Phoenix Houses of New England, Inc.

Transcription

1 Report to the Finance Committee of the Board of Directors of Phoenix Houses of New England, Inc. September 18, 2009 Grant Thornton LLP. All rights reserved.

2 Table of Contents I. Scope of Services II. III. Required Communications with the Finance Committee Draft Financial Statements IV. Fiscal 2009 Audit Engagement Letter V. Fiscal 2009 Audit Representation Letter (Draft) This report is intended solely for the information and use of the Board of Directors, the Finance Committee and Management of Phoenix Houses of New England, Inc. and should not be used by anyone other than these specified parties. Grant Thornton LLP. All rights reserved.

3 I. Scope of Services Services covered under our June 15, 2009 Engagement Letter: Financial Statement audit of Phoenix Houses of New England, Inc. ("PH New England") as of and for the year ended June 30, 2009 in accordance with U.S. Generally Accepted Auditing Standards (issued in draft) OMB Circular A-133 audit of PH New England for the year ended June 30, 2009 (to be completed) Preparation of Internal Control letter relating to the fiscal 2009 audit Review of PH New England s 2009 IRS Form 990 Grant Thornton LLP. All rights reserved.

4 II. Required Communications with the Finance Committee Professional auditing standards require us to communicate the following matters to those individuals responsible for the oversight of the financial reporting process: Required Communications: Disposition: The auditor s responsibility under U.S. generally accepted auditing standards Our audit was designed to provide reasonable, not absolute, assurance that PH New England s financial statements are presented fairly in accordance with U.S. GAAP. Our responsibilities are more fully explained in our Engagement Letter addressed to Mr. Kevin Kirchoff dated June 15, 2009, included in Section IV of this presentation. Changes in significant accounting policies Adoption of Financial Accounting Standards Board Statement No. 157, Fair Value Measurements. PH New England s significant accounting policies employed in the preparation of its financial statements are disclosed in Note B. Management s judgments and accounting estimates Determining allowances for doubtful accounts; allocation of expenses amongst functional expense categories; the useful lives assigned to fixed assets; and the fair values assigned to certain financial instruments. Audit adjustments (recorded and passed) and omitted disclosures Responsibility for information in other documents containing audited financial statements and auditors report Consultation with other accountants Major issues discussed with management prior to retention Difficulties encountered in performing the audit, irregularities or illegal acts Significant deficiencies or material weaknesses in the internal control environment over financial reporting. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects an entity s ability to initiate, authorize, record, process or report financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a misstatement of an entity s financial statements that is more than inconsequential will not be prevented or detected by the entity s internal control. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity s internal control. We have reviewed the methodologies utilized by management for all significant accounting estimates and concluded the estimates appear reasonable. Due from government receivable reclassification: $83,000; receivable correction: $28,000; establish deferred rent liability for prior years: $13,000; and, record additional deferred rent liability for the current year: $6,000. There were no omitted disclosures. Management is responsible for informing us on a timely basis. We are responsible for reading the document in its entirety and ensuring that there is no information contradictory to the financial statements or knowledge gained during the conduct of our audit. Not aware of any such consultations. None to report. No difficulties were encountered while performing our audit that requires the attention of the Finance Committee. We had the full cooperation of management and free access to all the appropriate information necessary to conduct our financial statement audit. The results of our procedures did not identify any significant deficiencies or material weaknesses.

5 III. Draft Financial Statements Review of Draft Financial Statements Grant Thornton LLP. All rights reserved.

6 Draft 9/18/2009 FINANCIAL STATEMENTS TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PHOENIX HOUSES OF NEW ENGLAND, INC. For the years ended June 30, 2009 and 2008

7 C O N T E N T S Report of Independent Certified Public Accountants 1 Financial Statements: Statements of Financial Position as of June 30, 2009 and Statement of Activities for the year ended June 30, Statement of Activities for the year ended June 30, Statement of Functional Expenses for the year ended June 30, Statement of Functional Expenses for the year ended June 30, Statements of Cash Flows for the years ended June 30, 2009 and Notes to Financial Statements 8-18

8 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Phoenix Houses of New England, Inc.: We have audited the accompanying statements of financial position of Phoenix Houses of New England, Inc. ( PH New England ) as of June 30, 2009 and 2008, and the related statements of activities, functional expenses and cash flows for the years then ended. These financial statements are the responsibility of PH New England s management. 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 as established by the American Institute of Certified Public Accountants. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of PH New England s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 Phoenix Houses of New England, Inc. as of June 30, 2009 and 2008 and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. New York, New York September, 2009

