attributed to service todate, but also for those expected to be earned in the future. The employercontributions amounted to $2,696,461 and the benefits paid amounted to $505,614during the fiscal year ended June 30, 20 II. The Agency expects to contribute$1,200,000 to its pension plan in the fiscal year ended June 30, 2012.

According to actuarial projections, the existing funding policy contribution amountis not sufficient to cover the cost of the plan over next several years. During the

26



year ended June 30, 2010, the board of the Agency decided to freeze the pensionplan effective December 31,2010.

Under the accounting standards, a liability (underfunded pension obligation) isdisclosed at fiscal year-end. The underfunded pension obligation is a compilationof the excess of total past and future amounts expensed to date over past amountscontributed. There is a cumulative amount totaling $3,805,849 of underfundedpension obligation as of June 30, 2011.

The following table sets forth the plan's funded status and amounts recognized inthe Agency's consolidated statement of financial position at June 30, 2011:

Pension Benefits2009/2010 2010/2011

Reconciliation ofbenefit obligationObligation at beginning of yearService CostInterest CostPlan amendmentsActuarial (gain) 1lossAcquisitions 1(divestitures)Benefit paymentsCurtailmentsSpecial termination benefitsSettlementsObligation at end of year

Reconciliation offair value ofassetsFair value of assets at beginning of yearActual return on assetsAcquisitions 1(divestitures)Employer ContributionsBenefit paymentsSettlementsFair value of assets at end of year

Funded Status at end ofyear

$

$

$

$

$

24,266,0391,115,7311,679,008

o5,382,361

o(484,707)

(5,044,643)oo

26,913,789

15,661,7451,507,381

o1,162,517(484,707)

o17,846,936

(9,066,853)

$ 26,913,789687,251

1,701,415o

(1,372,370)o

(505,614)ooo

$ 27,424,471

$ 17,846,9363,580,839

o2,696,461(505,614)

o$ 23,618,622

$ (3,805,849)

The accumulated benefit obligations for the year ended June 30, 2011 was$27,424,471.

Net periodic pension cost for the fiscal year ended June 30, 2011 included the

27



following components:

Service costInterest costExpected return on plan assetsAmortization of net lossNet periodic pension cost

Assumptions Weighted Average

Discount rateExpected long-term return on plan assetsRate of compensation increase

$

$

687,2511,701,415(1,514,922)

647,6531,521,397

6.00%8.00%2.50%

The discount rate was changed from 5.85% to 6.00% which decreased theaccumulated postretirement benefit obligation by $591,000.

With respect to the Plan assets, investments are to be made consistent with thesafeguards and diversity to which a prudent investor would adhere. Following is adescription of the investment guidelines used for the Plan's investment funds:

Equities - General assurances by the Plan money manager includes criteria that nomore than 2% of the equity position of the entire Plan assets portfolio at cost, and3% at market value, shall be invested in anyone company, and no more than 50%of the Plan money manager's portfolio at cost, and 60% at market value shall beinvested in anyone company. Investment possibilities includes 1) common stocklisted on any U.S. exchange or the over-the-counter market with the requirementthat such stock have, in the reasonable opinion of the Plan money manager,adequate market liquidity relative to the size of the investment, 2) foreign ordinarysecurities, 3) international investments managed by the Plan money manager whichadhere to specific criteria, the most significant being that no more than 20% of thevalue of the international portfolio's total assets, measured at time of purchase maybe invested in securities of companies in emerging securities markets throughoutthe world, and 4) exchange traded funds. The Plan money manager is givenflexibility to alter the asset mix and security selection to adjust to changing marketconditions. Convertible securities, however, must be rated single A or higher.Furthermore, there are several categories of securities and types of transactions thatare not permissible for investments and should not be part of the portfolio,including short sales, put and call options, margin purchases, private placements,commodities, securities of the Plan money manager, its direct parent or itssubsidiaries, penny stocks, and derivatives. In addition, the Agency may identifyadditional securities to be restricted.

