HOPE SERVICES FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2014 AND 2013

Transcription

1 FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2014 AND 2013

2 INDEPENDENT AUDITOR'S REPORT To the Board of Directors HOPE Services San Jose, California Report on the Financial Statements We have audited the accompanying financial statements of HOPE Services (HOPE), which comprise the statement of financial position as of 2014, and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements. We have also audited the accompanying consolidated financial statements of HOPE Services and The Foundation for HOPE, which comprise the consolidated statement of financial position as of 2013, and the related consolidated statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; 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. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

3 Opinion In our opinion, the 2014 financial statements referred to above present fairly, in all material respects, the financial position of HOPE Services as of 2014, and the changes in its net assets and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. Also, in our opinion, the 2013 consolidated financial statements referred to above present fairly, in all material respects, the financial position of HOPE Services and The Foundation for HOPE as of 2013, and the changes in their net assets and their cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. October 29, 2014

4 STATEMENTS OF FINANCIAL POSITION Assets Current assets: Cash and cash equivalents $ 509,687 $ 904,425 Cash restricted for debt service 1,612, ,000 Accounts receivable, net of allowance for doubtful accounts of $248,071 and $258,836 at 2014 and 2013, respectively 4,340,181 4,122,286 Pledges receivable 80,125 75,600 Investments 5,624,041 4,773,173 Prepaid expenses and other current assets 110, ,580 Total current assets 12,277,137 10,599,064 Assets limited as to use: Cash restricted for debt service 235,100 1,456,207 Cash restricted for endowment 134, ,229 Investments restricted for endowment 973, ,698 Total assets limited as to use 1,343,027 2,559,134 Noncurrent assets: Pledges receivable 72,084 - Property and equipment, net 13,325,026 13,394,811 Bond issuance costs, net 149, ,536 Other assets 111, ,885 Total noncurrent assets 13,657,434 13,672,232 Total assets $ 27,277,598 $ 26,830,430 Liabilities and Net Assets Current liabilities: Outstanding checks in excess of bank balance $ 201,495 $ 356,796 Line of credit 2,619,582 2,004,919 Notes payable, current maturities 159, ,662 Serial bonds, current maturities 1,630, ,000 Accounts payable 1,302,836 1,289,739 Accrued liabilities 2,585,452 2,203,432 Total current liabilities 8,498,653 6,374,548 Long-term liabilities: Notes payable, less current maturities 590, ,766 Serial bonds, less current maturities 1,170,000 2,800,000 Total long-term liabilities 1,760,718 3,350,766 Total liabilities 10,259,371 9,725,314 Net assets: Unrestricted: Board designated 1,576,422 1,576,422 Unrestricted 13,964,549 14,135,969 Temporarily restricted 369, ,798 Permanently restricted 1,107,927 1,102,927 Total net assets 17,018,227 17,105,116 Total liabilities and net assets $ 27,277,598 $ 26,830,430 The accompanying notes are an integral part of these financial statements. 4

