The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc.

Transcription

1 Report of Independent Auditors and Consolidated Financial Statements The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. December 31, 2016 and 2015

2 CONTENTS REPORT OF INDEPENDENT AUDITORS 1 2 PAGE CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets 3 4 Consolidated statements of operations 5 Consolidated statements of changes in net assets 6 Consolidated statements of cash flows 7 Notes to consolidated financial statements 8 24 OTHER INFORMATION Schedule of revenue and expenses extended employment workshops 25 Calculation of workshop expenses per client per day 26

3 REPORT OF INDEPENDENT AUDITORS Board of Directors The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. Kansas City, Missouri We have audited the accompanying consolidated financial statements of The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. (collectively referred to as the Institute), which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the 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 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 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. 1

4 Board of Directors The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. Kansas City, Missouri 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 The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. as of December 31, 2016, and the changes in its financial position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Prior Year Auditor s Report The consolidated financial statements of the Institute as of and for the year ended December 31, 2015 were audited by other auditors, whose report dated April 28, 2016 expressed an unmodified opinion on those consolidated financial statements. Other Information Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements as a whole. The other information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, accordingly, we do not express an opinion or provide any assurance on it. Albuquerque, New Mexico April 28,

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6 CONSOLIDATED BALANCE SHEETS ASSETS December 31, CURRENT ASSETS Cash and cash equivalents $ 848,846 $ 336,911 Patient accounts receivable, net of estimated uncollectibles of $166,000 in 2016 and $136,000 in ,713,249 1,581,445 Contributions receivable, net of estimated uncollectibles of $40,000 in 2016 and $33,000 in , ,086 Due from affiliate 91,000 Other receivables 491, ,935 Prepaid expenses and other 80, ,675 Total current assets 3,463,732 3,402,052 ASSETS LIMITED AS TO USE Internally designated 2,808,008 3,412,394 Externally restricted by donors 4,100,974 3,372,663 Total assets limited as to use 6,908,982 6,785,057 INVESTMENTS 1,169, ,993 PROPERTY AND EQUIPMENT, net 2,006,901 1,691,992 CONTRIBUTIONS RECEIVABLE 932, ,728 Total assets $ 14,481,755 $ 13,323,822 3 See accompanying notes.

7 CONSOLIDATED BALANCE SHEETS LIABILITIES AND NET ASSETS December 31, CURRENT LIABILITIES Accounts payable $ 325,646 $ 365,715 Accrued expenses 749, ,555 Deferred revenue 86,549 Total current liabilities 1,161,810 1,019,270 NET ASSETS Unrestricted Available for general activities 4,595,092 4,493,036 Working capital 400, ,140 Board designated quasi endowment fund 3,047,702 2,999,899 Total unrestricted 8,043,746 7,893,075 Temporarily restricted 5,166,708 4,302,486 Permanently restricted 109, ,991 Total net assets 13,319,945 12,304,552 Total liabilities and net assets $ 14,481,755 $ 13,323,822 See accompanying notes. 4

8 CONSOLIDATED STATEMENT OF OPERATIONS Years Ended December 31, OPERATING REVENUES Net patient service revenue, net of contractual allowances and discounts $ 6,759,004 $ 6,110,124 Provision for doubtful accounts (77,201) (30,184) Net patient service revenue, net of provision for doubtful accounts 6,681,803 6,079,940 Vocational services 1,692,477 1,855,959 Workshop sales 735, ,633 Government reimbursement sheltered workshop 1,056,725 1,108,860 Grant income 367, ,646 Public support United Way 414, ,344 Tuition 157, ,628 School district 187, ,829 In kind rent contribution 490, ,850 Other 247, ,126 Net assets released from restrictions used for operations 82,707 95,701 Total operating revenues 12,113,961 11,971,516 OPERATING EXPENSES Salaries and wages 8,448,662 7,921,700 Employee benefits 1,617,578 1,430,457 Professional fees 248, ,256 Supplies 338, ,675 Purchased services 1,813,219 1,691,236 Other 553, ,793 Depreciation 257, ,859 Interest 549 1,016 Total operating expenses 13,277,793 12,557,992 OPERATING LOSS (1,163,832) (586,476) NONOPERATING REVENUES (EXPENSES) Investment income (loss) 400,504 (10,513) Contributions 637, ,246 Special event expenses (113,341) (158,352) Total nonoperating revenues 925, ,381 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES (238,722) 25,905 CONTRIBUTIONS FOR ACQUISITION OF PROPERTY AND EQUIPMENT 51,805 NET ASSETS RELEASED FROM RESTRICTION USED FOR PURCHASE OF PROPERTY AND EQUIPMENT 389,393 66,955 INCREASE IN UNRESTRICTED NET ASSETS $ 150,671 $ 144,665 5 See accompanying notes.

