Financial Statements June 30, 2016 and 2015 Immanuel Lutheran Corporation

Transcription

1 Financial Statements Immanuel Lutheran Corporation

2 Table of Contents Independent Auditor s Report... 1 Financial Statements Balance Sheets... 2 Statements of Operations... 3 Statements of Changes in Net Assets... 4 Statements of Cash Flows Independent Auditor s Report on Supplementary Information...23 Supplementary Information Schedules of Revenues...24 Schedules of Expenses...25 Schedules of Other Income and Expense...26 Schedules of Changes in Net Assets...27

3 Independent Auditor s Report The Board of Directors Immanuel Lutheran Corporation Kalispell, Montana Report on the Financial Statements We have audited the accompanying financial statements of Immanuel Lutheran Corporation, which comprise the balance sheets as of, and the related statements of operations, changes in net assets, and cash flows for the years 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 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 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Immanuel Lutheran Corporation as of, and the results of its operations, changes in net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Billings, Montana October 26, N. 31st St., Ste P.O. Box 7112 Billings, MT TF T F EOE

4 (This page left blank intentionally.)

5 Assets Current Assets Cash and cash equivalents $ 4,115,496 $ 2,931,254 Receivables Resident, net of estimated uncollectibles of $125,000 in 2016 and ,044,884 1,258,315 Other 3,108 33,874 Supplies 82,724 91,060 Prepaid expenses 160, ,558 Total current assets 5,406,475 4,478,061 Assets Limited as to Use 758,218 12,674 Property and Equipment 20,700,347 17,147,358 Other Assets Long-term investments 7,638,383 7,523,591 Property held for investment - 235,000 Marketing costs and supplies 578,245 41,529 Beneficial interests in charitable trusts held by others 37,000 37,000 Deferred financing costs, net of accumulated amortization of $1,087 in 2016 and $43,464 in , ,150 Total other assets 8,717,000 8,125,270 Total assets $ 35,582,040 $ 29,763,363 See

6 Balance Sheets Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 291,759 $ 510,628 Accounts payable Trade 400, ,481 Construction 838,238 - Accrued expenses Vacation 247, ,601 Salaries and wages 233, ,587 Employee benefit plans 96,220 81,027 Payroll taxes and other 21,448 98,151 Interest 50,280 43,155 Estimated liabilities under split-interest agreements 64,000 62,000 Deferred revenue 36,000 19,000 Rental deposits 7,000 21,000 Total current liabilities 2,285,756 1,641,630 Other Liabilities 1,113, ,325 Fair Market Value of Interest Rate Swap Agreement 1,297, ,972 Long-term Debt, Less Current Maturities 17,224,269 12,132,510 Total liabilities 21,921,286 15,074,437 Net Assets Unrestricted 12,794,501 13,913,979 Temporarily restricted 241, ,462 Permanently restricted 624, ,485 Total net assets 13,660,754 14,688,926 Total liabilities and net assets $ 35,582,040 $ 29,763,363 2

7 Statements of Operations Years Ended Unrestricted Revenues and Other Support Net resident service revenue $ 8,890,520 $ 10,011,589 Retirement residence rent revenue 4,885,262 4,821,790 Net assets released from restrictions for operations 68, ,622 Other revenue 71,377 74,632 Total unrestricted revenues and other support 13,915,408 15,027,633 Expenses Professional care of residents 5,841,508 6,515,916 General and administrative 2,728,001 2,785,034 Dietary 1,868,104 1,873,830 Property and household 1,517,675 1,569,397 Depreciation and amortization 1,817,792 1,528,185 Interest 632, ,756 Provision for bad debts 88,181 34,028 Total expenses 14,493,584 14,838,146 Operating Income (Loss) (578,176) 189,487 Other Income (Expense), Net Interest and dividend income 222, ,646 Net realized gain on sale of investments 45,024 57,748 Unrestricted contributions 28,187 36,954 Rent income 1,150 4,143 Loss on sale of property held for investment (65,774) - Gain (loss) on sale of property and equipment (156,903) 2,205 Support services, including depreciation of $17,793 in 2016 and $21,229 in 2015 (236,390) (286,516) Total other income (expense), net (162,671) 23,180 Revenues in Excess of (less than) Expenses (740,847) 212,667 Change in Value of Interest Rate Swap Agreement (372,441) 28,181 Net Assets Released from Restrictions for Capital Acquisition 9,647 10,000 Change in Unrealized Gains and Losses on Investments (15,837) (109,170) Change in Unrestricted Net Assets $ (1,119,478) $ 141,678 See 3

