CALIFORNIA HEALTHCARE FOUNDATION AND SUBSIDIARIES

Transcription

1 CALIFORNIA HEALTHCARE FOUNDATION AND SUBSIDIARIES MARCH 31, 2016 AND FEBRUARY 28, 2015 INDEPENDENT AUDITORS REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

2 Independent Auditors Report and Consolidated Financial Statements Independent Auditors Report 1-2 Financial Statements Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Cash Flows

3 Independent Auditors Report THE BOARD OF DIRECTORS CALIFORNIA HEALTHCARE FOUNDATION AND SUBSIDIARIES Oakland, California Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of CALIFORNIA HEALTHCARE FOUNDATION AND SUBSIDIARIES (the Foundation) which comprise the consolidated statement of financial position as of March 31, 2016 and February 28, 2015, and the related consolidated statements of activities, and cash flows for the 13 month period ending March 31, 2016 and for the year ending February 28, 2015 and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 275 BATTERY STREET, SUITE 900 SAN FRANCISCO, CA SOUTH MARKET STREET, SUITE 200 SAN JOSE, CA

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California HealthCare Foundation and Subsidiaries as of March 31, 2016 and February 28, 2015, and the results of its activities and changes in net assets, and its cash flows for the 13 month period ending March 31, 2016 and for the year ending February 28, 2015 in accordance with accounting principles generally accepted in the United States of America. San Francisco, California September 29,

5 Consolidated Statement of Financial Position March 31, February 28, Assets Cash and cash equivalents $ 991,929 $ 3,713,302 Investments 721,438, ,563,606 Program-related investments, net 5,264,664 4,451,794 Investment sales pending settlement 10,169,253 1,003,699 Receivables and prepaid expenses 1,655,306 1,061,026 Fixed assets, net 143, ,570 Total assets $ 739,662,965 $ 780,974,997 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 1,990,148 $ 2,098,546 Grants payable 14,376,120 14,414,293 Total liabilities 16,366,268 16,512,839 Net Assets: Unrestricted 723,296, ,462,158 Total net assets 723,296, ,462,158 Total liabilities and net assets $ 739,662,965 $ 780,974,997 See accompanying notes to financial statements. 3

6 Consolidated Statement of Activities For the Thirteen Month Period from March 1, 2015 to March 31, 2016 and for the Year Ended February 28, Revenues: Investment income $ 15,147,973 $ 16,363,447 Net rental income 1,114,962 1,122,388 Program-related investment interest and other income 524, ,008 Less: Investment expenses (4,166,177) (4,435,816) 12,621,127 13,814,027 Net unrealized (loss) gain on investments (9,767,200) 59,237,704 Total revenues 2,853,927 73,051,731 Expenses: Grants 30,699,744 24,084,129 Direct charitable activities 1,801,341 1,882,209 Program support 7,804,996 6,620,227 Management and general 3,713,307 3,740,543 Total expenses 44,019,388 36,327,108 Change in Net Assets (41,165,461) 36,724,623 Net Assets, beginning of year 764,462, ,737,535 Net Assets, end of year $ 723,296,697 $ 764,462,158 See accompanying notes to financial statements. 4

7 Consolidated Statement of Cash Flows For the Thirteen Month Period from March 1, 2015 to March 31, 2016 and for the Year Ended February 28, Cash Flows from Operating Activities: Change in net assets $ (41,165,461) $ 36,724,623 Adjustments to reconcile change in net assets to net cash used by operating activities: Depreciation expense 159, ,788 Net realized gain on investments (14,944,898) (16,418,567) Net unrealized loss (gain) on investments 9,767,200 (59,237,704) Changes in operating assets and liabilities: Program-related investments, net (812,870) 664,206 Investments pending settlement (9,165,554) 13,788,725 Receivables and prepaid expenses (594,280) (635,972) Accounts payable and accrued expenses (108,398) 879,643 Grants payable (38,173) (3,894,139) Net cash used by operating activities (56,903,243) (27,985,397) Cash Flows from Investing Activities: Net sale of investments 54,303,051 28,292,059 Purchase of fixed assets (121,181) (128,977) Net cash provided by investing activities 54,181,870 28,163,082 Net Change in Cash and Cash Equivalents (2,721,373) 177,685 Cash and Cash Equivalents, beginning of year 3,713,302 3,535,617 Cash and Cash Equivalents, end of year $ 991,929 $ 3,713,302 Supplemental Disclosure of Cash Flow Information: Taxes (refunded) paid on unrelated business income $ (3,021) $ 620,361 See accompanying notes to financial statements. 5

8 Note 1 - Nature of the Organization: California HealthCare Foundation (the Foundation) is a philanthropic organization established as a tax exempt, nonprofit corporation under Section 501(c)(4) of the Internal Revenue Code and under California Revenue and Taxation Code Section 23701(f). The Foundation's primary purpose is to promote the availability of, and access to, quality and affordable health care and related services to the people of the State of California, including, without limitation (i) to improve the availability of, and access to, such care and services to the uninsured, underinsured and other underserved populations, and to improve the health status of all Californians, (ii) to develop and maintain initiatives to address short-term and long-term health care needs and concerns, (iii) to provide grants and establish programs to carry out such purposes and (iv) to otherwise serve the health-related social welfare needs of the people of the state of California. Note 2 - Significant Accounting Policies: a. Basis of Presentation The consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States. All significant intra-organizational accounts and transactions have been eliminated. The consolidated financial statements include two wholly owned Limited Liability Company (LLC) subsidiaries of the Foundation, OAC Properties and the California Joint Replacement Registry. OAC Properties was created in April 2006 to manage investment real estate in Oakland, CA. The California Joint Replacement Registry was created in February 2011 to develop, implement, test, and operate a human joint replacement registry in the State of California. The Foundation s 100% interest in the California Joint Replacement Registry LLC (CJRR) was sold to the American Joint Replacement Registry (AJRR) on March 31, The Foundation s assets are free of donor restrictions and are classified as unrestricted in the accompanying statement of financial position. On December 11, 2014, Foundation s Board of Directors approved changing the Foundation s fiscal year end from February to March effective March 1, 2015, for the period ending March 31, Accordingly, the 2016 financial statements include 13 months of activities. b. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments, with maturities of three months or less. The Foundation held its cash in two banking institutions as of March 31, This cash is insured by the Federal Deposit Insurance Corporation up to regulatory limits. 6

9 c. Investments Investments are held at fair value or estimated fair value. The Foundation established and maintains an investment policy approved by the Board of Directors, which governs its investment program. The Foundation uses a professional investment management firm to manage its investments. In doing so, the Foundation has delegated the authority for asset allocation and the investment of the assets to that firm. Realized gains or losses on the sale of investments are determined on an average cost basis. The private real estate, located in Oakland, California, is valued at March 31, 2016 and February 28, 2015 based on an independent appraisal done as of February 28, d. Investment Sales Pending Settlement Investment sales pending settlement consist of funds that are in the process of being liquidated from redeemed investments. e. Recent Accounting Pronouncement In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) (Topic ) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). This ASU eliminates the requirement to categorize investments within the fair value hierarchy when fair value is measured using net asset value per share. For nonpublic entities, the new guidance is effective for interim and annual reporting periods that begin after December 15, 2016, with early adoption permitted. The Foundation elected to early adopt ASU in the prior fiscal year. f. Fair Value Measurements The Foundation follows the FASB issued Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement and Disclosures, to value and classify its assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. ASC 820 specifies the use of three classification levels based on the marketability and liquidity of each asset or liability. Level 1 classifications are based on unadjusted quoted prices from active markets (that the Foundation has the ability to access at the measurement date) for identical securities. Level 2 classifications are based on significant observable market inputs, such as quoted prices for similar securities, or quoted prices in inactive markets. 7

10 Level 3 values are based on significant unobservable inputs that reflect the Foundation's determination of assumptions that market participants might reasonably use in valuing securities. In general, where available and appropriate, investments are valued using fund-provided net asset values per share or ownership interest (NAVs) as allowed under FASB Accounting Standards Update (ASU) , Fair Value Measurements and Disclosures (Topic 820): Investment in Certain Entities that Calculate Net Asset Value Per Share (commonly referred to as the Practical Expedient ). Where NAV information is not available, valuation estimates are based on information provided by investment managers. Management believes these methods provide a reasonable estimate of fair value. Investments valued at NAV are discussed with the Foundation s investment advisor, and reviewed by the Foundation for reasonableness against both audited December 31 and unaudited March 31 data. In addition, the Foundation reviews the valuation policies of its investment managers annually for reasonableness and consistency with GAAP and industry standards. Finally, the Foundation reviews the audited financial statements of the funds of each investment manager in which the Foundation is invested to ensure that an unqualified audit opinion was issued. Although a secondary market exists for some investments valued using NAV, it is not an active market and individual transactions are typically not observable. When transactions occur in this limited secondary market, they may occur at discounts to the reported net asset value. Therefore, where redemption rights in funds are restricted or non-existent, if the Foundation was to sell these investments in the secondary market, it is reasonably possible that a buyer in that market may require a discount to the reported NAV or valuation estimate, and the discount could be significant. g. Program-Related Investments Program-Related Investments (PRIs) are strategic funding for the specific objective of furthering the Foundation s charitable purpose. The investments support the testing and evaluation of innovative, market-based approaches to significantly lower the total cost of care, improve the quality of care, or substantially improve access to care for low-income Californians. The PRI loans bear below market interest rates and vary in duration, with the longest being five years. Repayment of the currently outstanding loans is scheduled through December of Some of the transactions have warrants that may be convertible to equity in the future if certain events transpire. 8

11 The program-related loans are recorded at a discount to face value to capture the interest rate benefit to the borrower of a below market rate. In recording that discount, a contribution expense is also recorded which is reflected in grants expense on the Statement of Activities. The discount is amortized over the life of the loan to interest income. The loans are monitored on an annual basis for impairment. The loans are summarized in the table below as of March 31, 2016 and for the period from March 1, 2015 to March 31, 2016, and as February 28, 2015 and for the year then ended: March 31, February 28, Loan receivable, gross beginning of year $ 6,394,650 $ 6,887,150 Additional loans 975,000 1,175,000 Loans written off (850,000) Principal repayments (279,500) (1,667,500) Gross subtotal, loans 6,240,150 6,394,650 Interest receivable 399, ,967 Net subtotal, loans 6,639,264 6,835,617 Less discount and uncollectible allowance (1,374,600) (2,383,823) Loan receivable, net of end of year $ 5,264,664 $ 4,451,794 h. Fixed Assets Fixed assets are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, ranging from three to six years. i. Grants Grants include unconditional promises to give and other awarded contracts that further the Foundation s mission. Grants awarded with an unconditional promise to give are accrued as a liability and expensed when approved. Grant amendments, including cancellations, are recorded as increases or decreases of grant expense in the year of amendment. No discount is recorded for grants expected to be paid after one year, as the short duration of the overall grant portfolio makes the amount of discount immaterial. j. Expense Allocations Expenses are allocated between direct charitable activities, program support, management and general, and investment activities, based upon estimates by management. 9

12 k. 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. These estimates and assumptions 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 revenue and expense during the reporting period. Significant accounting estimates reflected in the Foundation s financial statements include the determination of the fair value of investments, the functional expense allocation and the effective market interest rates for program-related investment loans. l. Income Taxes While the Foundation is generally exempt from income taxes, it is subject to tax on income which is deemed to be unrelated to its exempt purpose. The Foundation generates such unrelated business income through some of its investment activity. Management evaluated the Foundation s tax positions and concluded that the Foundation has maintained its tax exempt status and had taken no uncertain tax positions that require adjustments to the financial statements. m. Subsequent Events The Foundation has reviewed the change in net assets for the year ended March 31, 2016 through September 29, 2016, the date the financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements. 10

13 Note 3 - Investments: Investments as of March 31, 2016 and February 28, 2015 consist of the following: March 31, February 28, Fixed income commingled global fund $ 10,694,742 $ 36,638,577 Multi-strategy and fixed income absolute return funds 1,160,385 1,282,318 Multi-asset class commingled funds 582,981, ,170,004 Private equity and venture capital 97,022, ,572,707 Private real estate (a) 29,578,729 30,900,000 $ 721,438,253 $ 770,563,606 (a) On June 30, 2006, the Foundation acquired a building as an investment property. Rental space is leased under non-cancelable operating leases which expire through June Future minimum lease revenues exclusive of reimbursable costs as of March 31, 2016 are as follows: $ 1,843, ,965, ,017, ,944, ,575,059 Thereafter 3,110,852 $ 12,456,739 11