9 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS Years Ended December 31, UNRESTRICTED NET ASSETS Excess (deficiency) of revenues over expenses $ (238,722) $ 25,905 Contributions for acquisition of property and equipment 51,805 Net assets released from restriction used for purchase of property and equipment 389,393 66,955 Increase in unrestricted net assets 150, ,665 TEMPORARILY RESTRICTED NET ASSETS Contributions 1,336,322 1,712,691 Net assets released from restriction (472,100) (162,656) Increase in temporarily restricted net assets 864,222 1,550,035 PERMANENTLY RESTRICTED NET ASSETS Contributions Increase in permanently restricted net assets INCREASE IN NET ASSETS 1,015,393 1,695,200 NET ASSETS, BEGINNING OF YEAR 12,304,552 10,609,352 NET ASSETS, END OF YEAR $ 13,319,945 $ 12,304,552 See accompanying notes. 6

10 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 1,015,393 $ 1,695,200 Depreciation 257, ,859 Gain on sale of property and equipment 2,207 Permanently restricted contributions (500) Net realized and unrealized gains (losses) (317,466) 102,227 Contributions for acquisition of property and equipment (1,029,940) (1,558,031) Changes in operating assets and liabilities Accounts receivable 345,501 (171,443) Prepaid expenses and other 49,125 7,035 Accounts payable (40,069) 43,487 Accrued expenses 96,060 76,284 Deferred revenue 86,549 Net cash provided by operating activities 464, ,618 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (1,391,309) (3,880,469) Proceeds from sale of investments 1,206,020 2,577,587 Purchase of property and equipment (574,722) (161,151) Net cash used in investing activities (760,011) (1,464,033) CASH FLOWS FROM FINANCING ACTIVITIES Permanently restricted contributions 500 Contributions for acquisition of property and equipment 806, ,031 Net cash provided by financing activities 807, ,031 NET CHANGE IN CASH AND CASH EQUIVALENTS 511,935 (373,384) CASH AND CASH EQUIVALENTS, beginning of year 336, ,295 CASH AND CASH EQUIVALENTS, end of year $ 848,846 $ 336,911 7 See accompanying notes.

11 Note 1 Nature of Operations and Summary of Significant Accounting Policies Nature of operations and principles of consolidation The accompanying consolidated financial statements include the accounts of The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. (collectively referred to as the Institute), both of which are Missouri nonprofit corporations. Consolidated financial statements are presented as The Rehabilitation Institute of Kansas City is the sole member of The Rehabilitation Institute Industries, Inc. and the organizations have the same Board of Directors. All significant intercompany accounts and transactions have been eliminated in consolidation. The Rehabilitation Institute of Kansas City provides outpatient rehabilitation services and operates a vocational center for the purposes of rehabilitating persons with physical disabilities. The Rehabilitation Institute Industries, Inc. operates a sheltered workshop program to provide employment opportunities to persons with physical disabilities. Effective January 1, 2015, and as further discussed in Note 15, the Institute and Children s Therapeutic Learning Center, Inc. (CTLC) merged into a new organization, and CTLC was subsequently dissolved. CTLC provided therapeutic and educational services for children with disabilities in an environment that fosters their independence and celebrates their successes. The overriding goal is to prepare children with disabilities to succeed in their next educational environments and beyond. Use of estimates The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Institute considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At December 31, 2016 and 2015, cash equivalents consisted primarily of money market accounts with brokers. Patient accounts receivable Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Institute analyzes its past history and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for uncollectible accounts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third party coverage, the Institute analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for uncollectible accounts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third party payer has not yet paid, or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). 8

