Presbyterian Villages of Michigan Obligated Groupfinancials.pvm.org/files/21895 Presbyterian Villages of... · 2014. 4. 30. · Proceeds from refundable advance fees 227,140 991,648

Presbyterian Villages of MichiganObligated Group

Combined Financial Report

December 31, 2013

Presbyterian Villages of Michigan Obligated Group

Contents

Report Letter 1-2

Combined Financial Statements

Balance Sheet 3

Statement of Operations 4

Statement of Changes in Net Assets 5

Statement of Cash Flows 6

Notes to Combined Financial Statements 7-34

Independent Auditor's Report

To the Board of Directors and TrusteesPresbyterian Villages of Michigan

Obligated Group

We have audited the accompanying special purpose combined balance sheet of PresbyterianVillages of Michigan Obligated Group (the "Organization") (as defined in the Master TrustIndenture between Presbyterian Villages of Michigan and the Bank of New York Mellon TrustCompany, National Association) as of December 31, 2013 and 2012 and the related specialpurpose combined statements of operations, changes in net assets, and cash flows for the yearsthen ended.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these combined financialstatements in accordance with accounting principles generally accepted in the United States ofAmerica; this includes the design, implementation, and maintenance of internal control relevantto the preparation and fair presentation of combined financial statements that are free frommaterial misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these combined financial statements based on ouraudits. We conducted our audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the combined financial statements are free frommaterial misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the combined financial statements. The procedures selected depend on theauditor’s judgment, including the assessment of the risks of material misstatement of thecombined financial statements, whether due to fraud or error. In making those risk assessments,the auditor considers internal control relevant to the entity’s preparation and fair presentation ofthe combined financial statements in order to design audit procedures that are appropriate inthe circumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity’s internal control. Accordingly, we express no such opinion. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness of significantaccounting estimates made by management, as well as evaluating the overall presentation of thecombined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinions.

1

kim.partloPraxity

kim.partloSouthfield

To the Board of Directors and TrusteesPresbyterian Villages of Michigan

Obligated Group

Opinion

In our opinion, the special purpose financial statements referred to above present fairly, in allmaterial respect, the assets and liabilities of Presbyterian Villages of Michigan Obligated Group asof December 31, 2013 and 2012 and the combined results of its operations, changes in netassets, and cash flows for the years then ended in accordance with the basis of accountingdescribed in Note 1.

Emphasis of Matter

As described in Note 1, these special purpose financial statements were prepared in accordancewith the accounting requirements set forth in the Master Trust Indenture and are not intendedto be a presentation in conformity with accounting principles generally accepted in the UnitedStates of America.

Restriction on Use

This report is intended solely for the information and the use of the board of directors, thetrustees, and management of Presbyterian Villages of Michigan Obligated Group, the Bank ofNew York Mellon Trust Company, National Association, and the Michigan State HospitalFinance Authority and is not intended to be and should not be used by anyone other than thesespecified parties.

April 7, 2014

2


Combined Balance Sheet

December 31,2013

December 31,2012

Assets

Current AssetsCash $ 2,163,517 $ 823,151Resident accounts receivable - Net (Note 2) 2,986,187 2,029,155Due from related organizations - Net (Note 10) 1,171,263 1,156,299Pledges receivable (Note 3) 1,224,749 800,664Other receivables 249,792 205,307Investments and assets limited as to use - Current portion (Note 5) 194,922 192,514Accrued interest receivable 81,758 52,438

Prepaid expenses and other current assets 684,430 717,513

Total current assets 8,756,618 5,977,041

Land, Buildings, and Equipment - Net (Note 4) 25,535,190 26,661,085

Investments and Assets Limited As to Use - Net of current portion (Note 5) 16,742,203 16,779,413

Other AssetsBeneficial interest in assets held by third parties (Note 6) 282,213 341,066Pledges receivable - Net of current portion (Note 3) 232,371 349,955Investment in and amounts due from related organizations - Net (Note 10) 9,836,468 7,686,835

Bond issue costs - Net 549,515 581,129

Total assets $ 61,934,578 $ 58,376,524

Liabilities and Net Assets

Current LiabilitiesAccounts payable $ 1,671,185 $ 1,921,549Current portion of note payable and line of credit (Note 7) 434,847 323,177Current portion of bonds payable (Note 8) 740,000 705,000Accrued payroll and related liabilities 1,143,360 1,050,777Liability under split-interest agreements (Note 9) 28,946 37,568

Other current liabilities 390,152 379,397

Total current liabilities 4,408,490 4,417,468

Long-term LiabilitiesNote payable and line of credit - Net of current portion (Note 7) 2,924,930 3,044,304Bonds payable - Net of current portion (Note 8) 28,087,170 28,785,101Deferred revenue from advance fees 163,447 166,845Refundable advance fees 1,863,000 1,661,260

Liability under split-interest agreements - Net of current portion (Note 9) 17,224 57,205

Total liabilities 37,464,261 38,132,183

Net AssetsUnrestricted (Note 14) 14,720,713 12,818,875Temporarily restricted (Note 15) 5,642,263 3,331,462

Permanently restricted (Note 16) 4,107,341 4,094,004

Total net assets 24,470,317 20,244,341

Total liabilities and net assets $ 61,934,578 $ 58,376,524

See Notes to Financial Statements. 3


Combined Statement of Operations

Year Ended

December 31,

2013

December 31,

2012

Operating RevenueNet resident service revenue $ 32,573,160 $ 32,352,758Management fees (Note 10) 869,773 825,462Development fees (Note 10) 174,273 291,851Interest and dividends 239,595 343,190Contributions, gifts, and donations 496,127 790,361Other 1,296,749 1,178,948

Net assets released from restrictions (Note 15) 784,544 1,076,180

Total operating revenue 36,434,221 36,858,750

Operating ExpensesEmployee compensation 19,417,905 19,234,232Depreciation and amortization 2,704,323 2,649,771Interest 1,721,697 1,743,631Insurance 538,643 526,875Other operating expenses 13,958,755 14,362,302

Total operating expenses 38,341,323 38,516,811

Loss from Operations (1,907,102) (1,658,061)

Investment and Other (Loss) IncomeOther expense (4,198) (7,966)Other income 2,269,366 -Net realized gain on investments 598,645 405,261Net unrealized gain on investments 1,137,544 721,628Change in value of split-interest agreements 161,136 81,422Change in value of equity method investment in related

organizations (37,483) 264,617

Total investment and other income 4,125,010 1,464,962

Increase (Decrease) in Unrestricted Net Assets - Before netunrealized loss on split-interest agreements, net assetsreleased from restriction for capital purposes, and equitytransfer to affiliates 2,217,908 (193,099)

Net Unrealized Loss on Split-interest Agreements (5,361) (1,217)

Net Assets Released from Restriction (Note 15) 186,298 737,701

Increase in Unrestricted Net Assets Before Equity Transfer 2,398,845 543,385

Equity Transfer to Affiliate (Note 10) (497,007) (935,447)

Increase (Decrease) in Unrestricted Net Assets $ 1,901,838 $ (392,062)



Combined Statement of Changes in Net Assets

Year Ended

December 31,

2013

December 31,

2012

Unrestricted Net AssetsIncrease (decrease) in unrestricted net assets - Before net

unrealized loss on split-interest agreements, net assetsreleased from restriction for capital purposes, and equitytransfer to affiliates $ 2,217,908 $ (193,099)

Net unrealized loss on split-interest agreements (5,361) (1,217)