Fixed income - Diversification of the fund includes assurances that no more than5% of the Plan's portfolio should be invested in bonds of anyone issuer, and thereshall be no limit on direct obligations of the U.S. government. The Plan should not

28



invest in any fixed-income security carrying a rating less than BBB/Baa by eitherStandard & Poor or Moody's. If issues are downgraded so as to violate theseguidelines, the Plan's money manager should judiciously liquidate them. Issueswithin a quality high yield mutual fund are exempt from this provision. Withregards to maturity, the market value weighted average maturity of the bondportfolio should not exceed 15 years, and no holding may have an absolutematurity of more than 30 years at the time of purchase. This provision, however,does not apply to preferred stock issues. The Plan's money manager may elect toexceed these limits. Generally, fixed income investments includes debt securitiesguarantee by the U.S. government, corporate bonds, high quality and high yieldmutual funds, international bond mutual funds, indexed notes, Yankee bonds, andpreferred stock issues.

Cash equivalents - Cash equivalents shall consist of fixed income securities suchas certificates of deposit, commercial paper, U.S. treasury bills, and other similarinstruments with less than one year to maturity and/or money market funds.

The pension plan asset allocations, along with respective dollar values and fairvalue measurements, at June 30, 2011, by asset category are as follows:

Percentage of Dollar Fair ValueAsset Category Plan Assets Amount MeasurementEquity securities 65% $ 15,352,104 Level 1Fixed income security 22% 5,196,097 Level 2Other 13% 3,070,421 Level 2

100% $ 23,618,622

Following is a description of the valuation methodologies used for assets at fairvalue.

Corporate bonds: Certain corporate bonds are valued at the closing price reportedin the active market in which the bond is traded. Other corporate bonds are valuedbased on yields currently available on comparable securities of issuers with similarcredit ratings. When quoted prices are not available for identical or similar bonds,the bond is valued under a discounted cash flows approach that maximizesobservable inputs, such as CUlTent yields of similar instruments, but includesadjustments for certain risks that may not be observable, such as credit andliquidity risks.

Equities: Valued at the closing price reported on the major stock exchanges.

Money funds: Prices are received from various pricing services. Instances werepricing sources are not readily available estimated prices may be generated by amatrix system or market driven pricing model

Governmental securities: Valued at the closing price reported in active market in

29



which the individual security is traded.

Mutual funds: Prices are received from various pricing services. For instanceswhere pricing sources are not readily available, estimated prices may be generatedby a matrix system or market driven pricing model.

Certificate of deposit: The market value of certificate of deposits is estimated usinga matrix based on interest rate.

Municipal bonds: Valued at the closing price repOlied in active market in which theindividual security is traded.

The preceding methods described may produce a fair value calculation that may notbe indicative of net realizable value or reflective of future fair values. Furthermore,although the Plan believes its valuation methods are appropriate and consistentwith other market participants, the use of different methodologies or assumptionsto determine the fair value of certain financial instruments could result in differentfair value measurement at the reporting date.

FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurementsand Disclosures, provides the framework for measuring fair value. That frameworkprovides a fair value hierarchy that prioritizes the inputs to valuation techniquesused to measure fair value. The hierarchy gives the highest priority to unadjustedquoted prices in active markets for identical assets or liabilities (level Imeasurement) and the lowest priority to unobservable inputs (level 3measurements). The three levels of the fair value hierarchy under FASB ASC 820are described as follows:Level I - Inputs to the valuation methodology are unadjusted quoted prices foridentical assets or liabilities in active markets that the plan has the ability to access.

Level 2 - Inputs to the valuation methodology include:

• quoted prices for similar assets of liabilities in active markets;

• quoted prices for identical or similar assets of liabilities 111 inactivemarkets;

• inputs other than quoted prices that are observable for the asset or liability;

• inputs that are derived principally from or corroborate by observablemarket data by con"elation or other means.

If the asset or liability has a specified (contractual) tenTI, the level 2 input must beobservable for substantially the full tenTI of the asset or liability.

Level 3 - Inputs to the valuation methodology are unobservable and significant to

30



the fair value measurement.

The asset's or liability's fair value measurement level within the fair value hierarchyis based on the lowest level of any input that is significant to the fair valuemeasurement. Valuation techniques used need to maximize the use of observableinputs and minimize the use of unobservable inputs.