8 Statements of Changes in Net Assets Years Ended Unrestricted Net Assets Revenues in excess of (less than) expenses $ (740,847) $ 212,667 Change in value of interest rate swap agreement (372,441) 28,181 Net assets released from restrictions for capital acquisition 9,647 10,000 Change in unrealized gains and losses on investments (15,837) (109,170) Change in Unrestricted Net Assets (1,119,478) 141,678 Temporarily Restricted Net Assets Contributions for specific purposes 155,381 85,718 Investment income 15,619 6,784 Net assets released from restrictions (77,896) (129,622) Change in Temporarily Restricted Net Assets 93,104 (37,120) Permanently Restricted Net Assets Change in value of split-interest agreements (24,815) (40,594) Contributions 23, ,365 Change in Permanently Restricted Net Assets (1,798) 87,771 Change in Net Assets (1,028,172) 192,329 Net Assets, Beginning of Year 14,688,926 14,496,597 Net Assets, End of Year $ 13,660,754 $ 14,688,926 See 4

9 Statements of Cash Flows Years Ended Operating Activities Change in net assets $ (1,028,172) $ 192,329 Adjustments to reconcile change in net assets to net cash from operating activities Depreciation and amortization 1,835,585 1,549,414 Change in value of interest rate swap agreement 372,441 (28,181) Loss on sale of property held for investment 65,774 - (Gain) loss on sale of property and equipment 156,903 (2,205) Change in unrealized gains and losses on investments 15, ,170 Gain on sale of investments (45,024) (57,748) Contributions and investment income restricted by donor (194,017) (220,867) Changes in assets and liabilities Receivables 244, ,646 Supplies 8,336 3,075 Prepaid expenses 3,295 (45,304) Assets limited as to use (745,544) (12,674) Accounts payable (44,268) 41,300 Accrued expenses 64,025 (53,484) Estimated liabilities under split-interest agreements (5,000) (115,000) Deferred revenue 12,758 44,325 Reservation and rental deposits 735,765 (21,250) Net Cash from Operating Activities 1,452,891 1,700,546 Investing Activities Purchase of property and equipment (4,421,449) (1,203,903) Purchase of investments (2,806,871) (3,481,981) Proceeds from sale of investments 2,721,266 2,533,665 Payment of marketing costs and supplies (536,716) (41,529) Proceeds from sale of property held for investment 169, ,205 Proceeds from sale of property and equipment 3,447 - Net Cash used for Investing Activities (4,871,097) (2,001,543) Financing Activities Proceeds from issuance of long-term debt 17,560,527 - Principal payments on long-term debt (12,687,637) (480,622) Payment of deferred financing costs (464,459) (51,700) Contributions and investment income restricted by donor 194, ,867 Net Cash from (used for) Financing Activities 4,602,448 (311,455) Net Change in Cash and Cash Equivalents 1,184,242 (612,452) Cash and Cash Equivalents, Beginning of Year 2,931,254 3,543,706 Cash and Cash Equivalents, End of Year $ 4,115,496 $ 2,931,254 Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest, net of amount capitalized of $19,124 in 2016 and $-0- in 2015 $ 625,198 $ 538,067 Supplemental Schedule of Noncash Investing and Financing Activities Accounts payable for construction $ 838,238 $ - See 5

10 Note 1 - Organization and Significant Accounting Policies Organization Immanuel Lutheran Corporation (Corporation) operates a 155-bed nursing facility, Immanuel Skilled Care Center, of which 16 beds are in a transitional care unit (Retreat), and a retirement residence facility with 112 apartments, 54 of which are licensed for assisted living, Buffalo Hill Terrace, located in Kalispell, Montana. The Corporation is organized as a Montana nonprofit corporation. The Corporation also operates an Office of Development, which provides promotional and fund raising programs to advance the corporate objectives of Christian charity and care. Income Taxes The Corporation is organized as a Montana nonprofit corporation and has been recognized by the Internal Revenue Service (IRS) as exempt from federal and state income taxes under Internal Revenue Code Section 501(c)(3). The Corporation is annually required to file a Return of Organization Exempt from Income Tax (Form 990) with the IRS. The Corporation has determined it is not subject to unrelated business income tax and has not filed an Exempt Organization Business Income Tax Return (Form 990T) with the IRS. The Corporation believes it has support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the financial statements. The Corporation would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Use of Estimates The preparation of 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value Measurements The Corporation has determined the fair value of certain assets and liabilities in accordance with generally accepted accounting principles, which provides a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established, which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability. 6

