CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES

Transcription

1 CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Years Ended June 30, 2017 and 2016

2 CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Years Ended June 30, 2017 and 2016 CONTENTS Pages INDEPENDENT AUDITORS' REPORT 1-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position 3 Consolidated Statements of Activities and Changes in Net Assets 4-5 Consolidated Statements of Functional Expenses 6-7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 9-25 UNIFORM GUIDANCE SUPPLEMENTAL REPORTS Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards 29 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 Independent Auditors Report on Compliance For Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Corrective Action Plan and Summary Schedule of Prior Audit Findings 36-41

3 3101 N. Central Ave., Suite 300 Phoenix, AZ Main: Fax: INDEPENDENT AUDITORS REPORT To the Board of Directors of CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Catholic Charities Community Services, Inc. and Subsidiaries, which comprise the consolidated statement of financial position as of June 30, 2017, and the related consolidated statements of activities and changes in net assets, functional expenses and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audit. We conducted our audit 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Member of Kreston International a global network of independent accounting firms

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Catholic Charities Community Services, Inc. and Subsidiaries as of June 30, 2017, and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplemental Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule 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 is presented for purposes of additional analysis and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 consolidated 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 8, 2018 on our consideration of Catholic Charities Community Services, Inc. and Subsidiaries internal control over financial reporting and on our tests of their 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 Catholic Charities Community Services, Inc. and Subsidiaries internal control over financial reporting and compliance. Prior Year Consolidated Financial Statements The consolidated financial statements of Catholic Charities Community Services, Inc. and Subsidiaries as of and for the year ended June 30, 2016 were audited by other auditors whose report dated March 14, 2017, expressed an unmodified opinion on the consolidated financial statements. January 8, 2018

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 2017 and 2016 A S S E T S CURRENT ASSETS Cash and cash equivalents $ 1,332,536 $ 1,414,057 Accounts receivable, net 2,761,284 3,458,176 Contributions receivable, net 1,188, ,733 Prepaid expenses and other current assets 690, ,593 Property held for sale 92,600 92,600 TOTAL CURRENT ASSETS 6,064,896 6,295,159 INVESTMENT IN LAND 180, ,708 INVESTMENT IN PARTNERSHIP 119, ,583 OTHER INVESTMENTS 150, ,275 PROPERTY AND EQUIPMENT, net 12,051,681 12,142,718 TOTAL ASSETS $ 18,566,789 $ 18,846,443 L I A B I L I T I E S A N D N E T A S S E T S CURRENT LIABILITIES Accounts payable $ 1,240,812 $ 642,747 Accrued expenses 773, ,210 Contract advances 53,057 40,888 Line of credit 338, ,200 Current portion of notes payable, net 145, ,126 Current portion of capital lease obligations 166, ,837 Current portion of deferred revenue 493, ,940 Current portion of forgivable obligations - 453,000 TOTAL CURRENT LIABILITIES 3,210,741 3,284,948 NOTES PAYABLE, less current portion 2,756,866 2,916,961 CAPITAL LEASE OBLIGATIONS, less current portion 258, ,025 DEFERRED REVENUE, less current portion 2,450,895 2,690,007 FORGIVABLE OBLIGATIONS, less current portion 2,203,008 2,203,008 OTHER LIABILITIES TOTAL LIABILITIES 10,880,291 11,212,707 NET ASSETS Unrestricted: Board designated: Endowment 144, ,300 Long-term reserve 88,331 88,331 Operating reserve 719, ,821 Undesignated 4,633,170 5,175,437 Total unrestricted net assets 5,586,364 6,120,889 Temporarily restricted 2,100,134 1,512,847 TOTAL NET ASSETS 7,686,498 7,633,736 TOTAL LIABILITIES AND NET ASSETS $ 18,566,789 $ 18,846,443 See Notes to Consolidated Financial Statements -3-

6 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Year Ended June 30, 2017 Temporarily Unrestricted Restricted Total OPERATING SUPPORT AND REVENUES Governmental contracts $ 26,409,146 $ - $ 26,409,146 Contributions 3,034,852 1,928,867 4,963,719 Donated materials and services 669, ,684 Program service fees 1,609,830-1,609,830 Partnership income 8,555-8,555 Administrative service fees and other revenues 292, ,339 Revenues from special events 29,465-29,465 Less: costs of direct donor benefits (10,295) - (10,295) Gain on sale of property and equipment 14,441-14,441 Other income 35,134-35,134 Net assets released from restriction 1,341,580 (1,341,580) - TOTAL OPERATING SUPPORT AND REVENUES 33,434, ,287 34,022,018 OPERATING EXPENSES Program services: Education and family support 9,959,234-9,959,234 Social support 501, ,264 Immigration and refugee 5,236,510-5,236,510 Foster care and residential 3,943,804-3,943,804 Emergency assistance 5,207,970-5,207,970 Counseling and behavioral health 184, ,094 Pregnancy services 141, ,921 Adoption services 184, ,209 Permanent supportive housing 674, ,410 Total program services 26,033,416-26,033,416 Supporting services: Management and general 6,639,300-6,639,300 Fundraising, public relations and marketing 922, ,138 Total supporting services 7,561,438-7,561,438 CCCS Holdings 374, ,402 TOTAL OPERATING EXPENSES 33,969,256-33,969,256 CHANGE IN NET ASSETS (534,525) 587,287 52,762 NET ASSETS, BEGINNING OF YEAR 6,120,889 1,512,847 7,633,736 NET ASSETS, END OF YEAR $ 5,586,364 $ 2,100,134 $ 7,686,498 See Notes to Consolidated Financial Statements -4-

7 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Year Ended June 30, 2016 Temporarily Unrestricted Restricted Total OPERATING SUPPORT AND REVENUES Governmental contracts $ 26,887,641 $ - $ 26,887,641 Contributions 1,153,148 1,005,964 2,159,112 Donated materials and services 532, ,904 Program service fees 1,582,956-1,582,956 Partnership income 10,853-10,853 Administrative service fees and other revenues 517, ,934 Revenues from special events 52,120-52,120 Less: costs of direct donor benefits (26,591) - (26,591) Loss on disposal of property and equipment (35,965) - (35,965) Other income 786, ,108 Net assets released from restrictions 950,357 (950,357) - TOTAL OPERATING SUPPORT AND REVENUES 32,411,465 55,607 32,467,072 OPERATING EXPENSES Program services: Education and family support 10,152,718-10,152,718 Social support 509, ,176 Immigration and refugee 5,451,259-5,451,259 Foster care and residential 3,768,522-3,768,522 Emergency assistance 4,432,934-4,432,934 Counseling and behavioral health 189, ,153 Pregnancy services 120, ,011 Adoption services 192, ,263 Permanent supportive housing 441, ,161 Total program services 25,257,197-25,257,197 Supporting services: Management and general 6,002,374-6,002,374 Fundraising, public relations and marketing 833, ,819 Total supporting services 6,836,193-6,836,193 CCCS Holdings 438, ,374 TOTAL OPERATING EXPENSES 32,531,764-32,531,764 CHANGE IN NET ASSETS (120,299) 55,607 (64,692) NET ASSETS, BEGINNING OF YEAR 6,241,188 1,457,240 7,698,428 NET ASSETS, END OF YEAR $ 6,120,889 $ 1,512,847 $ 7,633,736 See Notes to Consolidated Financial Statements -5-

8 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2017 Program Services Supporting Services Education Foster Care Counseling Permanent Total Fundraising, and Family Social Immigration and Emergency and Behavioral Pregnancy Adoption Supportive Program Management Public Relations CCCS Support Support and Refugee Residential Assistance Health Services Services Houising Sevices and General and Marketing Subtotal Holdings Totals Personnel expenses: Salaries $ 5,548,986 $ 281,608 $ 2,077,622 $ 2,113,063 $ 1,603,921 $ 123,804 $ 41,923 $ 125,935 $ 14,998 $ 11,931,860 $ 2,922,313 $ 411,567 $ 3,333,880 $ 137,365 $ 15,403,105 Payroll taxes and benefits 1,856,833 99, , , ,305 35,496 8,828 34, ,879, , ,545 1,045,632 21,910 4,946,547 Total personnel expenses 7,405, ,853 2,762,722 2,788,749 2,087, ,300 50, ,051 15,394 15,810,865 3,823, ,112 4,379, ,275 20,349,652 Programs and activities 677,532 36,753 1,959, , ,295-25,674 7, ,378,815 8,639 2,954 11, ,390,680 Professional services 25,956 4, ,560 38, ,153 6,188 7,853 3,161 95, , ,943 64, ,870 23,140 1,225,206 Temporary staffing 205,018 8,075 80,539 1,548 15,050-13, ,906 83,134-83, ,040 Occupancy 559,178 35,883 13,674 7,585 1,389, , ,639 2,156, , ,156 32,412 2,361,379 Travel and conferences 201,240 3,110 68, ,301 49,808 2,821 2,619 1, ,084 82,904 10,146 93, ,134 Materials and supplies 346,520 5,473 84,126 22, ,869 2,900 7,317 1,012 11, , ,705 87, ,318 5, ,886 Maintenance and repairs 163,512 4,326 14,381 15, , , , , , ,120 Equipment rental 14,616 1,369 16,848 54,566 42,553 1, ,767 21,039 1,397 22,436 6, ,798 Telecommunications 189,686 10,541 28,060 61,212 82,468 2, ,484 8, , ,986 4, , ,577 Fundraising , , , ,647 Depreciation - 6, , , , , ,335 64, ,437 Interest ,532 15, , ,290 25, ,342 Other expenses 170,157 4,075 79,288 47, ,168 7,683 31,312 7, , , ,669 81, ,313 55,646 1,174,358 Total expenses $ 9,959,234 $ 501,264 $ 5,236,510 $ 3,943,804 $ 5,207,970 $ 184,094 $ 141,921 $ 184,209 $ 674,410 $ 26,033,416 $ 6,639,300 $ 922,138 $ 7,561,438 $ 374,402 $ 33,969,256 See Notes to Consolidated Financial Statements -6-

9 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2016 Program Services Supporting Services Education Foster Care Counseling Permanent Total Fundraising, and Family Social Immigration and Emergency and Behavioral Pregnancy Adoption Supportive Program Management Public Relations CCCS Support Support and Refugee Residential Assistance Health Services Services Houising Sevices and General and Marketing Subtotal Holdings Totals Personnel expenses: Salaries $ 5,612,171 $ 288,200 $ 2,071,737 $ 2,059,044 $ 1,535,666 $ 132,435 $ 32,362 $ 120,895 $ 44,981 $ 11,897,491 $ 2,564,292 $ 399,548 $ 2,963,840 $ 154,687 $ 15,016,018 Payroll taxes and benefits 1,848,279 94, , , ,830 33,767 6,520 32,986 11,911 3,753, , , ,930 28,049 4,667,251 Total personnel expenses 7,460, ,099 2,722,217 2,695,644 1,973, ,202 38, ,881 56,892 15,650,763 3,315, ,737 3,849, ,736 19,683,269 Programs and activities 759,480 14,534 2,159, , ,949-22,095 8,980 (431) 4,219,885 5,080 2,052 7,132 3,707 4,230,724 Professional services 19,182 6, ,747 27,606 89,335 2,280-15,029 5, , ,309 42, ,162 25,123 1,044,927 Temporary staffing 271,503 15,337 91,577 13,241 22,988 3,500 20, , ,147 91,173 20, ,448 5, ,409 Occupancy 605,841 34,969 15,579 7,790 1,242,623 2,051 2,160-85,510 1,996, , ,083 41,404 2,213,010 Travel and conferences 204,063 4,369 65, ,834 58,437 3,006 4,596 2, ,390 63,263 15,985 79,248 4, ,883 Materials and supplies 257,169 5, ,841 26,111 49,364 2,026 4, , , ,030 13, ,071 13, ,001 Maintenance and repairs 144,397 8,447 23,059 19,554 80, , , , , ,341 Equipment rental 48,181 5,717 41,632 38,270 40,503 2,636 1, , ,635 4, ,470 19, ,268 Telecommunications 187,073 14,338 27,357 49,557 67,839 2, ,477 2, , ,165 4, , ,045 Fundraising , , , , ,740 Depreciation - 6, , , , , ,801 46, ,091 Interest ,457 16, ,265 1, ,096 27, ,862 Other expenses 195,379 11,231 72,085 69,264 90,517 4,484 25,294 7,043 22, , ,478 51, ,216 67, ,194 Total expenses $ 10,152,718 $ 509,176 $ 5,451,259 $ 3,768,522 $ 4,432,934 $ 189,153 $ 120,011 $ 192,263 $ 441,161 $ 25,257,197 $ 6,002,374 $ 833,819 $ 6,836,193 $ 438,374 $ 32,531,764 See Notes to Consolidated Financial Statements -7-

10 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2017 and CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 52,762 $ (64,692) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation 951, ,091 Amortization of deferred financing costs 6,558 6,558 Change in allowance for doubtful accounts (43,336) (54,878) Change in allowance for uncollectible contributions receivable 34,293 - Change in value of other investments (9,410) 7,067 Change in value of investment in land (23,681) - Change in value of assets held for sale - (92,600) Change in forgivable obligations (453,000) (667) Contributions restricted to investment in property and equipment (419,904) (73,798) Partnership income (8,555) (10,853) (Gain) loss on sale/disposal of property and equipment (14,441) 14,942 Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable 740,228 (349,567) Contributions receivable (324,773) 12,903 Prepaid expenses and other current assets (257,670) (34,941) Increase (decrease) in: Accounts payable 598,065 (184,034) Accrued expenses 109,817 (234,375) Deferred revenue (135,285) (163,284) Contract advances 12,169 (275,274) Other liabilities (758) (640) Net cash provided by (used in) operating activities 814,516 (644,042) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (454,087) (1,452,840) Proceeds from sale of property and equipment 14,441 70,901 Distribution from investment in partnership - 125,000 Net cash used in investing activities (439,646) (1,256,939) CASH FLOWS FROM FINANCING ACTIVITIES Collection of contributions restricted for investment in property and equipment 419,904 73,798 Advances on line of credit 750,000 1,453,200 Payments on line of credit (1,210,000) (1,005,000) Proceeds from issuance of notes payable - 630,000 Payments on notes payable (160,095) (155,329) Payments on capital lease obligations (256,200) (183,016) Net cash (used in) provided by financing activities (456,391) 813,653 NET CHANGE IN CASH AND CASH EQUIVALENTS (81,521) (1,087,328) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,414,057 2,501,385 CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,332,536 $ 1,414,057 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 177,342 $ 190,862 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Equipment purchased through capital lease $ 406,313 $ 69,225 See Notes to Consolidated Financial Statements -8-

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies Nature of operations - Catholic Charities Community Services, Inc. and Subsidiaries ( Catholic Charities ), an Arizona nonprofit corporation, was formed in 1933 by the Roman Catholic Church Diocese of Tucson, and was separately incorporated in 1970 with the formation of the Diocese of Phoenix. Catholic Charities mission is helping the community's most vulnerable with solutions that permanently improve lives. The primary service area within Arizona is the four-county area of the Roman Catholic Church Diocese of Phoenix (the Diocese ), including Maricopa, Coconino, Yavapai, and Mohave counties, with some programs in Apache and Navajo counties. Regional offices are located in Phoenix, Peoria, Flagstaff, and Prescott. Catholic Charities operates program services from these regional offices and approximately 50 other program sites. The significant accounting policies followed by Catholic Charities are summarized below: Basis of presentation - The accompanying consolidated financial statements are presented in accordance with Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) , Not-for-Profit Entities Presentation of Financial Statements. Under FASB ASC , Catholic Charities is required to report information regarding their financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. As of June 30, 2017 and 2016, Catholic Charities had no permanently restricted net assets. Principles of consolidation - The accompanying consolidated financial statements include the accounts of the following entities (collectively hereafter referred to as CCCS ): CCCS Holdings, LLC - a holding company for certain social enterprise ventures that include CCCS Properties, LLC, CCCS Services, LLC, Page Condos I, LLC, 4727 N 7 th Ave, LLC, Cafe Esperanza, LLC, The Refuge at Melrose, LLC, and 3044 N. Tani Road, LLC. Housing for Hope, Inc., an Arizona nonprofit corporation established in fiscal year 2012, was granted taxexempt status effective January 1, This corporation supports various housing initiatives as directed by Catholic Charities, including Low Income Housing Tax Credit arrangements. Each project is legally protected under Housing for Hope, Inc. through the creation of additional sole-member LLC's, including Housing for Hope I, LLC, Housing for Hope II, LLC, Housing for Hope Ill, LLC, Housing for Hope IV, LLC, H4H Development, LLC, H4H Rosewood I, LLC and H4H Rosewood II, LLC. During the years ended June 30, 2017 and 2016, activities related to CCCS Holdings, LLC included operation of the Refuge at Melrose, LLC, Cafe Esperanza, LLC, a commercial rental, and startup and renovation expenses totaling $374,402 and $438,374, respectively. All significant inter-organization transactions and accounts have been eliminated in consolidation. Management s use of estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -9-

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Cash and cash equivalents - Cash and cash equivalents include cash and highly liquid financial instruments purchased with original maturities of three months or less. Deposits at each financial institution are insured in limited amounts by the Federal Deposit Insurance Corporation ( FDIC ). At times cash deposits exceed the FDIC limits. Accounts receivable - Accounts receivable primarily represent amounts due under governmental contracts. Accounts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for uncollectible accounts based upon its assessment of the current status of individual receivables. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable. The allowance for doubtful accounts as of June 30, 2017 and 2016 was $41,177 and $84,513, respectively. Contributions receivable - 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 initially recorded at the fair value of their estimated future cash flows as of the date of the promise to give through the use of a present value discount technique. In periods subsequent to initial recognition, unconditional promises to give are reported at the amount management expects to collect and are discounted over the collection period using the same discount rate as determined at the time of initial recognition. The discount rate determined at the initial recognition of the unconditional promise to give is based upon management's assessment of many factors, including when the receivable is expected to be collected, the creditworthiness of the other parties, CCCS' past collection experience and its policies concerning the enforcement of promises to give, expectations about possible variations in the amount or timing, or both, of the cash flows, and other factors concerning the receivable's collectability. Amortization of the discounts is included in support from contributions. Conditional promises to give are recognized when the conditions on which they depend are subsequently met. Property held for sale - In 2016, CCCS received a donated parcel of land. The land is currently listed for sale with a broker and the sale is expected to be completed within one year. Property held for sale is carried at the lesser of the book value or fair value less costs to sell. No impairment charges were recorded for 2017 or Investment in land - The investment in land consists of partial interests in two parcels of raw land located in Maricopa County and Pima County, Arizona. Under FASB ASC , real estate held for investment is recorded at fair value at the dates the investments were donated and are periodically revalued through the use of a third party appraiser or other appropriate valuation methods, including the market and income approaches. Changes in value are shown as unrealized gains or losses on the consolidated statements of activities and changes in net assets. The investment is for long term purposes and is included as a noncurrent asset in the accompanying consolidated statements of financial position. Investment in partnership - CCCS accounts for its investment in Arizona Partnership for Children, L.L.P. ( AzPaC ), a one-third owned affiliate, using the equity method of accounting. Under this method, CCCS' share of net income or loss of AzPaC is recognized in CCCS' consolidated statements of activities and changes in net assets and added to or deducted from the investment account. Distributions received are recorded as a reduction in the investment account. AzPaC delivers a full range of child welfare services throughout Arizona and is a limited liability partnership (pass-through entity). -10-

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Other investments - CCCS accounts for their investments in accordance with FASB ASC , Notfor-Profit Entities - Investments - Debt and Equity Securities and FASB ASC , Not-for-Profit Entities - Investments - Other. The fair value is based on quoted market prices. Under FASB ASC , stocks in closely held companies and real estate held for investment are recorded at fair value at the dates the investments were donated and are periodically revalued through the use of a third party appraiser or other appropriate valuation methods, including the market and income approaches. CCCS holds an interest in an investment pool managed by a community foundation. These investments represent CCCS board-designated endowment fund (see Note 11). FASB ASC , Not-for-Profit Entities Revenue Recognition, establishes accounting standards for transactions in which a community foundation accepts a contribution from a donor and agrees to transfer those assets, the return on investment of those assets, or both, to another entity that is specified by the donor. FASB ASC specifically requires that if a not-for-profit organization ( NPO ) establishes a fund at a community foundation with its own funds and specifies itself as the beneficiary of that fund, the NPO must record the fund as an asset and the community foundation must account for the fund as a liability. CCCS has such funds with the Catholic Community Foundation ( CCF ). The amounts held by CCF at June 30, 2017 and 2016 total approximately $145,000 and $135,000, respectively, and are included within other investments in the accompanying consolidated statements of financial position. CCCS funds at CCF are pooled with other funds at CCF to be invested. Investments are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in risks in the near term could materially affect account balances and the amounts reported in the accompanying consolidated financial statements. Fair value measurements - FASB ASC 820, Fair Value Measurements establishes a common definition for fair value to be applied to accounting principles generally accepted in the United States of America requiring the use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements. FASB ASC 820 establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values by requiring that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Inputs to the valuation methodology include unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3: Inputs to the valuation methodology are unobservable inputs for the asset or liability. Property and equipment - Purchased property and equipment is stated at cost. Property and equipment used in exchange transactions, such as federal contracts, in which the resource provider retains legal title during the term of the arrangement are recorded as contributions at fair value at the date received by CCCS only if it is probable that CCCS will be permitted to keep the assets when the contract or arrangement terminates. Donated property and equipment is recorded at fair market value at the date of gift. Maintenance and repairs are charged to operations when incurred. Additions, betterments and renewals in excess of $5,000 are capitalized. When property and equipment is sold or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved, and any gain or loss is included in operations. -11-

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Depreciation and amortization of property and equipment is computed on a straight-line basis over estimated useful lives ranging as follows: Buildings Furniture, equipment and software Leasehold and building improvements Vehicles 30 Years 3 10 Years 3 20 Years 3 5 Years Impairment of long-lived assets - CCCS accounts for long-lived assets in accordance with the provisions of FASB ASC 360, Property, Plant and Equipment. FASB ASC 350 requires that long-lived assets be 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. No impairment charges were recorded for 2017 or Deferred revenue - Deferred revenue consists of amounts received from exchange transactions related to services that were not yet earned as of year-end. Governmental contract revenue - CCCS recognizes amounts received from contracts and grants as earned when services are rendered under unit of service contracts or as allowable costs are incurred under cost reimbursement contracts. A receivable is recorded to the extent the amount earned exceeds cash advances. Conversely, a liability is recorded when cash advances exceed amounts earned. Funding sources may, at their discretion, request reimbursement for expenses or return of funds, or both, as a result of noncompliance by CCCS with the terms of the grants or contracts. Additionally, if CCCS terminates its activities, all unearned amounts are to be returned to the funding sources. Contributions - CCCS accounts for contributions in accordance FASB ASC , Not-for-Profit Entities Revenue Recognition. In accordance with FASB ASC , contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Restricted support, where restrictions are met in the same period as the contribution is made, is shown as unrestricted support. Donated materials and services - Donated materials are reflected as contributions in the consolidated statements of activities and changes in net assets at their estimated fair values at the date of receipt. Donated services are recognized as contributions in accordance with FASB ASC if the services (a) create or enhance nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased. No amounts have been reflected in the consolidated financial statements for certain donated volunteer services because they did not qualify for recording under the guidelines of FASB ASC ; however, a substantial number of volunteers have donated significant amounts of their time in CCCS program services. Management estimates that the unrecorded value of donated services was $2,583,976 and $4,124,700 for the years ended June 30, 2017 and 2016, respectively. -12-

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Donated materials and services recorded in the consolidated statements of activities and changes in net assets for the years ended June 30, 2017 and 2016 consist primarily of donated office space and materials benefiting certain program activities of CCCS. Program service fees - CCCS recognizes revenues from program service fees as earned when services are rendered. Administrative service fees - CCCS recognizes revenues from management and accounting services and leased employees provided to a related party as earned when services are rendered. Special events revenue - CCCS conducts special events in which a portion of the gross proceeds paid by the participant represents payment for the direct cost of the benefits received by the participant at the event. Unless a verifiable, objective means exists to demonstrate otherwise, the fair value of meals and entertainment provided at special events is measured at the actual cost to CCCS. The direct costs of the special events which ultimately benefit the donor rather than CCCS are recorded as costs of direct donor benefits. All proceeds received in excess of the direct costs are recorded as gross profit on special events in the accompanying consolidated statements of activities and change in net assets. Functional allocation of expenses - The costs of providing various program and other activities of CCCS have been summarized on a functional basis in the accompanying consolidated statements of activities and changes in net assets. Accordingly, certain costs have been allocated among the programs and supporting services benefited based on personnel activity and other appropriate allocation methods. Management and general includes those expenses that are not directly identifiable with any specific program, but provide overall support and direction of CCCS. These costs are allocated to programs based on a federally approved indirect rate. Advertising - CCCS uses advertising to promote its programs to the various groups it serves and for recruitment and fundraising. Advertising costs are charged to operations as incurred. Advertising expense charged to operations was approximately $47,000 and $53,000 for the years ended June 30, 2017 and 2016, respectively. Income tax status - Catholic Charities qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code ( IRC ) and, accordingly, there is no provision for income taxes in the accompanying consolidated financial statements. In addition, Catholic Charities qualifies for the charitable contribution deduction under Section 170 of the IRC and has been classified as an organization that is not a private foundation. Income determined to be unrelated business taxable income ( UBTI ) would be taxable. For income tax purposes, CCCS Holdings, LLC, CCCS Properties, LLC, CCCS Services, LLC, Page Condos I, LLC, 4727 N 7 th Ave, LLC, Cafe Esperanza, LLC, The Refuge at Melrose, LLC, 3044 N. Tani Road, LLC, Housing for Hope I, LLC, Housing for Hope II, LLC, Housing for Hope Ill, LLC, Housing for Hope IV, LLC, H4H Development, LLC, H4H Rosewood I, LLC and H4H Rosewood II are treated as disregarded entities, and accordingly, all income and expenses are passed through to Catholic Charities. Housing for Hope, Inc. obtained its tax-exempt status under IRC Section 501(c)(3) during the year ended June 30, Housing for Hope, Inc. also qualified for the charitable contribution deduction under Section 170 of the IRC and has been classified as an organization that is not a private foundation. CCCS evaluates their uncertain tax positions, if any, on a continual basis through review of their policies and procedures, review of their regular tax filings, and discussions with outside experts. CCCS believes that they have appropriate support for any tax positions taken, and as such, do not have any uncertain tax positions that are material to the consolidated financial statements. -13-

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Catholic Charities federal Return of Organizations Exempt from Income Tax (Form 990) for fiscal 2014, 2015 and 2016 are subject to examination by the IRS, generally for the three years after they were filed. As of the date of this report, the 2017 Form 990s for Catholic Charities and Housing for Hope, Inc. have not been filed. Recent accounting pronouncements - In May 2014, the FASB issued Accounting Standards Update ( ASU ) No , Revenue from Contracts with Customers (Topic 606), that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Additionally, the guidance requires disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606), which changed the effective date of the provisions of FASB ASU No As a result, the new effective dates for public business entities, certain not-for-profit entities, and certain employee benefit plans to apply the guidance in FASB ASU No is for annual reporting periods beginning after December 15, All other entities should apply the guidance in FASB ASU No to annual reporting periods beginning after December 15, Earlier application is permitted only as of annual reporting periods beginning after December 15, Transition to the new guidance may be done using either a full or modified retrospective method. CCCS is currently evaluating the full effect that the adoption of this standard will have on the consolidated financial statements. In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The amendments in ASU are intended to define management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern and to provide related footnote disclosures. FASB ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, CCCS adopted ASU in 2017 with no significant impact to the consolidated financial statements. In May 2015 the FASB issued Accounting Standards Update (ASU) , Fair Value Measurements, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. -14-

