Financial Reports FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS. Phoenix, Arizona COMBINED FINANCIAL STATEMENTS AND UNIFORM GUIDANCE REPORTS

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1 Financial Reports FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS Phoenix, Arizona COMBINED FINANCIAL STATEMENTS AND UNIFORM GUIDANCE REPORTS Years Ended June 30, 2017 and 2016

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3 INDEPENDENT AUDITORS REPORT To the Board of Directors FSL Programs, FSL Pathways and FSL Home Improvements Phoenix, Arizona Report on the Combined Financial Statements We have audited the accompanying combined financial statements of FSL Programs, FSL Pathways and FSL Home Improvements (collectively the Entities ), which comprise the combined statements of financial position as of June 30, 2017 and 2016, and the related combined statements of activities, functional expenses and cash flows for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. Tempe Scottsdale Casa Grande

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of FSL Programs, FSL Pathways and FSL Home Improvements as of June 30, 2017 and 2016, and the changes in net assets and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the combined financial statements as a whole. The accompanying combining statement of financial position and combining statement of activities is presented for purposes of additional analysis and is not a required part of the combined financial statements. The accompanying schedules of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, are presented for purposes of additional analysis and are not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the combined financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 30, 2018, on our consideration of the Entities internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Entities internal control over financial reporting and compliance. Tempe, Arizona January 30,

5 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINED STATEMENTS OF FINANCIAL POSITION June 30, 2017 and 2016 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,371,836 $ 971,654 Promises to give, current portion 232, ,000 Accounts receivable, net of allowance for uncollectible accounts of $188,000 and $184,000 2,843,785 2,557,311 Due from affiliates 3,573,202 3,358,833 Prepaid expenses and deposits 50,644 43,714 Current portion of note receivable - affiliate 3,324 3,229 TOTAL CURRENT ASSETS 8,075,471 7,184,741 PROMISES TO GIVE, net of current portion - 165,000 PROPERTY AND EQUIPMENT, net 430, ,290 NOTE RECEIVABLE - AFFILIATE, net of current portion 14,302 17,626 TOTAL ASSETS $ 8,519,780 $ 7,825,657 LIABILITIES CURRENT LIABILITIES Accounts payable $ 891,301 $ 748,595 Due to affiliates 1,330,511 1,326,646 Accrued expenses 964, ,665 Contract advances and overpayments 111, ,796 Line of credit 300, ,000 Current portion of note payable - affiliate 6,438 6,072 Current portion of long-term debt 24,973 23,480 TOTAL CURRENT LIABILITIES 3,629,810 3,325,254 NOTE PAYABLE - AFFILIATE, net of current portion 221, ,796 LONG-TERM DEBT, net of current portion 22,266 47,239 TOTAL LIABILITIES 3,873,434 3,600,289 NET ASSETS Unrestricted 4,099,908 3,464,696 Temporarily restricted 546, ,672 TOTAL NET ASSETS 4,646,346 4,225,368 TOTAL LIABILITIES AND NET ASSETS $ 8,519,780 $ 7,825,657 See accompanying notes. 3

6 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINED STATEMENTS OF ACTIVITIES Years Ended June 30, 2017 and 2016 SUPPORT AND REVENUES 2017 Temporarily Unrestricted Restricted Total Government contracts $ 19,958,541 $ - $ 19,958,541 Client fees 966, ,138 Program income 761, ,664 Contributions: Charity and Development Appeal 545, ,000 United Way 4,642-4,642 Corporations and individuals 427, , ,254 Related affiliates 259, ,862 In-kind 509, ,603 Grant income 616, ,230 Interest income 15,647-15,647 Other income 9,146-9,146 Net assets released from restrictions 341,691 (341,691) - TOTAL SUPPORT AND REVENUES 24,415,961 (214,234) 24,201,727 EXPENSES Program services 21,218,587-21,218,587 Management and general 2,562,162-2,562,162 TOTAL EXPENSES 23,780,749-23,780,749 CHANGE IN NET ASSETS 635,212 (214,234) 420,978 NET ASSETS, BEGINNING OF YEAR 3,464, ,672 4,225,368 NET ASSETS, END OF YEAR $ 4,099,908 $ 546,438 $ 4,646,346 See accompanying notes. 4