11 Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Resident Receivables and Credit Policies Resident receivables are uncollateralized resident obligations due under normal trade terms requiring payment within 30 days from the invoice date. Payments of receivables are allocated to the specific invoices identified on the resident s remittance advice or, if unspecified, to the earliest unpaid invoices. Resident account balances with invoices over 60 days old are considered delinquent. Delinquent balances do not accrue interest. The carrying amount of resident receivables is reduced by a valuation allowance that reflects management s best estimate of the amounts that will not be collected. Management reviews all resident receivable balances that exceed 180 days from the invoice date and based on the assessment of creditworthiness estimates the portion, if any, of the balance that will not be collected. All receivables from Medicaid and Medicare are recorded net of the estimated contractual allowance. Supplies Supplies are stated at lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment acquisitions in excess of $500 are capitalized and recorded at cost. Depreciation is provided over the estimated useful life of each depreciable asset and is computed using the straight-line method. The estimated useful lives of property and equipment are as follows: Land improvements Building and improvements Equipment years 5-40 years 5-20 years Gifts of long-lived assets such as land, buildings, or equipment are reported as additions to unrestricted net assets, and are excluded from revenues in excess of expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted net assets. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Resident Trust Funds The Corporation acts as custodian for the funds of the residents. These funds are included in assets limited as to use and accounts payable in the balance sheets. Assets Limited as to Use Assets limited as to use include cash and cash equivalents held in bank accounts, which are restricted to use for current or future residents. The assets consist of resident trust funds of $15,453 and $12,674 at June 30, 2016 and 2015, respectively, and reservation deposits of $742,765 and $-0- at, respectively. 7

12 Impairment of Long-lived Assets The Corporation considers whether indicators of impairment are present and performs the necessary analysis to determine if the carrying values of assets are appropriate. No impairment was identified for the years ended June 30, 2016 and Property Held for Investment Property held for investment consists of property received from donors that is held for future sale. The property is stated at its fair value on the date of the donation. Investments and Investment Income Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheet. Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in revenues in excess of (less than) expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from revenues in excess of expenses unless the investments are trading securities. Beneficial Interests in Charitable Trusts Held by Others The Corporation has been named as an irrevocable beneficiary of several charitable trusts held and administered by independent trustees. These trusts were created independently by donors and are administered by outside agents designated by the donors. Therefore, the Corporation has neither possession nor control over the assets of the trusts. At the date the Corporation receives notice of a beneficial interest, a temporarily or permanently restricted contribution is recorded in the statement of changes in net assets, and a beneficial interest in charitable trusts held by others is recorded in the balance sheet at fair value using present value techniques and risk-adjusted discount rates designed to reflect the assumptions market participants would use in pricing the expected distributions to be received under the agreement. Thereafter, beneficial interests in the trusts are reported at fair value in the balance sheet, with trust distributions and changes in fair value recognized in the statement of changes in net assets. Upon receipt of trust distributions and/or expenditures in satisfaction of the restricted purpose stipulated by the donor, if any, temporarily restricted net assets are released to unrestricted net assets. Deferred Financing Costs Deferred financing costs are amortized over the term the related obligation is outstanding using the straight-line method, which does not differ materially from the results that would be produced using the effective interest method. The estimated annual amortization of deferred financing costs is approximately $19,000 for each of the years 2017 through Liabilities under Split-interest Agreements Under charitable gift annuity contracts, the Corporation receives immediate and unrestricted title to contributed assets and agrees to make fixed recurring payments over the stipulated period. Contributed assets are recorded at fair value on the date of receipt. The related liability for future payments to be made to the specified beneficiaries is recorded at fair value using present value techniques and risk-adjusted discounts rate designed to reflect the assumptions market participants would use in pricing the liability. The excess of contributed assets over the annuity liability is recorded as a contribution. In subsequent years, the liability for future annuity payments is reduced by payments made to the specified beneficiaries and is adjusted to reflect amortization of the discount and changes in actuarial assumptions at the end of the year. 8

13 Non-refundable Entrance Fees, Refundable Resident Rental Deposits, and Reservation Deposits Retirement housing residents pay a non-refundable entrance fee upon entrance to the retirement residence facility. The non-refundable entrance fee is recorded as deferred revenue and amortized to revenue over the estimated period of occupancy of the resident. Certain retirement housing residents make a refundable deposit when placed on a waiting list or upon entrance to the residence facility. Reservation deposits are held for future residents for units in the retirement residence facility which have not yet opened. The reservation deposits are held in a restricted bank account and reported as assets limited as to use. The rental and reservation deposits are recorded as a liability on the balance sheet until refunded or converted to an entrance fee. Derivative Financial Instruments The Corporation makes limited use of derivative instruments for the purpose of managing interest rate risks. Interest rate swap agreements are used to convert the Corporation s variable rate long-term debt to a fixed rate. The swap agreements are recognized on the balance sheet at fair market value as either an asset or a liability. The value is determined using valuation models that are based upon the net present value of estimated future cash flows and other current market data (Level 2 in the fair value hierarchy). The differentials paid or received on interest rate swap agreements are accrued and recognized as adjustments to interest expense; gains and losses realized upon settlement of these agreements are deferred until the underlying hedged instrument is settled. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation 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 Corporation in perpetuity. Net Resident Service Revenue Net resident service revenue is reported at established billing rates for private pay residents. For Medicaid residents, prospective per diem rates are determined on a cost-related basis subject to certain limitations as prescribed by the Montana Department of Public Health and Human Services regulations. The Corporation participates in the Medicare program for which payment for services is made on a prospectively determined per diem rate, which varies, based on a case-mix adjusted patient classification system. Revenues in Excess of (Less than) Expenses Revenues in excess of (less than) expenses excludes unrealized gains and losses on investments, other than trading securities, changes in values of interest rate swap agreements, transfers of assets to and from related parties for other than goods and services and contributions of long-lived assets, including assets acquired using contributions which were restricted by donors. Donor-restricted Gifts Current unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift 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 donor stipulated time restrictions or purpose restrictions are met or accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of operations as net assets released from restrictions. 9

14 Advertising Costs The Corporation expenses marketing costs and supplies as they are incurred, except for direct response marketing which is capitalized as incurred and amortized to expense using the straight-line method over the expected benefit period of two years. Support Services Support services represent the activities of the Care Team Ministry and the fundraising activities of the Office of Development, and are included in other income and expense. Subsequent Events The Corporation has evaluated subsequent events through October 26, 2016, the date which the financial statements were available to be issued. Note 2 - Net Resident Service Revenue A summary of resident service revenue and contractual adjustments is as follows: Total resident service revenue $ 11,695,951 $ 12,487,802 Contractual adjustments Medicaid (1,163,189) (1,129,266) Medicare (1,288,943) (1,085,906) Private pay (353,299) (261,041) Total contractual adjustments (2,805,431) (2,476,213) Net resident service revenue $ 8,890,520 $ 10,011,589 Note 3 - Other Receivables Other receivables consist of: Interest $ 3,108 $ 13,448 Insurance settlement - 20,426 $ 3,108 $ 33,874 10

15 Note 4 - Long-Term Investments The Corporation measures the fair value of its investments based upon quoted market prices in certain active and inactive markets and include the following at : Mutual funds $ 5,568,797 $ 4,008,331 Large-cap stocks 1,069,063 1,127,289 Certificates of deposit 583,130 1,022,497 Corporate bonds 407,234 1,354,909 U.S. Government obligations 10,159 10,565 Investment Income $ 7,638,383 $ 7,523,591 Investment income, and gains and losses from cash equivalents and other investments are comprised of the following for the years ended : Other income Interest and dividend income $ 222,035 $ 208,646 Net realized gain on sale of investments 45,024 57,748 $ 267,059 $ 266,394 Other changes in unrestricted net assets Change in unrealized gains and losses on investments $ (15,837) $ (109,170) Other changes in temporarily restricted net assets Interest and dividends $ 14,586 19,242 Net appreciation (depreciation) (realized and unrealized) 1,033 (12,458) Total investment income $ 15,619 $ 6,784 Interest and dividend income is net of investment expenses of $49,684 and $44,262, for the years ended June 30, 2016 and 2015, respectively. 11

16 The fair values and gross unrealized losses of investments for individual securities that have been in a continuous unrealized loss position as of are as follows: 2016 Less Than Twelve Months More Than Twelve Months Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Mutual Funds $ (26,869) $ 449,018 $ (51,537) $ 668,525 Corporate Bonds - - (4,331) 282,411 Large-Cap Common Stocks (15,023) 165,487 (54,909) 88,988 U.S. Government Obligations (314) 10, $ (42,206) $ 624,664 $ (110,777) $ 1,039, Less Than Twelve Months More Than Twelve Months Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Mutual Funds $ (77,792) $ 1,667,228 $ (7,946) $ 213,395 Corporate Bonds (3,758) 403,887 (9,652) 321,994 Large-Cap Common Stocks (19,816) 138,758 (41,336) 21,285 U.S. Government Obligations (176) 99, $ (101,542) $ 2,309,697 $ (58,934) $ 556,674 The gross unrealized losses on these investments were primarily the result of recent market declines with the cyclical nature of the financial markets. The Corporation has a diversified portfolio. The Corporation s investments in an unrealized loss position consist of investments in various market sectors. Based on that evaluation and the Corporation s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Corporation does not consider these investments to be other than temporarily impaired at. 12

17 Note 5 - Endowments The Corporation s endowments consist of individual funds established for a variety of purposes. As required by Generally Accepted Accounting Principles (GAAP), net assets associated with endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Directors has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the 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 Corporation 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 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. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Corporation in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Corporation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund. (2) The purposes of the Corporation and the donor-restricted endowment fund. (3) General economic conditions. (4) The possible effect of inflation and deflation. (5) The expected total return from income and the appreciation of investments. (6) Other resources of the Corporation. (7) The investment policies of the Corporation. The composition of endowment net assets as of is as follows: Temporarily Permanently Unrestricted Restricted Restricted Total 2016: Endowment Funds Board designated $ 236,107 $ - $ - $ 236,107 Donor-restricted - 59, , ,972 $ 236,107 $ 59,285 $ 624,687 $ 920, : Endowment Funds Board designated $ 189,234 $ - $ - $ 189,234 Donor-restricted - 48, , ,416 $ 189,234 $ 48,931 $ 626,485 $ 864,650 13

