HOSPICE OF HENDERSON COUNTY, INC. AND AFFILIATE D/B/A FOUR SEASONS COMPASSION FOR LIFE. CONSOLIDATED FINANCIAL STATEMENTS September 30, 2016 and 2015

Transcription

1 HOSPICE OF HENDERSON COUNTY, INC. AND AFFILIATE D/B/A FOUR SEASONS COMPASSION FOR LIFE CONSOLIDATED FINANCIAL STATEMENTS

2 Flat Rock, North Carolina CONSOLIDATED FINANCIAL STATEMENTS CONTENTS INDEPENDENT AUDITOR'S REPORT... 1 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS... 3 CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS... 6 SUPPLEMENTARY INFORMATION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR A MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS... 24

3 INDEPENDENT AUDITOR'S REPORT Board of Directors Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life Flat Rock, North Carolina Report on the Financial Statements We have audited the accompanying consolidated financial statements of Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life (the "Organization"), which comprise the consolidated balance sheets as of and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1.

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life as of, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The schedule of expenditures of federal awards as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis of the consolidated financial statements, and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain other procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 26, 2017 on our consideration of Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life'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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life's internal control over financial reporting and compliance. South Bend, Indiana January 26, 2017 Crowe Horwath LLP 2.

5 CONSOLIDATED BALANCE SHEETS ASSETS Current assets Cash and cash equivalents $ 4,584,755 $ 4,358,758 Patient accounts receivable, net 1,526,016 1,488,884 Pledges and bequests receivable 345, ,035 Other receivables 581, ,999 Prepaid expenses and other 496, ,157 Total current assets 7,534,640 7,258,833 Property and equipment, net 6,145,498 6,251,740 Investments 652, ,861 Investment in Teleios (144,517) 63,202 Other assets 390, ,161 $ 14,579,002 $ 14,393,797 LIABILITIES AND NET ASSETS Current liabilities Current portion of long-term debt $ 47,401 $ 44,498 Line of credit 99,743 99,743 Accounts payable 1,342,719 1,804,828 Accrued salaries and related benefits 1,180,025 1,260,592 Deferred revenue 39,500 83,769 Total current liabilities 2,709,388 3,293,430 Long-term debt, net of current portion 834, ,705 Total liabilities 3,543,840 4,179,135 Net assets Unrestricted Undesignated 9,530,142 8,362,072 Board designated 886,007 1,141,824 Total unrestricted net assets 10,416,149 9,503,896 Temporarily restricted 413, ,766 Permanently restricted 205, ,000 Total net assets 11,035,162 10,214,662 $ 14,579,002 $ 14,393,797 See accompanying notes to consolidated financial statements. 3.

6 CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS Years ended Unrestricted net assets Operating revenue Net patient service revenue $ 14,705,468 $ 14,650,034 Contributions and fundraising 999, ,277 Resale of donated merchandise 468, ,521 Grant revenue 4,085,190 2,497,839 Investment income (loss) 54,426 (40,237) Clinical research 169,305 62,780 Net loss of Teleios (207,719) (336,798) Other revenue 1,043,673 1,039,596 Net assets released from restriction 425,456 20,827 Total operating revenue 21,743,936 18,736,839 Operating expenses Salaries and wages 11,073,442 10,706,969 Employee benefits 2,379,531 2,135,230 Professional services 2,512,297 1,567,165 Other patient-related 660, ,590 Nursing home room and board 151, ,247 Medical equipment and supplies 1,292,579 1,355,622 Insurance 151, ,120 Repairs and maintenance 112, ,782 Depreciation 468, ,054 Office rent 213, ,180 Interest 38,793 42,331 Provision for uncollectible accounts 92, ,564 Other 1,684,730 1,770,701 Total operating expenses 20,831,683 19,399,555 Change in unrestricted net assets 912,253 (662,716) Temporarily restricted net assets Contributions 228, ,673 Net assets released from restriction (425,456) (20,827) Change in temporarily restricted net assets (197,253) 503,846 Permanently restricted net assets Contributions 105,500 - Change in permanently restricted net assets 105,500 - Change in net assets 820,500 (158,870) Net assets at beginning of year 10,214,662 10,373,532 Net assets at end of year $ 11,035,162 $ 10,214,662 See accompanying notes to consolidated financial statements. 4.