Net assets released from restriction - Unrestricted 186,298 737,701

Increase in unrestricted net assets - Before equitytransfer to affiliate 2,398,845 543,385

Equity transfer to affiliate (497,007) (935,447)

Increase (Decrease) in Unrestricted Net Assets 1,901,838 (392,062)

Temporarily Restricted Net AssetsContributions 3,138,314 1,379,233Unappropriated earnings - Endowments 143,329 56,466Net assets released from restriction (970,842) (1,813,881)

Increase (Decrease) in Temporarily Restricted Net Assets 2,310,801 (378,182)

Permanently Restricted Net AssetsContributions 9,860 33,677Change in value of outside trust 3,477 2,056

Increase in Permanently Restricted Net Assets 13,337 35,733

Increase (Decrease) in Net Assets 4,225,976 (734,511)

Net Assets - Beginning of year 20,244,341 20,978,852

Net Assets - End of year $ 24,470,317 $ 20,244,341



Combined Statement of Cash Flows

Year Ended

December 31,2013

December 31,2012

Cash Flows from Operating ActivitiesIncrease (decrease) in net assets $ 4,225,976 $ (734,511)Adjustments to reconcile increase (decrease) in net assets to net

cash from operating activities:Equity transfers 497,007 935,447Depreciation and amortization 2,704,323 2,649,771Net realized and unrealized gain on investments (1,736,189) (976,551)Change in value of beneficial interest in assets held by

third parties 58,853 (277)Unrealized loss on split-interest agreements 5,361 1,217Contributions received for long-term purposes (186,298) (737,701)Resident bad debt expense - Write-offs 470,495 370,646Amortization of life leases (28,798) (13,537)Loss on sale of land, building, and equipment 4,198 7,966Changes in assets and liabilities which (used) provided cash:

Resident accounts receivable (1,427,527) (56,062)Other receivables (380,306) 1,051,553Prepaid expenses and other assets 1,043 (18,194)Liability under split-interest agreements (53,964) (12,161)Accounts payable (250,364) 177,884Other current liabilities 103,338 132,127

Net cash provided by operating activities 4,007,148 2,777,617

Cash Flows from Investing ActivitiesPurchase of investments and assets limited as to use (7,752,924) (9,078,675)Proceeds from sale and maturities of investments 9,534,043 9,015,660Cash paid for land, buildings, equipment, and construction activity (1,487,031) (2,219,078)Investment in and amounts due from related organizations (2,661,604) (3,409,256)

Net cash used in investing activities (2,367,516) (5,691,349)

Cash Flows from Financing ActivitiesNet repayments of line of credit (107,704) (227,766)Proceeds from debt 100,000 100,000Payment on long-term debt (705,000) (675,000)Proceeds from refundable advance fees 227,140 991,648

Contributions received for long-term purposes 186,298 737,701

Net cash (used in) provided by financingactivities (299,266) 926,583

Net Increase (Decrease) in Cash and Cash Equivalents 1,340,366 (1,987,149)

Cash and Cash Equivalents - Beginning of year 823,151 2,810,300

Cash and Cash Equivalents - End of year $ 2,163,517 $ 823,151

Supplemental Cash Flow Information - Cash paid for interest $ 1,691,098 $ 1,748,726



Notes to Combined Financial StatementsDecember 31, 2013 and 2012

Note 1 - Nature of Business and Significant Accounting Policies

Presbyterian Villages of Michigan Obligated Group (the "Organization") consists of thefollowing not-for-profit entities:

Presbyterian Villages of Michigan (PVM) Presbyterian Villages of Michigan Foundation (PVMF) Presbyterian Village Redford (PVR) Presbyterian Village East (PVE) Presbyterian Village Westland (PVW) Presbyterian Village North (PVN)

The Organization’s special purpose combined financial statements are prepared for thecombined entities for the purpose of complying with the requirements of Section 412(b)of the master trust indenture agreement between the Bank of New York Mellon TrustCompany, National Association, and the Organization as it relates to the Michigan StateHospital Finance Authority Revenue Bonds described in Note 8.

For financial statement purposes, the combined financial statements exclude 10 seniorhousing partnerships which are variable interest entities (VIEs) with which theOrganization is a primary beneficiary. The combined financial statements also excludePerry Farm Development Co., a not-for-profit entity for which the Organization hascontrol and economic interest. Investments in unconsolidated subsidiaries are recordedon the combined balance sheet as investments in and amounts due from relatedorganizations and accounted for under the equity method. The exclusion of theserelated entities is required to comply with the special purpose nature of these combinedfinancial statements. In order for these combined financial statements to have been incompliance with accounting principles generally accepted in the United States ofAmerica, the activity of these other entities would have to be included. As describedfurther in Note 10, the Organization has various transactions with these and otherrelated entities.

The Organization is a comprehensive, diverse, and faith-based organization servingseniors in multiple communities since 1945, with the following mission statement:

The mission of the Presbyterian Villages of Michigan organizations, guided by ourChristian heritage, is to serve seniors of all faiths and to create new possibilities forquality living.

Presbyterian Villages of Michigan Foundation provides philanthropic support to advanceand sustain the mission of Presbyterian Villages of Michigan. This includes the solicitationand stewardship of major and planned gifts, annual giving, lines of credit for recurringoperations and facilities advancement activities, loans for PVM investments in affiliatesand capital projects, pledges of assets to support PVM loans, grants supportingbenevolent care, wellness programs, innovative projects, and quality housing for seniorsof all faiths.

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Note 1 - Nature of Business and Significant Accounting Policies(Continued)

Presbyterian Villages of Michigan's traditions of benevolence and social accountability arefurther reflected in its statement of beliefs and values and its various operationalphilosophies and practices.

Presbyterian Villages of Michigan provides management and other services to theOrganization entities, other related entities described in Note 10, as well as certainunrelated organizations. Presbyterian Villages of Michigan Foundation engages infundraising activities and maintains a fiduciary role over certain unrestricted, temporarilyrestricted, and permanently restricted cash and investments for the support andbetterment of all the Presbyterian Villages of Michigan entities.

Presbyterian Village Redford and Presbyterian Village East provide housing withsupportive services, assisted living, health care, and other related services to residentsthrough the operation of a continuing care retirement community in Redford Township,Michigan and Chesterfield Township, Michigan, respectively. Presbyterian VillageWestland provides senior apartment housing with supportive services, assisted living,and related services in Westland, Michigan. The number of units of total capacity byvillage as of December 31, 2013 is as follows:

Apartments

Assisted-

living Units

Memory

Loss Units

Nursing

Units Total

Presbyterian Village Redford 63 40 16 88 207Presbyterian Village East 83 45 33 90 251Presbyterian Village

Westland 206 20 20 - 246

Total 352 105 69 178 704

During the course of 2013, PVR closed two wings of assisted living, reducing its capacityby 30 units. At December 31, 2012, there were 728 units of total capacity, including346 apartments, 135 assisted living units, 69 memory loss units, and 178 nursing units.

Presbyterian Village North (PVN) is a general partner in a PVM affiliate, Pontiac ILFLimited Dividend Housing Association Limited Partnership (Pontiac ILF), a 150-unitaffordable housing rental project for older adults. Pontiac ILF has a managementagreement with the Organization, and PVN staff carry out many of these managementfunctions. PVN continues to operate certain wellness programs for the benefit ofresidents of Pontiac ILF and Oakland Woods II and maintains the remaining undevelopedland on the campus.