18 Changes in endowment net assets for the years ended are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Beginning of Year $ 189,234 $ 48,931 $ 626,485 $ 864,650 Investment Return: Interest and dividends 27,370 14,531-41,901 Net depreciation (realized and unrealized) 1,945 1,033-2,978 Appropriation for Expenditure - (5,210) - (5,210) Contributions 17,558-23,017 40,575 Change in Value of Split-interest Agreements - - (24,815) (24,815) End of Year $ 236,107 $ 59,285 $ 624,687 $ 920,079 Temporarily Permanently Unrestricted Restricted Restricted Total Beginning of Year $ 135,262 $ 53,378 $ 538,714 $ 727,354 Investment Return: Interest and dividends 13,766 19,242-33,008 Net appreciation (realized and unrealized) (8,913) (12,458) - (21,371) Appropriation for Expenditure - (11,231) - (11,231) Contributions 49, , ,484 Change in Value of Split-interest Agreements - - (40,594) (40,594) End of Year $ 189,234 $ 48,931 $ 626,485 $ 864,

19 Note 6 - Property and Equipment A summary of property and equipment at follows: Accumulated Accumulated Cost Depreciation Cost Depreciation Land $ 608,600 $ - $ 608,600 $ - Land improvements 1,842, ,715 1,814, ,227 Building and improvements 24,124,536 12,332,008 24,328,122 11,834,560 Equipment 5,257,938 3,457,522 5,147,504 3,219,247 Construction in progress 5,408, ,704 - $ 37,242,592 $ 16,542,245 $ 32,884,392 $ 15,737,034 Net property and equipment $ 20,700,347 $ 17,147,358 Construction in progress at June 30, 2016 consists of costs to build additional independent and assisted living units. The Corporation has signed contracts for approximately $16,400,000 to build the new units and remodel parts of the facility. 15

20 Note 7 - Long-Term Debt $12,537,000 City of Kalispell Housing and Healthcare Facilities Revenue Refunding Bonds Series 2016A, due in monthly payments of principal from $23,000 to $68,000, plus interest, to April 1, 2041, at a variable interest rate determined by 65% of the LIBOR rate plus 125 basis points (effective rate with interest rate swap of 4.174% as of June 30, 2016) $ 12,490,000 $ - $21,095,000 City of Kalispell Housing and Healthcare Facilities Revenue Bonds Series 2016 B, due in monthly payments of principal from $58,000 to $94,000, plus interest, to April 1, 2043, at a variable interest rate determined by 65% of the LIBOR rate plus 125 basis points (1.568% as of June 30, 2016) 5,023,527 - $14,000,000 City of Kalispell Housing and Healthcare Facilities Revenue Bonds Series 2010, at a variable interest rate determined by 65% of the 30 day LIBOR rate plus 195 basis points (effective rate with interest rate swap 4.35% as of June 30, 2015) - 12,640,000 17% contract payable, due in monthly payments of $96, including interest, through May 2019, secured by equipment 2,501 3,138 17,516,028 12,643,138 Less current maturities (291,759) (510,628) $ 17,224,269 $ 12,132,510 On April 1, 2016, the Corporation issued $12,537,000 of Series 2016A Revenue Refunding Bonds, and $21,095,000 of Series 2016B Revenue Bonds, which were privately placed with the lender, Compass Mortgage Corporation. Under the terms of the loan agreement, the continuing covenant agreement, and indenture of trust by and between the Corporation, Compass Mortgage Corporation, the City of Kalispell, and the trustee, US Bank, N.A., the Corporation is required to meet various covenants, which limit additional borrowings and mandate certain financial ratios. Management believes these requirements were met as of June 30, Long-term debt maturities are as follows: Years Ending June 30, Amount 2017 $ 291, , , , ,000,000 Thereafter 13,819,527 $ 17,516,028 16