7 2016 Temporarily Unrestricted Restricted Total $ 19,284,218 $ - $ 19,284,218 2,470,271-2,470, , , , ,000 21,535-21, ,343 71, , , , , ,905 1,136,495 11,774-11,774 77,227-77, ,489 (361,489) - 24,723, ,349 25,287,821 21,853,149-21,853,149 2,575,119-2,575,119 24,428,268-24,428, , , ,553 3,169, ,323 3,365,815 $ 3,464,696 $ 760,672 $ 4,225,368 5

8 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINED STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2017 Maricopa County Home Care/ Home Health Adult Day Health Care Center for Home and Community Living Nutrition Program Community Action Program Community Living Resources Care by Design Salaries and wages $ 2,402,576 $ 1,897,360 $ 435,577 $ 264,301 $ 186,667 $ 206,646 $ 138,956 Payroll taxes 204, ,088 36,606 22,850 13,676 16,366 11,806 Employee benefits 181, ,943 35,604 14,174 27,418 18,366 11,169 2,788,601 2,245, , , , , ,931 Building and occupancy 87, ,666 28, ,381 37,565 22,429 5,091 Meetings and travel 35, ,823 9,790 32,923 2,326 17,036 7,031 Professional fees 79,962 27,954 47, ,020, Food and beverage 1, , , Specific client assistance ,000-73,460 Depreciation 21,819 (22,300) ,573 Interest 13, Bad debts Materials and supplies 37,075 83,987 16,922 26,873 3,260 5,020 16,201 Insurance 36,438 28,160 2,070 2, , Telephone 26,509 26,576 4,574 9,036 6,773 6,711 2,360 Other operating 14, ,163 1,857 49,313 10,636 8,760 13,965 Management fee TOTAL EXPENSES $ 3,145,202 $ 3,621,470 $ 619,121 $ 675,010 $ 292,404 $ 2,322,965 $ 288,535 See accompanying notes. 6

9 Home Repair/ Rehab Home Weatherization Home Training Assisted Group Living Eliminations Total Program Services Management and General Total Expenses $ 248,669 $ 267,504 $ 312,478 $ 4,053,528 $ - $ 10,414,262 $ 19,301 $ 10,433,563 22,408 36,575 32, , ,782 3, ,253 15,762 26,674 38, , , , , , ,207 4,769,895-12,244,868 22,772 12,267,640 22,986 22,367 65, ,814 (914) 1,497,646 11,500 1,509,146 28,169 17,708 18, , , , ,384 1,608,384 6, ,974 (314,506) 5,071,515-5,071, , , , , (7,337) 70,694-70, ,608 24,399-54,099-54,099 11, ,770-28,802-28, ,167 41,167 60,928 33,724 34, , , ,395 2,073 7,621 2,753 32, , ,634 7,123 7,417 8,765 26, , ,111 9,761 3,443 20,991 75,572 (255) 402, , ,486,723 2,486,723 $ 1,258,121 $ 2,031,540 $ 569,474 $ 6,717,757 $ (323,012) $ 21,218,587 $ 2,562,162 $ 23,780,749 7