8




Presbyterian Villages of Michigan is affiliated through covenant agreements with thePresbytery of Detroit, Lake Michigan Presbytery, the Presbytery of Lake Huron, and thePresbytery of Mackinac. Neither Presbyterian Villages of Michigan nor the fourPresbyteries accept any responsibility, either in whole or in part, for the financial orcontractual obligations of the other respective organizations.

The accompanying combined financial statements have been prepared on the accrualbasis of accounting. All material intercompany activity among the members of theOrganization has been eliminated in combination.

Significant accounting policies are as follows:

Cash and Cash Equivalents - The Organization considers all highly liquid investmentspurchased with a maturity of three months or less to be cash equivalents. Certain cashand cash equivalents held as designated funds are reported as long-term investments(see Note 5). The Organization maintains cash balances that at times may exceedFederal Deposit Insurance Corporation insurance coverage.

Resident Accounts Receivable - The Organization’s resident accounts receivable arestated at net invoice amounts. In addition, a portion of revenue is receivable undercontractual arrangements with the Medicare and Medicaid (State of Michigan) programs.An allowance for doubtful accounts is established based on historical loss experienceand adjusted for economic conditions and other trends affecting the Organization’sability to collect outstanding amounts. All amounts deemed to be uncollectible arecharged against the allowance for doubtful accounts in the period that determination ismade.

Pledges Receivable - The Organization receives pledges of financial support fromindividuals and corporations. Revenue is recognized when a pledge is made.Unconditional promises to give that are expected to be collected in future years arerecorded at the present value of their estimated cash flows. An allowance foruncollectible contributions is provided based on management's judgment of potentialdefaults. The determination includes such factors as prior collection history, type ofcontribution, current economic conditions, and nature of fundraising.

Investments - Investments in debt and equity securities are recorded at fair valuebased on quoted market prices. Realized and unrealized gains and losses are recordedin the combined statements of operations and changes in net assets. Investments inpooled insurance arrangements are recorded at cost and adjusted for any permanentimpairments.

9




Risks and Uncertainties - The Organization invests in various investment securities.Investment securities are exposed to various risks such as interest rate, market, andcredit risks. Due to the level of risk associated with certain investment securities, it is atleast reasonably possible that changes could materially affect the amounts reported inthe combined balance sheet.

Investments in and Amounts Due from Related Organizations - Investments inand amounts due from related organizations represent development and working capitaladvances, developer fees receivable, equity investments, and notes receivable which arerecorded at estimated net collectible value. Investments in related entities areaccounted for on the equity method. Amounts advanced to and equity received fromrelated organizations are accounted for as an equity transfer to or from affiliate in theyear it is made. Project development costs incurred toward new projects are recordedas project development costs until a related entity is formed. Upon establishment of thenew entity, amounts are classified as due from related organizations. Projectdevelopment costs recorded at transactional value include pre-development advancesfor land, infrastructure, and due diligence on projects in anticipation of a related entitybeing formed. The Organization expects to recover these costs after the related partyentity has been formed.

Land, Buildings, and Equipment - Land, buildings, and equipment are recorded atcost when purchased and at estimated fair market value when donated. Depreciation iscomputed principally on a straight-line basis over the estimated useful lives of the assets,which range from 5 years to 40 years. Costs of maintenance and repairs are charged toexpense when incurred.

Bond Issue Costs - Bond issue costs include financing costs related to the issuance ofMichigan State Hospital Finance Authority Revenue and Refunding Bonds, Series 2005.The revenue bonds are being amortized over the term of each bond issue.Amortization expense on the new bonds was $21,486 and $21,485 for the years endedDecember 31, 2013 and 2012, respectively. Accumulated amortization was $183,710and $162,224 at December 31, 2013 and 2012, respectively.

Original Issue Discount - Discounts related to the issuance of Michigan State HospitalFinance Authority Series 2005 Revenue Bonds are reported as a reduction of the bondprincipal amount outstanding and are amortized using the interest method over the lifeof the bonds.

10




Advance Fees - Presbyterian Villages East entered into advance fee contracts withcertain residents. Under the terms of the advance fee contracts, 90 percent of thecontract amount is refundable to the resident at the termination of the contract and isrecorded as a refundable entrance fee recorded in long-term liabilities in the combinedbalance sheet. The remaining 10 percent that is not refundable is recorded as deferredrevenue and amortized over the life expectancy of the resident on a straight-line basis.At December 31, 2013 and 2012, the Organization had refundable advance fees totaling$1,863,000 and $1,661,260, respectively.

Classification of Net Assets - Net assets of the Organization are classified aspermanently restricted, temporarily restricted, or unrestricted depending on thepresence and characteristics of donor-imposed restrictions limiting the Organization’sability to use or dispose of contributed assets or the economic benefits embodied inthose assets. Donor-imposed restrictions that expire with the passage of time or thatcan be removed by meeting certain requirements are recorded as temporarilyrestricted net assets. Earnings, gains, and losses on temporarily restricted net assets areclassified as unrestricted unless specifically restricted by the donor or by applicable statelaw. The Organization reports investment income and gains on permanently restricteddonations as unrestricted or temporarily restricted activity as applicable by state law.

Unrestricted Net Assets - Unrestricted net assets are comprised of undesignated andboard-designated net assets. Board-designated net assets are intended to be used forresident needs, benevolence, leadership development, and various capital items andprogram initiatives in the Organization and related organizations. In addition, theOrganization has a board-designated endowment fund. Assets invested by theOrganization for the purpose of these designations are included in long-terminvestments.

Net Resident Service Revenue - Net resident service revenue is recorded atestablished rates. Allowances are provided to adjust revenue to the reimbursableamounts expected to be received, including amounts receivable under contractualarrangements with Medicare and Medicaid.

Private-pay revenue includes adjustments for benevolent care for residents that qualifyunder the Organization’s established policies. The Organization makes every effort toassist residents when their assets have been depleted and services may include financialassistance to maintain a resident in their current Presbyterian Village home or assistancein finding resources in their community.

The Medicare payment methodology is based on clinical assessments that are subject toreview and final approval. Any adjustment resulting from this final review and approvalwill be recorded in the period in which the adjustment is made.

11




The Medicaid payment system is a cost-based reimbursement system that also includesa quality assurance supplement (QAS). The QAS is a reimbursement based on Medicaidoccupancy and is related to the provider bed tax assessed to nursing homes.

Laws and regulations governing the Medicare and Medicaid programs are complex andchange subject to interpretation. Management believes it is in compliance with allapplicable laws and regulations and is not aware of any pending or threatenedinvestigations involving allegations of potential wrongdoings. While no such regulatoryinquiries have been made, compliance with such laws and regulations can be subject tofuture government review and interpretation, as well as significant regulatory actionincluding fines, penalties, and exclusion from the Medicare and Medicaid programs.

Significant sources of net resident service revenue as a percentage are summarized asfollows:

Percent

2013 2012

Medicaid %21 %21Medicare 19 20Private and other 60 59

Total %100 %100

Contributions, Gifts, and Donations - Contributions, gifts, and donations of cash andother assets, including unconditional promises to give in the future, are reported asrevenue when received, measured at fair value. Donor promises to give in the futureare recorded at the present value of estimated future cash flows.

Contributions, gifts, and donations without donor-imposed restrictions andcontributions with donor-imposed time or purpose restrictions that are met in the sameperiod as the gift are both reported as unrestricted support. Other restricted gifts arereported as restricted support and temporarily or permanently restricted net assets.