21 Note 8 - Interest Rate Swap Agreement The Corporation has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its variable rate long-term revenue bonds. On April 1, 2016, the Corporation issued Series 2016A Revenue Refunding Bonds, which were privately placed with Compass Mortgage Corporation, a subsidiary of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA). On the same date, the Corporation entered into a novation agreement with BBVA, and Wells Fargo Bank, the trustee and purchaser of its 2010 Revenue Bonds, and the counterparty to the Corporation s 2011 interest rate swap agreement. Under the terms of the novation agreement, the Corporation s 2011 interest rate swap agreement with Wells Fargo on a principal notional amount of $12,640,000, as of March 31, 2016, was assumed by BBVA on April 1, Simultaneously, as part of the agreement, the Corporation entered in an interest rate swap agreement with BBVA on a principal notional amount of $12,220,000 with an expiration date of December 1, The agreement with BBVA effectively changed the Corporation s interest rate exposure on the variable rate Series 2016A Revenue Refunding Bonds through December 2021 to a fixed rate of 4.174%. The fair value of the agreements of $1,297,413 and $924,972, as of, respectively, is recognized as a liability on the balance sheet. The Corporation is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Corporation does not anticipate nonperformance by the counterparty. Note 9 - Other Liabilities Other liabilities consist of: Reservation deposits $ 742,765 $ - Resident rental deposits 37,000 44,000 Less estimated current portion of rental deposits (7,000) (21,000) Deferred revenue 57,083 44,325 Less estimated current portion of deferred revenue (36,000) (19,000) Estimated liabilities under split-interest agreements 384, ,000 Less estimated current portion of liabilities under split-interest agreements (64,000) (62,000) $ 1,113,848 $ 375,325 17

22 Note 10 - Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets consist of the following at : Beneficial interests in trusts that are not restricted by donors, but which are unavailable for expenditure $ 37,000 $ 37,000 Donor restricted contributions available for the following purposes: Equipment 110,392 - Endowment assets 59,285 48,931 Education and training 5,595 5,540 Other 29,294 56,991 $ 241,566 $ 148,462 In 2016 and 2015, net assets were released from donor restrictions by incurring expenditures satisfying the restricted purposes in the amounts of 77,896 and $129,622, respectively. These amounts are included in net assets released from restrictions in the accompanying financial statements. Permanently restricted net assets at are restricted to: Investments to be held in perpetuity, the income from which is expendable to support: Operating expenses $ 337,187 $ 338,985 Education and training 282, ,500 Courtyard maintenance 5,000 5,000 $ 624,687 $ 626,485 Note 11 - Fair Value of Financial Instruments The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Financial Assets: Due to the liquid nature of the instruments, the carrying value of cash and cash equivalents approximates fair value. For all investments, the fair value is based upon quoted market prices and observable inputs. The fair value of resident receivables and other receivables approximates book value. Financial Liabilities: The fair value of accounts payable and accrued expenses approximates book value due to expected payment in the near term. The combined fair value of the long-term debt and the interest rate swap agreement approximates book value since the interest rates on the debt and the rate swap approximate the Corporation s current long-term borrowing rate. 18

23 Note 12 - Pension Plan The Corporation has adopted a prototype 401(k) plan. Employees with one year of service who are over 21 years of age are eligible to participate. The Corporation annually elects to contribute a percentage of qualified employees' wages to individual employee pension accounts. Employer contributions vest 20% per year becoming fully vested after five years of service. During 2016 and 2015, the Corporation made contributions to the plan totaling $165,707 and $136,349, respectively. Note 13 - Concentrations of Credit Risk The Corporation grants credit without collateral to its residents. The mix of receivables from third-party payors and residents at was as follows: Private pay and other 54% 60% Medicaid 25% 17% Medicare 21% 23% 100% 100% The Corporation s cash balances are maintained in various bank accounts. At various times during the year, the balance of these deposits may be in excess of federally insured limits. 19

24 Note 14 - Fair Value Measurements Assets and liabilities measured at fair value on a recurring basis and the related fair values of these assets and liabilities at are as follows: Assets: 2016 Quoted Prices In Active Observable Unobservable Markets Inputs Inputs Level 1 Level 2 Level 3 Total Long-Term Investments Corporate bonds $ - $ 407,234 $ - $ 407,234 Certificates of deposit - 583, ,130 Large-cap stocks 1,069, ,069,063 Mutual funds Balanced equity funds 2,091, ,091,007 Small/midcap growth index funds 1,237, ,237,839 Specialty funds 822, ,028 International equity index funds 952, ,175 Realty investment trust funds 317, ,386 Bond funds 148, ,362 U.S. Government obligations - 10,159-10,159 Beneficial Interests in Charitable Trusts held by others - 37,000-37,000 Liabilities: $ 6,637,860 $ 1,037,523 $ - $ 7,675,383 Interest Rate Swap Agreement $ - $ 1,297,413 $ - $ 1,297,413 20

