REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS FOR MONTECEDRO, INC.

Transcription

1 REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS FOR MONTECEDRO, INC. June 30, 2017 and 2016

2 Table of Contents Report of Independent Auditors 1 2 PAGE Financial Statements Statements of Financial Position 3 4 Statements of Operations 5-6 Statements of Changes in Net Assets 7 Statements of Cash Flows

3 Report of Independent Auditors The Board of Directors Report on the Financial Statements We have audited the accompanying financial statements of, which comprise the statement of financial position as of June 30, 2017, and the related statements of operations, changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of June 30, 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. Other Matters Prior Period Financial Statements The financial statements of as of and for the year ended June 30, 2016, were audited by other auditors whose report dated October 18, 2016, expressed an unmodified opinion on those statements. Los Angeles, California October 27,

5 Statements of Financial Position ASSETS JUNE 30, Current Assets Cash and cash equivalents $ 17,918,222 $ 1,884,560 Accounts receivable, net 222,783 21,020 Inventories 61,937 52,206 Prepaid expenses and other current assets 103, ,281 Assets limited as to use, required for current liabilities 2,180,700 3,483,394 Total Current Assets 20,487,047 5,715,461 Property and Equipment, Net 153,092, ,829,230 Other Assets Assets limited as to use, net of current portion 1,668,119 25,144,271 Costs of acquiring initial continuing care contracts, net 8,459,970 9,586,457 Other assets 11,220 25,843 Interest in related parties' net assets 193,081 56,395 Total Other Assets 10,332,390 34,812,966 Total Assets $ 183,911,860 $ 196,357,657 See accompanying notes. 3

6 Statements of Financial Position (continued) JUNE 30, Current Liabilities Accounts payable and accrued expenses $ 533,916 $ 215,997 Accrued compensation, payroll taxes and benefits 259, ,686 Interest payable 272, ,050 Other current liabilities 387, ,686 Deferred revenue from entrance fees, current portion 476, ,197 Current portion of long-term debt 128, ,421 Due to related parties 64,804 52,007 Total Current Liabilities 2,123,038 1,905,044 Other Liabilities Liability for refundable and repayable entrance fees 99,608,760 78,595,365 Deferred revenue from entrance fees 10,798,715 9,724,653 Long-term debt, net of current maturities 45,787,216 76,052,971 Obligation to provide future services and the use of facilities 18,938,084 24,829,487 Deposits 135, ,172 Note payable, related party 1,503, ,000 Total Other Liabilities 176,771, ,785,648 Total Liabilities 178,894, ,690,692 Net Assets Unrestricted 4,942,460 3,608,927 Temporarily restricted 34,297 37,662 Permanently restricted 40,655 20,376 Total Net Assets 5,017,412 3,666,965 Total Liabilities and Net Assets $ 183,911,860 $ 196,357,657 4 See accompanying notes.

7 Statements of Operations YEARS ENDED JUNE 30, Unrestricted Revenues, Gains and Other Support Resident care fees, net $ 9,839,700 $ 1,679,601 Ancillary services 495, ,651 Amortization of entrance fees 1,660, ,460 Service revenue 452,447 56,498 Dividends and interest 40,566 42,541 Miscellaneous income 26,492 10,507 Total Unrestricted Revenues, Gains and Other Support 12,515,033 2,637,258 Operating Expenses Departmental Expenses General and administrative 2,564,951 1,600,869 Dining service 2,090, ,246 Nursing service, routine 762, ,854 Activities and social services 705, ,885 Housekeeping 458, ,103 General maintenance 1,194, ,926 Marketing 703, ,842 Resident health service 420, ,705 Insurance 208, ,868 Security 124,537 56,998 Grounds and gardens 80,036 16,690 Total Departmental Expenses $ 9,312,563 $ 4,771,986 See accompanying notes. 5

8 Statements of Operations (continued) YEARS ENDED JUNE 30, Property Expenses Depreciation $ 3,239,519 $ 4,156,012 Property taxes 186,398 80,201 Property insurance 55,650 11,936 Total Property Expenses 3,481,567 4,248,149 Other (Income) Expenses Change in obligation to provide future services and the use of facilities (5,891,403) 24,829,487 Interest expense 2,035,153 1,612,877 Amortization expense 2,371,061 3,170,028 Gain on disposal of property and equipment (4,241) - Total Other (Income) Expenses (1,489,430) 29,612,392 Total Operating Expenses 11,304,700 38,632,527 Operating Income (Loss) $ 1,210,333 $ (35,995,269) 6 See accompanying notes.