5 STATEMENTS OF ACTIVITIES Year Ended 2014 Year Ended 2013 Unrestricted Temporarily Restricted Permanently Restricted Total Unrestricted Temporarily Restricted Permanently Restricted Total Revenues, gains and other support: State and county funding $ 23,541,616 $ - $ - $ 23,541,616 $ 24,403,969 $ - $ - $ 24,403,969 Commercial contract services 6,798, ,798,550 6,963, ,963,723 In-kind donations of professional services 734, , , ,764 In-kind donations of property 132, , , ,036 Wholesale sales of salvage 5,607, ,607,497 5,608, ,608,623 Retail sales of salvage 719, , , ,563 In-kind donations of salvage 6,327, ,327,431 6,253, ,253,186 Contributions and pledges 347, ,653 5, , , , ,685 Contributed use of facilities 221, , , ,617 Special events 83, ,545 57, ,535 Rental income 209, , , ,758 (Loss) gain on disposal of property and equipment (9,976) - - (9,976) 873, ,983 Other 57, ,508 61, ,645 Net assets released from restriction 254,122 (254,122) ,406 (228,406) - - Total revenues, gains and other support 45,025,761 79,531 5,000 45,110,292 47,567,012 5,075-47,572,087 Functional expenses: Program services 29,997, ,997,377 29,755, ,755,216 Support services: General and administrative 3,824, ,824,022 3,885, ,885,458 Fundraising: - Salvage solicitation 5,568, ,568,675 5,548, ,548,732 Other 452, , , ,581 Cost of goods sold (salvage) 6,327, ,327,431 6,253, ,253,186 Total functional expenses 46,169, ,169,813 45,939, ,939,173 Change in net assets from operations (1,144,052) 79,531 5,000 (1,059,521) 1,627,839 5,075-1,632,914 Investment income, net 972, , , ,600 Change in net assets (171,420) 79,531 5,000 (86,889) 2,191,439 5,075-2,196,514 Net assets, beginning of year 15,712, ,798 1,102,927 17,105,116 13,520, ,723 1,102,927 14,908,602 Net assets, end of year $ 15,540,971 $ 369,329 $ 1,107,927 $ 17,018,227 $ 15,712,391 $ 289,798 $ 1,102,927 $ 17,105,116 The accompanying notes are an integral part of these financial statements. 5

6 STATEMENTS OF FUNCTIONAL EXPENSES Year Ended 2014 Support Services Fundraising Non-Cash Program General and Salvage Total Cost of Goods Services Administrative Solicitation Other Expenses Sold (Salvage) Total Personnel costs: Salaries and wages $ 15,839,528 $ 1,849,058 $ 1,931,402 $ 267,201 $ 19,887,189 $ - $ 19,887,189 Benefits 4,983, , ,555 44,233 6,379,593-6,379,593 Payroll taxes 1,129, , ,130 20,206 1,414,493-1,414,493 Donated services 734, , ,628 Total personnel costs 22,686,791 2,531,385 2,866, ,640 28,415,903-28,415,903 Cost of goods sold (salvage) ,327,431 6,327,431 Occupancy 2,003, , ,478 15,328 2,464,530-2,464,530 Operating supplies 1,308,326 37,129 61,105 3,595 1,410,155-1,410,155 Purchased services 2,028, ,031 1,285,263 25,182 3,809,904-3,809,904 Communications 236,967 48,881 36,615 17, , ,199 Interest 77,886 95,717 3,350 2, , ,214 Depreciation and amortization 510, ,580 66,327 9, , ,831 Travel and transportation 676,448 46, ,450 2,494 1,422,466-1,422,466 Equipment rental and maintenance 110,588 76,185 28,752 5, , ,197 Printing and publications 61,469 56,607 77,368 29, , ,745 Amortization of bond issuance costs 17,319 6, ,773-24,773 Bad debt expense 8, ,634-8,634 Insurance 224,766 41,049 73,569 1, , ,353 Other 45,537 56,718 36,311 6, , ,478 Total expenses $ 29,997,377 $ 3,824,022 $ 5,568,675 $ 452,308 $ 39,842,382 $ 6,327,431 $ 46,169,813 Percentage of total expenses 75% 10% 14% 1% 100% The accompanying notes are an integral part of these financial statements. 6