12




Performance Indicator Defined - The combined statement of operations includesincrease (decrease) in unrestricted net assets - before net unrealized loss on split-interest agreement, net assets released from restriction for capital purposes, and equitytransfers to affiliates. Changes in unrestricted net assets which are excluded fromincrease (decrease) in unrestricted net assets - before net unrealized loss on split-interest agreement, net assets released from restriction for capital purposes, and equitytransfers to affiliates, consistent with industry practice, include unrealized gains andlosses on investments other than trading securities, permanent transfers of assets to andfrom affiliates for other than goods and services, and contributions of long-lived assets(including assets acquired using contributions which by donor restriction were to beused for the purposes of acquiring such assets).

Collective Bargaining Agreement - Certain employees of Presbyterian VillageRedford are subject to a collective bargaining agreement that expires on December 31,2017. These employees comprise approximately 20 percent and 17 percent of theemployees of the Organization for 2013 and 2012, respectively.

Federal Income Taxes - The entities that comprise the Organization are exempt fromfederal income tax under Internal Revenue Code Section 501(c)(3). Accordingly, no taxprovision is recorded in the combined financial statements.

Accounting principles generally accepted in the United States of America requiremanagement to evaluate tax positions taken by the Organization and recognize a taxliability if the Organization has taken an uncertain position that more likely than notwould not be sustained upon examination by the Internal Revenue Service or otherapplicable taxing authorities. Management has analyzed the tax positions taken by theOrganization and has concluded that as of December 31, 2013 and 2012, there are nouncertain positions taken or expected to be taken that would require recognition of aliability or disclosure in the financial statements. The Organization is subject to routineaudits by taxing jurisdictions; however, there are currently no audits for any tax periodsin progress. Management believes it is no longer subject to income tax examinations foryears prior to 2010.

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

13




Resident Benevolence Program - The Organization provides care to residents whomeet certain criteria under its benevolence program without charge or at amounts lessthan established rates. Because the Organization does not pursue collection of amountsdetermined to qualify as benevolence, they are not reported as net resident servicerevenue. The amount reflects the cost of free or discounted assisted living and healthservices, net of contributions and other revenues received, as direct assistance for theprovision of benevolent care. The value of benevolence services provided was $652,938and $681,446 for the years ended December 31, 2013 and 2012, respectively, and isbased upon data derived from the Organization's cost accounting system.

Subsequent Events - The combined financial statements and related disclosuresinclude evaluation of events up through and including April 7, 2014, which is the date thecombined financial statements were issued.

Note 2 - Resident Accounts Receivable

The details of resident accounts receivable at December 31 are set forth below:

2013 2012

Resident accounts receivable $ 3,463,123 $ 2,347,593

Less allowance for uncollectible accounts (476,936) (318,438)

Net resident accounts receivable $ 2,986,187 $ 2,029,155

Bad debt expense was $470,495 and $370,646 for the years ended December 31, 2013and 2012, respectively. The allowance for doubtful accounts represents 14 percent ofgross resident accounts receivable at December 31, 2013 and 2012.

Accounts receivable in percentage at December 31 of each year were due from thefollowing:

Percent

2013 2012

Medicaid %34 %29Medicare 24 32Private 30 27Other 12 12

Total %100 %100

14



Note 3 - Pledges Receivable

Pledges receivable consist of the following unconditional promises to give as ofDecember 31:

2013 2012

Pledges receivable:Due within one year $ 1,328,320 $ 873,019Due in one to five years 217,121 349,955

Due after five years 15,251 -

Total pledges receivable 1,560,692 1,222,974

Less discount (25,537) (32,436)

Allowance for estimated uncollectible amounts (78,035) (39,919)

Total 1,457,120 1,150,619

Less current portion (1,224,749) (800,664)

Long-term portion $ 232,371 $ 349,955

Note 4 - Land, Buildings, and Equipment

The cost of land, buildings, and equipment is summarized as follows at December 31:

2013 2012

Land $ 2,266,089 $ 2,266,089Land improvements 6,150,034 6,123,609Buildings and additions 38,517,391 38,542,348Building improvements 9,633,787 9,185,577Departmental equipment 11,425,091 10,884,793Transportation equipment 444,989 444,989Furniture and fixtures 65,182 61,212Computer software and equipment 1,537,230 1,355,685

Construction in progress 86,801 18,774

Total cost 70,126,594 68,883,076

Less accumulated depreciation 44,591,404 42,221,991

Net carrying amount $ 25,535,190 $ 26,661,085

For the years ended December 31, 2013 and 2012, depreciation expense was$2,608,728 and $2,549,711, respectively.

15



Note 5 - Investments and Assets Limited As to Use

Pooled insurance arrangement is recorded at cost. Remaining investments are recordedat fair value. Investments consist of the following at December 31:

2013 2012

Cash and cash equivalents $ 1,863,772 $ 2,456,513Corporate bonds 3,566,122 3,773,546U.S. government and agency issues 3,615,615 3,169,169Fixed-income mutual funds 144,170 140,915Common stocks 7,211,898 6,896,236

Pooled insurance arrangement 535,548 535,548

Total investments $ 16,937,125 $ 16,971,927

At December 31, 2013 and 2012, Presbyterian Village North did not have anyinvestments.

2013

Presbyterian

Villages of

Michigan

Presbyterian

Villages of

Michigan

Foundation

Presbyterian

Village

Redford

Presbyterian

Village East

Presbyterian

Village

Westland Total

Investments:Assets limited as to use:

Debt service reserve $ 47,056 $ - $ 829,369 $ 788,187 $ 858,985 $ 2,523,597Endowment assets - 4,107,341 - - - 4,107,341Pooled income assets - 155,198 - - - 155,198Advance fee reserve - - - 500,250 - 500,250

Board-designated assets 122,683 8,992,508 - - - 9,115,191Pooled insurance

arrangement 535,548 - - - - 535,548

Total investments 705,287 13,255,047 829,369 1,288,437 858,985 16,937,125

Current portion 2,929 - 64,766 60,879 66,348 194,922

Long-term portion $ 702,358 $ 13,255,047 $ 764,603 $ 1,227,558 $ 792,637 $ 16,742,203

16



Note 5 - Investments and Assets Limited As to Use (Continued)

2012

Presbyterian

Villages of

Michigan

Presbyterian

Villages of

Michigan

Foundation

Presbyterian

Village

Redford

Presbyterian

Village East

Presbyterian

Village

Westland Total

Investments:Assets limited as to use:

Debt service reserve $ 46,995 $ - $ 828,004 $ 786,903 $ 857,585 $ 2,519,487Endowment assets - 4,046,690 - - - 4,046,690Pooled income assets - 160,559 - - - 160,559Advance fee reserve - - - 536,933 - 536,933

Board-designated assets 52,699 9,120,011 - - - 9,172,710Pooled insurance

arrangement 535,548 - - - - 535,548

Total investments 635,242 13,327,260 828,004 1,323,836 857,585 16,971,927

Current portion 2,893 - 63,966 60,127 65,528 192,514

Long-term portion $ 632,349 $ 13,327,260 $ 764,038 $ 1,263,709 $ 792,057 $ 16,779,413

Assets limited as to use, required by a third party, include funds held by the bondtrustee to fund a required debt reserve account, the balance of the fixed-incomeportfolio (as disclosed in Note 8), endowment assets related to the permanentlyrestricted net assets (as disclosed in Note 16), pooled income assets held byPresbyterian Villages of Michigan Foundation related to the split-interest agreements (asdisclosed in Note 9), and an advance fee reserve held for refundable entrance feecontracts.