12 Note 1 Nature of Operations and Summary of Significant Accounting Policies (continued) For receivables associated with self pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third party coverage exists for part of the bill), the Institute records a significant provision for uncollectible accounts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated or provided by policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Institute s allowance for doubtful accounts for self pay patients was 60% and 65% of self pay accounts receivable at December 31, 2016 and 2015, respectively. Assets limited as to use Assets limited as to use include (1) assets restricted by donors and (2) assets set aside by the Board of Directors for various designated projects and future capital improvements over which the Board retains control and may at its discretion subsequently use for other purposes. Investments and investment return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Investment return includes dividend and interest income and realized and unrealized gains and losses on investments carried at fair value. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the consolidated statement of operations and changes in net assets as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. 9

13 Note 1 Nature of Operations and Summary of Significant Accounting Policies (continued) Property and equipment Property and equipment acquisitions are recorded at cost and are depreciated using the straight line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives. The estimated useful lives for each major depreciable classification of property and equipment are as follows: Equipment Leasehold improvements 3 10 years 5 20 years Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long lived asset impairment The Institute evaluates the recoverability of the carrying value of longlived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long lived asset is tested for recoverability and the undiscounted estimate future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long lived asset exceeds its fair value. No asset impairment was recognized during the years ended December 31, 2016 or Professional liability claims The Institute recognizes an accrual for claim liabilities based on estimated ultimate losses and costs associated with settling claims and a receivable to reflect the estimated insurance recoveries, if any. Professional liability claims are described more fully in Note 13. Temporarily and permanently restricted net assets Temporarily restricted net assets are those whose use by the Institute has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Institute in perpetuity. Net patient service revenue The Institute has agreements with third party payers that provide for payments to the Institute at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third party payers and others for services rendered and includes estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known. 10

14 Note 1 Nature of Operations and Summary of Significant Accounting Policies (continued) Charity care The Institute provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Institute does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. The costs of charity care provided were approximately $63,000 and $108,000 for the years ended December 31, 2016 and 2015, respectively. The cost of charity care is estimated by applying the ratio of cost to gross charges to the gross uncompensated charges. Government grants Support funded by grants is recognized as the Institute performs the contracted services or incurs outlays eligible for reimbursement under the grant agreements. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. In kind rent contribution The Institute operates a sheltered workshop at 1020 East 12th Street in a building owned by Empowering Individuals Through Advocacy and Support (EITAS). EITAS charges the Institute a nominal rate for the lease of this space. In addition, EITAS provides for the repairs and maintenance of this building. The estimated value of the contributed rent was approximately $90,000 for each of the years ended December 31, 2016 and Repairs and maintenance expense for the building paid by EITAS was $1,914 and $6,061 for the year ended December 31, 2016 and 2015, respectively. The Institute also receives contributed rent from The Rehabilitation Institute Foundation (the Foundation), as described in Note 10. Excess of revenues over expenses The consolidated statement of operations includes excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers to and from affiliates for other than goods and services and contributions of long lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). 11

15 Note 1 Nature of Operations and Summary of Significant Accounting Policies (continued) Income tax status The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc. are not for profit organizations as described in Section 501(c)(3) of the Internal Revenue Code, and are exempt from income taxes on related income under Section 501(a) of the Code and a similar provision of state law. However, the Institute is subject to federal income tax on any unrelated business taxable income. The Institute files tax returns in the U.S. federal jurisdiction. Reclassifications Certain 2015 amounts have been reclassified to conform with the 2016 presentation. Subsequent events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are available to be issued. The Institute recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Institution s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the consolidated financial statements are available to be issued. The Organization has evaluated subsequent events through April 28, 2017, which is the date the consolidated financial statements are available to be issued. Note 2 Contributions Receivable All contributions receivable at December 31, 2016 and 2015 are for the Rebuilding Lives: Restoring Hope Capital Campaign. Contributions receivable consisted of the following at December 31: Due within one year $ 340,000 $ 397,000 Due in one to five years 1,000, ,000 1,340,000 1,108,000 Less Allowance for uncollectible contributions (40,380) (33,244) Unamortized discount at 2% (37,846) (35,942) $ 1,261,774 $ 1,038,814 12