7 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended Cash flows from operating activities Change in net assets $ 820,500 $ (158,870) Adjustments to reconcile change in net assets to net cash from operating activities Depreciation 468, ,054 Provision for uncollectible accounts 92, ,564 Net realized and unrealized (gains) losses on investments (55,706) 41,050 Net loss of Teleios 207, ,798 Changes in assets and liabilities Patient accounts receivable (129,475) (89,331) Pledges and bequests receivable 156,082 (342,332) Other receivables (81,303) (102,196) Prepaid expenses and other assets (255,110) (88,373) Accounts payable (462,109) 780,563 Accrued salaries and related benefits (80,567) 3,641 Deferred revenue (44,269) 39,269 Net cash from operating activities 636, ,837 Cash flows from investing activities Investment in Teleios - (400,000) Purchase of property and equipment (362,428) (157,737) Proceeds from sales of investments 71, ,932 Purchases of investments (71,736) (261,932) Net cash from investing activities (362,428) (557,737) Cash flows from financing activities Principal payments on long-term debt (48,350) (42,787) Borrowings on line of credit - 99,743 Net cash from financing activities (48,350) 56,956 Net change in cash and cash equivalents 225, ,056 Cash and cash equivalents at beginning of year 4,358,758 3,894,702 Cash and cash equivalents at end of year $ 4,584,755 $ 4,358,758 Supplemental disclosures of cash flow information Cash paid for interest during the year $ 38,793 $ 42,331 See accompanying notes to consolidated financial statements. 5.

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Organization: Hospice of Henderson County, Inc. d/b/a Four Seasons Compassion for Life ( Four Seasons ) was incorporated December 3, 1979 as a non-profit organization in the State of North Carolina with its principal office in Flat Rock. Four Seasons offers a hospice and palliative care program for terminally or critically ill patients and their families, and educates and informs health care professionals, concerned citizens, and others regarding the hospice and palliative care philosophy and programs. As an additional service to the community, Four Seasons opened the Elizabeth House in The 19-bed facility provides general inpatient, on-site, 24-hour nursing care, respite care, and routine levels of care on a temporary basis. Four Seasons also operates a resale store. The store is managed and operated by paid staff and volunteers. Carifex Group, LLC ( Carifex ) provides management services to healthcare entities. The Teleios Group, LLC ( Teleios ) is a for-profit company registered in Delaware. Teleios is a venture between Four Seasons and Cornerstone Hospice & Palliative Care, Inc. whose purpose is to develop and provide consolidated financial and purchasing services to the venture partners as well as other not-forprofit hospice companies. Services may include general financial consulting, specialized financial consulting, bookkeeping, analytics for management, and discounted group purchasing opportunities for clients. Four Seasons and Teleios are financially interrelated entities to the extent of Four Seasons' investment in Teleios and the related intercompany billings for services rendered. Four Seasons Compassion for Life Foundation (the "Foundation") is a not-for profit North Carolina corporation whose purpose is to foster, promote, support, develop, and encourage the functions of the Organization. The Organization and the Foundation are financially interrelated entities with separate boards of directors. Activity at the Foundation will commence during the year ending September 30, Basis of Accounting: The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Basis of Consolidation: The accompanying consolidated financial statements include the accounts of Four Seasons and Carifex (collectively referred to as the "Organization"). All significant interorganizational accounts and transactions between the affiliated organizations have been eliminated in consolidation. Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Statement Presentation: The consolidated financial statements report the changes in and totals of each net asset class based on the existence of donor or time restrictions, as applicable. Net assets are classified as unrestricted, temporarily restricted, or permanently restricted and are detailed as follows: Unrestricted net assets represent the part of the net assets that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. The unrestricted net assets are comprised of board designated and undesignated amounts. Board designated net assets are for needs based on the direction of the Organization's Board of Directors (Note 7). 6.

