Audited Financial Statements and Other Financial Information of Central City Community Health Center (A Nonprofit Organization) Year ended June 30,

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1 Audited Financial Statements and Other Financial Information of (A Nonprofit Organization) with Report of Independent Auditors

2 Table of Contents PAGE REPORT OF INDEPENDENT AUDITORS 1 FINANCIAL STATEMENTS Statement of Financial Position 2 Statement of Activities 3 Statement of Cash Flows 4 Notes to Financial Statements 5 Supplemental Information: Schedule of Functional Expenses 16 REPORT OF INDEPENDENT AUDITORS AND ON COMPLIANCE AND OTHER MATTERS ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 17

3 Report of Independent Auditors Board of Directors We have audited the accompanying statement of financial position of Central City Community Health Center (a nonprofit organization) as of June 30, 2010, and the related statements of activities and cash flows for the year then ended. These financial statements are the responsibility of Central City Community Health Center s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of June 30, 2010, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated July 25, 2011 on our consideration of s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was made for the purpose of forming an opinion on the financial statements taken as a whole. The supplementary information included in the schedule of functional expenses is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects, in relation to the financial statements taken as a whole. Los Angeles, California July 25, 2011

4 Statement of Financial Position June 30, 2010 ASSETS Current assets Cash $ 741,238 Accounts receivable, net of $497,723 allowance for doubtful accounts 995,835 Other receivables 28,571 Prepaid expenses and other current assets 111,129 Total current assets 1,876,773 Property and equipment Property and equipment, net 2,872,745 $ 4,749,518 LIABILITIES AND NET ASSETS Liabilities Current liabilities Accounts payable and accrued expenses $ 764,373 Long-term debt - current portion 40,989 Capital lease obligation - current portion 10,171 Total current liabilities 815,533 Long-term liabilities Long-term debt - net of current portion 590,430 Capital lease obligation - net of current portion 14,409 Total liabilities 1,420,372 Net assets Temporarily restricted 610,000 Unrestricted 2,719,146 Total net assets 3,329,146 Total liabilities and net assets $ 4,749,518 The accompanying notes are an integral part of these financial statements. 2

5 Statement of Activities Temporarily Unrestricted Restricted Total Revenues Net patient service revenues $ 5,235,162 $ - $ 5,235,162 Government grants 2,754,919-2,754,919 Contributions 40, , ,000 Other revenues 125, ,068 Net assets released from restrictions 727,781 (727,781) - Total revenues 8,882,930 (562,781) 8,320,149 Expenses Program services 6,189,646-6,189,646 General and administrative 1,614,757-1,614,757 Total expenses 7,804,403-7,804,403 Change in net assets 1,078,527 (562,781) 515,746 Net assets Beginning of year, as restated 1,640,619 1,172,781 2,813,400 End of year $ 2,719,146 $ 610,000 $ 3,329,146 The accompanying notes are an integral part of these financial statements. 3

6 Statement of Cash Flows Cash flows from operating activities Change in net assets $ 515,746 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 76,638 Provision for doubtful accounts 254,244 Changes in net assets and liabilities: Accounts receivable (351,741) Contributions receivable 922,781 Other receivables 106,372 Prepaid expenses (111,129) Escrow deposit 322,000 Accounts payable and accrued expenses 143,063 Net cash provided by operating activities 1,877,974 Cash flows from investing activities Acquisition of property and equipment (1,353,625) Net cash used in investing activities (1,353,625) Cash flows from financing activities Payments of bank line of credit (77,993) Payments of long-term debt (67,211) Payments of lease obligations (10,171) Net cash used in financing activities (155,375) Net change in cash 368,974 Cash - beginning of year 372,264 Cash - end of year $ 741,238 Supplemental disclosure of cash flow information Interest paid $ 8,972 The accompanying notes are an integral part of these financial statements. 4

7 Notes to Financial Statements NOTE 1 ORGANIZATION PROFILE (CCCHC) (the Center) is a 501(c)(3) California non-profit, Section 330 Federally Qualified Health Center. It was established in 1994 to provide health and human services to low income families. The Center provides quality medical, psychological, social and other related services to the underserved in Los Angeles and Orange Counties. CCCHC operates three licensed community health centers: two in the Orange County area in the cities of Anaheim and Stanton, and one in South Los Angeles. In addition, CCCHC has a licensed mobile clinic which provides medical and mental health treatment to individuals in homeless shelters, and adult residential care facilities and migrant seasonal farm workers in Los Angeles and Orange Counties. The Center is a strategic partner with the Los Angeles Department of Health Services through its Public Private Partnership (PPP) program and holds a Federal Homeless Healthcare subcontract. The Center also contracts with The Health Care Agency of Orange County to provide services to the indigent CCCHC holds multiple managed care/hmo contracts in both Los Angeles and Orange Counties. In Los Angeles County, it contracts with Healthcare LA and Healthcare Partners. In Orange County, it holds contracts with Noble Mid, ARTA, CalOptima, Talbert, Noble AMA, CHOC Health Alliance, Altamed, Monarch, and ADOC. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The financial statements of have been prepared using the accrual basis of accounting. Basis of Presentation The net assets of CCCHC are reported in each of the following three classes: unrestricted, temporarily restricted, and permanently restricted net assets. Unrestricted - Contributions and allocations, the uses of which are not restricted by donors or grantors, are recorded in unrestricted net assets. Temporarily Restricted - Contributions and allocations, the uses of which are limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of CCCHC pursuant to those stipulations, are recorded as temporarily restricted net assets. As the restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying statements of activities and changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying financial statements. At June 30, 2010, CCCHC had temporarily restricted net assets amounting to $610,000. 5

8 Notes to Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Presentation (continued) Permanently Restricted - Permanently restricted net assets are restricted by donors to be maintained by CCCHC in perpetuity but permit CCCHC to expend some of the income (or other economic benefits) derived from the donated assets for specific purposes. At June 30, 2010, CCCHC did not have any permanently restricted net assets 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. Significant estimates include the determination of realizable value of receivables and accrual for unbilled services. Actual results could differ from the estimates. Cash and Cash Equivalents Cash and cash equivalents include certain highly liquid investments with original maturities of three months or less. Fair Value Measurements 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 at the measurement date. Assets and liabilities are measured at fair value using a three-level fair value hierarchy that ranks the quality and reliability of the information used to measure fair value. The three levels of inputs used to measure fair value are as follows: Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 2: Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 3: Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management s best estimate of fair value. An asset s or liability s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore, have little or no price transparency are classified as Level 3. 6

9 Notes to Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value Measurements (continued) The Center s financial instruments include primarily cash, receivables, accounts payable, and long-term debt. The Center uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: Cash - The carrying amount approximates fair value because of the short maturity of those instruments. Accounts receivable - The carrying amount of accounts receivable approximates fair value because of their short-term nature and historical collectibility. Accounts payable - The carrying amount of accounts payable approximates fair value because of the short-term nature of the obligations. Long-term debt - The fair value of long-term debt is estimated by discounting the future cash flow using the Company s current borrowing rates for similar types and maturities of debt. Property and Equipment Purchased property and equipment are recorded at cost; if donated, recorded at estimated fair value at the date of donation. Provision for depreciation and amortization is computed using the straight-line method over the estimated useful lives of the properties or life of the lease, whichever is shorter, as follows: Medical equipment Office equipment Transportation equipment Buildings 5 years 3-5 years 3-5 years 30 years Maintenance, repairs, and investments in minor equipment are charged to operations. Expenditures that will materially increase the value of properties or extend useful lives are capitalized. Upon disposal of depreciable property, the appropriate property accounts are reduced by the related costs and accumulated depreciation. The resulting gains and losses are reflected in the statement of activities. Impairment of Long-lived Assets The Center reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The measurement of possible impairment is based primarily on the undiscounted future operating cash flows without interest charges generated through the use of these assets during their remaining estimated useful life. The assessed recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. The Center believes that no events occurred that would impair the carrying value of its long-lived assets during the year ended June 30,