9 Phoenix Houses of New England, Inc. STATEMENTS OF FINANCIAL POSITION As of June 30, 2009 and 2008 ASSETS Cash and cash equivalents $ 148,523 $ 414,418 Due from government agencies, net of allowance of approximately $95,000 and $84,000 in 2009 and 2008, respectively 2,335,550 1,365,002 Contributions receivable, net (Note E) 179, ,100 Other receivables, net of allowance of approximately $58,000 and $72,000 in 2009 and 2008, respectively 420, ,445 Prepaid expenses and other assets 201, ,851 Property and equipment, net (Notes G) 4,950,452 4,830,415 Total assets $ 8,235,850 $ 7,277,231 LIABILITIES AND NET ASSETS Liabilities: Accounts payable and accrued expenses $ 1,069,285 $ 998,791 Deferred revenue - 33,925 Due to government agencies 89, ,457 Due to Parent (Note D) 1,783,274 1,081,800 Long-term debt (Note G) 325, ,907 Long-term debt to Parent (Notes D and G) 488, ,111 Total liabilities 3,755,561 3,177,991 Commitments and contingencies (Note K) Net assets: Unrestricted 4,230,039 3,643,138 Temporarily restricted (Note I) 250, ,102 Total net assets 4,480,289 4,099,240 Total liabilities and net assets $ 8,235,850 $ 7,277,231 The accompanying notes are an integral part of these statements. -2-

10 Phoenix Houses of New England, Inc. STATEMENT OF ACTIVITIES For the year ended June 30, 2009 Temporarily Unrestricted Restricted Total Operating revenues and support: Government contract revenue $ 11,930,249 $ - $ 11,930,249 Client and third party revenue (Note H) 4,417,155-4,417,155 Donated goods and services 260, ,970 Grants and contributions 102,693 33, ,183 Special event revenue, net of costs of direct benefits to donors of approximately $16, , ,890 Other revenue 38,098-38,098 Net assets released from restrictions (Note I) 63,298 (63,298) - Total operating revenues and support 16,951,353 (29,808) 16,921,545 Operating expenses: Program services 14,247,819-14,247,819 Supporting services 2,246,906-2,246,906 Total operating expenses 16,494,725-16,494,725 Changes in net assets from operations 456,628 (29,808) 426,820 Contributions - capital - 5,498 5,498 Depreciation - nonoperational (51,269) - (51,269) Net assets released - capital expenditures 181,542 (181,542) - Changes in net assets 586,901 (205,852) 381,049 Net assets, beginning of year 3,643, ,102 4,099,240 Net assets, end of year $ 4,230,039 $ 250,250 $ 4,480,289 The accompanying notes are an integral part of this statement. -3-

11 Phoenix Houses of New England, Inc. STATEMENT OF ACTIVITIES For the year ended June 30, 2008 Temporarily Unrestricted Restricted Total Operating revenues and support: Government contract revenue $ 10,845,572 $ - $ 10,845,572 Client and third party revenue (Note H) 3,590,664-3,590,664 Donated goods and services 217, ,414 Grants and contributions 103,264 31, ,608 Special event revenue, net of costs of direct benefits to donors of approximately $15, , ,000 Other revenue 189, ,732 Net assets released from restrictions (Note I) 20,669 (20,669) - Total operating revenues and support 15,101,315 10,675 15,111,990 Operating expenses: Program services 12,448,801-12,448,801 Supporting services 2,203,464-2,203,464 Total operating expenses 14,652,265-14,652,265 Changes in net assets from operations 449,050 10, ,725 Contributions - capital - 152, ,880 Depreciation - nonoperational (18,596) - (18,596) Net assets released - capital expenditures 534,837 (534,837) - Gain on disposal of property 8,300-8,300 Changes in net assets 973,591 (371,282) 602,309 Net assets, beginning of year 2,669, ,384 3,496,931 Net assets, end of year $ 3,643,138 $ 456,102 $ 4,099,240 The accompanying notes are an integral part of this statement. -4-

12 Phoenix Houses of New England, Inc. STATEMENT OF FUNCTIONAL EXPENSES For the year ended June 30, 2009 Program Services Supporting Services Residential Ambulatory Prevention Program Administration Treatment Treatment Healthcare and Education Support and Fund- Services Services Services Services Services Total General Raising Total Total Salaries $ 4,853,377 $ 2,158,567 $ 632,747 $ 198,105 $ 46,506 $ 7,889,302 $ 943,871 $ 28,519 $ 972,390 $ 8,861,692 Employee benefits and payroll taxes 1,220, , ,699 51,121 11,664 1,985, ,731 7, ,884 2,229,769 Consulting and contractual services 242, ,483 74,949 4, , ,380 75, , ,572 Resident sustenance 660, , , ,296 1, ,957 Occupancy costs 772, ,797 28,748 5,046 6, ,392 49,428 14,750 64, ,570 Vehicle costs 155,211 37,082 10, ,005 61,482-61, ,487 Communications 207,704 70,640 11,356 1,427 1, ,271 54,068 6,011 60, ,350 Office and program supplies 290,794 69,387 45,657 7,933 3, ,602 49,888 14,872 64, ,362 Insurance 144,968 39,553 11,665 3, ,028 43, , ,225 Travel 63,812 95,002 33,090 3, ,715 34,078 2,398 36, ,191 Interest 34, ,807 3,756-3,756 38,563 Miscellaneous 134,015 42,216 3,463 5, ,079 94,021 3,765 97, ,865 Repairs and maintenance 178,317 26,481 18, ,491 10, , ,547 Depreciation 366,717 21,304 25,562-12, ,753 43,431 1,391 44, ,575 Administrative charges from Parent , , ,000 Total expenses $ 9,325,069 $ 3,467,274 $ 1,090,604 $ 281,484 $ 83,388 $ 14,247,819 $ 2,090,485 $ 156,421 $ 2,246,906 $ 16,494,725 The accompanying notes are an integral part of this statement. -5-

13 Phoenix Houses of New England, Inc. STATEMENT OF FUNCTIONAL EXPENSES For the year ended June 30, 2008 Program Services Supporting Services Residential Ambulatory Prevention Program Administration Treatment Treatment Healthcare and Education Support and Fund- Services Services Services Services Services Total General Raising Total Total Salaries $ 4,169,409 $ 1,738,804 $ 622,466 $ 214,638 $ 17,693 $ 6,763,010 $ 982,799 $ 36,677 $ 1,019,476 $ 7,782,486 Employee benefits and payroll taxes 965, , ,530 52,331 4,066 1,573, ,617 8, ,047 1,811,175 Consulting and contractual services 299, , ,511 15,292 35, , ,860 52, , ,681 Resident sustenance 542, , , ,570 1, ,475 Occupancy costs 680, ,474 27,849 4, ,034 88,298 15, , ,379 Vehicle costs 145,330 32,698 10, ,053 61,202-61, ,255 Communications 225,173 55,226 10,010 1, ,952 71,970 5,956 77, ,878 Office and program supplies 273,779 42,432 39,941 4,787 2, ,825 47,518 9,745 57, ,088 Insurance 132,097 29,430 6,832 2, ,849 47, , ,421 Travel 56,112 70,830 37,210 4,159 7, ,740 30, , ,168 Interest 14, ,448 3,170-3,170 17,618 Miscellaneous 124,090 34,762 5,574 1,870 21, ,836 26,983 3,990 30, ,809 Repairs and maintenance 167,214 23,945 12,665-1, ,885 11,456 1,062 12, ,403 Depreciation 323,884 3,983 25,267-1, ,290 29, , ,429 Administrative charges from Parent , , ,000 Total expenses $ 8,119,580 $ 2,862,641 $ 1,071,592 $ 302,718 $ 92,270 $ 12,448,801 $ 2,066,119 $ 137,345 $ 2,203,464 $ 14,652,265 The accompanying notes are an integral part of this statement. -6-

14 Phoenix Houses of New England, Inc. STATEMENTS OF CASH FLOWS For the years ended June 30, 2009 and Cash flows from operating activities: Changes in net assets $ 381,049 $ 602,309 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Amortization of discount on contributions receivable (3,536) (25,929) Provision for doubtful accounts (3,236) (112,462) Depreciation 521, ,025 Gain on sale of property - (8,300) Contributions restricted for captial expenditures (5,498) (152,880) Loss on disposal of property - - Changes in operating assets and liabilities: Due from government agencies (981,526) 70,660 Contributions receivable 114, ,781 Other receivables (175,896) 30,618 Prepaid expenses (52,559) (38,690) Others assets (1,877) (12,598) Accounts payable and accrued expenses 68, ,057 Due to government agencies (76,989) (30,873) Deferred revenue (33,925) 28,198 Due to Parent 701, ,331 Net cash provided by operating activities 452,242 1,838,247 Cash flows from investing activities: Proceeds from sale of property - 8,300 Purchases of property and equipment (591,734) (1,462,819) Net cash used in investing activities (591,734) (1,454,519) Cash flows from financing activities: Contributions restricted for captial expenditures 5, ,880 Principal payments on loan payable to Parent (270,000) (270,000) Proceeds from loan payable 200,000 - Principal payments on capital lease (48,417) (64,532) Principal payments on long-term debt (13,484) (5,557) Net cash used in financing activities (126,403) (187,209) Net (decrease) increase in cash and cash equivalents (265,895) 196,519 Cash and cash equivalents, beginning of year 414, ,899 Cash and cash equivalents, end of year $ 148,523 $ 414,418 Supplemental disclosure of cash flow information: Interest paid $ 38,564 $ 17,034 Capital obligations incurred $ 50,147 $ - The accompanying notes are an integral part of these statements. -7-

15 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS June 30, 2009 and 2008 NOTE A - ORGANIZATION Phoenix Houses of New England, Inc. ( PH New England ) is a Section 501(c)(3) not-for-profit organization, exempt from federal income taxes under Section 501(a) of the Internal Revenue Code (the Code ). PH New England is also exempt from state and local taxes under similar provisions. PH New England was established in order to operate therapeutic treatment centers for the rehabilitation of drug and substance abusers throughout New England. Phoenix House Foundation, Inc. (the Parent ) is the sole member of PH New England and the following affiliated organizations: Phoenix Houses of New York, Inc. and Affiliates (which consists of Phoenix Houses of New York, Inc. and Phoenix Houses of Long Island, Inc.); Phoenix Houses of California, Inc. and Affiliates (which consists of Phoenix Houses of California, Inc.; Phoenix Houses of Los Angeles, Inc.; Phoenix House Orange County, Inc.; and Phoenix House San Diego, Inc.); Phoenix Programs of Florida, Inc.; Phoenix Houses of Texas, Inc.; American Council for Drug Education, Inc.; Center on Addiction and the Family, Inc.; and Phoenix Houses of New Jersey, Inc. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation The accompanying financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Accordingly, the net assets of PH New England and changes therein are classified and reported based upon the existence or absence of donor-imposed restrictions as follows: Unrestricted net assets represent expendable resources that are used to carry out PH New England s operations and are not subject to donor-imposed stipulations. Temporarily restricted net assets represent resources that contain donor-imposed restrictions that permit PH New England to use or expend such resources only as or when specified. Restrictions are satisfied either by the passage of time or by actions of PH New England. Permanently restricted net assets represent resources that contain donor-imposed restrictions stipulating that such resources be maintained permanently. PH New England had no permanently restricted net assets at June 30, 2009 and

16 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE B (continued) 2. 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. 3. Cash and Cash Equivalents PH New England considers all highly liquid financial instruments, which principally consist of money market funds, with original maturities of three months or less from the date of purchase to be cash equivalents. 4. Donated Goods and Services Donated goods are recorded as revenues and assets (at fair value when received) and expenses (when used) in the accompanying financial statements. Food stamps are recorded at face amount, which is the same as fair value, as revenues and assets and are charged to resident sustenance when expended. 5. Third-party Payor Programs Third-party payor programs in which PH New England participates are based on complex laws and regulations. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. PH New England is not aware of any allegations of noncompliance that could have a material adverse effect on the accompanying financial statements and believes it is in compliance with all applicable laws and regulations. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from third party payor programs. -9-

17 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE B (continued) 6. Property and Equipment Property and equipment are stated at cost, if purchased, or if donated, at the fair value at the date of gift, less accumulated depreciation. PH New England capitalizes assets acquired for greater than $1,000 and with useful lives greater than one year. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets as follows: 7. Revenue and Support Buildings and improvements 4-40 years Furniture, fixtures and equipment 3-5 years Computer equipment and vehicles 3-5 years Grants and contributions (including unconditional promises to give) are recorded at fair value when received. Contributions received with donor stipulations that limit the use of the donated assets are reported as either temporarily or permanently restricted support. Unconditional promises to give, with payments due in future years, are reported as either temporarily restricted or permanently restricted support and discounted to present value. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is fulfilled, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Contributions restricted by donors for the acquisition of property and equipment are generally released from their restrictions when the respective assets are acquired or constructed. PH New England s contracts and other program funding arrangements with government agencies are classified as part of unrestricted net asset activities. Client and third-party revenue (including Medicare and Medicaid) is recognized as earned when services are provided. 8. Government Contract Revenue PH New England operates under various contracts with government agencies which generally cover a one-year period, subject to annual renewal. The terms of these contracts allow the grantors the right to audit the costs incurred thereunder and adjust contract funding based upon, among other things, the amount of program income received. Any costs disallowed by the grantor would be absorbed by PH New England and any adjustments by grantors would be recorded when amounts are known; however, it is the opinion of management that disallowances, if any, would not be material to the accompanying financial statements. -10-

18 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE B (continued) 9. Program Services Residential treatment services are costs associated with providing residential care and treatment to clients. Ambulatory treatment services are costs associated with providing treatment on an outpatient basis to clients. Healthcare services are costs associated with providing primary medical and dental treatment to clients. Prevention and education services are costs associated with the dissemination of educational materials related to substance abuse prevention and community outreach activities. Program support services are costs associated with departments that provide indirect support to clients. 10. Supporting Services Supporting program services represent costs for administrative and general support activities not directly related to providing rehabilitation services. Fundraising includes the salaries and related expenses of employees involved in fundraising activities. 11. Operating Indicator The accompanying statements of activities distinguish between operating and nonoperating activities. PH New England s contracts and other program funding arrangements with government agencies are classified as part of operating activities. Other items which are unusual in nature or nonrecurring are reflected below the operating indicator in the accompanying statements of activities. 12. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, contributions receivable, prepaid expenses and other assets, and accounts payable and accrued expenses reported in the accompanying statements of financial position approximate fair value due to the short maturity of these financial instruments. The carrying value of due from government agencies and other receivables approximates net realizable value, and has been reduced by an appropriate allowance for doubtful accounts based on historical collection experience. The carrying value of long-term debt approximates fair value. -11-

19 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE B (continued) 13. Recently Adopted Accounting Standards As of July 1, 2008, PH New England adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements. The new standard provides a consistent definition of fair value which focuses on an exit price between market participants in an orderly transaction. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three level hierarchy for fair value measurements based on the transparency of information used in the valuation of the respective financial instrument. PH New England s investments and cash equivalents were classified as follows at December 31, 2008 within the fair value hierarchy of the standard: Fair Value Level 1 Cash and cash equivalents $ 149,000 $ 149,000 $ 149,000 $ 49,000 Financial instruments classified as Level 1 in the above chart are based on quoted prices available in active markets for identical investments as of the measurement date. NOTE C INCOME TAXES In July 2006, the Financial Accounting Standards Board ( FASB ) issued FASB Interpretation ( FIN ) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48, which clarifies FASB Statement No. 109, establishes the criterion that an individual tax position has to meet for some or all the benefits of that position to be recognized in an entity s financial statements. The cumulative effect of applying FIN 48 will be reported as an adjustment to net assets at the beginning of the period in which it is adopted, if an adjustment is concluded to be necessary. FSP FIN-48-3 deferred the effective date of adopting FIN 48 for non-public entities until fiscal years beginning after December 15, As a nonpublic entity, PH New England has elected to defer the adoption of FIN 48 and is currently assessing the impact, if any, FIN 48 will have on its financial statements. PH New England has processes presently in place to ensure the maintenance of its tax-exempt status; to identify and report unrelated income; determine its filing and tax obligations in jurisdictions for which it has nexus; and to assess other matters that may be considered tax positions. Accordingly, a loss contingency is recognized when it is probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can reasonable estimated. PH New England is currently assessing the impact of FIN 48 will have on its financial statements. -12-

20 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE D - RELATED PARTY TRANSACTIONS PH New England is charged for administrative services provided by its Parent based upon a cost allocation plan. The administrative expenses charged by the Parent approximate the federally approved indirect cost rate for the Parent and its affiliates on a combined basis, adjusted to reflect PH New England s own administrative expenses. During the years ended June 30, 2009 and 2008, such allocated charges were $312,000 each year and are included as part of supporting services expenses in the accompanying statements of activities and functional expenses. PH New England entered into an agreement with the Parent, in June 2001, to borrow up to $250,000. On June 2, 2004, PH New England entered into a loan agreement with the Parent converting a current payable and the above-mentioned loan into a long-term loan from the Parent in the approximate amount of $2,500,000, over a period not to exceed 10 years. At June 30, 2009 and 2008, approximately $488,000 and $758,000, respectively, was outstanding under this agreement. The loan accrues interest monthly at a rate equal to the rate as credited to the Parent s Treasury Plus Money Market Morgan Shares account held by JP Morgan Chase as quoted on the last day of the month. Interest is calculated based on PH New England s combined short- and long-term debt in excess of $2,550,000. There was no interest expense, relating to amounts outstanding under this agreement, for fiscal 2009 and 2008, respectively. NOTE E - CONTRIBUTIONS RECEIVABLE, NET At June 30, 2009 and 2008, PH New England s contributions receivable, net, consisted approximately of the following: Amounts expected to be collected: In less than one year $ 60,000 $ 89,000 In one to four years 127, , , ,000 Less: Discount to present value (discount rates ranging from 4.4% to 5.0%) (8,000) (12,000) $ 179,000 $ 290,