10 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINED STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2016 Maricopa County Home Care/ Home Health Adult Day Health Care Center for Home and Community Living Nutrition Program Community Action Program Community Living Resources Care by Design Other Program Expenses Salaries and wages $ 2,465,035 $ 1,882,419 $ 259,363 $ 262,929 $ 134,152 $ 193,227 $ 89,594 $ - Payroll taxes 222, ,718 21,983 23,936 11,372 15,931 7,855 - Employee benefits 214, ,233 20,688 26,474 21,926 20,475 9,482-2,902,238 2,329, , , , , ,931 - Building and occupancy 99, ,224 26, ,179 28,219 22,468 12, Meetings and travel 32, ,653 9,733 27,427 1,894 19,674 7,941 - Professional fees 47,158 32,562 48, ,938, ,132 Food and beverage 2, , , ,600 - Specific client assistance Depreciation 23,425 28, ,573 - Interest 13, Bad debts 99,969 10, (68) 116 2,448 Materials and supplies 53,821 93,183 8,272 27,032 3,106 5,255 30,729 - Insurance 36,242 27,954 1,415 2, , Telephone 25,051 29,604 2,821 11,449 3,068 7,076 1,559 - Other operating 29, ,504 19,547 53,364 22,636 9, ,322 Management fee TOTAL EXPENSES $ 3,365,948 $ 3,853,010 $ 419,411 $ 707,585 $ 227,200 $ 2,233,658 $ 178,319 $ 28,934 See accompanying notes. 8

11 Home Repair/ Rehab Home Weatherization Home Training Assisted Group Living Eliminations Total Program Services Management and General Total Expenses $ 305,930 $ 171,493 $ 323,430 $ 3,916,391 $ - $ 10,003,963 $ - $ 10,003,963 33,332 24,360 32, , , ,940 20,273 30,445 57, ,563-1,117,156-1,117, , , ,770 4,714,461-12,064,059-12,064,059 32,082 14,067 64, ,400 (1,132) 1,625,515-1,625,515 27,621 8,273 19, , , ,602 1,374,421 1,537,149 9, ,924 (362,679) 5,381,038 12,946 5,393, , , , , ,845-11,112-11, ,981 34, , ,004 14, ,997-33,333-33, ,195 61, , ,999 88,319 13,098 9, , , ,424 3,015 7,525 2,855 30, , ,762 12,497 5,556 9,960 25, , ,299 8,740 13,800 17,519 75,562 (180) 413, , ,562,173 2,562,173 $ 1,921,262 $ 1,825,766 $ 575,235 $ 6,880,812 $ (363,991) $ 21,853,149 $ 2,575,119 $ 24,428,268 9

12 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINED STATEMENTS OF CASH FLOWS Years Ended June 30, 2017 and CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 420,978 $ 859,553 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 54, ,003 Bad debt expense 41, ,999 (Increase) decrease in: Promises to give 182,320 (349,940) Accounts receivable (327,641) 462,755 Due from affiliates (214,369) (472,520) Prepaid expenses and deposits (6,930) (10,729) Increase (decrease) in: Accounts payable 142,706 63,301 Due to affiliates 3,865 (662,041) Accrued expenses 146, ,427 Contract advances and overpayments 10,057 (17,974) NET CASH PROVIDED BY OPERATING ACTIVITIES 452, ,834 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (25,816) - Payments received on note receivable - affiliates 3,229 3,137 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (22,587) 3,137 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 300, ,000 Payments on line of credit (300,000) (488,063) Principal payments on note payable - affiliate (6,072) (5,726) Principal payments on long-term debt (23,480) (22,079) NET CASH USED IN FINANCING ACTIVITIES (29,552) (75,868) NET INCREASE IN CASH AND CASH EQUIVALENTS 400, ,103 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 971, ,551 CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,371,836 $ 971,654 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest expense $ 28,802 $ 33,333 See accompanying notes. 10