Effective November 6, 2002, the Organization converted from traditional insurancecoverage for general and professional liability to participation in a pooled insurancearrangement. Participation in the pooled insurance arrangement required contributionstotaling $535,548 between 2002 and 2005. Effective November 6, 2007, the pooledinsurance arrangement converted to a stockholder-owned risk retention group. TheOrganization accounts for its investment in the pooled insurance arrangement under thecost method, which is included in investments and assets limited as to use. Premiumsand expenses related to actual liability claims made to the fund related to theOrganization will be recorded as insurance expense. At December 31, 2013 and 2012,the Organization's subscriber account savings balance was $607,916 and $472,209,respectively. The subscriber account is an asset of the pooled-insurance plan; thereforebalances are not reflected in the Organization's investments and assets limited as to useon the combined balance sheet. The Organization's premium expense was $320,592and $313,652 during 2013 and 2012, respectively.

17



Note 6 - Beneficial Interest in Assets Held by Third Parties

Beneficial interest in assets held by third parties consists of the following:

2013 2012

Contributions receivable from remainder trust $ 2,898 $ 1,060Beneficial interest in perpetual trust 52,443 51,053Beneficial interest in charitable gift annuities 14,872 76,953Beneficial interest in trust 212,000 212,000

Total $ 282,213 $ 341,066

Contributions receivable from remainder trust consist of donations made to thePresbyterian Foundation, a nonaffiliated organization, the principal of which will be givento the Organization upon the donor's death.

The Organization has a beneficial interest in a perpetual trust sponsored by theCommunity Foundation of Southeastern Michigan (CFSEM), a nonaffiliated organization.The purpose of the trust is to provide unrestricted operating and Green House®support for the Organization from trust earnings.

In addition, certain funds donated by outside donors for the benefit of the Organizationare held and managed by CFSEM. Such contributions are subject to variance powermaintained by CFSEM. During 2013 and 2012, there were contributions by outsidedonors. The fair values of these funds were $1,753,052 and $1,745,574 at December31, 2013 and 2012, respectively. Earnings are available for distribution to theOrganization for operations at the discretion of CFSEM; therefore, interest and principalbalances are not reflected in the combined financial statements.

Beneficial interest in charitable gift annuities consists of gift annuities that are held intrusts by a financial institution and will be given to the Organization upon the donor'sdeath.

Beneficial interest in trust consists of donated funds held by a third party until 2021,when the principal will be given to the Organization.

Note 7 - Note Payable and Line of Credit

The Organization has a financing agreement with Huntington National Bank. Under theterms of the agreement, the Organization originally had access to three credit facilities(collectively, the HNB credit facilities):

18



Note 7 - Note Payable and Line of Credit (Continued)

A revolving loan note was established to fund working capital expenses of theOrganization. The revolving loan note was amended in October 2011 to a $500,000 lineof credit. On January 31, 2014, the line of credit was amended to extend the due date toMay 5, 2014. Payments of interest are due monthly. The line of credit carried a balanceof $350,000 and $242,218 at December 31, 2013 and 2012, respectively.

A draw loan note was established to finance investments in proposed affiliateorganizations and capital expenditures in the Organization. The draw loan note wasamended in October 2011 to a $2,182,000 draw loan note. Interest on the unpaidbalance accrues monthly, with payments of $15,097 due monthly beginning November2012 through May 2015, when remaining unpaid principal and interest are due. Theoutstanding balance was $2,047,810 and $2,163,296 at December 31, 2013 and 2012,respectively.

A revolving construction loan note was established to finance construction of units ofthe planned expansion of Presbyterian Village East, with an available borrowing amountof $1,000,000 subject to appraised loan to value ratio of 80 percent, of which $961,967was outstanding at both December 31, 2013 and 2012. Payments of interest are duemonthly, with remaining unpaid principal and interest due in May 2015.

Interest on the HNB credit facilities accrues at a floating rate of interest based on LIBORplus an applicable margin based on the Organization's credit bond rating (3.50 percent atDecember 31, 2013). The HNB credit facilities are collateralized by a pledged fundincluded in investments limited as to use, and are subject to certain financial covenants.

For the line of credit, draw loan note, and revolving construction loan note, minimumrequired principal is due as follows:

2014 $ 434,847

2015 2,924,930

Total $ 3,359,777

Note 8 - Bonds Payable

During 2005, the Organization consummated financing arrangements through theMichigan State Hospital Finance Authority, providing for the issuance of $34,640,000 ofSeries 2005 30-year revenue and refunding bonds, which were issued at a discount. Thebonds are collateralized by identified real and personal property, contracts, and futurerevenue of each entity within the Organization. Interest payments are due biannually onMay 15 and November 15, with rates on the bonds ranging from 4.45 percent to5.50 percent. Remaining annual principal payments range from $740,000 to $2,180,000and are due each November 15 through 2035. The first call date for the bonds isNovember 15, 2014.

19



Note 8 - Bonds Payable (Continued)

The bonds require funding of a debt service reserve, which is included in investments asassets limited as to use (as disclosed in Note 5). The bonds are subject to certainrestrictive financial and other covenants.

Future minimum principal payments on bonds payable to maturity as of December 31,2013 are as follows:

2014 $ 740,0002015 775,0002016 810,0002017 850,0002018 895,000

Thereafter 25,055,000

Subtotal 29,125,000

Less original issue discount (297,830)

Total long-term debt 28,827,170

Less current portion (740,000)

Total long-term debt - Net of currentportion $ 28,087,170

Note 9 - Split-interest Agreements

The Organization is a beneficiary of various split-interest agreements held in a pooledincome trust. Assets contributed under these agreements are held at PresbyterianVillages of Michigan Foundation. Donors to this pooled income trust receive paymentsbased on interest earned on amounts donated during their lifetimes. The value of thesplit-interest agreements was $271,376 and $432,362 at December 31, 2013 and 2012,respectively. Of these amounts, Presbyterian Village East has borrowed funds totaling$116,178 and $271,803 from Presbyterian Villages of Michigan Foundation atDecember 31, 2013 and 2012, respectively, related to the pooled interest trust undermortgage loans at an interest rate of 8.75 percent. Principal amounts of the mortgagesare reduced with proceeds available upon a donor’s death. The mortgage loans arecollateralized by land and buildings with a net carrying amount of $700,427 at December31, 2013 and $854,282 at December 31, 2012. The remaining balance of $155,198 and$160,559 at December 31, 2013 and 2012, respectively, is recorded by the Organizationas pooled income assets (see Note 5). The present value of the estimated futurepayments to the donors, using 8.75 percent as of December 31, 2013 and 2012, hasbeen recorded as a liability of the Organization. As of December 31, 2013 and 2012,the total liability under these split-interest agreements was $46,170 and $94,773,respectively.

20



Note 10 - Related Party Transactions

The Organization has an interest in certain affiliate entities.

