Midwest Christian Villages, Inc. and Affiliates

Transcription

1 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Financial Report with Supplemental Information June 30, 2018

2 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Contents Independent Auditor's Report 1 Consolidated Financial Statements Balance Sheet 2-3 Statement of Unrestricted Activities 4 Statement of Changes in Net Assets 5 Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7-26 Supplemental Information 27 Report Letter 28 Consolidating Balance Sheet Consolidating Statement of Unrestricted Activities Consolidating Statement of Changes in Net Assets Consolidating Statement of Cash Flows 37-38

3 Independent Auditor's Report To the Board of Directors Midwest s, Inc. and Affiliates d/b/a Christian Horizons We have audited the accompanying consolidated financial statements of Midwest s, Inc. and Affiliates d/b/a Christian Horizons (the "Organization"), which comprise the consolidated balance sheet as of June 30, 2018 and 2017 and the related consolidated statements of unrestricted activities, changes in net assets, and cash flows for the years 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. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 auditor s 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Midwest s, Inc. and Affiliates d/b/a Christian Horizons as of June 30, 2018 and 2017 and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. September 21,

4 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Balance Sheet Assets Current Assets Cash and cash equivalents $ 14,480,839 $ 15,014,986 Accounts receivable - Net (Note 3) 16,242,917 20,267,575 Current portion of assets limited as to use (Note 4) 8,507,854 9,001,643 Other current assets 1,826,547 1,944,610 Total current assets 41,058,157 46,228,814 Assets Limited as to Use - Net of current portion (Note 4) 14,678,628 16,514,538 Investments (Note 5) 42,340,104 35,433,475 Property and Equipment Land and land improvements 3,344,156 3,344,156 Building and improvements 183,212, ,500,116 Equipment 27,247,140 28,712,951 Construction in progress 2,001,317 1,854,506 Total property and equipment 215,804, ,411,729 Less accumulated depreciation 117,983, ,371,820 Net property and equipment 97,820, ,039,909 Goodwill and Intangibles (Note 14) 2,009,231 2,013,664 Other Assets 10,440 11,347 Total assets $ 197,917,378 $ 203,241,747 See notes to consolidated financial statements. 2

5 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Balance Sheet (Continued) Liabilities and Net Assets Current Liabilities Accounts payable $ 3,557,394 $ 5,495,425 Current portion of long-term debt (Note 7) 3,636,404 3,954,406 Resident trust fund payable 352, ,724 Current portion of refundable entrance fees 790, ,527 Accrued liabilities and other 11,544,838 12,516,921 Total current liabilities 19,881,861 23,175,003 Long-term Debt - Net of current portion and unamortized deferred financing costs (Note 7) 100,148, ,523,638 Other Long-term Liabilities Refundable entrance fees 4,121,629 4,414,859 Deferred revenue from entrance fees 6,228,405 6,101,274 Supplemental employer retirement plan liability (Note 9) 1,677,266 1,740,235 Other long-term liabilities 729, ,525 Total other long-term liabilities 12,756,848 12,997,893 Total liabilities 132,787, ,696,534 Net Assets Unrestricted 64,879,553 63,281,566 Temporarily restricted 250, ,647 Total net assets 65,130,329 63,545,213 Total liabilities and net assets $ 197,917,378 $ 203,241,747 See notes to consolidated financial statements. 3

6 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Statement of Unrestricted Activities Years Ended Operating Revenue Net service revenue $ 121,777,351 $ 121,786,312 Amortization of entrance fees 796,212 1,024,903 Other 16,416,332 17,299,755 Net assets released from restrictions provided by operations 54,154 44,448 Total operating revenue 139,044, ,155,418 Operating Expenses Nursing 38,390,526 38,802,406 Ancillary 20,056,098 20,096,040 Dietary 8,184,445 8,233,584 Homecare 2,322,340 2,602,693 Housekeeping 3,912,315 3,682,722 Activities and social services 4,052,957 3,942,508 Plant operations and maintenance 6,355,448 6,246,938 Administrative 23,966,817 22,925,630 Marketing 3,641,116 3,470,457 Payroll taxes 4,819,373 4,695,877 Employee benefits 9,138,545 8,446,836 Property taxes 820, ,597 Interest 5,588,496 5,735,830 Depreciation 9,523,133 9,229,055 Goodwill impairment (Note 14) - 1,150,038 Total operating expenses (Note 11) 140,772, ,074,211 Operating (Loss) Income (1,728,495) 81,207 Nonoperating Income (Loss) Investment income 2,400,934 2,064,174 Unrealized gains on investments (Note 5) 272, ,403 Contributions 737, ,685 Other (68,206) (78,381) Total nonoperating income 3,343,268 3,078,881 Excess of Revenue Over Expenses 1,614,773 3,160,088 Distribution to Noncontrolling Member (Note 6) (55,529) (100,368) Net Assets Released from Restrictions for Capital Purchases 38,743 15,894 Increase in Unrestricted Net Assets $ 1,597,987 $ 3,075,614 See notes to consolidated financial statements. 4