9 Statements of Changes in Net Assets YEARS ENDED JUNE 30, Change in Unrestricted Net Assets Operating Income (Loss) $ 1,210,333 $ (35,995,269) Other Changes in Unrestricted Net Assets Change in interest in related parties' net assets 64, Transfer of net assets (to)/from related parties, net 59,199 1,014,627 Total Change in Unrestricted Net Assets 1,333,533 (34,980,178) Change in Temporarily Restricted Net Assets Change in interest in related parties' net assets (3,365) 37,528 Total Change in Temporarily Restricted Net Assets (3,365) 37,528 Change in Permanently Restricted Net Assets Change in interest in related parties' net assets 20, Total Change in Permanently Restricted Net Assets 20, Change in Net Assets 1,350,447 (34,942,491) Net Assets, Beginning 3,666,965 38,609,456 Net Assets, Ending $ 5,017,412 $ 3,666,965 See accompanying notes. 7

10 Statements of Cash Flows YEARS ENDED JUNE 30, Operating Activities Cash received: Resident care fees, net of contractual adjustments and allowances $ 10,133,164 $ 1,806,670 Entrance fees 24,658,558 88,854,243 Investment income 40,566 42,541 Service revenue 452,447 56,498 Other 26,492 10,507 Transfers (to)/from related parties 16, Cash disbursed: Cash paid to employees and suppliers (8,770,202) (10,669,410) Interest (2,608,201) (2,528,440) Net Cash Provided by Operating Activities 23,949,049 77,573,377 Investing Activities Purchase of property and equipment (498,471) (41,859,722) Additions to costs of acquiring initial continuing care contracts - (1,214,021) Additions to capitalized financing costs - (2,165,879) Release of assets limited as to use 23,919,674 32,008,183 Net Cash Provided by (Used in) Investing Activities 23,421,203 (13,231,439) Financing Activities Payment of long-term debt (31,240,000) (64,260,000) Refunds of entrance fees (1,011,225) - Distributions from related parties 914,635 1,594,444 Net Cash Used in Financing Activities (31,336,590) (62,665,556) Net Increase in Cash and Cash Equivalents 16,033,662 1,676,382 Cash and Cash Equivalents, Beginning 1,884, ,178 Cash and Cash Equivalents, Ending $ 17,918,222 $ 1,884,560 8 See accompanying notes.

11 Statements of Cash Flows (continued) YEARS ENDED JUNE 30, Reconciliation of Change in Net Assets to Net Cash Provided by Operating Activities Change in net assets $ 1,350,447 $ (34,942,491) Adjustments to reconcile the change in net assets to net cash provided by operating activities: Amortization of entrance fees (1,660,601) (692,460) Amortization of premium (517,586) (641,025) Amortization of financing costs (1,244,574) 2,619,803 Amortization of deferred marketing costs 3,615, ,751 Depreciation expense 3,239,519 4,156,012 (Gain) loss on disposal of property and equipment (813) - Change in obligation to provide future services and the use of facilities (5,891,403) 24,829,487 Interest in related parties' net assets (140,114) (1,052,314) (Increase) decrease in: Accounts receivable (201,763) (28,568) Inventories (9,731) (52,206) Prepaid expenses and other current assets 170,876 (129,542) Other assets 14,623 - Increase (decrease) in: Accounts payable and accrued expenses 317,919 (5,917,561) Accrued compensation, payroll taxes, and benefits 13, ,030 Interest payable (55,462) (274,538) Other current liabilities 277,002 79,988 Due (to)/from related parties 12, Deferred revenue from entrance fees and liability for refundable and repayable entrance fees 24,658,558 88,854,243 Total Adjustments 22,598, ,515,868 Net Cash Provided by Operating Activities $ 23,949,049 $ 77,573,377 Supplemental Schedule of Non-cash Investing and Financing Activities Assets and liabilities transferred (to)/from related parties through net asset transfers: Property and equipment, net $ - $ 9,726 Interest in related parties' net assets - 1,004,901 Total Non-cash Net Asset Transfers $ - $ 1,014,627 See accompanying notes. 9

