HOSPICE OF THE VALLEY FINANCIAL STATEMENTS JUNE 30, 2011 AND 2010

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7 NOTE 1 - SUMMARY OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Nature of Activities Hospice of the Valley (Organization) is a nonprofit organization that provides compassionate palliative, hospice, and grief care services to individuals facing serious illness in Santa Clara County. This includes a broad set of medical, spiritual, psychological, social, educational, bereavement, and advocacy services to insure individual dignity, choice, and quality of life. The Organization's primary sources of support and revenue are fees for services provided including Medicare and Medi-Cal and contributions. Summary of Significant Accounting Policies Basis of Presentation - The Organization follows standards of accounting and financial reporting for voluntary health and welfare organizations as prescribed by the American Institute of Certified Public Accountants. The Organization reports its financial position and operating activities in three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Unrestricted net assets include those assets over which the Board of Directors has discretionary control in carrying out the operations of the Organization. Under this category, the Organization maintains an operating fund and an equipment fund plus any net assets designated by the Board for specific purposes. Temporarily restricted net assets include those assets, which are subject to a donor or funding source restriction and for which the applicable restriction was not met as of the end of the current reporting period. The Organization does not imply a time restriction on gifts of long-lived assets. Permanently restricted net assets include those assets, which are subject to a non-expiring donor restriction, such as endowments. Basis of Accounting - The Organization's financial statements have been prepared on the accrual basis of accounting, and accordingly, reflect all significant receivables, payables and other liabilities. Revenue Recognition - The Organization recognizes revenue on the accrual basis of accounting. Patient service revenues are reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered. Grants that do not represent exchange transactions are recognized as contributions in accordance with generally accepted accounting principles. -6-

8 NOTE 1 - SUMMARY OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Contributions and Grants - Unrestricted contributions are recorded as unrestricted revenue when received. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Contributions with donor restrictions are recognized as temporarily restricted revenue. Generally, donors place restrictions on contributions for a specific time period and/or a specific use or purpose. Once donor restrictions have been satisfied, temporarily restricted revenue is released and reclassified as unrestricted revenue. Restrictions on gifts of property or equipment or gifts restricted to the purchase of property or equipment are satisfied when the assets are place in service. Contributions In-kind - Donated equipment and other donated goods are recorded at their estimated fair market value as of the date of the donation. Contributed services, which require a specialized skill and which the Organization would have paid for if not donated, are recorded at the estimated fair market value at the time the services are rendered. The Organization also receives donated services that do not require specific expertise but which are nonetheless central to the Organization's operations. These contributed services are not reflected in the financial statements but the estimated value of these services is disclosed in Note 6 below. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments and investments with a maturity of three months or less. The Organization maintains its cash in bank deposit and other security accounts which, at times, may exceed federally insured limits. The Organization has not experienced any losses in such accounts. Management believes it is not exposed to any significant risk on cash accounts. Accounts Receivable - The change in net assets is charged with the allowance for estimated uncollectible accounts based on past experience and on analysis of current receivable collectability. Accounts deemed uncollectible are charged to the allowance in the year they are deemed uncollectible. Investments Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values in the statements of financial position. Unrealized gains and losses are included in the change in net assets. Investment income and gains restricted by a donor are reported as increases in unrestricted net assets if the restrictions are met (either by passage of time or by use) in the reporting period in which the income and gains are recognized. 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 at the measurement date." -7-

9 NOTE 1 - SUMMARY OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments (continued) A hierarchy has been established to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). Observable inputs are those that market participants would use in pricing the asset based on market data obtained from sources independent of the Organization. Unobservable inputs reflect the Organization s assumption about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows: Level 1 - Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date. Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves. Level 3 - Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Organization s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date. Equipment, Leasehold Improvements and Depreciation - Equipment is recorded at cost or, if contributed, at the estimated fair market value when donated. It is the Organization's policy to capitalize items costing more than $1,000. Depreciation is computed using the straight-line method over estimated useful lives, which range from 5 to 31.5 years. Depreciation is recorded as a decrease in unrestricted net assets and the expense is charged to the activity benefiting from the use of the facilities or equipment. Prior Year Information - The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Organization's financial statements for the year ended June 30, 2010, from which the summarized information was derived. -8-

10 NOTE 1 - SUMMARY OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Indirect Expense Allocations - Indirect expense allocations are based on the number or salaries of staff members in each activity. Income Taxes - Income taxes are not provided for in the financial statements since the Organization is exempt from federal and state income taxes under section 501(c)(3) of the Internal Revenue Code and Section 23701(d) of the California Code. The Organization is not classified as a private foundation. Uncertainty in Income Taxes - Generally accepted accounting principles provide accounting and disclosure guidance about positions taken by an organization in its tax returns that might be uncertain. Management has considered its tax positions and believes that all of the positions taken by the Organization in their federal and state exempt organization tax returns are more likely than not to be sustained upon examination. The Organization files information returns in the U.S. federal jurisdiction and state of California. The Organization s federal returns for the years 2008 and beyond remain subject to examination by the Internal Revenue Service. The Organization s California returns for the tax years 2007 and beyond remain subject to examination by the Franchise Tax Board. Estimates - In accordance with generally accepted accounting principles management has made estimates and assumptions that affect certain amounts and disclosures which could differ from actual results. Advertising The Organization expenses advertising costs in the period incurred. Comparative Information - Certain prior year amounts reflected in these financial statements have been reclassified to reflect the current year presentation. NOTE 2 - CONTRIBUTIONS RECEIVABLE Contributions receivable are recorded at their estimated fair value with amounts due later than one year (when applicable) at the present value of estimated future cash flows. Contributions receivable at June 30, 2011 and 2010 are $207,131 and $0, respectively and are collectible within one year. The Organization considers contributions receivable to be fully collectible; accordingly, no allowance for uncollectible contributions receivable has been made. -9-

11 NOTE 3 - INVESTMENTS All of the following investments are classified as Level 1 investments (See Note 1). The fair market value of investments as of June 30 is as follows: Mutual Funds: ishares Barclays 1-3 Yr Treasury Bond Fund $ - $ 313,347 PIMCO Short-Term Class A Fund 406, ,155 PIMCO Total Return Class A Fund 239, ,658 PIMCO Real Return Class A Fund 243,602 - Templeton Global Bond Class A Fund 147,615 55,408 Vanguard GNMA Admiral Fund 244, ,509 Sentinel Government Secs Class A Fund 231,856 - Sentinel Short Maturity Govt Class A Fund 262,367 - $ 1,775,909 $ 1,115,077 Composition of Investment Income: Realized and unrealized gains (losses) $ (15,346) $ 39,226 Interest and dividends 83,789 28,475 Management fees (6,705) (3,021) Total $ 61,738 $ 64,680 NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS At June 30 the cost and related accumulated depreciation of equipment and leasehold improvements is as follows: Office furniture & equipment $ 818,720 $ 726,091 Leasehold improvements 550, ,746 Sub-Total 1,369,466 1,276,837 Less: accumulated depreciation (487,201) (346,510) Net $ 882,265 $ 930,327 Total depreciation expense for the years ended June 30, 2011 and 2010 was $140,691 and $133,191 respectively. -10-

12 NOTE 5 - LEASE COMMITMENTS The Organization leases its facilities under a noncancellable lease agreement that provides for operating expense pass-throughs. The lease expires on June 30, 2016 with an option to extend the lease for two additional five year periods. The minimum annual lease payments are as follows: Fiscal Year Ended June 30 Minimum Lease Payment 2012 $ 411, , , , ,452 $ 2,186,160 NOTE 6 - CONTRIBUTIONS IN-KIND The Organization receives donated services that do not require specific expertise but which are nonetheless central to the Organization's operations. The estimated value of these services, assuming an average fair value hourly rate of $24.26 ($23.98 in 2010) amounts to $354,366 and $330,133 for the years ended June 30, 2011 and 2010, respectively. The value of these services is not reflected in the financial statements. NOTE 7 - BOARD DESIGNATED RESERVES Board designated reserves consist of unrestricted funds received from donors which will be designated for future use in accordance with a board-approved purpose. NOTE 8 - RESTRICTED NET ASSETS At June 30 temporarily restricted net assets consisted of the following monies earmarked for program activities: Heritage Bank of Commerce $ 106 $ - Mountain View Kiwanis Foundation United Way Silicon Valley 2,780 - The Leo M. Shortino Family Foundation - 35,000 $ 3,516 $ 35,

13 NOTE 9 - RETIREMENT PLAN The Organization maintains a retirement plan (403(b)) for all eligible employees. Employees are allowed to contribute the maximum amount set by law. There is no matching employer contribution. The Organization also maintains a retirement plan (457(b)) for its senior executive personnel. Eligible employees are allowed to contribute the maximum amount set by law, with a 100% matching employer contribution. The total employer contributions made by the Organization to the employee s retirement accounts were $44,416 and $0 for the years ended June 30, 2011 and 2010, respectively. NOTE 10 - SUBSEQUENT EVENTS Management of the Organization has evaluated events and transactions subsequent to June 30, 2011 for potential recognition or disclosure in the financial statements. The Organization did not have subsequent events that required recognition or disclosure in the financial statements for the fiscal year ended June 30, Subsequent events have been evaluated through the date the financial statements became available to be issued, November 4, NOTE 11 - ENDOWMENT Hospice of the Valley s endowment consists of one individual donor-restricted endowment established to provide a perpetual source of funds to support end of life care for terminally ill individuals living in Santa Clara County, California. As required by Generally Accepted Accounting Principles (GAAP), net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments (if any), are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law: The Board of Directors of Hospice of the Valley has interpreted the California version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, Hospice of the Valley classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by the California version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). -12-

14 NOTE 11 - ENDOWMENT (Continued) In accordance with the California version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the 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 Funds with Deficiencies: From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor or California version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) requires the Organization to retain as a fund of perpetual duration. There were no such deficiencies as of June 30, Return Objectives and Risk Parameters: Hospice of the Valley has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets consist of those assets of donor-restricted funds that the organization must hold in perpetuity. Strategies Employed for Achieving Objectives: To satisfy its long-term rate-of-return objectives, Hospice of the Valley generally 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). Spending Policy and How the Investment Objectives Relate to Spending Policy: Hospice of the Valley has a policy of spending its endowment fund earnings in the year they earned. -13-

15 NOTE 11 - ENDOWMENT (Continued) Changes in Endowment Net Assets for the Fiscal Year Ended June 30, 2011: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment Net Assets, Beginning of Year $ - $ - $ 59,853 $ 59,853 Interest Income Appropriation for Expenditure - (157) - (157) Endowment Net Assets, End of Year $ - $ - $ 59,853 $ 59,853 Endowment Net Asset Composition by Type of Fund as of June 30, 2011: Unrestricted Temporarily Restricted Permanently Restricted Total Donor-Restricted Endowment Funds $ - $ - $ 59,853 $ 59,