7 STATEMENTS OF FUNCTIONAL EXPENSES Year Ended 2013 Support Services Fundraising Non-Cash Cost Program General and Salvage Total of Goods Services Administrative Solicitation Other Expenses Sold (Salvage) Total Personnel costs: Salaries and wages $ 15,839,592 $ 1,663,078 $ 1,823,535 $ 304,703 $ 19,630,908 $ - $ 19,630,908 Benefits 4,778, , ,036 60,566 6,044,961-6,044,961 Payroll taxes 1,152, , ,910 23,695 1,427,450-1,427,450 Donated services 877, , ,764 Total personnel costs 22,648,946 2,348,692 2,594, ,964 27,981,083-27,981,083 Cost of goods sold (salvage) ,253,186 6,253,186 Occupancy 1,926, , ,179 12,825 2,364,153-2,364,153 Operating supplies 1,266,966 34,360 49,449 1,674 1,352,449-1,352,449 Purchased services 1,787, ,592 1,574,522 16,361 3,963,607-3,963,607 Communications 239,772 48,926 48,441 20, , ,446 Interest 117, ,666-2, , ,499 Depreciation and amortization 479, ,349 77,973 10, , ,813 Travel and transportation 689,507 58, ,938 5,988 1,510,619-1,510,619 Equipment rental and maintenance 111,972 66,265 29,145 6, , ,656 Printing and publications 72,446 62,576 17,270 19, , ,269 Amortization of bond issuance costs 207,944 68,321-4, , ,430 Bad debt recovery (40,660) (40,660) - (40,660) Insurance 209,483 42,865 68,434 1, , ,727 Other 39,238 70,524 21,900 5, , ,896 Total expenses $ 29,755,216 $ 3,885,458 $ 5,548,732 $ 496,581 $ 39,685,987 $ 6,253,186 $ 45,939,173 Percentage of total expenses 75% 10% 14% 1% 100% The accompanying notes are an integral part of these financial statements. 7

8 STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents Year Ended Cash flows from operating activities: Change in net assets $ (86,889) $ 2,196,514 Adjustments to reconcile change in net assets to net cash provided by operating activities: Provision for (recovery of) uncollectible receivables 8,634 (40,660) Depreciation and amortization 833, ,813 Amortization of bond issuance costs 24, ,430 Net realized and unrealized gain on investments (869,136) (441,319) In-kind donation of property (132,413) (438,036) Loss (gain) on disposition of property and equipment 9,976 (873,983) Changes in operating assets and liabilities: Accounts receivable (226,529) (189,701) Pledges receivable (76,609) (33,020) Prepaid expenses and other assets 221,543 (98,340) Accounts payable 13,097 (59,388) Accrued liabilities 382,020 (135,573) Net cash provided by operating activities 102,298 1,011,737 Cash flows from investing activities: Cash restricted for debt service (6,390) (1,105,939) Proceeds from maturities and sales of investments 4,679,301 3,906,032 Purchases of investments (4,710,770) (3,308,271) Proceeds from sale of property and equipment 24,611 1,217,498 Purchases of property and equipment (428,842) (160,776) Net cash (used in) provided by investing activities (442,090) 548,544 Cash flows from financing activities: Outstanding checks in excess of bank balance (155,301) (1,493) Repayments on notes payable (172,800) (139,800) Payment of bond issuance costs (1,245) (194,166) Borrowings through bond issuance - 3,185,000 Repayments of bonds (385,000) (3,465,000) Borrowings on line of credit, net of repayments 614,663 (429,573) Net cash used in financing activities (99,683) (1,045,032) Net (decrease) increase in cash and cash equivalents (439,475) 515,249 Cash and cash equivalents at beginning of year 1,083, ,405 Cash and cash equivalents at end of year $ 644,179 $ 1,083,654 Reconciliation of cash and cash equivalents at end of year: Cash and cash equivalents $ 509,687 $ 904,425 Cash restricted for endowment 134, ,229 Cash and cash equivalent at end of year $ 644,179 $ 1,083,654 Supplemental disclosure of cash flows information: Interest paid $ 172,886 $ 243,111 Non-cash investing and financing activities: In-kind donation of property $ 132,413 $ 438,036 Purchases of vehicles $ 237,378 $ 152,003 The accompanying notes are an integral part of these financial statements. 8