12 Note 1 Organization and Nature of Activities (MCINC) operates housing specially designed for older adults, with arrangements for residents health care and financial security, and otherwise to promote the interest and serve the needs of older adults, provided that such activities are consistent with its exempt purposes. MCINC operates a continuing care retirement community (CCRC) in Altadena, California (MonteCedro) consisting of residential, assisted living, and skilled nursing. MCINC is organized as a nonprofit corporation under the general nonprofit corporation laws of the State of California. MonteCedro opened December 16, MCINC is an affiliate organization of Episcopal Communities & Services for Seniors (ECS). ECS owns and operates CCRCs known as The Canterbury in Rancho Palos Verdes, California, and The Covington in Aliso Viejo, California, which provide residential, assisted living, and skilled nursing facilities. ECS also owns and operates: ECS Management, LLC (ECSLLC) ECSLLC was created to provide administrative, programmatic, and other forms of support to ECS and any of its subsidiaries and affiliated organizations. Sophie Miller Foundation (SMF) SMF is a supporting organization created to enhance the fundraising efforts of ECS and to oversee the investment and distribution of its restricted and unrestricted donor funds. Creative Housing & Services (formerly Community Housing Management Services) (CHS), a California nonprofit corporation, which provides development, management, and consulting services to affordable senior, disabled, and low-income housing facilities. Artful Home Care, LLC (Artful LLC), a nonprofit LLC, is organized to develop and operate home care services for older adults, and promote the interests and serve the needs of older adults. Note 2 Summary of Significant Accounting Policies Basis of accounting MCINC accounts for its financial transactions using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accrual basis of accounting recognizes revenues in the accounting period in which revenues are earned regardless of when cash is received and recognizes expenses in the accounting period in which expenses are incurred regardless of when cash is disbursed. Basis of presentation MCINC s financial statement presentation follows the recommendations prescribed by U.S. GAAP. In accordance with U.S. GAAP, MCINC is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily, and permanently restricted net assets. 10

13 Note 2 Summary of Significant Accounting Policies (continued) Cash and cash equivalents For purposes of reporting cash flows, MCINC considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. MCINC maintains its cash in bank deposit accounts, which may exceed federally insured limits. MCINC has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. At June 30, 2017, cash balances held at one bank exceeded federally insured limits by approximately $17,665,000. Assets limited as to Use Assets limited as to use consist of cash, cash equivalents and investments that are limited by the 2014 bond indenture for the development of The MonteCedro facility, debt service, workers compensation collateral and wait list deposits. Amounts required for payment of current liabilities are classified as current assets. Accounts receivable MCINC provides an allowance for uncollectible accounts based on management s assessment of the collectability of existing specific accounts. Inventories Inventories at June 30, 2017 and 2016 consist of dining supplies and are reflected in the financial statements of financial position at cost, which does not exceed market value. Property and equipment The costs of property and equipment are depreciated using the straight-line method over their estimated useful lives. Costs of additions, renewals, and betterments are capitalized; maintenance and repairs are charged to expense when incurred. Acquisitions of $1,500 or more and with a useful life of more than one year are capitalized. Donated fixed assets are recorded at their fair value at the date of donation. Construction in progress consists of costs incurred on construction projects that have not been completed. Interest cost incurred during the period of construction of capital assets is capitalized as a component of the cost of constructing those assets, net of investment income on unspent proceeds of tax-exempt borrowings restricted for use in construction. MCINC capitalized interest of approximately $0 and $1,845,000 in 2017 and 2016, respectively. Depreciation begins when related assets are placed in service. Estimated useful lives are as follows: Useful Lives Land improvements Buildings and improvements Furnishings and equipment (including capitalized computer hardware and software) 5-25 years 5-40 years 3-20 years Costs of acquiring initial continuing care contracts Costs of acquiring initial continuing care contracts represent certain advertising and marketing costs incurred with acquiring initial continuing care contracts related to the construction and completion of the MonteCedro facility. These costs are amortized over the average expected remaining lives of the residents under contract at the MonteCedro facility. 11