13 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FSL Programs, FSL Pathways, and FSL Home Improvements (collectively the Entities"), are Arizona non-profit corporations whose sole member is the Foundation for Senior Living ( FSL ). FSL is a non-profit corporation whose sole member is the Roman Catholic Church, Diocese of Phoenix and has an elected Board of Directors that provides policy, advice and guidance to FSL and its affiliated entities. Support services are provided by FSL Management, a related affiliate, through the charging of a monthly management fee as defined by the management agreement. The rate for this fee was negotiated with and approved by the U.S. Department of Energy. FSL Programs administers programs and services for senior adults, persons with disabilities, and their families. FSL Pathways provides group housing and related behavioral health services for mentally impaired adults. FSL Home Improvements provides construction services related to the rehabilitation of existing housing and for home repairs and improvements, primarily to reduce or eliminate health and safety hazards, for the benefit of senior adults, low income individuals, and individuals with disabilities. Principles of Combination The combined financial statements include the accounts of the Entities. These combined Entities are affiliated through common control. All significant intercompany accounts and transactions have been eliminated in the preparation of these combined financial statements. Basis of Presentation The accompanying combined financial statements of the Entities have been prepared on the accrual basis of accounting and accordingly reflect all significant receivables, payables, and other liabilities. The Entities are required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Cash and Cash Equivalents For the purpose of the statements of cash flows, the Entities considers all highly liquid debt instruments with an original maturity of three months or less at date of acquisition to be cash equivalents. 11

14 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Promises to Give Unconditional promises to give are recognized as revenues in the period the promise is received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Unconditional promises to give that are to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. Promises to give are charged off against the allowance when they are deemed to be uncollectible. Management expects to collect all promises to give and therefore has not recorded an allowance as of June 30, 2017 and Accounts Receivable Accounts receivable are carried at the outstanding balances less an allowance for doubtful accounts, if applicable. The Entities evaluate the collectability of their accounts receivable based on a combination of factors. In circumstances where it is aware of a specific amount where there may be an inability to meet the financial obligation, it records a specific reserve to reduce the amounts recorded to what it believes will be collected. Accounts are charged off against the allowance when they are deemed to be uncollectible. Due From and Due To Affiliates Due from and due to affiliates are transactions that arise primarily in the normal course of business and include advances to and from affiliates for operational purposes. These balances are carried at the outstanding balances, are unsecured with no interest due and have no specific repayment terms. Property and Equipment Acquisitions of property and equipment in excess of $5,000 are capitalized. Property and equipment are stated at cost or, if donated, at the approximate fair value at the date of donation. Depreciation of buildings and equipment is calculated using the straight-line method over the estimated useful lives of the respective assets. Major additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and gains and losses are included in operations. 12

15 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Revenue Recognition Revenue is recognized when earned. Program service fees and payments under costreimbursable contracts received in advance are deferred to the applicable period in which the related services are performed or expenditures are incurred, and are recorded as contract advances. Contributions Contributions and grants, including promises to give, are received and recorded as unrestricted, temporarily restricted or permanently restricted support depending on the existence and/or nature of any donor restrictions. When a donor restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily or permanently restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Contributions or promises to give that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. Contributions of donated non-monetary assets (in-kind donations) are recorded at their fair values in the period received. In-kind donations include rent and use of vehicles. Contributions of donated services that create or enhance non-financial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donated services, are recorded at their fair market values in the period received. Functional Expenses Expenses are charged to program services, management and general, and fundraising categories based on direct expenditures incurred. Any expenditures not directly chargeable are allocated based on personnel activity or other appropriate indicators. 13

16 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Advertising Advertising costs are charged to operations as incurred. Advertising expense charged to operations was approximately $19,000 and $8,000 during the years ended June 30, 2017 and 2016, respectively. Income Tax Status The Entities qualify as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code (IRC) and, therefore, there is no provision for income taxes. In addition, the Entities qualify for the charitable contribution deduction under Section 170 of the code and have been classified as organizations that are not private foundations. Income determined to be unrelated business taxable income (UBTI) would be subject to income tax. The Entities recognize uncertain tax positions in the combined financial statements when it is more likely-than-not that the positions will not be sustained upon examination by the tax authorities. As of June 30, 2017 and 2016, the Entities had no uncertain tax positions that qualify for either recognition or disclosure in the combined financial statements. The Entities recognize interest and penalties associated with income tax in operating expenses. During the years ended June 30, 2017 and 2016 the Entities did not have any income tax related interest and penalty expense. Management s Use of Estimates The preparation of the combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from these estimates. Date of Management s Review In preparing these combined financial statements, the Entities have evaluated events and transactions for potential recognition or disclosure through January 30, 2018, the date the combined financial statements were available to be issued. 14