21 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE F - PROPERTY AND EQUIPMENT, NET At June 30, 2009 and 2008, property and equipment, net, consisted approximately of the following: Land $ 69,000 $ 49,000 Buildings and improvements 7,449,000 6,993,000 Furniture, fixtures and equipment 663, ,000 Computer equipment 745, ,000 Vehicles 45,000 45,000 Construction-in-progress 22,000 1,000 8,993,000 8,351,000 Less: Accumulated depreciation and amortization (4,043,000) (3,521,000) $ 4,950,000 $ 4,830,000 During 2008, PH New England disposed of property costing approximately $74,000, and recognized a loss in connection with this disposal of approximately $8,300. Construction in progress relates to three separate projects: $6,000 at Dublin, New Hampshire with a total approximated completion cost of $10,000 for server and infrastructure improvements; $10,000 at Mulberry St; Springfield, Massachusetts with a total approximated completion cost of $25,000 to expand services to the ground floor; and, $6,000 at Madison Avenue, Springfield, Massachusetts to perform extensive external renovations with a total approximated completion cost of $20,000. All construction is scheduled to be completed in September Included in property and equipment are purchases acquired under capital lease arrangements with terms ranging from four to five years. At June 30, 2009 and 2008, computers acquired under such leases had a cost of approximately $88,000 for both years, and accumulated depreciation of approximately $62,000 and $32,000, respectively. At June 30, 2009 and 2008, furniture acquired under a capital lease arrangement had a cost of approximately $116,000 and $66,000, respectively, and accumulated depreciation of approximately $23,000 and $6,000, respectively. The amount outstanding under these capital leases is included in accounts payable and accrued expenses in the accompanying statements of financial position as of June 30, 2009 and 2008 and totaled approximately $121,000 and $119,000, respectively. -14-

22 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE G - LONG-TERM DEBT At June 30, 2009 and 2008, long-term debt consisted of the following: On May 1, 2007, PH New England entered into a loan agreement with Citizens Bank of Rhode Island in the amount of $146,000 due in 120 monthly installments with a final balloon payment, including interest amortized over ten years at a rate of 7.25%, through May The proceeds of the loan are being used to purchase and renovate a building. Amounts due under the mortgage are secured by the property purchased. At June 30, 2009 and 2008, the balance of this mortgage payable was approximately $133,000 and $139,000, respectively. Long-term loan payable to the Parent in the amount of $2,700,000 due in 120 monthly installments, including interest at a variable rate based upon the Treasury Plus Money Market Morgan Shares held by the Parent, which had a rate of 0.05% and 1.37% at June 30, 2009 and 2008, respectively. At June 30, 2009 and 2008, the balance of the loan payable was approximately $488,000 and $758,000, respectively (see also Note D). On July 18, 2008, PH New England entered into a loan agreement with Citizens Bank of Rhode Island in the amount of $200,000 due in 120 monthly installments with a final balloon payment, including interest amortized over fifteen years at a rate of 6.465%, through July The proceeds of the loan are being used to purchase and renovate a building in Holyoke, Massachusetts. Amounts due under the mortgage are secured by the property in Springfield, Massachusetts. At June 30, 2009 the balance of this mortgage payable was approximately $192,000. Approximate annual principal payments due on all debt obligations (including amounts due to the Parent) were as follows at June 30, 2009: 2010 $ 285, , , , ,000 Thereafter 238,000 $ 813,