10 Notes to Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors, and others for services rendered including estimated retroactive adjustments under reimbursement agreements with third-party payors. These retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and are adjusted in future periods as final settlements are determined. Cost Reimbursable Grants and Contracts Revenue from cost reimbursable grants and contracts is recorded to the extent of expenses incurred applicable to the grant or contract. Any difference between expenses incurred and the total funds received (not to exceed the grant or contract maximum) is recorded as a receivable or an advance whichever is applicable. Revenue from other grants is recognized on an accrual basis as earned according to the provisions of the grant. Contributions of Cash Contributions primarily include unconditional promises to give cash or other assets. Contributions, whether temporarily restricted or unrestricted, are recognized as revenue when they are received. Unconditional promises to give are reported at fair value on 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 or when the conditions expire, whichever occurs first. Contributions are reported as temporarily restricted support if they are received with donor stipulations that limit the use of the cash or other assets. Contributions received with donor-imposed restrictions that are met in the same year in which the contributions are received are classified as unrestricted contributions. Donations in Kind Contributions of donated non-cash assets are recorded at fair value in the period received. There were no non-cash assets received for the year ended June 30, Donated services are recognized if the service requires specialized skills, is provided by individuals possessing the skills, and the service would otherwise need to be purchased. There were no donated services for the year ended June 30, Income Taxes is a nonprofit corporation exempt from the payment of income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701(d). Accordingly, no provision has been made for income taxes. An organization is required to recognize in the financial statements the impact of the tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position. As of and for the year ended June 30, 2010, the Center had no material unrecognized tax benefits or tax penalties or interest. 8

11 Notes to Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Functional Allocation of Expenses Costs for providing the Center's programs and other activities have been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the programs and the supporting services benefited by a method that best measures the relative degree of benefit. The Center uses square footage, time studies and percentage of use estimates to allocate indirect costs. NOTE 3 CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Center to concentrations of credit risk consist of cash and accounts receivable. The Center places its cash with high credit quality financial institutions which at times may exceed federally insured limits. At June 30, 2010, cash in bank balances in excess of the federally insured limits amounted to $275,805., On July 21, 2010, the Dodd-Frank financial regulatory reform legislation was signed into law making all noninterest-bearing transaction accounts fully insured without limit effective December 31, 2010 until January 1, During the two-year period, all noninterest-bearing accounts of all banks are covered. The legislation also modifies the methodology for FDIC assessments from deposit-based to asset-based. In addition, on July 21, 2010, the regulatory reform signed into law made the standard maximum deposit insurance amount of $250,000 permanent. The $250,000 per depositor is in addition to the full insurance on noninterest-bearing transaction accounts. At June 30, 2010, $1,219,352 or 95% of the total gross patient accounts receivable of $1,286,444 were Medicare and Medi-Cal fees receivable. The Center s revenues and support that are received from governmental agencies in 2010 is 75% of total revenue and support. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment consist of the following at June 30, 2010: Land $ 332,474 Building and improvements 2,465,532 Medical equipment 38,264 Office equipment 128,315 Transportation equipment 85,576 3,050,161 Less accumulated depreciation 177,416 $ 2,872,745 Provision for depreciation for the year ended June 30, 2010 amounted to $76,638. 9