14 Note 4 - Fair Value Measurements: The following two tables present the FASB ASC 820 fair value categorization of the Foundation s investments as of March 31, 2016 and February 28, 2015: March 31, 2016 Level 1 Level 2 Level 3 Total Investments (Note 3): Fixed income commingled global fund $ 10,694,742 $ 10,694,742 Private real estate 29,578,729 29,578,729 $ 40,273,471 $ 40,273,471 Investments valued using NAV Practical Expedient (see notes 2e and 2f) 681,164,782 Total $ 721,438,253 February 28, 2015 Level 1 Level 2 Level 3 Total Investments (Note 3): Fixed income commingled global fund $ 36,638,577 $ 36,638,577 Private real estate 30,900,000 30,900,000 $ 67,538,577 $ 67,538,577 Investments valued using NAV Practical Expedient (see notes 2e and 2f) 703,025,029 Total $ 770,563,606 12

15 The following table summarizes the Foundation s investments, by strategy, that are valued based on the net asset values (NAVs). These NAV amounts are reported by the fund managers as of March 31, 2016 and February 28, 2015: March 31, 2016 February 28, 2015 # of # of Redemption Notice Strategies Funds Valuation Funds Valuation Frequency Period Commingled funds: Redeemable - long term (a) 1 $ 514,293,079 1 $ 516,362,120 Annually 1 year Redeemable - long term (b) 1 68,688, ,807,884 Quarterly 95 days Redeemable - near term (c) 1 10,694, ,638,577 Monthly 45 days Absolute return funds: Non-Redeemable (d) 3 1,160, ,282,318 N/A (d) Private equity and venture capital (e) 20 97,022, ,572,707 Not permitted N/A Total $ 691,859,524 $ 739,663,606 (a) This holding is the investment advisor s primary investment vehicle. It is structured to generate performance in excess of relevant benchmarks while realizing substantially lower volatility than public equity markets. It was allocated across the following asset classes at March 31, 2016 and February 28, 2015: % of Fund March 31, February 28, Asset Class Absolute Return Private Equity Global Public Equity Real Estate Tactical / Hedged Equity Natural Resources 10 9 Fixed Income 8 9 Cash

16 (b) This holding is a fund of the investment advisor which is designed to be similar in broad asset allocation to their primary fund, but with greater liquidity. It was allocated across the following asset classes at March 31, 2016 and February 28, 2015: % of Fund March 31, February 28, Asset Class Global Public Equity Absolute Return Tactical / Hedged Equity Fixed Income 9 9 Real Estate 7 5 Natural Resources 4 4 Cash (c) This holding is the investment advisor s fixed income offering. It has a global fixed income strategy that seeks to provide diversification benefits, positive risk-adjusted returns and monthly liquidity. Core investments are held in global nominal and inflationlinked government bonds. (d) These represent trailing investment balances from redeemed investments which will be paid out as the underlying investments can be liquidated by the investment manager. (e) Prior to hiring the current investment advisor, the Foundation invested directly in private equity and venture capital through both investment funds and fund of funds relationships, with the intent to diversify across industries, industry sectors and geographies. These investments have a current remaining life of between one and eight years. The Foundation will not be investing directly in any new funds. The unfunded commitment was $21,371,000 and $25,724,000 at March 31, 2016 and February 28, 2015, respectively. Other Financial Instruments: Grants payable and accrued expenses, which include accounts for retirement agreements, are not discounted because their book values approximate fair value due to their liquid and short term natures. 14