17 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 2 CONCENTRATIONS OF CREDIT RISK Financial instruments that subject the Entities to potential concentrations of credit risk consist principally of cash and cash equivalents. The Entities maintain their cash in bank accounts, which at times may exceed federally insured limits. The Entities have not experienced any losses in such accounts and do not believe they are exposed to any significant credit risk on cash balances. NOTE 3 ACCOUNTS RECEIVABLE AND REVENUE DEPENDENCY The Entities obtain a majority of their revenues through contracts and grants from various governmental agencies, insurance plans, and individuals. Accounts receivable from the Entities four major funding sources compose approximately 72% and 71% of total net accounts receivable as of June 30, 2017 and 2016, respectively. Concentrations of credit risk with respect to accounts receivable are limited due to the nature of the receivables and the Entities history with the government agencies and insurance plans. Revenues from the Entities four major funding sources compose approximately 65% and 62% of total revenues during the years ended June 30, 2017 and 2016, respectively. If the governmental agencies affect significant budget cuts in the future this source of funding could decrease. If this were to occur, it is management s opinion that the Entities could continue activities at a reduced level of service and continue to seek other sources of funding to support the activities. Additionally, program costs are subject to audit by the contracting agency, and in the event that the contract proceeds were not spent in accordance with contract terms, the proceeds may be required to be returned to the appropriate agency. Management of the Entities is of the opinion that an adequate provision has been made in the combined financial statements for the effect of any costs, which might be disallowed under these various contracts. NOTE 4 NOTE RECEIVABLE - AFFILIATE During 2014, a note receivable in the amount of $30,000 was issued between the Entities and a related party of the entities, FSL St. Frances Villas LP. The note bears interest at 2.9% and both principal and interest payments are payable in monthly payments of $316 through the maturity date of July 1, The note is secured by a vehicle. The balance of the note receivable as of June 30, 2017 and 2016 was $17,626 and $20,855, respectively. 15

18 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 5 PROPERTY AND EQUIPMENT Property and equipment consist of the following at June 30: Building $ 58,500 $ 58,500 Furniture and equipment 620, ,666 Vehicles 425, ,927 Leasehold improvements 433, ,314 1,539,223 1,513,407 Accumulated depreciation (1,109,216) (1,055,117) Property and equipment, net $ 430,007 $ 458,290 Depreciation expense was $54,099 and $116,003 during the years ended June 30, 2017 and 2016, respectively. NOTE 6 LONG-TERM DEBT The Entities have five separate loan agreements for vehicles. These loan agreements require monthly payments varying between $434 and $461 at interest rates between 3.99% and 6.59% and mature at various dates through November Future minimum principal payments due on these loans as of June 30, 2017 are as follows: Years Ending June 30, 2018 $ 24, , , ,720 47,239 Current portion (24,973) Long-term portion $ 22,266 16

19 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 7 NOTE PAYABLE - AFFILIATE FSL Programs has entered into a note payable agreement with a related party of the entity, FSL Holding Properties, LLC. The note bears interest at 5.875% and both principal and interest are due monthly in installments of $1,637. The note matures in December Interest expense was approximately $14,000 during each of the years ended June 30, 2017 and 2016, respectively. Future minimum principal payments due on this note as of June 30, 2017 are as follows: Years Ending June 30, 2018 $ 6, , , ,676 Thereafter 199, ,796 Current portion (6,438) Long-term portion $ 221,358 NOTE 8 LINE OF CREDIT FSL Home Improvements has a revolving line of credit with Johnson Bank, collateralized by substantially all of the entity s assets, with interest at the Johnson Bank Reference Rate plus 0.50%, subject to a floor of 4.00%. The line of credit provides for maximum borrowings of $750,000. The amount drawn and outstanding at June 30, 2017 and 2016 was $300,000 for each year. The line of credit expires on March 9, 2018, and is guaranteed by FSL. 17

20 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 9 OPERATING LEASES The Entities lease space for a number of their program service locations and leased vehicles under operating lease agreements that expire at various dates through July Approximate minimum future rental payments required under these non-cancelable operating leases as of June 30, 2017 are as follows: Years Ending June 30, 2018 $ 847, , , ,000 $ 909,000 Total rent expense under these leases and month-to-month leases was approximately $971,000 and $1,043,000 during the years ended June 30, 2017 and 2016, respectively. Included in these amounts are rents of $812,000 and $811,000 paid to an affiliate, FSL Holdings, LLC, during the years ended June 30, 2017 and 2016, respectively. The Entities also received in-kind rent, valued in the amounts of approximately $274,000 and $305,000 during the years ended June 30, 2017 and 2016, respectively. NOTE 10 TRANSACTIONS WITH AFFILIATES FSL Management provides management services to affiliated entities for a management fee. The expenses paid to FSL Management by the Entities during the years ended June 30, 2017 and 2016 were $2,486,723 and $2,562,173, respectively. The following amounts are due from affiliates at June 30: Foundation for Senior Living $ 2,818,462 $ 2,492,570 FSL Management 754, ,773 Foundation for Senior Adult Living - 5,000 FSL Holdings, Inc $ 3,573,202 $ 3,358,833 18

21 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 10 TRANSACTIONS WITH AFFILIATES (Continued) The following amounts are due to affiliates at June 30: Foundation for Senior Living $ 237,594 $ 855,696 FSL Rural Development Corporation 420, ,000 FSL Management 422,079 50,313 FSL Real Estate 250, $ 1,330,511 $ 1,326,646 FSL allocated $545,000 and $560,000 of Charity and Development Appeal (CDA) funds awarded by the Roman Catholic Church, Diocese of Phoenix to the Entities during the years ended June 30, 2017 and 2016, respectively. NOTE 11 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets consist of the following at June 30: Purpose restricted: Care by design $ 227,415 $ 247,199 Transportation 51,744 7,263 Nutrition 78,847 47,984 Center for Health and Community Living - 25,500 Other 23,432 17,726 Time and purpose restricted (promises to give): Care by design 165, ,000 Total temporarily restricted net assets $ 546,438 $ 760,672 19

22 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 12 EMPLOYEE BENEFIT PLAN The Entities employees are eligible to participate in a Tax Sheltered Annuity Employee Retirement Plan. The Entities will match 100% of employee contributions up to 2% of employee compensation subject to certain eligibility criteria as stated in the Plan document. The Entities recorded contribution expense of approximately $95,000 and $69,000 during the years ended June 30, 2017 and 2016, respectively. 20

23 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS COMBINING STATEMENT OF FINANCIAL POSITION AND COMBINING STATEMENT OF ACTIVITIES

24 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINING STATEMENT OF FINANCIAL POSITION June 30, 2017 ASSETS FSL Programs FSL Pathways CURRENT ASSETS Cash and cash equivalents $ 654,066 $ 192,907 Promises to give, current portion 232,680 - Accounts receivable, net of allowance for uncollectible accounts of $188,000 1,765, ,728 Due from affiliates 525 3,521,537 Due from combined affiliates - 29,494 Prepaid expenses and deposits 28,190 21,454 Current portion of note receivable - affiliate 3,324 - TOTAL CURRENT ASSETS 2,684,061 4,195,120 PROPERTY AND EQUIPMENT, net 88,162 54,084 NOTE RECEIVABLE - AFFILIATE, net of current portion 14,302 - TOTAL ASSETS $ 2,786,525 $ 4,249,204 LIABILITIES CURRENT LIABILITIES Accounts payable $ 295,361 $ 72,556 Due to affiliates 591,863 - Due to combined affiliates 84,974 58,496 Accrued expenses 533, ,091 Contract advances and overpayments 111,853 - Line of credit - - Current portion of note payable - affiliate 6,438 - Current portion of long-term debt 4,643 20,330 TOTAL CURRENT LIABILITIES 1,628, ,473 NOTE PAYABLE - AFFILIATE, net of current portion 221,358 - LONG-TERM DEBT, net of current portion 11,582 10,684 TOTAL LIABILITIES 1,861, ,157 NET ASSETS Unrestricted 378,909 3,777,047 Temporarily restricted 546,438 - TOTAL NET ASSETS 925,347 3,777,047 TOTAL LIABILITIES AND NET ASSETS $ 2,786,525 $ 4,249,204 22