12 Notes to Financial Statements NOTE 5 LINE OF CREDIT The Center has a revolving line of credit totaling $500,000 for general working capital with a bank which provides for interest payable at the rate of 6% as of June 30, 2010, due and payable on demand. The line is collateralized by the Center s assets. The Organization had no outstanding loans from this line as of June 30, NOTE 6 LONG-TERM DEBT On May 19, 2008, the Center purchased the building in which it operates its Los Angeles clinic for $1,000,000. The facility was acquired with a 15-year mortgage loan and a grant from the California Health Facilities Financing Authority (CHFFA). The loan is collateralized by the property and by a subordination of CHFFA s lien on corporate gross revenue pledged to creditor bank for up to $500,000 for the remaining loan term. The monthly mortgage payment is $4,986 together with interest thereon at the rate of 3% per annum. Future scheduled maturities of long-term debt are as follows: Years ending June 30, 2011 $ 40, , , , ,208 ThereAfter 413,622 Total 631,419 Less current portion 40,989 $ 590,430 NOTE 7 CAPITAL LEASE Capital lease payable represents liability to Macondo Leasing Co., Inc. for the purchase of medical equipment dated February 18, 2008 due in monthly principal and interest payments of $848 at an annual rate of 9.5%. Future scheduled maturities of capital lease payable are as follows: Years ending June 30, 2011 $ 10, , ,238 Total 24,580 Less current portion 10,171 $ 14,409 10

13 Notes to Financial Statements NOTE 8 PATIENT FEES AND MANAGED CARE CONTRACTS For the year ended June 30, 2010, revenue from Medicaid (Medi-Cal in California) and Medicare programs accounted for approximately the following percentages of CCCHCs net patient service revenue and managed care contracts revenue. Patient service revenue Medi-Cal 61% Medicare 1% Managed care contracts Medi-Cal 6% Medicare 0% Laws and regulations governing the Medicaid and Medicare programs are extremely complex and subject to interpretation. Because of the inherent variability of many of the factors impacting these programs, actual receivables/revenue could differ significantly from the estimated amounts recorded. CCCHC, as a community health center and as a Federally Qualified Health Center (FQHC), has elected to participate in the FQHC Medi-Cal reimbursement program. Effective in 2001, CCCHC converted to the federally mandated Prospective Payment System (PPS) reimbursement method for Medi-Cal services whereby reimbursement was established using PPS rates per Medi-Cal visit. Under the Medi-Cal program, CCCHC is required to file payment reconciliation reports at the end of each fiscal year. The reports reconcile payments received for Medi-Cal visits against compensation due using PPS rates. The reports are subject to adjustment based on review and audit by the Department of Health Services Payment agreements have been established with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. Premiums are due monthly (calculated on a prospectively determined capitated rate) and are recognized as revenue during the period in which CCCHC is obligated to provide services to its members. NOTE 9 GOVERNMENT CONTRACTS The Center's government contracts are subject to inspection and audit by the appropriate governmental funding agencies. The purpose is to determine whether program funds were used in accordance with their respective guidelines and regulations. Government contracts for the year ended June 30, 2010 consists of the following: County of Los Angeles, Department of Health Services (Public Private $ 826,130 Partnership Program) State of California, Department of Health Services (Medi-Cal) 3,218,258 $ 4,044,388 11

14 Notes to Financial Statements NOTE 10 COMMITMENTS Obligation under operating leases The Center leases real property for two clinic sites and an administrative office under separate non-cancelable five-year operating lease arrangements expiring between January 2011 and July Total new monthly rent for real property is $29,689 with certain escalation clauses. The Center also leases certain storage facilities on an as needed basis. The Center also leases a van and some office equipment under operating lease agreements ranging from three to five years with monthly payments ranging from $2,270 to $2,427. Total future minimum lease commitments at June 30, 2010, are as follows: Years ending June 30, 2011 $ 29, , , , ,732 Total $ 160,806 Rent expense under operating leases for the year ended June 30, 2010 was $382,687. NOTE 11 LITIGATION During the normal course of business, the Center may be involved in litigation. After consultation with legal counsel, management estimates that there are no matters with material adverse effect on the Center's future financial position or results of its operations. DHCS Withhold Suspense Account In July 2009, the Center entered into a settlement agreement with the California Department of Health Care Services (DHCS) which placed $221,516 in accounts receivable payments into a withhold suspense account as a result of an audit conducted by DHCS in February Under the terms of the settlement agreement, DHCS would conduct a future recovery audit of the Center within 2 years to determine if any overpayment has been made to the Center deducting such amounts from the withhold suspense account. The withheld amount is reported as accounts receivable with a corresponding valuation allowance for the full amount. In October 2010, DHCS conducted the stipulated recovery audit of the Center and found an overpayment to the Center of $193,823. This overpayment amount was statistically extrapolated using an audit-determined billing error rate based on all amounts paid to the Center from February 4, 2007 to January 29, DHCS has not approved the auditors findings nor sent correspondence related to deducting this $193,823 from the withhold suspense account but when such notice is received, the Center intends to appeal the decision. 12

15 Notes to Financial Statements NOTE 11 LITIGATION (CONTINUED) DHCS Withhold Suspense Account (continued) Under the terms of the settlement agreement, DHCS was to conduct the recovery audit for the period between January 1, 2007 and June 30, The recovery audit was, however, conducted for the period February 4, 2007 to January 29, 2010 resulting in a larger base on which the billing error rate was applied. DHCS Overpayment The loss contingency may range from $193,823 at the maximum to a low estimate of $29,095 based on the audit-determined billing error rate applied to amounts paid to the Center from January 1, 2007 to June 30, This contingency continues to exist as of June 30, 2010 and an accrual of $29,095 is included in accrued expenses. Alleged Wrongful Termination On February 1, 2010, a former employee brought a complaint in Los Angeles Superior Court against the Center and its officers alleging wrongful termination, defamation, and unpaid wages. This complaint has since been settled and all obligations have been fully paid as of June 30, NOTE 12 RELATED PARTY TRANSACTIONS On November 1, 2007, the Center entered into a management service agreement with Dr. Gilbert Varela M.D., Inc. (the Group), a professional medical corporation owned by the Executive Director. The Group is engaged in the practice of medicine primarily in the areas of worker s compensation and personal injury cases involving litigation which does not conflict with the Center s medical practice which provides a wide scope of primary care healthcare services to disadvantaged and underserved communities. The agreement is for the Center to sublease office space and to provide certain administrative services relating to the management of non-professional aspects of the Group s non-conflicting practice of medicine. The agreement is for one year and shall automatically renew for successive one-year terms unless either party provides prior written notice of its intention not to renew. The management services is subject to a fixed monthly management fee of $3,000. For the year ended June 30, 2010, the Center recognized and received management fee totaling $36,000. On August 1, 2009, the Center entered into a management service agreement with Sadler Healthcare, Inc. (Sadler), a company owned and managed by the Executive Director. Sadler is engaged in the practice of addiction medicine primarily in the area of rehabilitation and operates a 24-hour residential facility to provide rehabilitation services to post-incarcerated men with mental health disorders and substance abuse problems. The agreement is for the Center to provide certain administrative services relating to the management of non-professional aspect s of Sadler s practice of medicine. The agreement is for one year and shall automatically renew for successive one-year terms unless either party provides prior written notice of its intention not to renew. The management services is subject to a fee of $300 per month plus reimbursement for costs incurred and additional services rendered. For the year ended June 30, 2010, the Center recognized and received management fee totaling $3,600. The management service agreements were terminated in December