25 Assets: 2015 Quoted Prices In Active Observable Unobservable Markets Inputs Inputs Level 1 Level 2 Level 3 Total Long-Term Investments Corporate bonds $ - $ 1,354,909 $ - $ 1,354,909 Certificates of deposit - 1,022,497-1,022,497 Large-cap stocks 1,127, ,127,289 Mutual funds Balanced equity funds 1,352, ,352,414 Small/midcap growth index funds 862, ,046 Specialty funds 514, ,755 International equity index funds 392, ,752 Realty investment trust funds 355, ,963 Bond funds 325, ,206 Small/midcap value index funds 205, ,195 U.S. Government obligations - 10,565-10,565 Beneficial Interests in Charitable Trusts held by others - 37,000-37,000 Liabilities: $ 5,135,620 $ 2,424,971 $ - $ 7,560,591 Interest Rate Swap Agreement $ - $ 924,972 $ - $ 924,972 The fair values for U.S. Government obligations, corporate bonds, mutual funds, common stock, and certificates of deposit are determined by reference to quoted market prices. A significant portion of the Corporation s investment assets are classified within Level 1 because they are comprised of open-end mutual funds with readily determinable fair values based on daily redemption values. The Corporation invests in certificates of deposit traded in the financial markets. Those certificates of deposit, corporate bonds and U.S. Government obligations are valued by the custodians of the securities using pricing models based on credit quality, time to maturity, stated interest rates and market-rate assumptions, and are classified within Level 2. The fair values of beneficial interests in charitable trusts are determined by management using present value techniques and risk-adjusted discount rates designed to reflect the assumptions market participants would use in pricing the underlying assets, and are based on the fair values of trust investments as reported by the trustees. The interest rate swap agreement is valued using a third party s proprietary discounted cash flow model which considers past, present and future assumptions regarding interest rates and market conditions to estimate the fair value of the agreement. This is classified within Level 2. 21

26 Note 15 - Contingencies Malpractice Insurance The Corporation has malpractice insurance coverage to provide protection for professional liability losses on a claims-made basis subject to a limit of $1 million per claim and an annual aggregate limit of $3 million. Should the claims-made policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term, but reported subsequently, will be uninsured. Litigations, Claims, and Disputes The Corporation is subject to the usual contingencies in the normal course of operations relating to the performance of its tasks under its various programs. In the opinion of management, the ultimate settlement of any litigation, claims, and disputes in process will not be material to the financial position, operations, or cash flows of the Corporation. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations, specifically those relating to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Federal government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of regulations, which could result in the imposition of significant fines and penalties, as well as significant repayments of previously billed and collected revenues from resident services. 22

27 Supplementary Information Immanuel Lutheran Corporation

28 Independent Auditor s Report on Supplementary Information The Board of Directors Immanuel Lutheran Corporation Kalispell, Montana We have audited the financial statements of Immanuel Lutheran Corporation as of and for the years ended, and our report thereon dated October 26, 2016, which expressed an unmodified opinion on those financial statements, appears on page 1. Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The schedules of revenues, schedules of expenses, schedules of other income and expense, and schedules of changes in net assets, for the years ended June 30, 2016 and 2015, on pages 24 through 27 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management, was derived from, and relates directly to the underlying accounting and other records used to prepare the June 30, 2016 and 2015 financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. Billings, Montana October 26, N. 31st St., Ste P.O. Box 7112 Billings, MT TF T F EOE

29 Schedules of Revenues Years Ended Immanuel Buffalo Office Immanuel Buffalo Office Skilled Care Hill of Skilled Care Hill of Center Terrace Development Total Center Terrace Development Total Resident Service Revenue Medicaid $ 4,715,539 $ - $ - $ 4,715,539 $ 4,726,083 $ - $ - $ 4,726,083 Private Pay 3,087, ,087,033 3,977, ,977,835 Medicare 3,893, ,893,379 3,783, ,783,884 Total resident service revenue 11,695, ,695,951 12,487, ,487,802 Contractual Adjustments Medicaid (1,163,189) - - (1,163,189) (1,129,266) - - (1,129,266) Medicare (1,288,943) - - (1,288,943) (1,085,906) - - (1,085,906) Private pay (353,299) - - (353,299) (261,041) - - (261,041) Total contractual adjustments (2,805,431) - - (2,805,431) (2,476,213) - - (2,476,213) Net Resident Service Revenue 8,890, ,890,520 10,011, ,011,589 Retirement Residence Rent Revenue - 4,885,262 4,885,262-4,821,790 4,821,790 Net Assets Released from ,249 68, , ,622 Restrictions for Operations Other Revenue 21,711 49,666-71,377 21,918 52,714-74,632 Total revenue $ 8,912,231 $ 4,934,928 $ 68,249 $ 13,915,408 $ 10,033,507 $ 4,874,504 $ 119,622 $ 15,027,633 24

30 Schedules of Expenses Years Ended 2016 Immanuel Buffalo Immanuel Buffalo Skilled Care Hill Skilled Care Hill Center Terrace Total Center Terrace Total Professional Care of Patients Nursing service $ 3,207,951 $ 655,026 $ 3,862,977 $ 3,909,164 $ 657,732 $ 4,566,896 Physical therapy 990, , , ,848 Central supply 378, , , ,015 Activities 181, , , , , ,338 Social service 116, ,613 99,901-99,901 Chaplaincy 54,769 59, ,493 53,376 57, ,918 Total professional care of residents 4,929, ,727 5,841,508 5,624, ,259 6,515,916 General and Administrative Administration 1,431, ,301 2,217,399 1,555, ,937 2,245,053 Bed tax 272, , , ,430 Marketing 22,248 75,098 97,346 33,252 78, ,330 Transportation 69,391 27,443 96,834 45,662 17,813 63,475 Gift shop 31,172 12,429 43,601 32,118 10,628 42,746 Total general and administrative 1,826, ,271 2,728,001 1,988, ,456 2,785,034 Dietary 862,454 1,005,650 1,868, ,044 1,008,786 1,873,830 Property and Household Plant maintenance 485, , , , , ,261 Housekeeping 254, , , , , ,451 Laundry 84,356-84, , ,685 Total property and household 824, ,369 1,517, , ,517 1,569,397 Depreciation and Amortization Depreciation 758, ,011 1,528, , ,192 1,512,712 Amortization 123, , ,237 6,586 8,887 15,473 Total depreciation and amortization 881, ,133 1,817, , ,079 1,528,185 Provision for Bad Debts 88,181-88,181 34,028-34,028 Interest 268, , , , , ,756 Total expenses $ 9,682,044 $ 4,811,540 $ 14,493,584 $ 10,441,331 $ 4,396,815 $ 14,838,

31 Schedules of Other Income and Expense Years Ended Immanuel Buffalo Office Immanuel Buffalo Office Skilled Care Hill of Skilled Care Hill of Center Terrace Development Total Center Terrace Development Total Other Income (Expense) Interest and dividend income $ 54,559 $ 43,901 $ 123,575 $ 222,035 $ 38,089 $ 50,158 $ 120,399 $ 208,646 Net realized gain (loss) on sale of investments 4,360 14,524 26,140 45,024 (1,022) 27,422 31,348 57,748 Unrestricted contributions ,187 28, ,954 36,954 Rent income - - 1,150 1, ,143 4,143 Loss on sale of property held for investment - - (65,774) (65,774) Gain (loss) on sale of property and equipment (1,035) 1,962 (157,830) (156,903) 205-2,000 2,205 Support services Fundraising salaries, taxes and benefits - - (148,027) (148,027) - - (186,961) (186,961) Fundraising general administration - - (96,132) (96,132) - - (110,776) (110,776) Fundraising other income - - 7,769 7, ,221 11,221 Total other income (expense), net $ 57,884 $ 60,387 $ (280,942) $ (162,671) $ 37,272 $ 77,580 $ (91,672) $ 23,180 26

32 Schedules of Changes in Net Assets Years Ended Immanuel Buffalo Office Immanuel Buffalo Office Skilled Care Hill of Skilled Care Hill of Center Terrace Development Total Center Terrace Development Total Unrestricted Net Assets Operating income (loss) $ (769,813) $ 123,388 $ 68,249 $ (578,176) $ (407,824) $ 477,689 $ 119,622 $ 189,487 Other income (expense), net 57,884 60,387 (280,942) (162,671) 37,272 77,580 (91,672) 23,180 Change in value of interest rate swap agreement (144,372) (228,069) - (372,441) 11,995 16,186-28,181 Net assets released from restrictions for capital acquisition - - 9,647 9, ,000 10,000 Unrealized gains (losses) on investments 18,472 (17,174) (17,135) (15,837) (33,847) (38,048) (37,275) (109,170) Change in unrestricted net assets (837,829) (61,468) (220,181) (1,119,478) (392,404) 533, ,678 Temporarily Restricted Net Assets Contributions , , ,718 85,718 Investment income ,619 15, ,784 6,784 Net assets released from restrictions - - (77,896) (77,896) - - (129,622) (129,622) Change in temporarily restricted net assets ,104 93, (37,120) (37,120) Permanently Restricted Net Assets Change in value of split-interest agreements - - (24,815) (24,815) - - (40,594) (40,594) Contributions ,017 23, , ,365 Change in permanently restricted net assets - - (1,798) (1,798) ,771 87,771 Change in net assets (837,829) (61,468) (128,875) (1,028,172) (392,404) 533,407 51, ,329 Net Assets, Beginning of Year 2,475,762 7,337,798 4,875,366 14,688,926 2,868,166 6,804,391 4,824,040 14,496,597 Net Assets, End of Year $ 1,637,933 $ 7,276,330 $ 4,746,491 $ 13,660,754 $ 2,475,762 $ 7,337,798 $ 4,875,366 $ 14,688,926 27