Expected Future BenefitsThe following benefit payments, which reflect expected future service, asappropriate, are expected to be paid:

Fiscal Year Ending June 30,201220132014201520162017-2021

$

$

PensionBenefits

625,020738,198876,845973,351

1,112,2587,406,676

11,732,348

18. POSTRETIREMENTHEALTH CAREBENEFIT PLAN:

The Agency sponsors a defined benefit postretirement health care benefit plan.

Plan Provisions

Retired Prior to January 1, 2000

For certain long-service employees, the plan will pay the monthly premium for theparticipant (and eligible spouse) to continue coverage under the pre-2000postretirement plan.

Retired January 1, 2001 and Later

For employees who retire on or after age 65 with at least 20 years of service, theAgency will enroll the retiree and eligible spouse in an AARP MedicareSupplement plan and contribute the following towards such coverage (for eachretiree and eligible spouse):

-- 20 years of service-- 25 years of service-- 30 years of service

PlanEPlan GPlan I

--$130.25 per month--$152.25 per month--$259.00 per month

For employees who retire between ages 62 and 65, with the requisite years ofservice, the Agency will contribute, as per the above schedule, towards coverageunder the current active employee's plan, until Medicare eligibility. At that time,

31



the retiree will be treated in the same fashion as a post-65 retiree.

If an eligible spouse is not Medicare eligible, the Agency will contribute towardscoverage under the current active employees' plan in an amount based on theretiree's service as described above.

Determination of the Net Periodic Benefit Cost for the Fiscal Year

July 1, 2010 through June 30,2011:

(1) Service cost $(2) Interest cost(3) Amortization:

(a) Transition obligation(b) Prior service cost(c) (Gain)/loss(d) Total amortization

(4) Net periodic benefit cost - July 1,2010 - June 30, 2011 $

228,423238,420

63,914

63,914530,757

Reconciliation of Funded Status for the Fiscal Year Ended June 30, 2011:

(1) Accumulated postretirement benefit obligationat June 30, 2011

(2) Net liability recognized at June 30, 2011

Net Amount Recognized in Statement of Financial Position

(1) Beginning ofyear(2) Service cost(3) Interest cost(4) Expected return on plan assets(5) Employer contributions(6) Net gain/Closs)(7) Prior service credit/(cost)(8) End of year

Assumptions:

$ (4,423,192)$ (4,423,192)

$ (4,098,016)(228,423)(238,420)

38,653103,014

N/A$ (4,423,192)

Discount rates:ExpenseDisclosure

Mortality:

6.00%6.00%RP 2000 SeparateAnnuitants and NonAnnuitants Mortality

32



Claim cost:Trend:

Funding Method:

Table projected to 2011for males and femalesMonthly premium4.40%-7.80% - based onthe year of retirementProjected Unit CreditActuarial Cost Method

a. The discount rate was changed from 5.85% to 6.00% which decreasedthe accumulated postretirement benefit obligation by $115,000.

b. Based upon the plan provisions, the Affordable Care Act will have animmaterial effect on the accumulated postretirement benefit obligationand the net periodic benefit cost of the Lifespire postretirement healthcare benefit plan.

Postretirement BenefitsAccumulated

At trendAt trend + 1%

Dollar ImpactPercentage Impact

At trend - 1%Dollar ImpactPercentage Impact

$

postretirementBenefit Obligation

4,423,192 $4,469,637

46,4451.05%

4,383,419(39,773)-(0.90%)

Service Cost plusInterest Cost

446,843469,555

2,7120.58o/c

464,723(2,120;

-(0.45%;

Expected Future Benefit Payments:The following benefit payments, which reflect expected future servIce, asappropriate are expected to be paid:

Fiscal Year Ending June 30,201120122013201420152016 - 2020

PostretirementBenefits

$ 49,71369,06889,053

108,389130,784

1,039,164$ 1,486,171

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19. TEMPORARILYRESTRICTED NETASSETS:



The changes in contributions, which comprise the Agency's temporarily restrictednet assets for the year ended June 30, 2011, which are available for use in futureyears, were as follows:

Program $

Balance at6/30/1°

44,930 $Additions

31,269 $Expenditures

(18,876) $

Balance at6/30/11

57,323

20. COMMITMENTS ANDCONTINGENCIES:

The funds released from restrictions were used towards operating expenses for oneof the Agency's Intermediate Care Facility properties.