16 Notes to Financial Statements NOTE 13 RESTATEMENT AND PRIOR PERIOD ADJUSTMENT Certain misstatements which included an understatement of previously reported contributions revenue, contributions receivable, unrestricted net assets and temporarily restricted net assets, and an overstatement of deferred revenue were discovered during the current year. A review of advance funds received disclosed that these were contributions the nature of which were that of temporarily restricted net assets. These should have been recorded as an increase in net assets during the period received. To correct the misstatements, the statement of financial position has been restated to reflect the corrected balances of contributions receivable, unrestricted net assets and temporarily restricted net assets. The effects of the restatement on the 2009 financial statements are as follows: As Reported Adjustments As Restated Contributions receivable $ - $ 922,781 $ 922,781 Total assets 3,323, ,781 4,246,084 Deferred revenue 250,000 (250,000) - Total liabilities 1,682,684 (250,000) 1,432,684 Temporarily restricted net assets - 1,172,781 1,172,781 Total net assets 1,640,619 1,172,781 2,813,400 NOTE 14 SUBSEQUENT EVENTS On September 1, 2010, the Center entered into an Asset Purchase Agreement with Universal Care, Inc. to purchase the Universal Care Garden Grove Clinic. Assets purchased include office furniture and equipment, medical furniture and equipment, medical supplies and patient medical records. Consideration for the assets purchased includes the payment by the Center of $15,000 in cash, the assumption of accrued vacation of clinic employees, the assumption of the lease for a photocopy machine and a contract for medical waste disposal. In addition, the Center is required to provide tail coverage for the providers of the clinic, to have a 340B pharmacy program in place, and a restriction not to contract with a Medicare Advantage Prescription Drug Chronic Special Needs Plan for the seriously and persistently mentally ill other than the seller s Brand New Day program without first receiving written approval from the seller. In addition, the Center is required to offer employment to at least 90% of the current clinic employees. Also as a condition of the sale, the Center contemporaneously executed a commercial lease agreement with Davis Property Holdings, LLC for the property in Garden Grove, California which has an initial rent of $21,000 per month and a security deposit of $21,000. Among other terms, the agreement also requires the Center to enter into an IPA contract with Universal Care which shall include risk share bonus provisions of up to $135,000 a month for the first year of the contract, if the Center qualifies for the risk share contribution. The Organization has evaluated events subsequent to June 30, 2010 to assess the need for potential recognition or disclosure in the financial statements. Such events were evaluated through July 25, 2011, the date the financial statements were available to be issued. Based upon this evaluation, it was determined that no subsequent events, other than that which is described above, occurred that require recognition or additional disclosure in the financial statements. 14

17 Schedule of Functional Expenses Description Program General Services Administration Total Salaries and benefits Salaries $ 2,624,900 $ 758,692 $ 3,383,592 Payroll taxes 220,768 59, ,152 Employee benefits 213,988 60, ,547 Total salaries and benefits 3,059, ,635 3,938,291 Other expenses Auto and travel expenses 24,884 19,834 44,718 Billing services - 90,123 90,123 Bad debt expense 283, ,677 Contract labor - physicians 650, ,538 Depreciation 58,384 18,254 76,638 Dues and subsciptions 30,568 7,254 37,822 Equipment rentals 16,763 11,005 27,768 Interest expense 4,682 4,290 8,972 Insurance 38,721 5,480 44,201 Laboratory fees 161, ,089 Taxes and licenses 14,354 1,090 15,444 Medical supplies and pharmacy 347, ,269 Outreach expense 379, ,150 Office expense 162,667 95, ,370 Outside services/consultants 354,721 71, ,669 Professional fees 166, , ,524 Professional development 26,925 2,014 28,939 Rent 173, , ,687 Repairs and maintenance 30,962 7,465 38,427 Telephone 58,612 16,883 75,495 Utilities 45,159 8,338 53,497 Other expenses 100,000 29, ,095 Total other expenses 3,129, ,122 3,866,112 Total expenses $ 6,189,646 $ 1,614,757 $ 7,804,403 15

18 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in a Accordance with Government Auditing Standards Board of Directors We have audited the financial statements of (a nonprofit organization) as of and for the year ended June 30, 2010, and have issued our report thereon dated July 25, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of Central City Community Health Center s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance that are required to be reported under Government Auditing Standards. The Center received ARRA funding which partially funded its construction projects and purchase of equipment. We noted that the construction contract did not include terms that required the contractor to comply with the requirements of the Davis-Bacon Act, nor was there any Buy-American requirement in the contract.

19 We noted certain matters that we reported to management of in a separate letter dated July 25, This report is intended solely for the information and use of management, the Board of Directors, others within the entity and federal and state awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Los Angeles, California July 25, 2011

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