23 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE H - CLIENT AND THIRD-PARTY REVENUE For the years ended June 30, 2009 and 2008, client and third-party revenue consisted approximately of the following: Healthcare services $ 2,273,000 $ 2,130,000 Food stamps 221, ,000 Client fees 1,163, ,000 School lunch program 74,000 72,000 Education/tutoring/other 685, ,000 $ 4,417,000 $ 3,591,000 Amounts reflected as due to Parent in the accompanying statements of financial position of approximately $1,783,000 and $1,082,000 as of June 30, 2009 and 2008, respectively, relate to costs incurred by PH New England but paid for by the Parent. NOTE I - TEMPORARILY RESTRICTED NET ASSETS At June 30, 2009 and 2008, temporarily restricted net assets are available for the following purposes: Capital initiatives $117,000 $ 181,000 Program Initiatives 133, ,000 $250,000 $ 456,000 For the years ended June 30, 2009 and 2008, $245,000 and $556,000 respectively, were released for program and capital initiatives. -16-

24 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE J - TAX-DEFERRED ANNUITY PLAN PH New England has a tax-deferred annuity plan, which is sponsored by the Parent, for all eligible employees under Section 403(b) of the Code. PH New England makes contributions equal to 3% to 10% of each active participant s compensation, based on years of service, as defined in the plan agreement. Total contributions to this plan by PH New England for fiscal 2009 and 2008, totaled approximately $307,000 and $252,000, respectively. NOTE K - COMMITMENTS AND CONTINGENCIES 1. Lease Commitments PH New England leases facilities, vehicles and other equipment under various noncancelable operating leases expiring at various dates through Total expense under these leases was approximately $589,000 and $507,000 for the years ended June 30, 2009 and 2008, respectively. Future minimum lease payments are approximately as follows at June 30, 2009: 2010 $ 566, , , , , , ,000 $ 1,389,000 In addition, PH New England rents certain facilities under operating leases on a month-to-month basis. Rent expense relating to these month-to-month leases totaled approximately $92,000 and $119,000 for fiscal 2009 and 2008, respectively. 2. Litigation PH New England is contingently liable under various claims which have arisen in the ordinary course of business. In the opinion of management, the claims will be defended as appropriate and, in certain cases, are adequately covered by insurance. Management believes that these claims will not have a material effect on the financial position, changes in net assets or cash flows of PH New England. -17-

25 Phoenix Houses of New England, Inc. NOTES TO FINANCIAL STATEMENTS (continued) June 30, 2009 and 2008 NOTE K (continued) 3. Other PH New England s title to the facility located in Exeter, Rhode Island is subject to a right of reversion held by the State of Rhode Island if PH New England, or its designee, fails at any time within 25 years from the date of execution of the deed to comply with all the terms and conditions set forth in the deed and related attachments. The deed was executed on November 20, Terms of the deed include, among other pertinent provisions, that the property be used to provide long-term residential drug dependency treatment, provide for the increase of current drug dependency treatment slots, conduct research into efficient treatment methods and length of stay, and provide individual and group counseling and training. PH New England believes that it has and will continue to operate this facility consistent with these stated purposes and has included this facility within property and equipment. -18-

26 IV. Fiscal 2009 Audit Engagement Letter Grant Thornton LLP. All rights reserved.

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46 V. Fiscal 2009 Audited Representation Letter (Draft) Grant Thornton LLP. All rights reserved.

47 (PH New England letterhead) September XX, 2009 Grant Thornton LLP 666 Third Avenue New York, NY Dear Sir or Madam: We are providing this letter in connection with your audits of the financial statements of Phoenix Houses of New England, Inc. ( PH New England ) as of June 30, 2009 and 2008, and for the years then ended, for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, the changes in net assets, and cash flows of PH New England are in conformity with accounting principles generally accepted in the United States of America ( US GAAP ). We confirm that we are responsible for the fair presentation in the financial statements of financial position, activities, and cash flows in conformity with US GAAP. We also acknowledge our responsibility for establishing and maintaining effective internal control over financial reporting, including designing and implementing programs and controls to prevent, detect and correct fraud. Certain representations in this letter are described as being limited to matters that are material. Items are considered to be material, regardless of size, if they involve an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. We confirm, to the best of our knowledge and belief, as of September XX, 2009, the following representations made to you during your audits. 1. The financial statements referred to above have been prepared and are fairly presented in conformity with US GAAP. 2. We have made available to you all: a. Financial records, documentation of internal control over financial reporting, and related data. b. Minutes of the meetings of PH New England s Board of Directors and Committees of Directors or summaries of actions of recent meetings for which minutes have not yet been prepared. All significant Board and Committee actions are included in the summaries provided to your representatives. 3. There have been no communications, written or oral, from regulatory agencies or others concerning noncompliance with, or deficiencies in, financial reporting practices.