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (1) Nature of operations and summary of significant accounting policies (continued) Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The disclosures of unfunded commitments, redemption frequency and redemption notice are still required. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. CCCS has elected to adopt ASU for the year ended June 30, As a result, the fair value of CCCS investment in pooled investments which are measured using net asset value as a practical expedient are not presented within the fair value hierarchy. In April 2015, the FASB issued ASU No , Interest - Imputation of Interest (Subtopic ), an amendment of previously issued guidance on imputation of interest. ASU amends existing guidance to require the presentation of debt issuance costs in the consolidated statement of financial position as a deduction from the carrying amount of the related debt liability instead of as an asset. ASU is effective for annual and interim reporting periods after December 15, 2015, with early adoption permitted. CCCS adopted ASU retrospectively to June 30, As a result of the retrospective adoption, CCCS reclassified unamortized debt issuance costs of $9,794 and $16,352 as of June 30, 2017 and 2016, respectively, from deferred financing costs, net to a reduction in notes payable on the consolidated statements of financial position. Adoption of ASU did not impact the consolidated results of operations, net assets, or cash flows in the current or prior year. In February 2016, the FASB issued ASU No , Leases (Topic 842). ASU requires that a lease liability and related right-of-use-asset representing the lessee s right to use or control the asset be recorded on the balance sheet upon the commencement of all leases except for short-term leases. Leases will be classified as either finance leases or operating leases, which are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in existing lease accounting guidance. The ASU is effective for fiscal years beginning after December 15, Early adoption is permitted. The Organization has estimated that if they were to adopt the standard for the year ended June 30, 2017, a non-current right-of-use-asset of approximately $817,000 would be recorded and a corresponding current and non-current lease liability of approximately $417,000 and $400,000, respectively, would be recorded in the accompanying consolidated statement of financial position. The estimate was calculated using the future minimum lease payments (See Note 13) and a discount rate of 4.25%, representing the Organization s approximate incremental borrowing rate. In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities. ASU improves the current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity s liquidity, financial performance, and cash flows. ASU is effective for annual financial statements issued for fiscal years beginning after December 15, Early application is permitted. The amendments of this ASU are to be applied on a retrospective basis in the year that the ASU is first applied. CCCS is currently evaluating the full effect that the adoption of this standard will have on the consolidated financial statements. Subsequent events - CCCS has evaluated events through January 8, 2018, which is the date the consolidated financial statements were available to be issued. -15-

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (2) Contributions receivable Contributions receivable consist of the following: Unconditional Promises to Give: Due in Less than One Year $ 1,222,506 $ 897,733 Total Unconditional Promises to Give 1,222, ,733 Less: Allowance for Uncollectible Contributions (34,293) - Net Unconditional Contributions Receivable 1,188, ,733 Less: Current Portion (1,188,213) (897,733) Noncurrent Portion $ - $ - Contributions receivable consist of time-restricted contributions due from various United Way organizations, the Diocese, and private donors. Two donors, Valley of the Sun United Way and the Diocese of Phoenix, comprise 79% and 100% of the contributions receivable balance at June 30, 2017 and 2016, respectively. (3) Investment in partnership CCCS owns a one-third interest in AzPaC. As of June 30, 2017 and 2016, CCCS' share of AzPaC's equity was $119,138 and $110,583, respectively. AzPaC's assets consist primarily of cash and receivables. Liabilities consist primarily of vendor payables. The following is a summary of AzPaC's financial position at June 30, 2017 and 2016, and the results of its operations for the years ended June 30, 2017 and 2016 (unaudited): Assets Current Assets $ 2,020,728 $ 3,254,053 Total Assets $ 2,020,728 $ 3,254,053 Liabilities and Partners Equity Current Liabilities $ 1,663,316 $ 2,922,304 Partners Equity 357, ,749 Total Liabilities and Partners Equity $ 2,020,728 $ 3,254,053 Operating Activities Total Revenues $ 10,494,533 $ 11,987,576 Total Expenses (10,468,870) (11,957,406) Other Income - 2,386 Net Income $ 25,663 $ 32,

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (4) Property and equipment Property and equipment consist of: Cost and donated value: Land $ 1,694,049 $ 1,657,049 Buildings 10,203,524 10,220,524 Furniture, equipment, and software 2,321,624 1,859,540 Leasehold and building improvements 4,646,904 4,621,328 Vehicles 155, ,182 Construction in progress 793, ,903 Total cost and donated value 19,815,063 18,974,526 Accumulated depreciation (7,763,382) (6,831,808) Property and equipment, net $ 12,051,681 $ 12,142,718 Depreciation expense charged to operations was $951,437 and $854,091 for the years ended June 30, 2017 and 2016, respectively. As of June 30, 2017, construction in progress consists of various projects of building improvements in process. The projects have an estimated remaining total cost of approximately $2,700,000 and are estimated to be completed through March 31, The projects are being funded through operating cash, contributions received, a credit line (see Note 20), and loan commitments. CCCS has commitments related to ongoing construction of approximately $2,700,000 as of June 30, Property and equipment purchased with Head Start funds are owned by the funder; however, CCCS uses these assets in their Head Start program. The funding source retains a reversionary interest in the property and equipment purchased with grant funds. Its disposition, as well as ownership of any proceeds there from, is subject to funding source regulations. These assets are not recorded on CCCS' consolidated financial statements, however, CCCS keeps an inventory of these assets and the total cost of these assets was $161,090 and $377,618 as of June 30, 2017 and 2016, respectively. (5) Line of credit CCCS has a loan agreement with a bank which includes a $2.0 million revolving line of credit. The line of credit bears interest at the greater of the bank s prime rate plus 0.5% or 4% per annum (4.0% at June 30, 2017) and is payable monthly. The loan agreement is collateralized by substantially all assets of CCCS. The line of credit is subject to certain nonfinancial covenants. Effective March 16, 2017, the line of credit was modified to extend the maturity date to March 16, As of June 30, 2017 and 2016, $338,200 and $798,200 was outstanding under the line of credit, respectively. -17-

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (6) Notes payable Notes payable consists of the following at June 30: Note payable to a bank, as part of the loan agreement (see Note 5), bearing interest at a fixed rate of 4.28% per annum. Note requires monthly principal and interest payments of $19,314 with all unpaid principal and interest due in full on March 19, Note payable is subject to certain nonfinancial covenants and is secured by a deed of trust upon real property. $ 1,985,738 $ 2,127,958 Note payable to a bank bearing interest at a fixed rate of 5% per annum collateralized by a deed of trust and fixture filing and assignment of rents. Note requires monthly principal and interest payments of $2,783 with a balloon payment of all unpaid principal and interest due in full on April 1, Note payable is subject to a nonfinancial covenant. CCCS received a waiver for this nonfinancial covenant subsequent to year end. 296, ,481 Promissory note secured by a deed of trust upon real property, payable to a trust bearing interest at a fixed rate of 5% per annum and requiring payments of interest only totaling $2,630 per month, with all unpaid principal and interest due in full on November 3, , ,000 Total notes payable 2,912,344 3,072,439 Less: current portion (145,684) (139,126) Less: unamortized deferred financing costs (9,794) (16,352) Noncurrent portion $ 2,756,866 $ 2,916,961 Future maturities of the note payable as of June 30, 2017 are as follows: Years Ending June 30, 2018 $ 155, , , ,036, ,655 Thereafter 1,185,369 Total $ 2,912,