25 FSL Home Improvements Combined Eliminations Totals $ 524,863 $ - $ 1,371, , ,781-2,843,785 51,140-3,573, ,976 (143,470) - 1,000-50, ,324 1,339,760 (143,470) 8,075, , , ,302 $ 1,627,521 $ (143,470) $ 8,519,780 $ 523,384 $ - $ 891, ,648-1,330,511 - (143,470) - 121, , , , , , ,973 1,683,569 (143,470) 3,629, , ,266 1,683,569 (143,470) 3,873,434 (56,048) - 4,099, ,438 (56,048) - 4,646,346 $ 1,627,521 $ (143,470) $ 8,519,780 23

26 FSL PROGRAMS, FSL PATHWAYS AND FSL HOME IMPROVEMENTS COMBINING STATEMENT OF ACTIVITIES Year Ended June 30, 2017 FSL Programs FSL Pathways SUPPORT AND REVENUES Government contracts $ 8,839,190 $ 7,014,606 Client fees 1,142,246 1,169 Program income 44, ,146 Contributions: Charity and Development Appeal 515,000 - United Way 4,642 - Corporations and individuals 480,903 - Related affiliates 184,192 - In-kind 509,603 - Grant income 616,230 - Interest income 13,869 1,778 Other income 877 6,201 TOTAL SUPPORT AND REVENUES 12,351,270 7,740,900 EXPENSES Program services 10,964,707 6,717,757 Management and general 1,226, ,017 TOTAL EXPENSES 12,190,836 7,526,774 CHANGE IN NET ASSETS 160, ,126 NET ASSETS, BEGINNING OF YEAR 764,913 3,562,921 NET ASSETS, END OF YEAR $ 925,347 $ 3,777,047 24

27 FSL Home Improvements Combined Eliminations Totals $ 4,104,745 $ - $ 19,958, ,735 (323,012) 966, ,664 30, , ,642 74, ,254 75, , , , ,647 2,068-9,146 4,432,569 (323,012) 24,201,727 3,859,135 (323,012) 21,218, ,016-2,562,162 4,386,151 (323,012) 23,780,749 46, ,978 (102,466) - 4,225,368 $ (56,048) $ - $ 4,646,346 25

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29 FSL PROGRAMS, FSL PATHWAYS, AND FSL HOME IMPROVEMENTS UNIFORM GUIDANCE SUPPLEMENTARY REPORT

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31 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors FSL Programs, FSL Pathways and FSL Home Improvements Phoenix, Arizona We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to the financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the combined financial statements of FSL Programs, FSL Pathways and FSL Home Improvements which comprise the combined statements of financial position as of June 30, 2017, and the related combined statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the combined financial statements, and have issued our report thereon dated January 30, Internal Control Over Financial Reporting In planning and performing our audit of the combined financial statements, we considered FSL Programs, FSL Pathways and FSL Home Improvements internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of FSL Programs, FSL Pathways and FSL Home Improvements internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Tempe Scottsdale Casa Grande

32 Compliance and Other Matters As part of obtaining reasonable assurance about whether FSL Programs, FSL Pathways and FSL Home Improvements combined financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the organization's internal control or on compliance. This report is an integral part of the audit performed in accordance with Government Auditing Standards in considering the organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Tempe, Arizona January 30,