48 4. We believe that the effects of the uncorrected financial statement misstatements as detailed on the attached Appendix are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. 5. There are no significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting of which we are aware. We understand that a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of PH New England s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 6. We have no knowledge of fraud or suspected fraud affecting PH New England involving: a. Management; b. Employees who have significant roles in internal control; or c. Others where the fraud could have a material effect on the financial statements. 7. We have no knowledge of any allegations of fraud or suspected fraud affecting PH New England received in communications from employees, former employees, analysts, regulators, or others. 8. PH New England s assets and liabilities are appropriately classified and releases from net asset restrictions are appropriate. 9. PH New England has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities. 10. The financial statements include all assets and liabilities under PH New England s control. 11. Related party relationships and transactions and related amounts receivable or payable, including sales, purchases, loans, transfers, leasing arrangements and guarantees have been properly recorded or disclosed in the financial statements. For the purpose of this letter, we understand the following to be the definition of the term related party: Affiliates of the enterprise; entities for which investments are accounted for by the equity method by the enterprise; trusts for the benefit of employees, such as pension and profitsharing trusts that are managed by or under the trusteeship of management; its management; members of the immediate families of its management; and other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly 2

49 influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. 12. There are no guarantees, whether written or oral, under which PH New England is contingently liable. 13. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with the AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, are properly disclosed in the financial statements. Significant estimates are estimates at the date of the statement of financial position which could change materially within the next year. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur which would significantly disrupt normal finances within the next year. 14. There are no: a. Violations or possible violations of laws, including charitable registration laws, regulations, or the provisions of contracts, grant agreements, or donor restrictions whose effects should be considered for disclosure in the financial statements, or as a basis for recording a loss contingency. We have complied with all laws, including charitable registration laws, regulations, the provisions of contracts and grant agreements, and donor restrictions. b. Unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with Financial Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies. c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No PH New England has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral. 16. PH New England has adequate controls over the receipt and recording of contributions. 17. PH New England has complied with all aspects of contractual agreements that would have a material effect on its financial statement in the event of noncompliance. 18. The methods and significant assumptions used to determine fair values of financial instruments have been consistently applied and result in a measure of fair value appropriate for financial measurement and disclosure purposes. In addition, to the best of our knowledge and belief, there have been no subsequent events through the date of this letter that would require adjustment to the fair value measurements and disclosures included in the financial statements. 19. The basis for the allocation of expenses to functional expense categories on the statement of activities and statement of functional expenses is reasonable, appropriate, and complies with the requirements of PH New England s various funding sources. 3

50 20. PH New England is a tax-exempt organization under the Internal Revenue Code. PH New England has not entered into any transactions or activities which could potentially negatively impact its tax-exempt status. 21. PH New England is not subject to the California Nonprofit Integrity Act of 2004 (SB 1262) and there were no changes in circumstances that would change this determination. 22. Third party payor programs in which PH New England participates are based upon complex laws and regulations. Noncompliance with such laws and regulations could result in fines, penalties and exclusion from such programs. PH New England is not aware of any allegation of noncompliance that could have a material adverse effect on the financial statements and management believes that PH New England is in compliance with all applicable laws and regulations. 23. PH New England s contract revenues are subject to audit and possible adjustment by third party payors. The effects of any such adjustments are recorded when reasonably determinable. Any costs disallowed by the grantor would be absorbed by PH New England; however, it is management's opinion that disallowances, if any, would not be material to its 2009 financial statements. 24. FIN No. 47 does not have a material effect on PH New England s financial statements. Accordingly, management has not disclosed or recorded a liability for an asset retirement obligation. 25. At June 30, 2009, PH New England has recorded receivables on its financial statements that represent valid claims against government agencies or other debtors arising on or before the statement of financial position date which have been appropriately assessed for collectability by management and have been reflected net of an appropriate allowance for doubtful accounts. It is management s opinion that the receivables outstanding at June 30, 2009 have been presented at their net realizable value. To the best of our knowledge and belief, no events have occurred subsequent to the date of the statement of financial position and through the date of this letter that would require adjustment to, or disclosure in, the aforementioned financial statements. Very truly yours, Phoenix Houses of New England, Inc. Howard Meitiner, President, Chief Executive Officer Kevin Kirchoff, Senior Vice President, Chief Financial Officer Susan Shubitowski, Regional Finance Director 4