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (7) Capital lease obligations CCCS leases certain office equipment under capital leases expiring in 2021 and bearing interest rates ranging between 1.00% and 6.23%. The assets and liabilities under the capital leases are initially recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. Amortization expense under the capital leases is included in depreciation expenses. Each asset is depreciated over its expected useful life. The total cost and accumulated depreciation of the equipment under the capital leases are as follows: Equipment $ 972,180 $ 565,868 Less: Accumulated depreciation (493,122) (252,859) Total $ 479,058 $ 313,009 Future minimum lease payments under the capital leases are as follows: (8) Deferred revenue Years ending June 30, 2018 $ 180, , , ,997 Total minimum payments 456,104 Less: amount representing interest (31,129) Present value of net minimum lease payments 424,975 Less: current portion of capital lease obligations (166,194) Noncurrent portion of capital lease obligations $ 258,781 In October 2011, CCCS entered into a Contract for Service agreement ( Agreement ) with Maricopa County, Arizona ( County ). The Agreement calls for the acquisition, development, and renovation of a foreclosed or abandoned multi-family housing complex within the County and to provide rental and support services to veterans and certain homeless or formerly homeless individuals or families meeting certain lowincome requirements. CCCS must maintain the facility and provide support services for 15-years commencing upon the completion of renovations and initial occupancy. The purchase and renovation work concluded during the year ended June 30, CCCS received approximately $4,145,000 under the Agreement, passed through from the U.S. Department of Housing and Urban Development, of which approximately $3,581,000 was allocated to the 15-year support service period and approximately $564,000 relates to services performed during the upfront acquisition, development and renovation period. Under CCCS's revenue recognition policy, the revenues related to this contract will be recognized when the services are rendered throughout the term of the Agreement. During the years ended June 30, 2017 and 2016, CCCS recognized revenue totaling $239,112. Additionally, as of June 30, 2017 and 2016, $2,690,007 and $2,929,119 respectively, is reflected as deferred revenue in the accompanying consolidated statements of financial position of which $2,450,895 and $2,690,007, respectively, is classified as noncurrent with the remaining balances for each year reflected as current deferred revenue, respectively. -19-

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (8) Deferred revenue (continued) In the event that CCCS were to default under the terms of this contract during the development stage and/or the 15 subsequent years, and if CCCS were not able to remedy the default as provided for in the contract, then the entire amount received from the County would need to be paid back to the County. This contingent liability is secured by a forgivable note and deed of trust on the housing complex. If there is no default, the County will cancel the forgivable note and release the deed of trust at the end of the 15-year period. Management believes that CCCS and/or its contractors assisting with the project have the resources and expertise necessary to comply with these contract terms during this period of time. The remaining $254,655 and $150,828 of deferred revenue at June 30, 2017 and 2016, respectively, relates to various contract funds received in advance of the performance of the services required. (9) Forgivable obligations Forgivable obligations relate to various grants that CCCS has received for the purpose of acquiring or remodeling facilities during the period from 1994 to These funds are to be repaid by CCCS under certain circumstances. Many of these grants were specifically identified by the grantor/lender as forgivable loans and these forgivable loans are secured by deeds of trust on the related facilities. Other funds have been specifically identified as grants; however, the terms of the grants provide that the funds are to be repaid under similar circumstances. In general, the circumstances that would result in these funds being repaid by CCCS relate to noncompliance with the terms of the respective agreements (i.e., CCCS failing to use the property over the specified period for the intended purpose specified by the grantor). The funds received by CCCS for these types of grants or forgivable loans have been recorded as a forgivable obligation liability in the accompanying consolidated statements of financial position. The liability is reduced either at the expiration of the forgivable obligation period or pro-rata over the specified period of restricted use, depending on the underlying terms of the grant or loan. As the forgivable obligation liability is reduced, there is a corresponding increase to governmental contracts revenue. During the year ended June 30, 2017, CCCS met the requirements of a forgivable obligation and recognized $453,000 as an unrestricted contribution in the accompanying consolidated statement of activities and changes in net assets. There were no reductions in forgivable obligations during the year ended June 30, The remaining obligations at June 30, 2017 will be considered forgiven in fiscal years 2026, 2027 and 2054 and have been classified as noncurrent liabilities in the accompanying consolidated statements of financial position. (10) Board designated unrestricted net assets The board of directors has designated portions of the unrestricted net assets for various purposes, including an operating reserve, a long-term reserve, and an endowment (Note 11). -20-

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (11) Endowment As required by GAAP, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. At June 30, 2017 and 2016, CCCS endowment consists entirely of a Board-designated endowment established in 2004 through the investment of funds in an investment pool held and managed by CCF. There are no donor-restricted endowment funds as of June 30, 2017 and CCCS has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to CCCS while seeking to maintain the purchasing power of the endowment assets. Under this policy the endowment assets are invested in a manner that is intended to produce results while assuming a moderate level of investment risk. To satisfy its long-term rate-of-return objectives, CCCS relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). CCCS endowment is invested in an investment pool managed by CCF. CCF implements an investment strategy for these pooled funds that includes equity, fixed income, and private equity investments. The net income of the endowment fund is distributed to CCCS in at least annual installments unless directed by the Board of Directors to remain either partially or entirely in the fund and added to the corpus. The changes in endowment net assets for the year ended June 30, 2017 are as follows: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment net assets, July 1, 2016 $ 135,300 $ - $ - $ 135,300 Investment return 14, ,976 Board appropriated (5,328) - - (5,328) Endowment net assets, June 30, 2017 $ 144,948 $ - $ - $ 144,948 The changes in endowment net assets for the year ended June 30, 2016 are as follows: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment net assets, July 1, 2015 $ 141,252 $ - $ - $ 141,252 Investment return (5,952) - - (5,952) Endowment net assets, June 30, 2016 $ 135,300 $ - $ - $ 135,

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (12) Temporarily restricted net assets Temporarily restricted net assets consist of the following at June 30: Time restrictions Charities and development appeal (the Diocese) $ 800,000 $ 780,000 United Way organizations 140, ,805 Thunderbirds 100,000 - Other contributions receivable 147,557 - Purpose restrictions Emergency services 4,683 5,883 Educational and family support services 172, ,813 Counseling and behavioral health services 12,155 12,155 Program services in Yavapai County 200, ,707 Social support 21,414 22,818 Building renovations 493,702 73,798 Other 6, ,868 Total temporary restricted net assets $ 2,100,134 $ 1,512,847 During June 30, 2017 and 2016, $1,341,580 and $950,357, respectively, of donor restrictions were released from restriction primarily related to the expiration of time restrictions and provision of educational and family support services. (13) Leases CCCS leases buildings and equipment under various operating lease agreements expiring in various years through March Minimum future rental payments under operating leases, having remaining terms in excess of one year at June 30, 2017, are as follows: Years Ending June 30, 2018 $ 433, , ,870 $ 871,880 Total rental expense was approximately $2,473,000 and $2,162,000 for 2017 and 2016, respectively. This includes rental expense on donated facilities of approximately $387,000 and $415,000 for 2017 and 2016, respectively. Operating leases for certain facilities provide for renewal options at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by other leases. -22-

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (14) 403(b) plan CCCS participates in a 403(b) plan that is administered by the Diocese of Phoenix. Eligible employees may elect to make contributions subject to the maximum amounts allowed by the Code. There were no employer matching contributions for the years ended June 30, 2017 and (15) Pension plan CCCS participates in the Lay Employees Retirement Plan (the Plan), multi-employer defined benefit pension plan administered by the Diocese of Phoenix. The Plan covers lay employees of the Diocese of Phoenix, the Central Administrative Office, the Diocesan High Schools, the parishes, and employees of CCCS. CCCS made contributions to the Plan of approximately $1,286,000 and $1,185,000 for 2017 and 2016, respectively. The portion of the Plan's assets and liabilities allocable to CCCS has not been determined with respect to accumulated benefits. In the event of withdrawals from the Plan and under certain other conditions, a contributor to a multi-employer plan may be liable to the Plan for a portion of the funds of the under-funded status, if any. The plan is exempt from filing Form 5500 and plan information is not readily available. (16) Related party transactions Catholic Charities was formed as an expression of the social mission of the Roman Catholic Church and receives funding from the Diocese of Phoenix. Catholic Charities and its subsidiaries are separate corporations from the Diocese of Phoenix. CCCS receives some financial support through the Diocese of Phoenix's annual Charity and Development Appeal, a parish-based fundraising and grant program which supports a number of programs and services in the Diocese of Phoenix. In addition to the employee pension plans noted in Notes 14 and 15, CCCS also purchased employee benefits and liability insurance during the years ended June 30, 2017 and 2016, the cost for which was approximately $2,800,000 and $2,600,000, respectively, in a pool with other employees of the Diocese of Phoenix. CCCS received unconditional promises to give of $800,000 and $780,000 from the Diocese of Phoenix during 2017 and The unconditional promises to give were collected subsequent to the respective fiscal year ends. These amounts are included in contributions receivable in the accompanying consolidated statements of financial position at June 30, 2017 and 2016, respectively. CCCS provides social services to AzPaC's clients. The revenue earned from these services was $4,049,081 and $4,402,973 in 2017 and 2016, respectively, and is recorded in governmental contracts revenue in the accompanying consolidated statements of activities and changes in net assets. CCCS has amounts due from AzPaC of $1,631,185 and $1,057,698 at June 30, 2017 and 2016, respectively, which is included in accounts receivable. Through October 2016, CCCS also provided management and accounting services and leased employees to AzPaC. AzPaC reimbursed CCCS approximately $63,000 and $173,000 for 2017 and 2016, respectively, for management and accounting services and approximately $50,000 and $205,000 for 2017 and 2016, respectively, for leased employee costs and employee related expenses. The amounts have been included as reductions in management and general expenses in the consolidated statements of activities and changes in net assets for the years ended June 30, 2017 and The responsibility for management, accounting and leased employee costs transferred to another AzPaC partner during the first half of the 2017 fiscal year. -23-

26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (17) Fair value measurements Investment in land, real estate held for investment and stock in closely held companies are valued using Level 3 inputs. The table below presents the change in fair value measurements that used Level 3 inputs during the year ended June 30, 2017: Investment in Land Real Estate Held for Investment Stock in Closely Held Companies Total Balance at July 1, 2016 $ 156,708 $ - $ 5,975 $ 162,683 Stock contribution - - 1,000 1,000 Unrealized/realized gains (losses) - 23,681 (1,238) 22,443 Balance at June 30, 2017 $ 156,708 $ 23,681 $ 5,737 $ 186,126 For the above level 3 investments, the valuation technique used was the market approach, with unobservable inputs consisting primarily of adjustments to comparable real estate sales and discount to net asset value. The table below presents the change in fair value measurements that used Level 3 inputs during the year ended June 30, 2016: Investment in Land Real Estate Held for Investment Stock in Closely Held Companies Total Balance at July 1, 2015 $ 156,708 $ - $ 7,090 $ 163,798 Unrealized/realized losses - - (1,115) (1,115) Balance at June 30, 2016 $ 156,708 $ - $ 5,975 $ 162,683 For the above level 3 investments, the valuation technique used was the market approach, with unobservable inputs consisting primarily of adjustments to comparable real estate sales and discount to net asset value. In accordance with ASU , Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent), the investments in CCF totaling approximately $145,000 and $135,000 are excluded from fair value measurements leveling disclosure. CCCS determines the fair value of their investments held by CCF based on their investment percentage in the consolidated investment pool. CCF implements an investment strategy for these pooled funds that includes equity, fixed income, and private equity investments. In accordance with FASB ASC 820, CCCS is required to disclose the nature and risks of the investments reported at net asset value ( NAV ). There are no unfunded commitments associated with the investments held at CCF and there are no redemption provisions. -24-

27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2017 and 2016 (18) Concentrations CCCS receives federal funding for the Head Start and Early Head Start programs. This funding accounts for approximately 27% and 30% of total support and revenue for the years ended June 30, 2017 and 2016, respectively. Accounts receivable related to this program at June 30, 2017 and 2016 accounted for approximately 11% and 14%, respectively, of the total accounts receivable balances. (19) Commitments and contingencies Periodically, CCCS is involved in litigation and claims arising in the normal course of operations. In the opinion of management, and based on consultation with legal counsel, losses, if any, from these matters are covered by insurance or are immaterial. (20) Subsequent events In August 2017, CCCS entered into a revolving line of credit with a bank in the amount of $2,500,000 with a maturity date of August The line of credit was provided to CCCS under the previously established loan agreement with a bank (see Note 5). The revolving line of credit bears interest at the greater of the lender s prime rate plus one quarter of one percent per annum or four percent per annum. CCCS utilized $1,050,000 of draws on the line of credit to purchase a building and land in August CCCS anticipates approximately $800,000 of renovations to this property which are expected to commence in early In October 2017, CCCS purchased a building and land for $50,000. CCCS is in the process of securing contributions of approximately $1 million to assist in funding the construction of a multi-use facility on the acquired property. CCCS has obtained architectural estimates which approximate $2 million. The project is expected to begin in March

28 UNIFORM GUIDANCE SUPPLEMENTAL REPORTS

29 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2017 Federal CFDA Pass-through Grantor's Federal Federal Grantor / Pass-Through Agency / Program or Cluster Title Number Identifying Number Expenditures U.S. Department of Agriculture Pass through Arizona Department of Education: Child & Adult Care Food Program CTD $ 422,183 Total U.S. Department of Agriculture 422,183 U.S. Department of Housing and Urban Development Pass through City of Flagstaff: Community Development Block Grants/Entitlement Grants C-15 41,958 Community Development Block Grants/Entitlement Grants C-15 72,255 Pass through Maricopa County: Community Development Block Grants/Entitlement Grants C ,384,505 Subtotal CFDA ,498,718 Pass through Arizona Department of Housing: Continuum of Care Program ,502 Continuum of Care Program ,147 Continuum of Care Program ,970 Continuum of Care Program ,451 Continuum of Care Program ,978 Continuum of Care Program ,747 Continuum of Care Program ,637 Continuum of Care Program ,474 Subtotal CFDA ,906 Section 8 Housing Choice Vouchers N/A 2,091 Total U.S. Department of Housing and Urban Development 5,165,715 See Independent Auditors' Report See Notes to Schedule of Expenditures of Federal Awards -26-