Certain directors and officers of the Organization are also trustees of the followingsponsorship interests:

Bethany Presbyterian Manor (Bethany) Brush Park Senior Housing Development Corp. (Brush Park) Harmony Village Senior Nonprofit Housing Corp. (Harmony) Our Saviour’s Manor Senior Nonprofit Housing Corp. (OSM) Peace Presbyterian Village Nonprofit Housing Corp. (Peace) Presbyterian Village Holly Nonprofit Housing Corp. (Holly 1) Presbyterian Village Holly Phase II Nonprofit Housing Corp. (Holly II) First Presbyterian Church Housing Corp. (Warren Glenn) Oakman Village Manor Senior Housing Development Corp. (Oakman) Hampton Farms Senior Housing Corp. (Hampton Meadows) Mill Creek Senior Housing Corp. (Mill Creek) St. Martha's Senior Housing Corp. (St. Martha's) Hillside Apartments Phase II (Hillside II) Perry Farm Development Co. (PFDC) Perry Farm Village Association (PFVA) Harbor Area Housing (Hillside I) Spring Meadows II Senior Nonprofit Housing Corp. (Spring Meadows II) PVM Kalamazoo Senior Nonprofit Housing Corp. (Sage Grove) Rivertown Senior NP Housing Corp., Inc. (Rivertown Senior Living)

In addition, the Organization has a direct ownership interest in the following entities,which are accounted for under the equity method:

Blackman LDHA LP (Spring Meadows) Alpena Pines, LDHA, LP (Pines) TESSS Hartford-PVM, LLC (Hartford PVM) St. Martha's Commons Project, LLC (St. Martha's Commons) Center for Senior Independence (CSI) East Jefferson Neighborhood Condominium Association (Rivertown Association) PVM EJNP Real Estate Company, LLC (Rivertown) Detroit Affordable Assisted Living, LDHA, LP (Rivertown Assisted Living) PVM East St. Clair, LLC (East Harbor St. Clair) Lake Huron Woods Associates LDHA, LP (Lake Huron Woods) Oakland Woods LDHA, LP (Oakland Woods II A) Pontiac ILF LDHA, LP (Oakland Woods) Gibraltar Manor LDHA, LP (Gibraltar)

21



Note 10 - Related Party Transactions (Continued)

Woodbridge ILF LDHA, LP (Woodbridge) Alpena Village, LLC (Alpena) Redford Manor LDHA, LP (Villa at Redford) Redford Cottages LDHA, LP (Cottages at Redford) Community Connections, Inc. (Community Connections) 5221 Lakeshore LLC (Lakeshore) Your Aging Well Advisors, LLC

PVM has an equity interest in general partner entities associated with various limiteddividend housing associations as follows: PV North, LLC; Redford Manor, LLC; PVMJefferies, LLC; PV North II, LLC; PV West, LLC; PVM Detroit AAL, Inc., and PVM EJNPAAL, LLC. PVM is also a 50 percent owner of Gibraltar Manor Development, Inc.

Investments in and Amounts Due from Related Organizations

Transactions with affiliated organizations are reflected in the accompanying combinedbalance sheet in the investment in and amounts due from related organizations, asfollows:

2013 2012

Noninterest-bearing development advances $ 492,074 $ 457,641Noninterest-bearing development fees 228,637 255,156Noninterest-bearing operating advances:

Due from 552,924 517,977 Less reserve (285,000) (230,000)Note receivable and accrued interest - PFDC (PVM) 4,050 18,692Note receivable and accrued interest - PFDC (PVMF) 95,000 342,000Less allowance on note receivable and accrued

interest - PFDC (PVMF) (95,000) (95,000)Note receivable and accrued interest - Other 812,620 789,760Less allowance (125,927) (95,464)Project development advances 832,964 810,744Equity investment in CSI 2,112,824 2,360,024Equity investment in Rivertown 3,167,275 1,234,992Equity investments in senior housing and service

organizations 3,270,612 2,591,935

Less allowance (55,322) (115,323)

Total 11,007,731 8,843,134

Less current portion (1,171,263) (1,156,299)

Total - Less current portion $ 9,836,468 $ 7,686,835

22




Advances to related party entities are uncollateralized and repayment is subject to theability of the related party entity to generate adequate cash flow to meet its existingobligations and repay the Organization.

Note receivable and accrued interest were established to fund capital improvementsand working capital needs. All notes are unsecured. A note of $155,000 carries aninterest rate of 3.50 percent. All notes are repayable from excess operating cash flows.No repayments were made in 2013 and 2012.

In 2007, Presbyterian Villages of Michigan Foundation made a loan to Perry Farm in theamount of $519,000, net of a discount of $106,000. The balance, net of discount andafter an equity transfer, was $95,000 and $342,000 as of December 31, 2013 and 2012,respectively, and is included in the due from related organizations receivable in the tableabove. Equity transfers to affiliate totaled $247,000 and $0 at December 31, 2013 and2012, respectively. Cumulative equity transfers totaled $247,000 at December 31, 2013.The note is noninterest-bearing. The balance of the loan is to be repaid with theproceeds from land sales (related to the initial cottage and apartment unit sales).

In 2007, Presbyterian Villages of Michigan established a note receivable from Perry Farmfor amounts that were previously recorded as noninterest-bearing advances. The noteis subordinated and unsecured, carries an interest rate of 4 percent, and is repayablefrom excess operating cash flows. No repayments were made in 2013 or 2012. Thenote calls for any additional working capital advanced to Perry Farm to be added to thenote balance in the subsequent year. At December 31, 2013, the outstanding notereceivable net of allowance was $4,050, after an equity transfer to affiliate. Equitytransfers to affiliate totaled $250,007 and $635,447 at December 31, 2013 and 2012,respectively. Cumulative equity transfers totaled $1,599,254 at December 31, 2013. AtDecember 31, 2012, the outstanding receivable was $18,692.

Revenue and Expenses

The Organization also received fees for management services and financial servicesprovided to certain of these related organizations totaling $859,477 and $815,166 forthe years ended December 31, 2013 and 2012, respectively, which are included inmanagement fees in the combined statement of operations. The Organizationrecognized developer fees totaling $174,273 and $291,851 for the years endedDecember 31, 2013 and 2012, respectively, in relation to complying with developmentcontracts for related entity projects. The Organization also provided technologyservices to related parties in the amount of $774,118 and $491,838 for the years endedDecember 31, 2013 and 2012, respectively, which is included in other operatingrevenue. The Organization made grant allocations to certain of these relatedorganizations totaling $160,930 and $213,329 for the years ended December 31, 2013and 2012, respectively.

23




Equity Transfers to and from Affiliates

For the years ended December 31, 2013 and 2012, the Organization conducted certaintransactions with related parties which were accounted for as equity transfers on thecombined statement of activities, as follows:

2013 2012

Transfer of operating development advances to PFDCoutside of the Organization $ (497,007) $ (635,447)

Transfer of operating development advances to Alpenaoutside of the Organization - (300,000)

Net equity transfers to related parties $ (497,007) $ (935,447)

Guarantees

The Organization has guaranteed debt for related organizations as follows:

In 2007, PFDC obtained tax-exempt bonds to finance its projects. The Organizationguaranteed 50 percent and 25 percent of the outstanding principal and interest amountof the bond at the time payment is demanded as of December 31, 2013 and 2012,respectively. At December 31, 2013, the outstanding principal balance of the bonds was$1,420,301. The amount of the guarantee was $355,075 and $500,000 at December 31,2013 and 2012, respectively. Full repayment of the bonds is due by PFDC on June 1,2014.

In 2008, Alpena obtained two construction loans to finance its projects in the amount of$1,500,000 and $775,000. The Organization is a co-borrower of the loans. AtDecember 31, 2013 and 2012, the outstanding loan balance of the two constructionloans was $922,024 and $1,129,857, respectively.

In 2011, the Organization agreed to fund the operating assurance escrow with letters ofcredit from Lake Huron Woods Associates LDHA, LP totaling $150,000. PresbyterianVillages of Michigan is the sole member of Lakewood, the general partner of LakeHuron Woods Associates LDHA, LP. Additionally, the Organization has pledged futurecontributions of $135,000 to operating assurance reserve if certain conditions are notmet. All conditions were met in 2013 and 2012.