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Temporarily restricted net assets represent the part of the net assets resulting from contributions and other inflows of assets whose use is limited by donor-imposed stipulations that either expire by the passage of time or by actions of the Organization. Permanently restricted net assets represent the part of the net assets resulting from contributions and other inflows of assets whose use is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the Organization. Cash and Cash Equivalents: Cash and cash equivalents consist of bank deposits in accounts that are federally insured up to $250,000. Additionally, for purposes of the consolidated statements of cash flows, the Organization considers all highly liquid investments of operating cash purchased with an original maturity of three months or less to be cash equivalents. Patient Accounts Receivable: The patient accounts receivable balance represents the unpaid amounts billed to patients and third-party payors. Contractual adjustments, discounts, and an allowance for uncollectible accounts are recorded to report receivables for patient care services at their net estimated realizable value. Past due receivables are determined based on contractual terms. The Organization does not accrue interest on any of its accounts receivables. Allowance for Uncollectible Accounts: The allowance for uncollectible accounts is determined by management based upon the Organization's historical losses, specific patient circumstances, and general economic conditions. Periodically, management reviews patient accounts receivable and records an allowance based on current circumstances, and charges off the receivable against the allowance when all attempts to collect the receivable are deemed to have failed in accordance with the internal collection policy. Management believes the allowances of $196,275 and $172,121 as of September 30, 2016 and 2015, respectively, are adequate to cover potential losses from uncollectible accounts. Pledges and Bequests Receivable: Pledges and bequests receivable represent the remaining balance of unconditional promises to give and bequests receivable that have not yet been paid. Pledges and bequests that are expected to be collected within one year or less are recorded at net realizable value. Pledges and bequests that are expected to be collected beyond one year are recorded at the present value of their estimated future cash flows. The non current pledges and bequests have been discounted using a rate commensurate with risk applicable during the time the pledge or bequest was made. Amortization of the pledge and bequest discounts are recognized as contribution revenue each year until the pledge or bequest is paid in full. Conditional promises to give are recognized only when the conditions on which they depend are substantially met and the promises become unconditional. An allowance is made for uncollectible contributions based on management's expectations regarding collection of outstanding promises to give and Organization's collection experience. Other Receivables: Other receivables are comprised of a related party receivable from Teleios (Note 4), clinical research receivables, and grants receivable. The Organization receives its grant support through periodic claims filed with the funding sources, not to exceed a limit specified in the funding agreement. Grants receivable represents the costs incurred through that have been requested for reimbursement under the terms of cost-reimbursement grants. Investments: All investments are valued at their fair values in the consolidated balance sheets. Unrealized gains and losses are included in the change in net assets. See note 14 for additional information on the nature of the Organization's investments. 7.

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Property and Equipment: Property and equipment are stated at cost or, if donated to the Organization, at their fair value on the date of the gift. Additions and improvements over $2,500 are capitalized; expenditures for routine maintenance are charged to operations. Depreciation is provided over the estimated useful lives of the various classes of assets on the straight-line method. Gifts of long-lived assets such as land, buildings, and equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets are to be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash and other assets that must be used to acquire long-lived assets are reported as temporarily restricted support. Absent explicit donor stipulations about how long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Impairment of Long-Lived Assets: On an ongoing basis, the Organization reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may be overstated. The Organization recognizes impairment losses if the undiscounted cash flows expected to be generated by the asset are less than the carrying value of the related asset. The impairment loss adjusts the assets to fair value. As of, management believes that no impairments existed. Net Patient Service Revenue: Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Approximately 94% and 93% of the Organization's net patient service revenue was derived from the Medicare and Medicaid programs for the years ended, respectively. Provisions for estimated third-party payor settlements have been made in the consolidated financial statements for estimated contractual adjustments, representing the difference between the standard charges for services and estimated total payments to be received from third-party payors. These estimates are adjusted in future periods as final settlements are determined. The Organization, like other health care providers, may be subject to investigations, regulatory action, lawsuits, and claims arising out of the conduct of its business, including the interpretation of laws and regulations governing the Medicare and Medicaid programs and other third-party payor agreements. Management intends to fully cooperate with any governmental agencies in requests for information. Noncompliance with laws and regulations can make the Organization subject to regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. Medicare Program: The Medicare program reimburses the Organization on a prospective payment basis for each day that the terminally ill patient is enrolled in the program. Payments to the Organization are based on four separate levels of care provided and the geographical location of the patient. Hospice organizations are subject to two specific payment limit caps under the Medicare program. One limit relates to inpatient care days that exceed 20% of the total days of hospice care provided for the year. The Organization did not exceed the 20% cap related to inpatient days in 2016 or The second limit relates to an aggregate Medicare reimbursement cap calculated by the Organization. The Organization did not exceed the aggregate Medicare reimbursement cap for the years ended September 30, 2016 and

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Medicaid Program: Medicaid is a state-administered program financed by state funds and matching federal funds to provide medical assistance to the indigent and certain other eligible persons. Medicaid is required to pay the Organization rates that are at least equal to the Organization rates paid by Medicare. North Carolina pays Medicaid hospice benefits at rates equal to or greater than the rates provided under Medicare and those rates are calculated using the same methodology as Medicare. The state maintains flexibility to establish their own hospice election procedures and to limit the number and duration of benefit periods for which they will pay for hospice services. Nursing Home Support: Numerous patients served by the Organization resided in nursing home settings during part or all of their hospice enrollment period. If, during the enrollment period, a patient s nursing home obligation is the responsibility of the Medicaid program, the Organization assumes responsibility for the payment to the nursing home and billing to the Medicaid program. Payment to the Organization is established by the state of North Carolina; however, payment to the nursing home is based on a contractual arrangement with the Organization. For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Organization contracts with the nursing home for room and board services. The state must pay the Organization, in addition to the applicable Medicare and Medicaid hospice daily or hourly rate, an amount equal to at least 95% of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under standard nursing home contracts, the Organization pays the nursing home for these room and board services at 100% of the Medicaid daily nursing home rate. Contributions: Contributions received and unconditional promises to give are recorded as unrestricted, temporarily restricted, or permanently restricted revenue depending on the existence of donor restrictions and the nature of such restrictions, if they exist. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets released from restriction. If a restriction is fulfilled in the same accounting period in which the contribution is received, the contribution is reported as unrestricted. Resale of Donated Merchandise: The Organization operates resale shops that sell primarily donated merchandise. The fair value of the donated merchandise sold approximates the revenue generated from its sale. Contributed Services: Volunteers and other organizations have donated a significant amount of time to the Organization's programs. Contributed services that create or enhance non-financial assets or require specialized skills and are provided by individuals possessing those skills are recognized as support. For the years ended, the value of these contributed services meeting the requirements for recognition in the consolidated financial statements was not material and has not been recorded. Advertising: The Organization expenses advertising costs as incurred. Advertising expense amounted to $246,438 and $245,150 for the years ended, respectively. 9.

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Income Taxes: Four Seasons is exempt from income taxes on income from related activities under Section 501(c)(3) of the U.S. Internal Revenue Code and corresponding state tax law. Accordingly, no provision has been made for federal or state income taxes. Carifex is a single member limited liability company. All income is included in the taxable income of the individual member; thus, no federal or state income taxes are included in these consolidated financial statements. U.S. GAAP requires that a tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Due to its tax-exempt status, Four Seasons is not generally subject to U.S. federal income tax or state income tax. Four Seasons' Form 990 has not been subject to examination by the Internal Revenue Service or the state of North Carolina for the last three years. Four Seasons does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months. Four Seasons recognizes interest and/or penalties related to income tax matters in income tax expense. Four Seasons did not have any amounts accrued for interest and penalties at. Subsequent Events: Management has performed an analysis of the activities and transactions subsequent to September 30, 2016 to determine the need for any adjustments to and/or disclosures within the consolidated financial statements for the year ended September 30, Management performed their analysis through January 26, 2017, which is the date the consolidated financial statements were available to be issued. Subsequent to September 30, 2016, the Organization purchased a home care practice. The purchase price was $412,500. NOTE 2 - PATIENT ACCOUNTS RECEIVABLE Receivables from patients and third-party payors for the years ended September 30 are as follows: Medicare $ 1,294,867 $ 1,074,247 Medicaid 242, ,834 Other third-party payors 143, ,144 Patients 42,134 58,780 1,722,291 1,661,005 Allowance for uncollectible accounts (196,275) (172,121) $ 1,526,016 $ 1,488,

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - PROPERTY AND EQUIPMENT The Organization's property and equipment and the related accumulated depreciation at September 30 are as follows: Land and land improvements $ 1,525,526 $ 1,525,526 Buildings and improvements 6,340,016 6,331,680 Leasehold improvements 10,331 10,331 Furniture and equipment 750, ,094 Equipment 2,083,683 1,715,466 Construction in progress 61, ,887 10,772,097 10,420,984 Less accumulated depreciation (4,626,599) (4,169,244) $ 6,145,498 $ 6,251,740 Depreciation expense for the years ended was $468,670 and $402,054, respectively. NOTE 4 - RELATED PARTY TRANSACTIONS The Organization accounts for its investment in Teleios under the equity method. During the year ended September 30, 2015, the Organization made an initial investment of $200,000, as well as an additional $200,000 investment consisting of salaries, benefits, and other organizational costs incurred by the Organization on behalf of Teleios. The Organization has recorded its 50% share of the Teleios loss for the years ended, which amounted to $207,719 and $336,798, respectively. The net investment in Teleios at was $(144,517) and $63,202, respectively. In addition, during the years ended, $525,910 and $408,976, respectively, of salaries, benefits, and other organizational costs paid on behalf of Teleios were then incurred and charged back to Teleios. During the years ended, the Organization was charged $214,008 and $26,800, respectively, for financial and purchasing services provided by Teleios. As of, Teleios owed the Organization a total of $349,651 and $182,976, respectively, for organization and other start-up costs paid on Teleios' behalf. This amount is included within other assets on the consolidated balance sheets. NOTE 5 - LINE OF CREDIT The Organization maintains a $2,750,000 unsecured line of credit with a financial institution. The line of credit accrues interest at a variable rate of one-month LIBOR plus 1.50% with a cap of 5.99% and a floor of 2.99%, resulting in an interest rate of 2.99% as of. The line of credit expires on September 18, The Organization had borrowings on the line of credit totaling $99,743 at. 11.

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LONG-TERM DEBT A summary of long-term debt at September 30 is as follows: Mortgage note payable to a financial institution with fixed interest rate of 3.95% with monthly payments of principal and interest of $4,678 with final payment due September 16, 2018, includes negative pledge agreement on certain real property. $ 524,711 $ 568,037 Mortgage note payable to a financial institution bearing interest at 4.45% to be paid with monthly payments of principal and interest of $2,227 with final payment due September 29, 2021; secured by real property. 357, , , ,203 Less current maturities 47,401 44,498 Scheduled principal repayments over the next five fiscal years are as follows: 2017 $ 47, , , , ,558 $ 834,452 $ 885,705 The notes payable require the Organization to meet certain financial and other covenants., the Organization was in compliance with all financial covenants. As of NOTE 7 - BOARD DESIGNATED NET ASSETS The Organization's Board of Directors has placed the following limitations on unrestricted net assets as of September 30: Endowment Fund $ 652,567 $ 596,861 HRSA In-Kind 82,719 43,928 CMMI In-Kind 150, ,035 $ 886,007 $ 1,141,

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes at September 30: Pledges and bequests receivable $ 345,953 $ 502,035 Center for Excellence - Idaho - 3,000 Music therapy fund - 1,486 Capital Campaign II 21,450 21,450 Capital Campaign/Building 46,110 46,110 Zambia - 11,280 WNC service area fund - 13,365 Chaplain fund - 5,000 Counseling services fund - 6,040 T. Barishnakov Scholarship fund - 1,000 $ 413,513 $ 610,766 Temporarily restricted net assets have been released from restriction due to the purpose or time restriction being met for the years ending September 30 as follows: Pledges receivable collected $ 384,285 $ - Other 41,171 20,827 $ 425,456 $ 20,827 NOTE 9 - ENDOWMENT ASSETS Overview: The Organization has two endowments. The first was established from donor funds to provide financial assistance for palliative care and is classified as permanently restricted. The second was established by board designation. As required by U.S. GAAP, net assets associated with these endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. 13.

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - ENDOWMENT ASSETS Interpretation of Relevant Law: The Organization has determined the requirements of North Carolina s version of the Uniform Prudent Management of Institutional Funds Act ("UPMIFA") to center around the preservation of the fair value of the original investment as of the date of the asset transfers. For those investments that were initiated by action of the Board of Directors, the related net assets, both principal and subsequent accumulations, are classified as unrestricted. The investments resulting from donations directing that they be invested in perpetuity are classified as permanently restricted. The earnings generated by these investments are classified as temporarily restricted. The temporarily restricted earnings are reclassified as unrestricted upon their appropriation for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by North Carolina s version of UPMIFA. The Organization considers the following factors in making a determination to appropriate or accumulate its endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization Return Objectives and Risk Parameters: The Organization has adopted investment and spending policies for endowment assets that attempt to provide a perpetual source of support to programs supported by its endowments while seeking to preserve the purchasing power of the endowment assets. Endowment assets include assets of donor-restricted funds that the Organization intends to hold in perpetuity and assets of the Organization that the Board of Directors has designated for endowment purposes. Strategies Employed for Achieving Objectives: To satisfy its long-term rate-of-return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a broadly diversified portfolio to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy: The Organization's distribution rate is based upon a total return approach, which utilizes both income and capital appreciation, to be withdrawn for spending. The target spending amount for the Organization is not to exceed 4.5% of the trailing three calendar year end moving average market balance. In establishing this policy, the Organization considered the long-term expected return on its endowments. Accordingly, over the long term, the Organization expects the current spending policy to allow its endowment to grow at an average of inflation plus 5% annually. The Organization's general policy for the board-designated endowment is until the endowment has a corpus of $3,000,000, no earnings from the principal will be spent. 14.

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - ENDOWMENT ASSETS Endowment Net Asset Composition by Type of Fund: The Organization s composition of endowment assets for the years ended September 30 is as follows: 2016 Undesignated Board Designated Temporarily Restricted Permanently Restricted Total Donor-Restricted $ - $ - $ - $ 205,500 $ 205,500 Board Designated - 652, ,567 Total Endowment $ - $ 652,567 $ - $ 205,500 $ 858, Undesignated Board Designated Temporarily Restricted Permanently Restricted Total Donor-Restricted $ - $ - $ - $ 100,000 $ 100,000 Board Designated - 596, ,861 Total Endowment $ - $ 596,861 $ - $ 100,000 $ 696,861 Change in Endowment Net Assets: The Organization s change in endowment assets, by net asset composition, for the years ended September 30 is as follows: 2016 Undesignated Board Designated Temporarily Restricted Permanently Restricted Total Beginning balance $ - $ 596,861 $ - $ 100,000 $ 696,861 Additions , ,500 Investment return - 55, ,706 Ending balance $ - $ 652,567 $ - $ 205,500 $ 858, Undesignated Board Designated Temporarily Restricted Permanently Restricted Total Beginning balance $ - $ 637,911 $ - $ 100,000 $ 737,911 Investment loss - (41,050) - - (41,050) Ending balance $ - $ 596,861 $ - $ 100,000 $ 696,

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - OPERATING LEASE COMMITMENTS The Organization has various operating leases for equipment and buildings that expire on various dates through September Total rent expense amounted to $213,463 and $184,180 for the years ended, respectively. Future minimum lease commitments are as follows: 2017 $ 174, , ,607 $ 410,810 NOTE 11 - RETIREMENT PLAN The Organization sponsors a defined contribution retirement plan covering substantially all of its employees. The plan is funded through employee contributions. The Organization did not make matching contributions for the years ended. NOTE 12 - FUNCTIONAL EXPENSES Expenses categorized by their functional classification for the years ended September 30 are as follows: Program services $ 15,581,080 $ 13,610,254 General and administrative 4,586,019 5,231,786 Fundraising 664, ,515 $ 20,831,683 $ 19,399,555 NOTE 13 - COMMITMENTS AND CONTINGENCIES The Organization's professional liability insurance is on a claims-made basis and has coverage limits of $1,000,000 per incident with an annual aggregate of $3,000,000. The Organization's has excess liability coverage of $3,000,000 in aggregate per year. To the extent that any claims-made coverage is not renewed or replaced with equivalent insurance, claims based on occurrences during the term of such coverage, but reported subsequently, would be uninsured. Management believes, based on incidents identified through the Organization's incident reporting system, that any such claims would not have a material effect on the Organization's operations or financial position. In any event, management anticipates that the claims-made coverage currently in place will be renewed or replaced with equivalent insurance as the term of such coverage expires. 16.

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS U.S. GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in Organization's principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Hospice has the ability to access as of the measurement date. The fair values of money market funds and fixed income and equity mutual funds that are readily marketable are determined by obtaining quoted prices from nationally recognized securities exchanges. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. The fair values of common trust funds are based on NAV, which is determined by the managers based upon the market prices of the underlying holdings of the funds. Level 3: Significant unobservable inputs that reflect a reporting entity s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Organization had no financial instruments categorized as Level 3 at. In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. Assets measured at fair value on a recurring basis are summarized below: Fair Value Measurements at September 30, 2016 Level 1 Level 2 Level 3 Total Investments: Money market funds $ 25,172 $ - $ - $ 25,172 Fixed income and equity mutual funds 434, Common trust funds - 192, ,474 Total investments $ 460,093 $ 192,474 $ - $ 652,567 Fair Value Measurements at September 30, 2015 Level 1 Level 2 Level 3 Total Investments: Money market funds $ 12,640 $ - $ - $ 12,640 Fixed income and equity mutual funds 400, ,706 Common trust funds - 183, ,515 Total investments $ 413,346 $ 183,515 $ - $ 596,

20 SUPPLEMENTARY INFORMATION

21 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year ended September 30, 2016 Grantor/Program Title Federal CFDA Number Pass Through or Agency Number Federal Expenditures U.S. Department of Health and Human Services: Nurse Education, Practice Quality, and Retention UD7HP $ 351,884 Health Care Innovation Award (HICA) C1CMS ,592,580 Research and Development - Cluster Passed through Duke University: Research on Healthcare Costs, Quality, and Outcomes R18-HS ,034 Nursing Research U24-NR U24-NR , ,726 $ 4,085,190 See notes to schedule of expenditures of federal awards. 18.

22 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Years ended NOTE 1 - BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the schedule) includes the federal grant activity of the Organization under programs of the federal government for the year ended September 30, The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Because the schedule presents only a selected portion of the operations of the Organization, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the Organization. NOTE 2 - BASIS OF ACCOUNTING Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement (see Note 3 below). Negative amounts shown on the schedule represent adjustments or credit made in the normal course of business to amounts reported as expenditures in prior years. NOTE 3 - INDIRECT COST RATE The Organization has elected not to use the 10-percent de minimum indirect cost rate as allowed under the Uniform Guidance. 19.

23 INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life Flat Rock, North Carolina We have audited, in accordance with the 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, the consolidated financial statements of Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life (the "Organization"), which comprise the consolidated balance sheets as of September 30, 2016, and the related consolidated statements of operations and changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated January 26, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. 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 a 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 20.

24 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization's consolidated 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 no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely 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 effectiveness of the Organization's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. South Bend, Indiana January 26, 2017 Crowe Horwath LLP 21.

25 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR A MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE Board of Directors Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life Flat Rock, North Carolina Report on Compliance for the Major Federal Program We have audited Hospice of Henderson County, Inc. and Affiliate d/b/a Four Seasons Compassion for Life's (the "Organization's") compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Organization's major federal program for the year ended September 30, The Organization's major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal program. Auditor's Responsibility Our responsibility is to express an opinion on compliance for the Organization's major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on the major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination on the Organization's compliance. Opinion on the Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended September 30,