33 FSL PROGRAMS UNIFORM GUIDANCE SUPPLEMENTARY REPORTS

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35 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH UNIFORM GUIDANCE Board of Directors FSL Programs Phoenix, Arizona Report on Compliance for Each Major Federal Program We have audited FSL Programs compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of FSL Programs major federal programs for the year ended June 30, FSL Programs major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of FSL Programs major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about FSL Programs compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of FSL Programs compliance. Opinion on Each Major Federal Program In our opinion, FSL Programs complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Tempe Scottsdale Casa Grande

36 Report on Internal Control Over Compliance Management of FSL Programs is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered FSL Programs internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of FSL Programs internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of the internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Tempe, Arizona January 30,

37 FSL PROGRAMS STATEMENT OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2017 Federal Federal Grantor / Pass-Through Grantor / Program CFDA Number Grantor's Number Federal Expenditures U.S. Department of Agriculture Passed through Arizona Department of Education Child and Adult Care Food Program E $ 107,664 Total U.S. Department of Agriculture 107,664 U.S. Department of Housing and Urban Development Passed through City of Tempe Community Development Block Grants/Entitlement Grants None 2,971 Total U.S. Department of Housing and Urban Development 2,971 U.S. Department of Health and Human Services Aging Cluster Passed through Area Agency on Aging Region One, Inc. Special Programs for the Aging - Title III, Part B FSL 207,182 Special Programs for the Aging - Title III, Part C FSL 241,130 Nutrition Services Incentive Program FSL 41,048 Total Aging Cluster 489,360 Passed through Area Agency on Aging Region One, Inc. National Family Caregiver Support - Title III, Part E FSL 187,122 Passed through Maricopa County Low Income Home Energy Assistance RFP/PQ ,259 Passed through Area Agency on Aging Region One, Inc. Social Services Block Grant FSL 327,419 * Passed through Maricopa County Social Services Block Grant RFP/PQ ,023 * 370,442 TOTAL U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 1,086,183 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 1,196,818 *Denotes major program See accompanying notes. 35

38 FSL PROGRAMS NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS June 30, 2017 NOTE 1 BASIS OF PRESENTATION The accompanying Schedule of Expenditures of Federal Awards includes the federal grant activity of FSL Programs under programs of the federal government for the year ended June 30, The information in this schedule is presented in accordance with requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule of Expenditures of Federal Awards presents only a portion of the operations of FSL Programs it is not intended to and does not present the financial position, changes in net position, or cash flows of FSL Programs. NOTE 2 CATALOG OF FEDERAL DOMESTIC ASSISTANCE (CFDA) NUMBERS The program titles and CFDA numbers were obtained from the Catalog of Federal Domestic Assistance. NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance and/or Circular A-122, Cost Principles for Non-Profit Organizations, wherein certain types of expenditures are not allowable or are limited as to reimbursement. B) FSL Programs has elected not to use the 10 percent de minimis indirect cost rate as allowed under the Uniform Guidance 36

39 FSL PROGRAMS SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2017 SECTION I SUMMARY OF AUDITORS RESULTS Financial Statements Type of auditors report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? yes _X _ no Significant deficiency(ies) identified that are not considered to be a material weakness(es)? yes _X _ no Noncompliance material to financial statements noted? yes _X _ none reported Federal Awards Internal control over major programs: Material weakness(es) identified? yes _X no Significant deficiency(ies) identified that are not considered to be a material weakness(es)? yes _X none reported Type of auditors report issued on compliance for major program listed below: Unmodified Any audit findings disclosed that are required to be reported in accordance with the Uniform Guidance? yes _X no Identification of major program: CFDA Numbers Name of Federal Program or Cluster Social Services Block Grant Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? X yes no 37

40 FSL PROGRAMS SCHEDULE OF FINDINGS AND QUESTIONED COSTS June 30, 2017 SECTION II FINDINGS RELATED TO FINANCIAL STATEMENTS REPORTED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS None noted. SECTION III FINDINGS AND QUESTIONED COSTS RELATED TO FEDERAL AWARDS None noted 38