In 2012, Rivertown obtained a $2,467,200 construction loan to finance the constructionof Condominium Unit 1. The Organization fully guaranteed the outstanding principaland interest amount of the loan at the time payment is demanded. At December 31,2013 and 2012, the outstanding principal balance of the construction loan was$1,342,153 and $1,522,983, respectively. The principal balance of the construction loanconverted to a permanent loan with a balance of $1,071,080 on January 31, 2014.

24



Note 11 - Retirement Plans

The Organization maintains a tax-sheltered retirement plan under Internal RevenueCode Section 403(b). Under this plan, the Organization contributes 6 percent of eachqualified union participant's compensation, provided the participant contributes at least6 percent of compensation. Additionally, the Organization contributes a discretionarymatch subject to board approval to qualified nonunion participants. The Organization’scontributions to the plans totaled $135,218 in 2013 and $157,351 in 2012.

Note 12 - Functional Expenses

The Organization consists of not-for-profit entities, including two continuing careretirement communities and a senior housing and assisted-living community providinghousing, health care, wellness, and other related services to residents. Expenses of theOrganization related to providing these services in 2013 and 2012 are as follows:

2013 2012

Program services $ 28,766,894 $ 28,709,492General and administrative 7,623,502 7,853,219Fundraising and public relations 1,950,927 1,954,100

Total $ 38,341,323 $ 38,516,811

Note 13 - Deferred Compensation

In 2008, the Organization entered into an IRS Section 457(f) nonqualified deferredcompensation agreement with an officer of the Organization. Other officers weresubsequently added to the plan. Failure of the officer to meet conditions of the planshall result in an immediate termination of any future payments. During the years endedDecember 31, 2013 and 2012, contributions to the nonqualified plan were $69,984 and$2,699, respectively. At December 31, 2013 and 2012, the aggregate contributions areinvested; the balances were $122,683, and $52,699, respectively.

Note 14 - Unrestricted Net Assets

Unrestricted net assets at December 31 are as follows:

2013 2012

Designated net assets $ 9,115,191 $ 9,172,710

Undesignated net assets 5,605,522 3,646,165

Total unrestricted net assets $ 14,720,713 $ 12,818,875

25



Note 15 - Temporarily Restricted Net Assets

Temporarily restricted net assets at December 31 are as follows:

2013 2012

Contributions receivable under charitable remaindertrust agreements (Note 6) $ 2,898 $ 1,060

Beneficial interest in trust (Note 6) 212,000 212,000Other purpose and time restriction 5,284,036 3,061,936

Unappropriated earnings - Endowment 143,329 56,466

Total $ 5,642,263 $ 3,331,462

During 2013 and 2012, $970,842 and $1,813,881, respectively, of temporarily restrictednet assets were released.

Note 16 - Permanently Restricted Net Assets

Permanently restricted net assets at December 31 are as follows:

2013 2012

Beneficial interest in perpetual trusts and charitable giftannuities $ 61,138 $ 57,661

Funds restricted in perpetuity to investments, theincome from which is expendable to support thecontinuing care of residents 4,046,203 4,036,343

Total $ 4,107,341 $ 4,094,004

Note 17 - Donor-restricted and Board-designated Endowments

Organization endowment includes both donor-restricted and board of directorsdesignated funds to function as endowments. Net assets associated with endowmentfunds, including funds designated by the board of directors to function as endowments,are classified and reported based on the existence or absence of donor-imposedrestrictions.

26



Note 17 - Donor-restricted and Board-designated Endowments(Continued)

Interpretation of Relevant Law

The Organization has interpreted the Uniform Prudent Management of InstitutionalFunds Act (UPMIFA) as requiring the preservation of the fair value of the original gift asof the gift date of the donor-restricted endowment funds absent explicit donorstipulations to the contrary. As a result of this interpretation, the Organization classifiesas permanently restricted net assets (a) the original value of gifts donated to thepermanent endowment, (b) the original value of subsequent gifts to the permanentendowment, and (c) accumulations to the permanent endowment made in accordancewith the direction of the applicable donor gift instrument at the time the accumulation isadded to the fund. The remaining portion of the donor-restricted endowment fund thatis not classified in permanently restricted net assets is classified as temporarily restrictednet assets until those amounts are appropriated for expenditure by the Organization in amanner consistent with the standard of prudence prescribed by UPMIFA. In accordancewith UPMIFA, the Organization considers the following factors in making adetermination to appropriate or accumulate donor-restricted endowment funds:

(1) The duration and preservation of the fund(2) The purposes of the Organization and the donor-restricted endowment fund(3) General economic conditions(4) The possible effect of inflation and deflation(5) The expected total return from income and the appreciation of investments(6) Other resources of the Organization(7) The investment policies of the Organization

Endowment Net Asset Composition by Type of Fund as of December 31, 2013

UnrestrictedTemporarilyRestricted

PermanentlyRestricted Total

Donor-restricted endowmentfunds $ - $ 698,644 $ 4,046,203 $ 4,744,847

Board-designated endowmentfunds 1,089,597 - - 1,089,597

Total funds $ 1,089,597 $ 698,644 $ 4,046,203 $ 5,834,444

27




Changes in Endowment Net Assets for the Fiscal Year Ended December 31, 2013



Endowment net assets -Beginning of year $ 586,533 $ 346,878 $ 4,036,343 $ 4,969,754

Investment return:Investment income 122,825 262,341 - 385,166Net appreciation

(realized and unrealized) - 283,907 - 283,907

Total investmentreturn 122,825 546,248 - 669,073

Contributions and change in value 380,239 - 9,860 390,099Appropriation of endowment

assets for expenditure - (194,482) - (194,482)

Endowment net assets -End of year $ 1,089,597 $ 698,644 $ 4,046,203 $ 5,834,444

Endowment Net Asset Composition by Type of Fund as of December 31, 2012



Donor-restricted endowmentfunds $ (62,183) $ 346,878 $ 4,036,343 $ 4,321,038

Board-designated endowmentfunds 648,716 - - 648,716

Total funds $ 586,533 $ 346,878 $ 4,036,343 $ 4,969,754

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Changes in Endowment Net Assets for the Fiscal Year Ended December 31, 2012



Endowment net assets -Beginning of year $ 374,613 $ 338,559 $ 4,002,666 $ 4,715,838

Investment return:Investment income 59,474 46,624 - 106,098Net appreciation

(realized and unrealized) 152,446 119,105 - 271,551

Total investmentreturn 211,920 165,729 - 377,649

Contributions - - 33,677 33,677Appropriation of endowment

assets for expenditure - (157,410) - (157,410)

Endowment net assets -End of year $ 586,533 $ 346,878 $ 4,036,343 $ 4,969,754

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restrictedendowment funds may fall below the level that the donor or UPMIFA requires theOrganization to retain as a fund of perpetual duration. In accordance with GAAP,deficiencies of this nature that are reported in unrestricted net assets were $0 and$62,183 at December 31, 2013 and 2012, respectively, which resulted from unfavorablemarket fluctuations relative to spending policy in these funds during the year.