17 Note 5 - Fixed Assets: Fixed assets as of March 31, 2016 and February 28, 2015 consist of the following: March 31, February 28, Furniture and fixtures $ 781,613 $ 787,361 Office computers and equipment 1,492,429 1,426,870 2,274,042 2,214,231 Less accumulated depreciation (2,130,482) (2,032,661) Fixed assets, net $ 143,560 $ 181,570 Note 6 - Grants Payable: Grants payable as of March 31, 2016 are expected to be paid in the following fiscal years: $ 10,964, ,182, , ,000 $ 14,376,120 Note 7 - Cy Pres Fund: In October of 2014, the Foundation was designated under a third party legal settlement as the administrator of a Cy Pres fund to be used for the purpose of developing and implementing an educational program concerning patient privacy and security issues. The Foundation received settlement funds of $500,000 in October of 2014 and $730,949 in August of Cy Pres deferred revenue is included in the Statement of Financial Position as part of accounts payable and accrued expenses as settlement funds are received or interest is earned. Revenue is recognized as grants are awarded, and grants are expensed simultaneously, resulting in no net impact on the Statement of Activities. Per the amended agreement, the Foundation intends to expend the funds received, and interest earned thereon, by the end of October The un-awarded balance of the Cy Pres Fund at March 31, 2016 and February 28, 2015 was $677,332 and $500,197, respectively. 15

18 Note 8 - Functional Expenses: Grants expense represents grants awarded by the Foundation in a given year. Grants expense is net of cancellations, refunds, and amendments. Refunds totaled $205,481 for the period from March 1, 2015 to March 31, 2016, and $156,770 for year ending February 28, Direct charitable activities expenses are non-grant costs that directly further the Foundation s philanthropic efforts, including the publishing and dissemination of research and educational information. Program support represents expenses incurred to originate, administer and evaluate the Foundation's grants and direct charitable activities. Management and general expense are expenses for governing and operating the Foundation, not associated specifically with the Foundation s program activities. In addition to investment management fees and unrelated business income taxes, investment expenses on the Consolidated Statement of Activities include $318,896 and $281,410 for the period from March 1, 2015 to March 31, 2016 and for the year ending February 28, 2015, respectively, of allocated operating expenses attributable to portfolio management. Note 9 - Employee Benefit Plans: Retirement Savings 401(k) Plan The Foundation maintains a voluntary 401(k) plan (the Plan) for all employees. The Foundation makes an annual employer contribution of between 8% and 14% (age-based) of annual compensation for all employees who have at least 1,000 service hours during the calendar year. Employees are also eligible for matching contributions equal to 100% of the first 4.5% of employees salary deferral contributions after six calendar months of service. The Foundation s matching contributions to the Plan for the period from March 1, 2015 to March 31, 2016 and for the year ended February 28, 2015 were $305,012 and $268,371, respectively. The Foundation s additional employer only contributions to the Plan for the period from March 1, 2015 to March 31, 2016 and for the year ended February 28, 2015 were $746,709 and $725,107, respectively. 16

19 Note 10 - Commitments and Contingencies: Leases In April 2011, the Foundation leased office space in Sacramento, CA. That lease was extended in August 2015 into March Future minimum lease commitments by fiscal year are as follows: $ 106, , , , ,060 Thereafter 29,444 $ 586,878 Total rent expense was $117,465 and $104,235 for the period from March 1, 2015 to March 31, 2016 and for the year ended February 28, 2015, respectively. Note 11 - Related Party Transactions: In the course of carrying out its charitable purpose, the Foundation may make grants and conduct business with entities that have connections with members of the Board of Directors, Officers or Key Employees. Such situations are subject to the Foundation s conflict of interest policy and each grant and contract the Foundation makes is reviewed in advance for any potential conflict of interest or legal issues. As such, Board Members and Key Employees are required to disclose potential conflicts of interest annually, and throughout the year as circumstances change. Board members are also required to recuse themselves from voting on grants or contracts with which they may have a conflict. The Foundation has awarded and expensed grants to organizations that have relationships with Foundation Directors, Officers and Key Employees. Amount Amount Commitment Awarded Awarded Remaining Organization March 31, 2016 Stanford University $ 2,614,826 N/A $ 990,000 University of California, Davis 359,858 N/A 208,858 University of Southern California N/A N/A 58,409 Other 258,452 $ 67,621 10,452 17

20 The Foundation maintains a Designated Projects Fund (DPF) program for its Board of Directors, whereby each Director can individually award up to $100,000, per year, to nonprofit organizations doing work aligned with the Foundation s mission. Each year some of these awards are made to organizations affiliated with members of the Board of Directors. As appropriate, those awards are listed in the preceding table. Amounts paid for DPF grants reported above for the period from March 1, 2015 to March 31, 2016 and for the year ended February 28, 2015 totaled $200,000 and $35,000, respectively. There are no outstanding balances related to DPF grants at March 31,