30 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (CONTINUED) Year Ended June 30, 2017 Federal CFDA Pass-through Grantor's Federal Federal Grantor / Pass-Through Agency / Program or Cluster Title Number Identifying Number Expenditures U.S. Department of Justice Pass through Arizona Department of Public Safety: Crime Victim Assistance $ 131,942 Crime Victim Assistance ,417 Subtotal CFDA ,359 Total U.S. Department of Justice 324,359 U.S. Department of State Pass through United States Conference of Catholic Bishops: U.S. Refugee Admissions Program ,589 U.S. Refugee Admissions Program ,343 Subtotal CFDA ,188,932 Total U.S. Department of State 1,188,932 U.S. Department of Health and Human Services Pass through Northern Arizona Regional Behavioral Health Authority: Projects For Assistance in Transition from Homelessness (PATH) ADHS ,473 Pass through Arizona Department of Health Services: Affordable Care Act Abstinence Education Program ADHS ,145 Pass through Arizona Department of Economic Security: Temporary Assistance for Needy Families DES ,642 Pass through Arizona Department of Economic Security: Refugee & Entrant Assistance - Targeted Assistance Grants DE ,405 Pass through Arizona Department of Economic Security: Refugee & Entrant Assistance - State /Replacement Designee Administered Programs ADES ,428,099 Refugee & Entrant Assistance - State /Replacement Designee Administered Programs DE ,351 Subtotal CFDA ,789,450 Pass through Arizona Department of Economic Security: Refugee & Entrant Assistance - Discretionary Grants DE ,475 Refugee & Entrant Assistance - Discretionary Grants ADHS ,125 Pass through United States Conference of Catholic Bishops: Refugee & Entrant Assistance - Discretionary Grants ,512 Subtotal CFDA ,112 Pass through United States Conference of Catholic Bishops: Refugee & Entrant Assistance - Voluntary Agency Programs ,030 Pass through United States Conference of Catholic Bishops: Unaccompanied Alien Children Program ZU ,625 Unaccompanied Alien Children Program LT DUCS 14,017 Subtotal CFDA ,642 See Independent Auditors' Report See Notes to Schedule of Expenditures of Federal Awards -27-

31 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (CONTINUED) Year Ended June 30, 2017 Federal CFDA Pass-through Grantor's Federal Federal Grantor / Pass-Through Agency / Program or Cluster Title Number Identifying Number Expenditures U.S. Department of Health and Human Services (continued) Head Start N/A $ 9,203,860 Total U.S. Department of Health and Human Services 13,959,759 U.S. Department of Homeland Security Pass through United States Conference of Catholic Bishops: Cuban/Haitian Entrant Program ,310 Cuban/Haitian Entrant Program ,613 Subtotal CFDA ,923 Total U.S. Department of Homeland Security 404,923 U.S. Department of Veterans Affairs VA Supportive Services for Veteran Families Program N/A 1,185,073 VA Homeless Providers Grant and Per Diem Program N/A 755,456 Total U.S. Department of Veterans Affairs 1,940,529 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 23,406,400 See Independent Auditors' Report See Notes to Schedule of Expenditures of Federal Awards -28-

32 NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2017 (1) Basis of presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) includes the federal award activity of Catholic Charities Community Services, Inc. and Subsidiaries under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with the 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 presents only a selected portion of the operations of Catholic Charities Community Services, Inc. and Subsidiaries, it is not intended to and does not present the consolidated financial position, changes in net assets or cash flows of Catholic Charities Community Services, Inc. and Subsidiaries. Catholic Charities Community Services, Inc. and Subsidiaries did not provide federal awards to sub-recipients during the year ended June 30, (2) Summary of significant accounting policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following, as applicable, either the cost principles contained in OMB Circular A-122, Cost Principles for Not-for-Profit Organizations, or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Catholic Charities Community Services, Inc. and Subsidiaries has not elected to use the ten percent de minimis indirect cost rate allowed under the Uniform Guidance. (3) Loan program The accompanying schedule of expenditures of federal awards includes a loan program from the U.S. Department of Housing and Urban Development, passed through Maricopa County, under CFDA , Community Development Block Grants/Entitlement Grants with ongoing compliance requirements with an ending outstanding loan balance of $4,145,393 at June 30, (4) Catalog of federal domestic assistance (CFDA) number The program titles and CFDA numbers were obtained from the 2017 Catalog of Federal Domestic Assistance. -29-

33 3101 N. Central Ave., Suite 300 Phoenix, AZ Main: Fax: 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 of CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES We have audited, in accordance with the 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, the consolidated financial statements of Catholic Charities Community Services, Inc. and Subsidiaries (the Organization ), which comprise the consolidated statement of financial position as of June 30, 2017 and the related consolidated statements of activities and changes in net assets, functional expenses and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated January 8, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered Catholic Charities Community Services, Inc. and Subsidiaries 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 consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of Catholic Charities Community Services, Inc. and Subsidiaries internal control. Accordingly, we do not express an opinion on the effectiveness of Catholic Charities Community Services, Inc. and Subsidiaries 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 consolidated 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 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. Member of Kreston International a global network of independent accounting firms

34 Compliance and Other Matters As part of obtaining reasonable assurance about whether Catholic Charities Community Services, Inc. and Subsidiaries consolidated financial statements are free from material misstatement, we performed tests of their 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 consolidated 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 Catholic Charities Community Services, Inc. and Subsidiaries internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Catholic Charities Community Services, Inc. and Subsidiaries internal control and compliance. Accordingly, this communication is not suitable for any other purpose. January 8, 2018

35 3101 N. Central Ave., Suite 300 Phoenix, AZ Main: Fax: INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors of CATHOLIC CHARITIES COMMUNITY SERVICES, INC. AND SUBSIDIARIES Report on Compliance for Each Major Federal Program We have audited Catholic Charities Community Services, Inc. and Subsidiaries compliance with the types of compliance requirements described in the U.S. Office of Management and Budget ( OMB ) Compliance Supplement that could have a direct and material effect on each of Catholic Charities Community Services, Inc. and Subsidiaries major federal programs for the year ended June 30, Catholic Charities Community Services, Inc. and Subsidiaries 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 federal statutes, regulations and the terms and conditions of their federal awards applicable to their federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of Catholic Charities Community Services, Inc. and Subsidiaries 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 Government Auditing Standards, issued by the Comptroller General of the United States; and the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (the Uniform Guidance ). Those standards and the 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 Catholic Charities Community Services, Inc. and Subsidiaries 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 Catholic Charities Community Services, Inc. and Subsidiaries compliance. Member of Kreston International a global network of independent accounting firms