Return Objectives and Risk Parameters

The Organization has adopted investment and spending policies for endowment assetsthat attempt to provide a predictable stream of funding to programs supported by itsendowment while seeking to maintain the purchasing power of the endowment assets.Endowment assets include those assets of donor-restricted funds that the Organizationmust hold in perpetuity or for a donor-specified period. Under this policy, as approvedby the board of directors and trustees, the endowment assets are invested in a mannerthat is intended to produce results that exceed the price and yield results of the S&P500, Merrill Lynch All Convertibles, EAFE, and Barclay Intermediate Government/CreditBond Index, while assuming a moderate level of investment risk. The Organizationexpects its endowment funds, over time, to provide a blended rate of return of thenamed indices annually. Actual returns in any given year may vary from this amount.

29




Strategies Employed for Achieving Objectives

To satisfy its long-term rate-of-return objectives, the Organization relies on a totalreturn strategy in which investment returns are achieved through both capitalappreciation (realized and unrealized) and current yield (interest and dividends). TheOrganization targets a diversified asset allocation that places a greater emphasis onequity-based investments to achieve its long-term return objectives within prudent riskconstraints.

Spending Policy and How the Investment Objectives Relate to Spending Policy

As a matter of general policy, the maximum annual cash payout from both donor-restricted and board-designated endowments shall not exceed 5 percent of the averageof the market value of invested assets, using a three-year rolling average as of June 30 ofeach of the three most recent years. The amount will be available for distribution eachyear for the purpose of the endowment. Annually, the Organization's board of directorswill approve as part of the annual budget an amount that will be appropriated forspending, absent any donor restrictions.

Note 18 - Operating Leases

The Organization entered into a 10-year building lease for office space through July 31,2016. During 2010, the Organization gave notice of termination of the lease effectiveOctober 1, 2010. During 2011, the Organization entered into an amendment of thebuilding lease. A lease termination fee of $253,867 was paid and is being amortized overthe remaining term of the new lease. The new lease expires April 30, 2022. Monthlylease payments range from $10,233 to $12,729, which are expensed on a straight-linebasis over the life of the lease.

Future minimum lease commitments as of December 31, 2013 are as follows:

2014 $ 118,0532015 119,5502016 123,5442017 125,0412018 129,035

Thereafter 451,995

Total $ 1,067,218

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Note 19 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in thefinancial statements and provide a framework for establishing that fair value. Theframework for determining fair value is based on a hierarchy that prioritizes the inputsand valuation techniques used to measure fair value.

The following tables present information about the Organization’s assets and liabilitiesmeasured at fair value on a recurring basis at December 31, 2013 and 2012 and thevaluation techniques used by the Organization to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active marketsfor identical assets or liabilities that the Organization has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, eitherdirectly or indirectly. These Level 2 inputs include quoted prices for similar assets andliabilities in active markets and other inputs such as interest rates and yield curves thatare observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situationswhere there is little, if any, market activity for the related asset. These Level 3 fair valuemeasurements are based primarily on management’s own estimates using pricingmodels, discounted cash flow methodologies, or similar techniques taking into accountthe characteristics of the asset or liability.

In instances whereby inputs used to measure fair value fall into different levels in theabove fair value hierarchy, fair value measurements in their entirety are categorizedbased on the lowest level input that is significant to the valuation. The Organization’sassessment of the significance of particular inputs to these fair value measurementsrequires judgment and considers factors specific to each asset or liability.

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Note 19 - Fair Value Measurements (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

SignificantOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs(Level 3)

Balance atDecember 31,

2013

AssetsInvestments in common stock:

Consumer discretionary $ 676,973 $ - $ - $ 676,973Consumer staples 1,047,096 - - 1,047,096Energy 671,150 - - 671,150Financial 1,059,480 - - 1,059,480Health care 608,282 - - 608,282Industrial 792,903 - - 792,903Information technology 1,575,847 - - 1,575,847Materials 728,952 - - 728,952Oil and gas 6,341 - - 6,341Telecommunication services 10,183 - - 10,183Utilities 34,691 - - 34,691

Corporate bonds - 3,566,122 - 3,566,122Investment in U.S. government

and agency issues:U.S. government - 2,698,748 - 2,698,748U.S. agency issues - 916,867 - 916,867

Fixed-income mutual funds 144,170 - - 144,170Beneficial interest in assets held

by third parties - - 282,213 282,213

Liabilities - Split-interestagreements - - (46,170) (46,170)

32




Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2012

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

SignificantOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs(Level 3)

Balance atDecember 31,

2012

AssetsInvestments in common stock:

Consumer discretionary $ 781,934 $ - $ - $ 781,934Consumer staples 867,452 - - 867,452Energy 736,695 - - 736,695Financial 930,808 - - 930,808Health care 576,544 - - 576,544Industrial 793,560 - - 793,560Information technology 1,406,771 - - 1,406,771Materials 757,557 - - 757,557Oil and gas 6,729 - - 6,729Utilities 38,186 - - 38,186Corporate bonds - 3,773,546 - 3,773,546

Investment in U.S. governmentand agency issues:

U.S. government - 2,844,695 - 2,844,695U.S. agencies - 324,474 - 324,474

Fixed-income mutual funds 140,915 - - 140,915Beneficial interest in assets held

by third parties - - 341,066 341,066

Liabilities - Split-interestagreements - - (94,773) (94,773)

The Organization's policy is to recognize transfers between levels of the fair valuehierarchy as of the actual date of the event of change in circumstances that caused thetransfer. There were no transfers between levels of the fair value hierarchy during 2013or 2012.

The fair value of corporate bonds, U.S. government, and agency issues at December 31,2013 was determined primarily based on Level 2 inputs. The Organization estimatesthe fair value of these investments based on the present value of future cash flows asestimated by the investment custodian at December 31, which takes into account therelative interest rates and maturity dates of these instruments, and applies anappropriate discount rate which is determined by reference to similar instrumentactivity.

33




Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for theYears Ended December 31, 2013 and 2012

Beneficial Interestin Assets Held by

Third Parties

Liability UnderSplit-interestAgreements Total

Balance at January 1, 2012 $ 340,789 $ (105,717) $ 235,072Net change in value 277 10,944 11,221

Ending balance at December 31, 2012 341,066 (94,773) 246,293

Net change in value (58,853) 48,603 (13,477)

Ending balance at December 31, 2013 $ 282,213 $ (46,170) $ 232,816

Beneficial interest in assets held by third parties categorized as Level 3 assets consistprimarily of beneficial interest in outside trusts. The Organization estimates the fair valueof these assets based upon the fair value of the assets in the trust unless the facts andcircumstances indicate that the fair value would be different from the present value ofestimated future distributions.

Of the Level 3 assets that were held as beneficial interest in assets held by third partiesby the Organization, the net change in value is recognized in the combined statement ofchanges in net assets.

Split-interest agreement liabilities characterized as Level 3 liabilities consist primarily ofcharitable gift annuity agreements. The Organization estimates the fair value of thesecontributions based upon the present value of the expected future cash flows usingmanagement’s best estimates of key assumptions, including life expectancies ofannuitants, payment periods, and a discount rate commensurate with the currentmarket and other risks involved.

Of the Level 3 liabilities that were held as split-interest agreement liabilities by theOrganization, the net change in the table included change in value of charitable giftannuities which is recognized in the combined statement of changes in net assets.

Both observable and unobservable inputs may be used to determine the fair value ofpositions classified as Level 3 assets and liabilities. As a result, the unrealized gains andlosses for these assets and liabilities presented in the tables above may include changesin fair value that were attributable to both observable and unobservable inputs.

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Documents

Presbyterian Villages of Michigan Obligated Groupfinancials.pvm.org/files/21895 Presbyterian Villages of... · 2014. 4. 30. · Proceeds from refundable advance fees 227,140 991,648