16 Note 3 Assets Limited as to Use and Investments Assets limited as to use consisted of the following at December 31: Internally designated for various designated projects and future capital improvements Money market mutual funds $ $ 12,355 Investments 2,808,008 3,400,039 $ 2,808,008 $ 3,412,394 Externally restricted by donors Cash and cash equivalents $ 438,122 $ 460,936 Investments 3,662,852 2,911,727 $ 4,100,974 $ 3,372,663 Investments consisted of the following at December 31: Cash and cash equivalents $ $ 300,000 Certificates of deposit 5,771 Money market mutual funds 1,099,690 1,006,628 Common stock 2,149,653 2,042,932 Equity mutual funds U.S. large cap funds 960, ,990 Other 1,269,241 1,252,733 Fixed income mutual funds 1,161, ,293 Exchange traded funds 331, ,740 Hedge mutual funds 39,193 59,271 Corporate bonds 628, ,477 $ 7,640,683 $ 7,120,835 13

17 Note 3 Assets Limited as to Use and Investments (continued) Total investments are reflected in the consolidated balance sheet as follows at December 31: Cash and cash equivalents $ $ 5,721 Internally designated for various designated projects and future capital improvements 2,808,008 3,412,394 Externally restricted by donors 3,662,852 2,911,727 Investments 1,169, ,993 $ 7,640,683 $ 7,120,835 Total investment return is comprised of the following for the years ended December 31: Interest and dividend income $ 83,038 $ 91,714 Net realized gains 90, ,407 Net unrealized gains (losses) 227,240 (232,634) $ 400,504 $ (10,513) Note 4 Property and Equipment Property and equipment consisted of the following at December 31: Land $ 547,959 $ 547,959 Equipment 2,116,182 1,930,065 Leasehold improvements 2,895,394 2,677,361 Construction in progress 301, ,869 5,860,610 5,429,254 Less accumulated depreciation and amortization 3,853,709 3,737,262 $ 2,006,901 $ 1,691,992 14

18 Note 5 Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes or periods: Building improvements and purchase of equipment $ 4,481,368 $ 3,558,167 Emergency cash reserve fund 360, ,037 Other programs 325, ,282 $ 5,166,708 $ 4,302,486 Permanently restricted net assets are restricted to Investments to be held in perpetuity, the income is unrestricted $ 109,491 $ 108,991 Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors: Building improvements and purchase of equipment $ 389,393 $ 66,955 Other programs 82,707 95,701 $ 472,100 $ 162,656 Note 6 Endowment The Institute s endowment consists of several donor restricted funds established for a variety of purposes. The endowment includes both donor restricted endowment funds and funds designated by the governing body to function as endowments (board designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board designated endowment funds, are classified and reported based on the existence or absence of donor imposed restrictions. The Institute s governing body has interpreted the State of Missouri Prudent Management of Institutional Funds Act (SPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Institute classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. 15

19 Note 6 Endowment (continued) The remaining portion of donor restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Institute in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the Institute and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the Institute 7. Investment policies of the Institute The composition of net assets by type of endowment fund at December 31, 2016 was as follows: Permanently Unrestricted Restricted Total Donor restricted $ $ 109,491 $ 109,491 Board designated 3,047,702 3,047,702 Total endowment funds $ 3,047,702 $ 109,491 $ 3,157,193 The composition of net assets by type of endowment fund at December 31, 2015 was as follows: Permanently Unrestricted Restricted Total Donor restricted $ $ 108,991 $ 108,991 Board designated 2,999,899 2,999,899 Total endowment funds $ 2,999,899 $ 108,991 $ 3,108,890 16

20 Note 6 Endowment (continued) Changes in endowment net assets for the years ended December 31, 2016 and 2015 were as follows: Permanently Unrestricted Restricted Total Balance at January 1, 2015 $ 3,112,426 $ 108,491 $ 3,220,917 Investment return Investment income 58,173 58,173 Net depreciation (10,166) (10,166) Contributions 3, ,755 Appropriation of endowment assets for expenditure (163,789) (163,789) Balance at December 31, ,999, ,991 3,108,890 Investment return Investment income 112, ,611 Net appreciation 59,739 59,739 Contributions 10, ,697 Appropriation of endowment assets for expenditure (134,744) (134,744) Balance at December 31, 2016 $ 3,047,702 $ 109,491 $ 3,157,193 Amounts of donor restricted endowment funds classified as permanently restricted net assets at December 31, 2016 and 2015 consisted of amounts required to be retained permanently by explicit donor stipulation or SPMIFA. The Institute has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor restricted endowment funds the Institute must hold in perpetuity, as well as those of boarddesignated endowment funds. The Institute expects its endowment funds to provide an average rate of return of approximately 7 8% annually over time. Actual returns in any given year may vary from this amount. To satisfy its long term rate of return objectives, the Institute relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The Institute targets a diversified asset allocation that places a greater emphasis on equity based investments to achieve its long term return objectives within prudent risk constraints. 17