14 Note 2 Summary of Significant Accounting Policies (continued) Capitalized financing costs Capitalized financing costs represent costs incurred in obtaining long-term financing and are amortized over the respective terms of the related obligations using the interest method. Such costs are presented as a component of long-term debt in accordance with Accounting Standards Update ( ASU ) No , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. Amortization expense is included as component of interest expense. See below in Note 2, Recent Accounting Pronouncements, for impact of adoption on the financial statements as of and for the year ended June 30, Impairment of long-lived assets MCINC reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying value may not be recoverable. MCINC considers assets to be impaired and writes them down to fair value if expected associated cash flows are less than the carrying amounts. MCINC has determined that no long-lived assets are impaired at June 30, Interest in related parties net assets MCINC recognizes its rights to assets held by a recipient organization. Such rights are recognized as an asset, unless the donor has explicitly granted the recipient organization variance power, that is, the unilateral power to redirect the use of the assets. Those rights are an interest in the net assets of the recipient organization. MCINC accounts for its interest in the net assets of related parties in a manner similar to the equity method. Changes in interest are included in the change in net assets. Transfers of assets between the related parties and MCINC are recognized as increases or decreases in the interest. Obligation to provide future services and the use of the facilities MCINC is required to calculate the present value (using a 5% discount rate at June 30, 2017 and 2016) of the estimated net cost of future services to be provided to current continuing care residents, and, to the extent this amount exceeds the balance of unamortized deferred revenue, monthly maintenance fees and other contractually committed revenue, a liability would be recorded for the obligation to provide future services. The change in the obligation during a year would be reported as a current year change in obligation to provide future services in the statements of changes in net assets. The estimated amounts received or to be received from current continuing care residents did not exceed the estimated costs of providing future services and use of facilities to those residents. Consequently, a liability of $18,983,084 and $24,829,487 is shown on the statements of financial position as of June 30, 2017 and 2016, respectively. The California Health and Safety Code Section 1790 mandates a statutory reserve and a liquid asset requirement. The mandates were met for the year ended June 30, 2017 and Net assets MCINC s net assets comprise the following: Unrestricted net assets Unrestricted net assets represent the portion of expendable net assets that are neither permanently restricted nor temporarily restricted by donor-imposed restrictions. These net assets are available for support of the ordinary operations and administration of MCINC. 12

15 Note 2 Summary of Significant Accounting Policies (continued) Temporarily restricted net assets Temporarily restricted net assets represent net assets that result from contributions and other inflows of assets whose use by MCINC is limited by donorimposed restrictions that either expire by the passage of time or can be satisfied by actions of MCINC. As the restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying financial statements as net assets released from restrictions. Restricted gains and investment income whose restrictions are met in the same reporting period are presented as unrestricted support. At June 30, 2017, temporarily restricted net assets comprise net assets that are satisfied by use totaling approximately $34,000. At June 30, 2016, temporarily restricted net assets comprise net assets that are satisfied by use totaling approximately $38,000. Permanently restricted net assets Permanently restricted net assets represent net assets that result from contributions and other inflows of assets whose use by MCINC is limited by donorimposed restrictions that neither expire by the passage of time nor can be fulfilled and removed by actions of MCINC pursuant to those restrictions. These net assets are permanently restricted by donors for investment in perpetuity. Generally, the donors of these assets permit MCINC to use all or part of the income earned on related investments for general or specific purposes. MCINC accounts for and records transactions in established fund groups for the purpose of identifying those resources that are available for specific objectives of MCINC. As of June 30, 2017 and 2016, MCINC had permanently restricted net assets of approximately $41,000 and $20,000, respectively, which included the Endowed Employee Education Fund Scholarships (which are held by SMF). Fair value of financial instruments MCINC s financial statements include the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, obligation to provide future services and the use of facilities, and long-term debt. MCINC believes that the carrying amounts of current assets and liabilities in the statements of financial position approximate the fair values of these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. The fair values of assets limited as to use disclosed in Note 6. The fair value of long-term debt is disclosed in Note 6. Revenue recognition Resident care fees and ancillary service revenue represent fees for services provided to residents and patients of the MonteCedro facility and are recognized as services are performed. Payments for such services are received from residents, insurance companies, Medicare, and other third-party payers. 13

16 Note 2 Summary of Significant Accounting Policies (continued) Entrance fees and financial arrangements MCINC offers payment options under a care and residence agreement (both a 75% Reoccupancy Benefit Option and a 90% Reoccupancy Benefit Option) which requires payment of, (1) an entrance fee upon admission ranging from $399,000 to $1,460,000, and (2) a monthly care fee. The entrance fee is refundable or repayable if the resident should leave MCINC as follows: i) During the first ninety days, the entrance fee paid by the resident is refunded in full. ii) If the resident s tenancy terminates subsequent to the first ninety days, the resident will receive a reoccupancy benefit equal to 75% or 90% (depending on the contract) of the paid entrance fees within fourteen calendar days after the resident s accommodation unit is re-let to a new continuing care resident who has executed a care and residence agreement and paid the then-applicable entrance fee for the same unit in full. Under the 75% Reoccupancy Benefit contract agreement, MCINC amortizes 25% of the entrance fee over the resident s expected life. A liability is recognized ( liability for refundable and repayable entrance fees ) for the remaining 75%. Under the 90% Reoccupancy Benefit contract agreement, MCINC amortizes 10% of the entrance fee over the resident s expected life. A liability is recognized ( liability for refundable and repayable entrance fees ) for the remaining 90%. At June 30, 2017 and 2016, approximately $99,609,000 and $78,595,000 was contractually refundable or repayable, respectively. These amounts represent the amount due to residents, if all were to cancel their contracts as of June 30, 2017 and 2016 based on MCINC s refund and repayment policy. The contractually refundable or repayable amount is included in deferred revenue from entrance fees and liability for refundable and repayable entrance fees in the accompanying statements of financial position. Income taxes MCINC is organized as a nonprofit corporation under the general nonprofit corporation laws of the State of California and is exempt from federal income taxation under IRC section 501(c)(3). MCINC is classified as a supporting organization under IRC section 509(a)(3). Nonprofit organizations are generally not liable for taxes on income; therefore, no provision is made for such taxes in the financial statements, in accordance with U.S. GAAP. MCINC considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. MCINC evaluates its uncertain tax positions using the provisions in conformity with U.S. GAAP. These standards require management to perform an evaluation of all income tax positions taken, or expected to be taken in the course of preparing MCINC's tax returns. Management believes the tax positions taken more likely than not will be sustained under examination by the applicable tax authorities. Examples of tax positions include the tax-exempt status of MCINC and various positions related to the potential sources of unrelated business taxable income. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the taxing authorities will not challenge MCINC s tax returns, or that MCINC will not be subject to additional tax, penalties, and interest as a result of such challenge. Generally, MCINC's tax returns remain open for three years for federal tax examination and four years for state tax examination. 14

17 Note 2 Summary of Significant Accounting Policies (continued) Operating income (loss) (Performance Indicator) Operating income (loss) reports the results of operations for MCINC. Changes in unrestricted net assets that are excluded from operating income (loss), consistent with industry practice, include net unrealized gains or losses on other than trading securities and contributions of long lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). Reclassifications Certain amounts included in the 2016 financial statements and related notes have been reclassified for comparative purposes to conform to the presentation in the 2017 financial statements. Use of estimates The preparation of financial statements in conformity with U.S. GAAP 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent accounting standards In April 2015, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the statement of financial position as a direct deduction from the carrying amount of that debt liability. The adoption of ASU is effective for financial statements issued for fiscal years beginning after December 15, The following table discloses the impact of the adoption of ASU on amounts previously reported in the statement of financial position, including the reclassification of certain 2016 amounts to conform to the 2017 presentation: JUNE 30, 2016: As Previously Reported Impact of ASU Adjusted Balance As Adjusted Reclassifications at June 30, 2016 Capitalized financing costs, net $ 3,587,865 (3,587,865) $ - $ - $ - Total assets $ 198,921,587 $ (3,587,865) $ 195,333,722 $ 1,023,935 $ 196,357,657 Long-term debt, less current portion $ 79,640,836 $ (3,587,865) $ 76,052,971 $ - $ 76,052,971 Total other liabilities $ 193,956,538 $ (3,587,865) $ 190,368,673 $ 416,975 $ 190,785,648 Total liabilities $ 195,254,619 $ (3,587,865) $ 191,666,754 $ 1,023,938 $ 192,690,692 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, which requires management to evaluate whether there is a substantial doubt about the entity s ability to continue as a going concern and, if so, to disclose this in its financial statements. The adoption of ASU is effective for annual periods ending after December 15, The adoption of ASU did not have a material impact on the MCINC s financial statements or related disclosures. 15

18 Note 2 Summary of Significant Accounting Policies (continued) Going concern In connection with the preparation of the financial statements for the year ended June 30, 2017, the Organization conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity s ability to continue as a going concern within one year after the date of the consolidated financial statements were issued, noting that there did not appear to be evidence of substantial doubt of the entity s ability to continue as a going concern. Subsequent events Subsequent events are events or transactions that occur after the statement of financial position date but before financial statements are issued. MCINC recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing the financial statements. MCINC's financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the statement of financial position but arose after the statement of financial position date and before the financial statements are issued. Management evaluated subsequent events through October 27, 2017, the issuance date of MCINC s financial statements. Note 3 Assets Limited as to Use Assets limited as to use comprise the following as of June 30, 2017 and 2016 (in thousands): Series 2014 bonds: Project Fund $ - $ 411,493 Capitalized Interest Funds 531, ,567 Debt Service Reserve Funds 3,120,763 4,631,423 Entrance Fee Fund - 14,221,065 Working Capital Fund - 8,517,145 Principal Fund - 3,809 Optional Redemption Fund - 8,685 Collateral for Workers' Compensation Claims 61,739 17,428 Wait List Deposits 135, ,050 3,848,819 28,627,665 Less amounts required for payment of current liabilities (2,180,700) (3,483,394) $ 1,668,119 $ 25,144,271 16

19 Note 4 Property and Equipment As of June 30, 2017 and 2016, property and equipment consists of the following: Land $ 17,289,427 $ 17,289,427 Land improvements 2,236,874 2,119,199 Buildings and improvements 136,145, ,412,636 Furnishings and equipment 4,374,677 3,765,041 Capitalized computer hardware and software 213, ,580 Construction in progress 226, , ,486, ,204,565 Less accumulated depreciation (7,394,401) (2,375,335) Total $ 153,092,423 $ 155,829,230 Note 5 Note Payable, Related Party Note payable, related party of approximately $1,504,000 and $589,000 as of June 30, 2017 and 2016, respectively, represents a loan from Sophie Miller Foundation (a related party). The note is interest free and repayment is due upon availability of funds. Note 6 Fair Value Measurements U.S. GAAP provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The asset or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under U.S. GAAP are described as follows: 17

20 Note 6 Fair Value Measurements (continued) Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that management has the ability to access. Level 2 Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such instruments pursuant to the valuation hierarchy: Level 1 Measurements Cash and cash equivalents: cash equivalents generally consist of actively traded money market funds that have daily quoted net asset values for identical assets that MCINC has the ability to access at the measurement date. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts MCINC would realize in a current market exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair values. The estimates presented are based on pertinent information available to management as of June 30, 2017 and Current estimates of fair value may differ significantly from the amounts presented. The following table sets forth by level, within the fair value hierarchy, assets at fair value as of June 30, 2017: 2017 Active Markets for Identical Fair Value Assets (Level 1) Fair Value Measurements Using Quoted Prices In Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets limited as to use: Cash and cash equivalents $ 3,848,819 $ 3,848,819 $ - $ - Total assets limited as to use $ 3,848,819 $ 3,848,819 $ - $ - 18

21 Note 6 Fair Value Measurements (continued) The following table sets forth by level, within the fair value hierarchy, assets at fair value as of June 30, 2016: 2016 Fair Value Measurements Using Quoted Prices In Active Markets Significant Significant for Identical Observable Unobservable Fair Value Assets (Level 1) Inputs (Level 2) Inputs (Level 3) Assets limited as to use: Cash and cash equivalents $ 28,627,665 $ 28,627,665 $ - $ - Total assets limited as to use $ 28,627,665 $ 28,627,665 $ - $ - The fair value of the Organization s long-term debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to MCINC for debt of the same remaining maturities. The carrying amounts and fair values of MCINC s long-term debt are as follows as of June 30 (in thousands): Carrying Carrying Amount Fair value Amount Fair value Series 2014A Bonds $ 48,258,672 $ 50,306,276 $ 48,386,837 $ 52,724,936 Series 2014B-1 Bonds ,707,554 25,547,175 Series 2014B-2 Bonds - - 5,921,867 5,755,842 19