GeneralPursuant to the Agency's contractual relationships with certain funding sources,outside agencies have the right to examine the Agency's books and records whichpertain to transactions relating to these contracts. The accompanying consolidatedfinancial statements do not include a provision for possible disallowances andreimbursements. Management believes that any actual disallowances, if any, wouldbe immaterial. In addition, certain agreements provide that certain property, plantand equipment owned by or on loan to the Agency (see Note 7) be utilized by theAgency for its continued ownership, since the costs of such property andequipment were funded under these agreements.

There are certain amounts of real and personal property used by the Agency in itsprogram operations which is owned by New York State and/or other governmentalsources. The Agency uses some of these real and personal properties at no cost.The value of the benefit received for use of these real and personal properties is notreadily measurable and is not recorded in the accompanying consolidated financialstatements.

The Agency has a number of pending lawsuits against them for a variety ofreasons. The alleged claims are being handled by legal counsel and/or by itsinsurance providers. In the opinion of the Agency's legal counsel, and in theopinion of management, there is no basis to establish a liability for any losscontingency due to lack of merit or insurance coverage exceeding expectedsettlement amounts. Regardless of the circumstance, the Agency has meritoriousdefenses and has been directed to defend this matter vigorously.

During the year ended June 30, 2010, the Agency entered into a collectivebargaining agreement with the Civil Service Employees Association, Inc.("CSEA"). This agreement will be effective until June 30, 2012. Additionalinformation regarding the agreement can be obtained by contacting Lifespire, Inc.at 350 Fifth Avenue, Suite 301, New York, NY 10118.

Operating LeasesThe Agency is obligated, pursuant to real property lease agreements, for minimummonthly rentals for its administrative and program operations as follows:

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21. 403(b) TAXSHELTEREDANNUITY PLAN:

22. CONCENTRATION OFCREDIT RISK:

23. RISKS ANDUNCERTAINTIES:



June 30,2012 $ 6,110,5312013 4,730,6132014 3,376,2682015 2,259,8492016 1,808,203

Thereafter 13,459,033$ 31,744,497

For the year ended June 30, 2011, rent expense was $6,525,904, which was fullyreimbursable to the Agency by the funding sources. The amounts are recoveredthrough fees for service.

A renewal option allows the Agency, at its sole option, the right to extend some ofthe leases for an additional five-year period with a predetermined rent base amountwith annual rent percentage increases. Various leases have rent escalations inwhich various predetermined annual percentage increases exist throughout thelease periods. A clause exists whereby, in the event that real estate taxes increaseduring the term of some of the leases, the Agency shall pay any increases in realestate taxes over the base year.

The Agency offers a 403(b) tax-sheltered annuity plan for all employees who areeligible and elect to participate. The plan is governed by IRS regulations setting thelimits on the amount that employees may contribute and the conditions to withdrawmonies from it. The employees each own their individual annuity plan and areresponsible for deciding the amount of contributions they wish to make each year(up to the maximum stipulated by the IRS) and how the funds may be invested.There are no employer contributions.

The Agency has maintained bank balances that often exceed the limit of theFederal Depository Insurance Corporation ("FDIC") insurance coverage. TheAgency verifies, on a quarterly basis, the equity strength and profitability of thebanks it uses in order to minimize the risk.

The Agency earns its revenue and records related receivables primarily fromservice fees provided to individuals with developmental disabilities within the NewYork City area. Approximately 76% of the Agency's revenue is received fromMedicaid and approximately 87% of the Medicaid receivable remains outstandingas of June 30,2011.

The Agency's pension plan invests in various investment securities. Investmentsecurities are exposed to various risks such as interest rate, market, and credit risks.Due to the level of risk associated with certain investment securities, it is at leastreasonably possible that changes in the value of investment securities will occur inthe near term and such changes could materially affect the amounts reported in the

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accompanying consolidated statement of financial position.

Plan contributions are made and the actuarial present value of accumulated planbenefits are repOlted based on celtain assumptions pertaining to interest rates,inflation rates and employee demographics, all of which are subject to change. Dueto unceliainties inherent in the estimations and assumptions process, it is at leastreasonably possible that changes in these estimates and assumptions in the nearterm would be material to the financial statements.

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