7 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Statement of Changes in Net Assets Years Ended Unrestricted Temporarily Restricted Total Net Assets - July 1, 2016 $ 60,205,952 $ 201,158 $ 60,407,110 Excess of revenue over expenses 3,160,088-3,160,088 Restricted contributions - 122, ,831 Distribution to noncontrolling member (100,368) - (100,368) Net assets released from restriction used in operations - (44,448) (44,448) Net position released from restriction for capital purchases 15,894 (15,894) - Increase in net assets 3,075,614 62,489 3,138,103 Net Assets - June 30, ,281, ,647 63,545,213 Excess of revenue over expenses 1,614,773-1,614,773 Restricted contributions - 80,026 80,026 Distribution to noncontrolling member (55,529) - (55,529) Net assets released from restriction used in operations - (54,154) (54,154) Net assets released from restriction for capital purchases 38,743 (38,743) - Increase (decrease) in net assets 1,597,987 (12,871) 1,585,116 Net Assets - June 30, 2018 $ 64,879,553 $ 250,776 $ 65,130,329 See notes to consolidated financial statements. 5

8 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Consolidated Statement of Cash Flows Years Ended Cash Flows from Operating Activities Increase in net assets $ 1,585,116 $ 3,138,103 Adjustments to reconcile increase in net assets to net cash and cash equivalents from operating activities: Provision for bad debts 2,964,197 2,488,261 Depreciation 9,523,133 9,229,055 Amortization of entrance fees (796,212) (1,024,903) Unrealized gain on investments (272,948) (279,403) Amortization of bond premium (161,171) (161,390) Amortization of deferred issuance costs 120, ,958 Loss on disposal of property and equipment 68,206 78,381 Impairment of goodwill - 1,150,038 Restricted contributions (80,026) (122,831) Changes in operating assets and liabilities which provided (used) cash and cash equivalents: Accounts receivable 1,105,467 (6,116,116) Other assets 40,269 2,728 Accounts payable (1,938,031) 753,793 Accrued liabilities (1,063,041) (1,019,455) Net cash and cash equivalents provided by operating activities 11,095,467 8,282,219 Cash Flows from Investing Activities Proceeds from sale of investments 34,066,089 22,150,485 Purchase and reinvested interest of investments (40,672,613) (23,791,931) Purchase of property and equipment (4,372,248) (8,119,247) Change in assets limited as to use 2,412, ,133 Net cash and cash equivalents used in investing activities (8,565,939) (9,503,560) Cash Flows from Financing Activities Proceeds from entrance fee contracts 1,138, ,039 Refunds paid on entrance fee contracts (620,946) (817,128) Payments on long-term debt (3,661,589) (3,898,029) Restricted contributions 80, ,831 Net cash and cash equivalents used in financing activities (3,063,675) (3,730,287) Net Decrease in Cash and Cash Equivalents (534,147) (4,951,628) Cash and Cash Equivalents - Beginning of year 15,014,986 19,966,614 Cash and Cash Equivalents - End of year $ 14,480,839 $ 15,014,986 Supplemental Cash Flow Information - Cash paid for interest $ 5,731,263 $ 5,829,389 See notes to consolidated financial statements. 6

9 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 1 - Nature of Business Midwest s, Inc. (d/b/a Christian Horizons) (the Organization ) was incorporated on July 1, 2008 as the management company of its affiliates. The Organization and its affiliate entities are nonprofit organizations, except as noted in the following paragraph, organized primarily to own, operate, and support senior living and healthcare communities. Housing and services for seniors are provided at the Organization's communities through a continuum of care, including various levels of independent living, assisted living, and skilled nursing. The Organization operates in the states of Illinois, Indiana, Iowa, and Missouri. The Organization s stated mission is that it exists to honor God by providing a continuum of excellent care and support services, primarily for older adults. The Organization operates through a number of wholly owned subsidiaries, limited liability companies (LLCs), and Limited Partnerships (LPs). Certain of these entities are also members of an obligated group for credit purposes. The following is an organizational chart that illustrates the structure: Note 2 - Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include all accounts of Midwest s, Inc., and its affiliated entities, as summarized in Note 1. All significant intercompany transactions and balances have been eliminated in the consolidation. 7