22 Note 7 Long-term Debt In June 2014, MCINC issued Los Angeles County Regional Financing Authority Insured Revenue Bonds, Series 2014A, Series 2014B-1, Series 2014B-2 and Series 2014B-3, in the aggregate amount of approximately $140,305,000. The outstanding balances of these bonds are as follows at June 30, 2017 and 2016: Series 2014A, interest rates from 3% to 5% per annum, with principal payments due annually from November 15, 2019 to November 15, 2044 $ 44,805,000 $ 44,805,000 Series 2014B-1, interest rate of 3% per annum, with principal payments due on November 15, 2017 and November 15, ,500,000 Series 2014B-2, interest rate of 3% per annum, with principal payment due on November 15, ,740,000 Unamortized premium on Series 2014A, Series 2014B-1, Series 2014B-2 and Series 2014B-3 bonds 3,453,672 3,971,258 48,258,672 80,016,258 Less current portion (including current portion of unamortized premium of $128,164 and $375,421 at June 30, 2017 and 2016, respectively) (128,164) (375,421) Less capitalized financing costs, net of unamortized costs of $5,835,194 and $4,590,620 at June 30, 2017 and 2016, respectively (2,343,292) (3,587,866) $ 45,787,216 $ 76,052,971 Aggregate maturities of long-term debt before unamortized premium of approximately $3,454,000 are as follows: Year Ending June 30, 2018 $ , , ,000 Thereafter 41,935,000 $ 44,805,000 The 2014 Series bonds are secured by certain assets of MCINC. SMF is a guarantor on the bonds. The bond agreements contain certain covenants related to debt service coverage ratio, current ratio, and days cash on hand, which are required to be complied with beginning with fiscal year ending June 30,

23 Note 8 Related Party Transactions Due (to)/from Related Parties Due (to)/from related parties includes the following as of June 30, 2017 and 2016: Due from SMF $ - $ 152 Due to ECSLLC (64,804) (52,159) $ (64,804) $ (52,007) ECSLLC provides administrative and programmatic services to MCINC. Total amounts paid to ECSLLC totaled approximately $727,000 and $1,667,000 for these services for 2017 and 2016, respectively, of which approximately $0 and $806,000 for 2017 and 2016, respectively, have been included in project development costs. During 2017 and 2016, respectively, MCINC loaned approximately $1,504,000 and $589,000 from SMF to pay a portion of these fees (see Note 5). Note 9 Functional Expenses Expenses related to more than one functional expense category are allocated based on estimates by MCINC. Expenses by functional classification were as follows: Program expenses $ 9,292,470 $ 37,273,787 General and administrative expenses 1,995,710 1,344,374 Fundraising expenses 16,520 14,366 $ 11,304,700 $ 38,632,527 Note 10 Retirement Plans ECS maintains a safe harbor 401(k) retirement plan for all employees of ECS, its related entities, and MCINC. The plan allows for employer nonelective contributions, including a mandatory 3% employer contribution. The plan also allows for discretionary match contributions, approved on an annual basis. Total plan contributions attributed to MCINC in connection with the 401(k) retirement plan for the years ended June 30, 2017 and 2016, were approximately $89,000 and $37,000, respectively. ECS also maintains a 457(b) plan established for executives of ECS and its related entities who have completed six months of continuous service. The 457(b) plan allows for salary reduction contributions and employer discretionary contributions. Total 457(b) plan contributions attributed to MCINC in connection with the 457(b) plan for the years ended June 30, 2017 and 2016, were approximately $18,000 and $18,000, respectively. Approximately $8,000 of the 2016 expenses have been included in project development costs and costs of acquiring initial continuing care contracts. 21

24 Note 11 Commitments and Contingencies MCINC is subject to legal proceedings, which arise in the ordinary course of its business. In the opinion of management and legal counsel, the outcome of such matters will not have a material effect on the financial position of MCINC. MCINC is also subject to many complex federal, state, and local laws and regulations. Compliance with these laws and regulations is subject to government review and interpretation. Government activity, with respect to investigations and allegations regarding possible violations of these laws and regulations by health care providers, including those related to medical necessity, coding and billing for services, has increased significantly. Violations of these laws can result in large fines and penalties, sanctions on providing future services, and repayment of past patient revenues. Management believes any actions that may result from investigations of noncompliance with laws and regulations will not have a material effect on the MCINC s future financial position or results of operations. 22