21 Note 6 Endowment (continued) The Institute has a policy (the spending policy) of appropriating for expenditure each year 5% of its board designated endowment fund s three year rolling average balance. In establishing this policy, the Institute considered the long term expected return on its endowment. This is consistent with the Institute s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. The Institute s endowment assets include those assets of donor restricted endowment funds that must be held in perpetuity. The Institute invests the donor restricted endowments in low risk assets such as FDIC insured bank deposits and money market mutual funds to maintain the corpus amounts. As there are no donor restrictions on earnings from these assets, all income earned on the endowments is spent on operations as it is earned. Note 7 Net Patient Service Revenue The Institute recognizes patient service revenue associated with services provided to patients who have third party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the Institute recognizes revenue on the basis of its standard rates for services provided. On the basis of historical experience, a significant portion of the Institute s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Institute records a significant provision for uncollectible accounts related to uninsured patients in the period the services are provided. This provision for uncollectible accounts is presented on the consolidated statement of operations as a component of net patient service revenue. The Institute has agreements with third party payers that provide for payments to the Institute at amounts different from its established rates. These payment arrangements include: Medicare and Medicaid All outpatient services rendered to Medicare and Medicaid program beneficiaries are paid at prospectively determined rates based on fee schedules. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Institute has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Institute under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. 18

22 Note 7 Net Patient Service Revenue (continued) Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized for the years ended December 31 was: Medicare $ 476,447 $ 404,050 Medicaid 623, ,782 Other third party payers 5,362,719 5,057,019 Patients 296, ,273 $ 6,759,004 $ 6,110,124 Note 8 Functional Expenses The Institute provides health care and vocational rehabilitation services to persons with physical disabilities within its geographic location. Expenses related to providing these services are as follows for the years ended December 31: Health care and vocational rehabilitation services $ 9,685,059 $ 9,712,113 General and administrative 3,592,734 2,845,879 $ 13,277,793 $ 12,557,992 Note 9 Conditional Gifts The Institute has received the following conditional promises to give as of December 31, 2016 that are not recognized in the consolidated financial statements: A $1 million conditional promise to give upon raising $9 million for the Rebuilding Lives: Restoring Hope Capital Campaign. A $318,000 conditional promise to give upon breaking ground on the remodeling of the facilities. 19

23 Note 10 Related Party Transactions The Institute and The Rehabilitation Institute Foundation (Foundation) are related parties. The Institute authorizes the Foundation to solicit contributions on its behalf. In the absence of donor restrictions, the Foundation s Board of Directors has discretionary control over the amounts, timing and recipient of any distributions. The Foundation s contributions to the Institute during the years ended December 31, 2016 and 2015 was $2,500 and $4,500, respectively, and is reported in the Institute s consolidated financial statements as unrestricted contributions and temporarily restricted contributions. At December 31, 2016 and 2015, $0 and $91,000 of the committed support was outstanding, respectively. The Foundation has also agreed to lease its building to the Institute at a nominal rate through 2089, provided the Institute continues to use the property in accordance with terms specified in the lease agreement, which includes using the property to further the mission for which it was formed. As a result of the agreement, the Institute recorded rent expense of $490,850 and a corresponding amount as an inkind contribution from the Foundation within unrestricted revenues, gains and other support for each of the years ended December 31, 2016 and The Institute and Children s Center Campus (CCC) are related parties. CCC owns and leases the facility used by the Institute to provide therapeutic and educational services for children with disabilities. The lease term is for twenty years, with ten options for five year renewal periods. In lieu of rent, the Institute pays 40% of the operating expenses of the building. Annual payments are determined each year. Total expense related to this agreement was $258,883 and $244,557 for the years ended December 31, 2016 and 2015, respectively. Note 11 Pension Plan The Institute established a defined contribution pension plan covering substantially all of The Rehabilitation Institute of Kansas City (RIKC) employees effective July 1, The Board of Directors annually determines the amount, if any, of the Institute s contributions to the plan. Pension expense was $54,651 and $42,458 for 2016 and 2015, respectively. 20