10 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) Tax Status The organizations, except for the limited partnerships, qualify as tax-exempt corporations described in Section 501(c)(3) of the Internal Revenue Code. Accordingly, the organizations, except for the limited partnerships, are not subject to federal income taxes under Section 501(a) of the Code. The organizations are classified as publicly supported charitable organizations under the Code, and contributions to the organizations qualify as a charitable tax deduction for the contributor. The organizations are not aware of any activities that would jeopardize their tax-exempt status. The organizations are not aware of any activities that are subject to tax on unrelated business income or excise or other taxes other than what is already being reported. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Organization considers all money market accounts and certificates of deposit with maturity dates of three months or less to be cash equivalents, except for those included in investments. Certificates of deposit are stated at cost, which approximates market value. The Organization deposits its temporary cash investments in financial institutions. At times, such investments may be in excess of the FDIC insurance limit. Accounts Receivable Accounts receivable for residents, insurance companies, and governmental agencies are based on net charges. An allowance for uncollectible accounts is established using management's judgment. Payment for services is required upon receipt of invoice or as the claim is submitted to third-party payers. Accounts more than 30 days past due are individually analyzed for collectibility. In addition, an allowance is estimated for other accounts based on historical experience and industry trends. Uncollectible amounts are written off against the allowance for doubtful accounts in the period they are determined to be uncollectible. Other Current Assets Other current assets include inventory, prepaid expenses, and accrued interest receivable. Assets Limited as to Use Assets limited as to use include resident funds and deposits held in trust and assets held by trustees under bond and mortgage indenture agreements, which include funds restricted for use of future capital improvements, debt service, and other purposes. Assets limited as to use that are required for obligations classified as current liabilities are reported as current assets. Guarantee deposits of amounts ranging from $250 to $1,000 are required for each resident entering an independent or assisted living community within the Organization. The deposits in the case of nonrental units are credited to the residents' accounts upon execution of the occupancy agreement. In the case of rental units, the deposits are treated as security deposits and refunded at the time the premises are vacated. Resident deposits are included in assets limited as to use. Assets limited as to use are primarily invested in cash and cash equivalents, equity securities, and government bond obligations, which are measured at fair value on the consolidated balance sheet. 8

11 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value on the balance sheet. Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in net revenue over expense, unless the income or loss is restricted by donor or law. Property and Equipment Property and equipment are recorded at historical cost, net of accumulated depreciation. Donations of property, plant, and equipment are reported at fair value as an increase in unrestricted net assets, unless use of the assets is restricted by the donor. The Organization capitalizes items that cost $500 or more and have a useful life greater than one year. Depreciation is computed using the straight-line method over the following estimated useful lives: Land improvements 8 to 25 years Building and improvements 5 to 40 years Equipment 3 to 10 years Depreciation expense for the years ended is approximately $9,523,000 and $9,229,000, respectively. Construction in Progress Construction in progress costs have been deferred until the projects have been completed. When the planned projects are completed, the construction in progress costs are capitalized and depreciated over the estimated life of the project, including interest costs from borrowed funds. Goodwill The recorded amounts of goodwill from prior business combinations are based on management's best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is not amortized, but rather is assessed at least on an annual basis for impairment. During the year ended June 30, 2017, management determined that the carrying amount of the goodwill related to CareLink exceeded fair value, which was estimated based on the present value of expected future cash inflows. Accordingly, a goodwill impairment loss of $1,150,000 was recognized during the year ended June 30, No goodwill impairment loss was recognized during the year ended June 30, Deferred Financing Costs Costs incurred in connection with the issuance of long-term debt are capitalized and totaled approximately $3,583,000 at. These costs are amortized over the term of the related indebtedness. Accumulated amortization totaled approximately $1,641,000 and $1,520,000 at June 30, 2018 and 2017, respectively. Amortization expense totaled approximately $121,000 and $166,000 during the years ended, respectively. Refundable Entrance Fees and Deferred Revenue from Entrance Fees Residents of the independent senior living apartments and garden homes have the option to enter into a rental contract or an entrance fee contract. Under the rental contract, a resident simply pays a fee each month to live in a unit. Prior to August 2009, under the entrance fee residency agreement, the resident generally had three options to choose from for all communities. In August 2009, the Organization began offering only three contract types at all campuses. The old contracts will continue to be honored for those residents who moved in prior to August The new contract types are described below. 9

12 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) The current entrance fee contracts offered at all of the Organization's campuses provide for a refundable portion of 80 percent, 50 percent, or no refund. The nonrefundable portion of the entrance fee is recorded as deferred revenue and amortized into income using the straight-line method over the estimated remaining life expectancy of the resident. The refundable portion is not amortized and is recorded as a liability and reported as refundable entrance fees. When the resident vacates the unit, he or she receives a refund, due within 30 days of the reoccupancy of the unit by a new resident, equal to the refundable portion, as outlined in the entrance fee contract. Residents also agree to pay a monthly fee that is subject to periodic adjustment to reflect the cost of occupancy. Management has estimated the current portion of the amount of the remaining refundable balances as of to be approximately $790,000 and $858,000, respectively, based on historical refund activity. The potential refund obligation at June 30, 2018 totaled approximately $4,912,000. Obligation to Provide Future Services The Organization annually analyzes the present value of the net cost of future services and use of communities to be provided to current residents and compares that amount to the balance of deferred revenue from life occupancy fees. If the present value of the net cost of future services and use of communities exceeds the deferred revenue from life occupancy fees, a liability is recorded (obligation to provide future services and use of communities) with a corresponding charge to income. Management has determined that the Organization has no future service obligation liability related to its entrance fee contracts at both. Charitable Gift Annuities Payable The Organization has established a gift annuity program whereby donors may contribute assets to the Organization in exchange for the right to receive a fixed dollar annual return during their lifetime. A portion of the transfer is considered to be a charitable contribution. The difference between the amount provided for the gift annuity and the present value of the liability for future payments is recognized as an unrestricted contribution at the date of the gift, as specified by the donor on the contribution component. The Organization uses published mortality rate tables adopted by the United States Internal Revenue Service. The annuity liability is revalued annually based upon computed present values. Total charitable gift annuities payable as of are approximately $643,000 and $654,000, respectively, and are included in other long-term liabilities on the consolidated balance sheet. Net Assets Contributions received are recorded as an increase in unrestricted, temporarily restricted, or permanently restricted support depending on the existence or nature of any donor restrictions. Accordingly, net assets of the Organization and changes therein are classified and reported as follows: Unrestricted - Those resources over which the board of directors has discretionary control. Designated amounts represent revenue that the board has set aside for a particular purpose Temporarily restricted - Those resources subject to donor-imposed restrictions that will be satisfied by actions of the Organization or passage of time Permanently restricted - Those resources subject to a donor-imposed restriction that they be maintained permanently by the Organization Unconditional promises to give cash and other assets are accrued at estimated fair market value at the date each promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction is satisfied, net assets are released and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same reporting period as received are recorded as unrestricted contributions. 10

13 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) Temporarily restricted net assets consist of amounts restricted for capital expenditures and miscellaneous operational purposes. The Organization has no permanently restricted net assets at June 30, 2018 and Resident Services Revenue Resident services revenue includes room charges and ancillary services to residents and is recorded at established rates, net of contractual adjustments, resulting from agreements with third-party payers. The Organization provides care to residents covered by various third-party payers, such as Medicare, Medicaid, and private insurance companies. Medicare and Medicaid agreements provide for rate payments, which are updated annually by the federal and applicable state governments, respectively. Many of the residents served by the Organization are elderly and many have limited resources to pay for care without assistance from the Medicare and Medicaid programs. Provisions for estimated third-party payer settlements are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in revenue in the year of settlement. The Organization has agreements with third-party payers that provide for payments at amounts different than its established rates. The payment arrangements include the following: Medicaid The Organization participates in the Medicaid program that is administered by the Missouri Department of Social Services, Division of Medical Services. A licensed nursing community that participated in the Medicaid program in the State of Missouri for the years ended was reimbursed based on prospective rates. The Organization participates in the Medicaid program administered by the Illinois Department of Healthcare and Family Services (HFS). A licensed nursing community that participates in the Medicaid program in the State of Illinois is reimbursed based upon community-specific prospective daily rates. Rates are set taking into account individual community costs, variations in patient case mix, and geographical location. Communities are subject to periodic audit by the Illinois Department of HFS, which may result in retroactive adjustment to set rates. The Organization participates in the Medicaid program that is administered by the Indiana Family and Social Services Administration, Office of Medicaid Policy and Planning (OMPP). A licensed nursing community that participated in the Medicaid program in the State of Indiana for the years ended June 30, 2018 and 2017 was reimbursed upon prospective rates based upon the most recently submitted cost reports. The rate calculations take into account the individual community costs and variations in patient case mix. The cost reports are subject to periodic audit by OMPP, which may result in retroactive adjustment to set rates. The Organization participates in the Medicaid program that is administered by the Iowa Department of Human Services. A licensed nursing community that participated in the Medicaid program in the State of Iowa for the years ended was reimbursed upon prospective rates based upon cost reports submitted once every two years. Medicare The Organization participates in the Medicare program. This federal program is administered by the Centers for Medicare and Medicaid Services (CMS). The Organization is paid under the Medicare Prospective Payment System (PPS) for residents who are Medicare Part A eligible and meet the coverage guidelines for skilled nursing facility services (SNFs). The PPS is a per diem, price-based system. Annual cost reports are required to be submitted to the designated intermediary; however, they do not contain a cost settlement. 11

14 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management believes it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoings. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. Noncompliance with such laws and regulations may result in significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. Community Benefit The Organization provides care to residents who meet the criteria to be covered under the Medicaid program in the various states in which they operate. Typically, the reimbursement rates under this program are significantly less than the cost of providing the care, resulting in a significant reduction in revenue. Management has estimated the amount of care provided in excess of reimbursement under these programs based upon average Medicaid reimbursement rates and average daily costs to provide care. The estimated cost of community benefits provided under this program for the years ended June 30, 2018 and 2017 was approximately $12,159,000 and $8,113,000, respectively. Other Operating Revenue Other operating revenue consists primarily of IGT contract revenue, nonresident rental income, change in value of insurance policies, vending sales, activity income, and other miscellaneous revenue. Contributed Services No amounts have been reflected in the consolidated financial statements for donated services. Many individuals volunteer their time and perform a variety of tasks that assist the Organization with specific programs related to resident care and activities. The Organization receives more than 58,580 volunteer hours annually, which do not meet the criteria for recording as revenue. Advertising Expense Advertising expense is charged to income during the year in which it is incurred. Advertising expenses for the years ended was approximately $488,000 and $522,000, respectively. Excess of Revenue over Expenses The consolidated statement of unrestricted activities includes a measurement of excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from excess of revenue over expenses, consistent with industry practice, include net assets released from restriction for capital expenditures and distributions to noncontrolling members. Risk and Uncertainties The Organization owns investments in a variety of investment holdings. In general, investments are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with certain investments, it is reasonably possible that changes in the values of the investments will occur in the near term and that such changes could materially affect account balances reported on the consolidated balance sheet. 12

15 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 2 - Significant Accounting Policies (Continued) Upcoming Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of 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 ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance will be effective for the Organization's year ending June 30, The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods. The Organization has not yet determined which application method it will use. Management is in the process of reviewing their entrance fee contracts to determine if the new guidance will have a significant impact to the timing and recognition pattern of the Organization s main revenue streams. In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No , Leases, which will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right-of-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease-related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease guidance will be effective for the Organization's year ending June 30, Management expects that this new standard will increase long-term assets and short- and long-term liabilities upon adoption. The effects on the results of operations are not expected to be significant. In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for- Profit Entities. ASU No requires significant changes to the financial reporting model of organizations that follow FASB not-for-profit rules, including changing from three classes of net assets to two classes: net assets with donor restrictions and net assets without donor restrictions. The ASU will also require changes in the way certain information is aggregated and reported by the Organization, including required disclosures about the liquidity and availability of resources. The new standard is effective for the Organization s year ending June 30, 2019 and thereafter and must be applied on a retrospective basis. The Organization is currently evaluating the impact this standard will have on the consolidated financial statements. Subsequent Events The consolidated financial statements and related disclosures include evaluation of events up through and including September 21, 2018, which is the date the consolidated financial statements were available to be issued. 13

16 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 3 - Patient Accounts Receivable The details of patient accounts receivable at June 30 are set forth below: Patient accounts receivable $ 18,141,002 $ 21,780,417 Less allowance of uncollectible accounts 3,754,515 3,064,470 Net patient accounts receivable 14,386,487 18,715,947 Other receivables 1,856,430 1,551,628 Total accounts receivable $ 16,242,917 $ 20,267,575 The Organization grants credit without collateral to patients, most of whom are local residents and are insured under third-party payer agreements. The composition of receivables from patients and third-party payers was as follows at June 30: Medicaid 41 % 41 % Medicare Insurance Other Total 100 % 100 % Note 4 - Assets Limited as to Use Assets limited as to use consist of the following at June 30: Cash and cash equivalents $ 20,256,243 $ 19,324,711 Fixed-income 1,663,426 2,923,829 Equity securities - 980,910 Mutual funds 1,045,813 2,065,731 Certificate of deposit 221, ,000 Total $ 23,186,482 $ 25,516,181 14

17 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 4 - Assets Limited as to Use (Continued) The Organization is required to maintain the following accounts at June 30: Resident trust funds $ 366,744 $ 366,029 Trustee-held and restricted funds: State required entrance fee escrows 145, ,000 Debt service funds 5,795,885 5,379,920 Debt service reserve fund 10,292,169 11,251,633 Workers' compensation trust funds 2,456,955 4,265,572 Operating reserve 637, ,070 SLF and HUD escrows 1,741,811 1,730,722 Bundled payment escrow 72,675 - Supplemental employer retirement plan investments (Note 9) 1,677,266 1,740,235 Total trustee-held and restricted funds 22,819,738 25,150,152 Total 23,186,482 25,516,181 Current portion of assets limited as to use (8,507,854) (9,001,643) Assets limited as to use - Net of current portion $ 14,678,628 $ 16,514,538 The current portion of assets limited as to use consists of resident funds, debt service funds, and debt service reserve funds expected to be used to satisfy current obligations. Resident Trust Funds Resident funds are agency funds held locally at the communities for individual residents personal use, resident security deposits, and other miscellaneous deposits. State Required Entrance Fee Escrows In accordance with certain requirements of the states of Indiana and Missouri, escrows have been established as security for residents under entrance fee agreements. Debt Service Funds The debt service funds were established to deposit amounts necessary to pay principal and interest on the general obligation and tax exempt bonds of the Organization. Debt Service Reserve Fund The debt service reserve fund was established to provide a reserve for payment of principal and interest on the tax exempt bonds in the event the Organization s principal and interest payments are insufficient to meet debt service requirements. Workers Compensation Trust Funds The workers compensation trust fund was established as security and to pay claims under the Organization s self-insured workers compensation through the Organization's workers compensation trust. Operating Reserve and SLF and HUD Escrows These escrows have been established by the supportive living communities and HUD-financed communities to hold funds to be used for the repair or replacement of capital items and operating purposes as needed. Approval is needed to withdraw funds. 15

18 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 5 - Investments The details of the Company s investments in debt and equity securities are as follows at June 30: Cash and cash equivalents $ 7,298,430 $ 4,334,770 Fixed income 15,994,259 15,029,371 Equity securities 18,847,415 15,869,334 Certificate of deposit 200, ,000 Total $ 42,340,104 $ 35,433,475 Unrealized gains on investments for the years ended were approximately $273,000 and $279,000, respectively. Note 6 - Investment in Limited Partnerships The Organization maintains control over Wabash Estates, LLC and Washington Village Estates, LLC (collectively, the "General Partners"). Each of the General Partners is a wholly owned subsidiary of the Organization and owns between.01 percent and 1 percent in the respective limited partnerships. Under the partnership agreements, the General Partners shall have the option after the completion of the compliance audit termination date, upon written notice to the limited partners, to purchase the limited partners' entire interest in the partnership. The compliance audit termination date is defined as the period specified under Section 42(i)(l) of the IRS Code, which requires the limited partnerships to operate as tax credit projects for 15 years. Wabash Estates, LP and Washington Village Estates, LP, began operations during The partnership agreements define the terms of the purchase option. The Organization plans to exercise the purchase options of the General Partners to obtain full ownership of these projects in the future. The changes in consolidated net assets attributed to the Organization and the noncontrolling interests associated with Wabash Estates, LP and Washington Village Estates, LP within unrestricted net assets are as follows: Consolidated Total Controlling Interest Noncontrolling Interest Unrestricted net assets - July 1, 2016 $ 60,205,952 $ 58,657,015 $ 1,548,937 Excess of revenue over expenses 3,160,088 3,042, ,383 Distribution to noncontrolling member (100,368) - (100,368) Net assets released from restriction - Capital 15,894 15,894 - Change in unrestricted net assets 3,075,614 3,058,599 17,015 Unrestricted net assets - June 30, ,281,566 61,715,614 1,565,952 Excess of revenue over expenses 1,614,773 1,596,373 18,400 Distribution to noncontrolling member (55,529) - (55,529) Net assets released from restriction - Capital 38,743 38,743 - Change in unrestricted net assets 1,597,987 1,635,116 (37,129) Unrestricted net assets - June 30, 2018 $ 64,879,553 $ 63,350,730 $ 1,528,823 16

19 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 7 - Long-term Debt Long-term debt at June 30 is as follows: General Obligation Bonds, various series outstanding (1) $ 15,869,000 $ 18,246,000 Illinois Finance Authority, Revenue Refunding Bonds, Series 2007A (2) (3) 16,215,000 16,215,000 County of Pottawattamie, Iowa, Revenue Refunding Bonds Series, 2007E (2) 6,350,000 6,640,000 Industrial Development Authority of the City of Joplin, Missouri, Revenue Refunding Bonds, Series 2007F (2) 9,455,000 9,885,000 Illinois Finance Authority, Revenue Bonds, Series 2010 (3) 7,105,000 7,105,000 Illinois Finance Authority, Revenue Bonds, Series 2016 (4) 29,885,000 29,885,000 Series 2016 Unamortized Bond Premium (4) 2,418,398 2,579,785 Section 232 HUD Insured Mortgage Note Payable (5) 4,453,678 4,531,764 Section 232 HUD Insured Mortgage Note Payable (6) 5,418,643 5,513,647 Two Section 232 HUD Insured Mortgage Notes Payable (7) 8,123,023 8,490,708 Various mortgages payable (8) 433, ,790 Deferred financing costs (1,941,925) (2,062,650) Total 103,784, ,478,044 Less current portion 3,636,404 3,954,406 Long-term portion $ 100,148,340 $ 103,523,638 Aggregate scheduled future maturities of long-term debt are as follows: Years Ending Amount 2019 $ 3,636, ,486, ,839, ,142, ,391,324 Thereafter 80,812,593 Deferred financing costs (1,941,925) Series 2016 Unamortized Bond Premium 2,418,398 Total $ 103,784,744 The obligated group for the Series 2016, 2010, and Series 2007 Revenue Bonds consists of Christian Homes, Inc.; Risen Son ; Spring River, Inc.; Hoosier, Inc.; Crown Point, Inc.; Fair Havens Christian Home, Inc.; Lewis Memorial Christian Village; and Midwest Senior Ministries, Inc. (collectively, the "CH Obligated Group"). 17

20 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 7 - Long-term Debt (Continued) Bonds Payable (1) CH General Obligation Bonds are issued onsite at the corporate office in Lincoln, Illinois. Maturity dates range from April 2017 to July Certain of the bonds have optional redemption dates beginning in fiscal year Bondholders have the right to demand repayment on those option dates. Interest is paid quarterly with rates ranging from 4.00 percent to 5.50 percent and is funded through mandatory monthly deposits to a sinking fund. General Obligation Bonds are secured by revenue of the Organization that is not subject to the security agreement of the CH Obligated Group described in (2) below. (2) During the years ended June 30, 2007 and 2008, the CH Obligated Group, through the Illinois Finance Authority; the County of Pottawattamie, Iowa; and the Industrial Development Authority of the City of Joplin, Missouri, issued the Series 2007 bonds (including the Series 2007A, 2007B, 2007C, 2007D, 2007E, and 2007F bonds) at a total value of $80,075,000 under the newly formed Master Trust Indenture. The proceeds from the Series 2007 bonds were used to refinance or refund various outstanding bonds, fund the debt service reserves and the project funds, and pay the underwriter s discount. The Series 2007B, 2007C, and 2007D bonds have been fully refunded. The 2007A, 2007E, and 2007F bonds consist of term bonds with maturity dates ranging from May 2011 to May 2031 and interest rates ranging from 5.00 percent to 5.75 percent. The 2007B and 2007C bonds were fully refunded during the year ended June 30, All outstanding principal and interest on the 2007B bonds were paid on May 15, 2011 in accordance with the optional redemption schedule. The 2007C bonds were refunded as part of the Series 2010 bond issuance (see Series 2010 Bonds). The 2007D bonds were refunded as part of the Series 2016 bond issuance. (3) Series 2010 Bonds On July 20, 2010, the CH Obligated Group, through the Illinois Finance Authority, issued $25,000,000 of Revenue Bonds, Series 2010 under the existing Master Trust Indenture, as amended and supplemented by the First Supplemental Master Indenture. The proceeds of the bonds were used for the following: (i) to fund construction and remodeling of certain communities of the CH Obligated Group, (ii) refund all of the existing Series 2007C Bonds described above, (iii) pay certain termination costs owed on the interest rate swap agreements relating to the Series 2007C Bonds, (iv) fund the Debt Service Reserve Fund for the Bonds, and (v) fund certain issuance costs. The Series 2010 Bonds consist of term bonds with maturities ranging from May 2012 to May 2027 and interest rates ranging from 3.40 percent to percent. The Series 2010 and Series 2007 bonds are secured by the underlying mortgages and gross receipts of the CH Obligated Group. Effective December 31, 2014, the CH Obligated Group defeased a portion of the Series 2007A and Series 2010 Bonds totaling $12,655,000 and $8,650,000, respectively. Such bonds were legally defeased by depositing proceeds from the sale in escrow accounts with Wells Fargo, and the CH Obligated Group is no longer liable for these amounts. (4) Series 2016 Bonds On March 1, 2016 the CH Obligated Group, through the Illinois Finance Authority, issued $29,885,000 of Revenue Bonds, Series 2016 under the existing Master Trust Indenture, as amended and supplemented by the Fourth Supplemental Master Indenture. The proceeds of the bonds were used for the following, (i) to fund construction and remodeling of certain communities of the CH Obligated Group; (ii)(a) advance refund $2,680,000 of the Series 2007A bonds, (b) current refund all of the outstanding principal amount of the Series 2007D bonds, and (c) current refund $8,485,000 of the Series 2010 bonds; (iii) pay or reimburse the CH Obligated Group for the refinancing of the construction loan; (iv) fund the Debt Service Reserve Fund for the Bonds; and (v) to fund certain issuance costs. The Series 2016 Bonds consist of term bonds with maturities ranging from March 2026 to March 2040 and interest rates ranging from 4.00 percent to 5.00 percent. The Series 2016 bonds are secured by the underlying mortgages and gross receipts of the CH Obligated Group. 18

21 Midwest s, Inc. and Affiliates d/b/a Christian Horizons Notes to Consolidated Financial Statements Note 7 - Long-term Debt (Continued) HUD Mortgages (5) In September 2013, Wabash Estates, LP refinanced the existing Series 2006A and 2006B bonds with a mortgage note payable to Lancaster Pollard Mortgage Company in the original amount of $4,800,000. The mortgage is insured by the Department of Housing and Urban Development under Section 232 of the National Housing Act and collateralized by all assets, receipts, and profits of the project. The mortgage bears interest at 3.73 percent and matures on October 1, (6) In September 2013, Washington Village Estates, LP refinanced the existing Series 2006A and 2006B bonds with a mortgage note payable to Lancaster Pollard Mortgage Company in the original amount of $5,840,000. The mortgage is insured by the Department of Housing and Urban Development under Section 232 of the National Housing Act and collateralized by all assets, receipts, and profits of the project. The mortgage bears interest at 3.73 percent and matures on October 1, (7) Effective October 1, 2015, Shawnee Christian Nursing Center, LLC modified its mortgage note payable to obtain a lower interest rate and lower debt service payments. The previous mortgage payable bore interest at an annual rate of 5.88 percent and was payable in monthly installments of $42,263, including interest. The modified mortgage payable bears interest at an annual rate of 3.71 percent and is payable in monthly installments of $36,062, including interest, through July The mortgage payable is collateralized by all assets, receipts, and profits of the project. Prepayment of the principal balance was prohibited through August 2009, at which time prepayment was permitted subject to a penalty of 8 percent. Prepayment penalties are reduced by 1 percent per year through August 2017, after which prepayment is permitted without penalty. On October 1, 2011, Heartland, LLC refinanced the existing community with a mortgage note payable to Lancaster Pollard Mortgage Company in the original amount of $4,072,900. The mortgage is insured by the Department of Housing and Urban Development under Section 232 of the National Housing Act and collateralized by all assets, receipts, and profits of the project. The mortgage bears interest at 4.05 percent and matures in July Proceeds from the mortgage were used to pay off Ziegler Financing Corporation for the original mortgage note payable. Mortgages Payable (8) Mortgages payable consist of mortgages held at Wabash Christian Apartments, Limited Partnership. The first mortgage bears interest at 7 percent, and the second mortgage bears no interest. Both mortgages are secured by property and improvements and mature in December Loan Payable The Organization had access to a revolving loan payable with a financial institution for $5,000,000. The loan s purpose is to provide liquidity for redeeming general obligation bonds as they are presented at the end of interest periods and not refunded by issuance of new debt. The loan is secured by all assets of Midwest s, Inc. The loan s interest rate float is consistent with the current prime rate. The loan matures on September 22, 2018 and is renewable at the option of the Organization. No amounts have been drawn as of. Under the agreements with the bank, the Organization is subject to various financial covenants, including a debt service coverage ratio and days cash on hand ratio. In addition, the agreements contain various restrictive covenants that limit the occurrence of additional debt and require the Organization to periodically apply for a credit rating from a rating agency. Management believes the Organization is in compliance with such covenants at June 30,