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10 Note 2 - Summary of significant accounting polices (continued) Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Significant estimates used in preparing these financial statements include the allowance for doubtful accounts, the useful lives of property and equipment, the value of donated materials, property and equipment, and professional services, and the fair market value of assets and liabilities. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include highly liquid investments and investments with an original maturity of three months or less. Cash and cash equivalents restricted by donors for use for certain purposes or restricted for debt service under the terms of the debt agreement are not considered to be available for current use, and are not included in cash and cash equivalents for presentation purposes in the statements of financial position. Accounts and pledges receivable Accounts receivable consist primarily of public funding and contract service revenues. Contract service revenues are primarily from companies located in Northern California. Approximately 67 % and 660/0 of accounts receivable at 2014 and 2013, respectively, are from government agencies. Pledges receivable represent amounts committed by donors that have not been received by HOPE. HOPE makes estimates as to the ability to collect all of its outstanding receivables and provides allowances for amounts when collection becomes doubtful. Provisions are made based upon a specific review of past due and other outstanding balances for which collection is considered uncertain. Contract service revenues Revenue from state and county funding is recognized based on the terms of the respective fee for service contract. Most contracts provide that HOPE will be paid at pre-established rates based on attendance of clients, coaching hours provided, or other measures. Revenue from contract services provided by HOPE clients to commercial organizations is recognized upon completion of the services, or based on quantities of piecework completed. In-kind donations HOPE records various types of in-kind donations including professional services, tangible assets, and the use of tangible assets. Contributed professional services are recognized if the services received (a) create or enhance long-lived assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Contributions of tangible assets, or the use thereof, are recognized when promised or received, whichever is earlier. The amounts reflected in the accompanying financial statements as in-kind donations are offset by like amounts of expenses, or in the case of long-term assets, over the period benefited. Additionally, HOPE receives a significant amount of contributed time from volunteers, which does not meet the recognition criteria described above. Accordingly, the value of this contributed time has not been determined and is not reflected in the accompanying financial statements. 10

11 Note 2 - Summary of significant accounting policies (continued) Retail sales of salvage HOPE operates a retail store in Fremont, California to facilitate the sale of donated clothing and other household items. Revenue is recognized at the time of sale, as all sales to customers are unconditional and returns are not allowed. Cost of goods sold (salvage) HOPE collects donated items from the general public for sale to a third party retailer of used goods and for HOPE's Fremont store. As the value of donated items is not determinable at the time of donation, HOPE has historically recorded in-kind revenue from its salvage operations equal to the annual revenue generated from wholesale and retail salvage sales, with a corresponding in-kind charge to cost of goods sold (salvage). Inventory consists of donated clothing and other household items and is sold through HOPE's retail store or directly to other thrift stores. Inventory is valued at management's best estimate of fair market value at year-end because the value of donations is not determinable until the items are sold at the retail stores. For slow-moving or non-salable items, necessary provisions are recorded to reduce inventory to its net realizable value. As of, inventory of approximately $23,000 and $22,000, respectively, is included in prepaid expenses and other current assets in the statements of financial position. Investments Investments in marketable securities are reported at fair market value based on quoted market prices. Unrealized gains and losses are included in net investment income in the statements of activities. Income and gains on restricted investments are reported as increases in temporarily restricted net assets unless otherwise restricted by donor stipulations or until appropriated for expenditure by HOPE. Investments classified as current assets are readily marketable and are available for conversion to cash within one year of the date of the financial statements. Fair value measurements HOPE measures and discloses fair value measurements as required by the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification. 11

12 Note 2 - Summary of significant accounting policies (continued) Fair value measurements (continued) Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1 - Valuations based on observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 - Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets. Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer, or broker-traded transactions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Property and equipment Purchased property and equipment are recorded at cost. It is HOPE's policy to capitalize property and equipment acquisitions over $1,000. Donated property and equipment are recorded at their estimated fair value at the time of the donation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the term of the respective leases (including anticipated renewal options, where appropriate) or the estimated useful lives of the assets. