Pamela S. Kaufmann, Esq. Hanson Bridgett LLP (415) 995 5043 Direct (415) 995-3449 Fax

1. Detecting and Responding to Signs of Financial DistressAGING SERVICES OF CALIFORNIA ANNUAL MEETINGMay 5, 2010Long Beach, CA Pamela S. Kaufmann, Esq. Hanson Bridgett LLP (415) 995 5043 Direct (415) 995-3449 Fax pkaufmann@hansonbridgett.com

2. OVERVIEW • What is financial distress? • Duty to monitor finances • Strategies upon detection of distress • Continuing compliance • Q & A

3. WHAT IS FINANCIAL DISTRESS? • No single definition. Signs may include: • Decline in operating income • Reduction in asset value • Decline in occupancy • Frequent or serious regulatory citations • Slower payments to vendors • Inability to meet bond covenants (e.g., debt service coverage, occupancy, days’ cash on hand, financial reporting)

4. DUTY TO MONITOR FINANCES • Implicit in board’s fiduciary duties of care & loyalty • Buttressed by State audit committee requirements and best practices recommendations of finance committee, routine financial reporting • Requires recruitment of at least some board members with financial expertise • Requires all board members to ask tough questions

5. PRACTICES TO HELP ASSURE EARLY DETECTION • Active audit and finance committees (by whatever name) • At least some financially savvy board members • Attendance by appropriate employee (CFO/Controller) at board meetings • Financial reports at every board meeting • Active tracking of finances by appropriate board members and staff and regular meetings of “financial” committees

6. STRATEGIES UPON DETECTION OF DISTRESS - BIG PICTURE • Full disclosure to board • Honest assessment of problem • Timely communication to stakeholders • Prompt corrective action • Continuing compliance

7. FULL DISCLOSURE TO BOARD • Duty of key personnel and “financial” committees • Should be no surprise if board implements best practices • Need to support concerns and conclusions with data • Do not hesitate to report concerns; more options are available upon early detection and disclosure

8. TIMELY COMMUNICATION TO STAKEHOLDERS • Identify stakeholders • Residents and families • Regulatory agencies • Bondholders • Donors • Staff

9. RIGHTS AND EXPECTATIONS OF STAKEHOLDERS • Regulatory agencies • E.g. DPH, DSS, CMS, HUD • Legal duty to report • Triggers vary with law • Bondholders/bond trustee • Routine reporting obligations • Reporting failure to meet covenants

10. RIGHTS AND EXPECTATIONS OF STAKEHOLDERS (CONT.) • To review board minutes • To receive current budget information and audited financial statements • “Moral” rights • Trust and candor • Residents and families • Legal rights (in CCRCs)

11. RIGHTS AND EXPECTATIONS OF STAKEHOLDERS (CONT.) • Donors • Accountability of donee • Ability to meet conditions of gifts • Staff • Security of employment • Security of pensions and other benefits

12. WHAT TO REPORT- AND WHEN? • Depends on stakeholder and applicable law • E.g., “unsound financial condition” (CCRC law) • E.g., breach of bond covenant • Bond documents describe trigger and timing • Board should be the first to hear

13. WHAT TO REPORT- AND WHEN? (CONT.) • Reports to regulatory agencies will generally be a matter of public record • Accuracy and careful messaging are key • Residents will have their ears to the ground • Resident representatives may report concerns to larger resident community

14. HOW TO REPORT TO STAKEHOLDERS • Be candid • Be complete • Identify actions taken to date, proposed solutions • Avoid being either an alarmist or a Pollyanna • Prepare for difficult questions • Be realistic about options and timing

15. OTHER STRATEGIC RECOMMENDATIONS • Identify your legal obligations at the outset • Talk to regulators early and often • If bond financed, contact investment banker early • Carefully consider content of all board minutes • Public record if CCRC • Consider proper use of executive session

16. TALKING TO RESIDENTS AND FAMILIES • Give adequate notice of meetings • Repeat meetings to accommodate residents and families • Provide written materials in advance • Include CEO and one or more board members to show you take the matter seriously • Do not condescend or “white wash” • Expect challenging questions, heated meeting

17. TALKING TO BOND TRUSTEE/ BONDHOLDERS • Let your investment banker help you with this contact • Be prepared to compromise • Your bargaining position may not be good (but candor and early disclosure will be rewarded) • Expect additional reporting obligations, restrictive covenants, potentially a “forbearance agreement”

18. TALKING TO REGULATORS • Understand your breach (if any) and the regulatory agency’s powers and remedies before the call • Be prepared to offer solutions and realistic timelines • Do not be afraid to request concessions or extensions to comply with the law

19. TALKING TO DONORS • Empathize with their valid concerns about your use of their gifts • Focus on earning their trust and fulfilling the terms of their gifts • Request extensions if needed to meet the terms of any grant or donation • Be prepared for rescissions of certain gifts

20. ACTION PLAN- HOW TO IMPROVE FINANCES? • Huge array of solutions depending on facts; may need to implement multiple strategies • May need assistance of a consultant /manager • Bondholders or regulatory agency may require one • Research your options beforehand, research consultants (you may be able to choose), and express a willingness to work with them

21. BUDGET CUTS: COST- DRIVEN OPTIONS • Staffing • WARN Act – mass lay-offs • Effect on morale • Role of unions • Maintenance • Proceed with care • Programming • Beware dilution of product

22. COST- DRIVEN OPTIONS (CONT.) • Administrative office • Can be a sacred cow • Marketing budget • Cut with care • Could be counterproductive in current market • Other departments

23. REVENUE-DRIVEN OPTIONS • Fee increases – know your market! • New product • E.g. deferred entrance fees, RCFE-only agreements, continuing care at home, community-based services • Could improve leverage, occupancy • Need to understand cost/benefit of new product • Consult financial advisors as needed

24. REVENUE-DRIVEN OPTIONS (CONT.) • Renewed fundraising efforts • Challenging economy • Revamped marketing efforts • Need to promote “value proposition” • Need to acknowledge difference between need-driven and want-driven care • May need to take aggressive steps to distinguish product from competitors’ products

25. REVENUE-DRIVEN OPTIONS (CONT.) • Expanded admission criteria • Best suited to provider serving an affinity group • Must examine governing documents, Form 1023 • Dilution of mission? • Potential to improve census? • Essential to proceed with care

26. “MOTHER, MAY I?” • Expect enhanced reporting obligations to all stakeholders (especially bondholders and regulators) • Expect to lose some flexibility (e.g. further restrictions on transfers or on additional indebtedness) • Cooperate in the “new regime”; you will eventually see the light of day!

27. DOOMSDAY SCENARIO • Candidly assess your ability to emerge from crisis • Identify “doomsday options” • Acquisition of community by another provider • Affiliation with another provider • Merger • Closure • Bankruptcy

28. DOOMSDAY SCENARIO (CONT.) • Explore options early • Will improve your bargaining position, permit proper due diligence, and promote legal compliance • Understand financial and legal consequences of options • Do not be afraid to reach out to ASC members and friends

29. SUMMARY OF STRATEGIES • Early detection • Full disclosure to board • Honest assessment of problem • Timely communication to stakeholders • Prompt corrective action • Continuing compliance

30. Q & A