24 Note 12 Concentrations Cash and cash equivalents At times, the Institute s cash accounts exceed federally insured limits. Patient accounts receivable The Institute grants credit without collateral to its patients, most of who are area residents and are insured under third party payer agreements. The mix of net receivables from patients and third party payers at December 31 was: Medicare 11% 12% Medicaid 38% 26% Other third party payers 42% 52% Patients 9% 10% 100% 100% Contributions receivable Approximately 90% of contributions receivable at December 31, 2016 were from three donors. Approximately 79% of contributions receivable at December 31, 2015 were outstanding from two donors. Investments The Institute invests in various investment securities. Investment securities 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 the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated balance sheet. Contributions revenue Approximately 35% and 38% of all contributions revenue for the years ended December 31, 2016 and 2015, respectively, were received from two donors. Note 13 Commitments and Contingencies Operating leases Noncancellable operating leases for office space are renewed annually and require the Institute to pay all executory costs (property taxes, maintenance and insurance). Rental expense for all operating leases, including in kind rent as described in Note 1, was $839,495 and $790,070 for the years ended December 31, 2016 and 2015, respectively. Risk management The Institute purchases medical malpractice insurance under a claims made policy. Under such a policy, only claims made and reported to the insurer during the policy term, regardless of when the incidents giving rise to the claims occurred, are covered. The Institute also purchases excess umbrella liability coverage, which provides additional coverage above the basic policy limits up to the amount specified in the umbrella policy. 21

25 Note 13 Commitments and Contingencies (continued) Based upon the Institute s claims experience, no accrual has been made for the Institute s estimated medical malpractice costs as of December 31, 2016 and It is reasonably possible that this estimate could change materially in the near term. Compliance with laws and regulations The health care industry is subject to numerous laws and regulations from federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. 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 and coding and billing for services, has increased substantially. Violations of these laws and regulations could result in expulsion from government health care programs, together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Institute is in compliance with the fraud and abuse regulations, as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. Note 14 Fair Value of Financial Instruments Under accounting principles, a financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other instruments. The disclosure requirements exclude leases, affiliate investments, pension and benefit obligations, insurance contracts, and all nonfinancial instruments. The estimated fair value of certain financial instruments is reflected in the accompanying consolidated balance sheets in the following manner. The carrying amount of cash and cash equivalents, accounts payable and accrued expenses, approximates the fair value of these instruments. Fair values of assets limited as to use and investments are based on quoted market prices, if available, or estimated using quoted market prices for similar securities. 22

26 Note 14 Fair Value of Financial Instruments (continued) The following tables disclose, by level, the fair value hierarchy at December 31 (Note 2): Total Level 1 Level 2 Level 3 December 31, 2016 Money market mutual funds $ 1,099,690 $ 1,099,690 $ $ Common stock 2,149,653 2,149,653 Equity mutual funds U.S. large cap funds 960, ,698 Other 1,269,241 1,269,241 Fixed income mutual funds 1,161,841 1,161,841 Exchange traded funds 331, ,635 Hedge mutual funds 39,193 39,193 Corporate Bonds 628, ,732 $ 7,640,683 $ 7,011,951 $ 628,732 $ Total Level 1 Level 2 Level 3 December 31, 2015 Money market mutual funds $ 1,006,628 $ 1,006,628 $ $ Common stock 2,042,932 2,042,932 Equity mutual funds U.S. large cap funds 725, ,990 Other 1,252,733 1,252,733 Fixed income mutual funds 916, ,293 Exchange traded funds 158, ,740 Hedge mutual funds 59,271 59,271 Corporate bonds 652, ,477 $ 6,815,064 $ 6,162,587 $ 652,477 $ Note 15 Merger The Institute was formed on January 1, 2015, as the result of a merger between two existing not forprofit entities, the Institute and the Children s Therapeutic Learning Center, Inc. (CTLC). Both of these entities shared the common mission of providing therapeutic services to people with disabilities. Through their merger, the organizations seek to further their common mission by (a) improving the nature and depth of services provided to people with disabilities in the service area and (b) achieving economies of scale and other synergies through integrating their services. 23

27 Note 15 Merger (continued) The merger has been accounted for using the carryover method where by the beginning assets, liabilities and net assets of the Institute are based on their carrying amounts in the separate consolidated financial statements of the Institute and CTLC as of the merger date. The following table reflects the amounts recognized as of the merger date for each major class of assets and liabilities and each class of net assets: CTLC Institute Total ASSETS Cash and cash equivalents $ 37,576 $ 672,719 $ 710,295 Patient receivables, net of allowance 219,488 1,223,476 1,442,964 Other receivables 787, ,663 Contributions receivable 4, , ,124 Due from affiliate 91,000 91,000 Prepaid expenses and other assets 34, , ,710 Assets limited as to use Internally designated 3,462,528 12,354 3,474,882 Externally restricted 32,338 2,585,027 2,617,365 Investments 5, , ,148 Property and equipment, net 617,911 1,123,987 1,741,898 Total assets $ 4,414,092 $ 7,063,957 $ 11,478,049 LIABILITIES Accounts payable $ 17,187 $ 274,239 $ 291,426 Accrued expenses 84, , ,271 Total liabilities 101, , ,697 NET ASSETS Unrestricted 4,245,603 3,502,807 7,748,410 Temporarily restricted 34,357 2,718,094 2,752,451 Permanently restricted 32,338 76, ,491 Total net assets 4,312,298 6,297,054 10,609,352 Total liabilities and net assets $ 4,414,092 $ 7,063,957 $ 11,478,049 24

28 OTHER INFORMATION

29 SCHEDULE OF REVENUE AND EXPENSES EXTENDED EMPLOYMENT WORKSHOPS Years Ended December 31, Revenue Workshop (contract only) sales $ 735,418 $ 774,043 Governmental Reimbursement: Missouri Senate Bill #52 522, ,301 Jackson County Proposition #1 360, ,046 Platte County Board of Services 93,591 97,344 Developmental Disabilities Resource Board 15,121 10,542 MARC Grant 12,060 5,487 United Way 31,100 31,100 Donor Grant 14,333 Total revenue 1,784,429 1,863,863 Expenses Salaries staff 507, ,317 Wages workshops 342, ,217 Employee health and welfare 87,443 82,868 Payroll taxes 62,310 64,087 Insurance 12,708 10,062 Supplies 15,184 10,888 Cost of sales 100, ,097 Professional fees 52,480 47,062 Postage 75,550 64,297 Repairs and maintenance 80,758 51,160 Rent 19,248 2,100 Utilities 28,312 28,480 Telephone 13,311 10,768 Travel and automobile expense 11,093 14,121 General and administrative 327, ,033 Depreciation of facilities and equipment 52,438 57,223 Miscellaneous 2,177 2,109 Total expenses 1,791,130 1,842,889 Excess of revenue over expenses $ (6,701) $ 20,974 25

30 CALCULATION OF WORKSHOP EXPENSES PER CLIENT PER DAY Years Ended December 31, Workshop Operations Cost Salaries staff $ 507,114 $ 503,317 Wages workshops 342, ,217 Employee health and welfare 87,443 82,868 Payroll taxes 62,310 64,087 Insurance 12,708 10,062 Supplies 15,184 10,888 Cost of sales 100, ,097 Professional fees 52,480 47,062 Postage 75,550 64,297 Repairs and maintenance 80,758 51,160 Rent 19,248 2,100 Utilities 28,312 28,480 Telephone 13,311 10,768 Travel and automobile expense 11,093 14,121 General and administrative 327, ,033 Depreciation of facilities and equipment 52,438 57,223 Miscellaneous 2,177 2,109 Total cost 1,791,130 1,842,889 Less cost of sales 100, ,097 Adjusted workshop operations cost 1,690,504 1,713,792 Total workshop client days (6 hour days) 28,533 34,394 Workshop expenses per client per day $ $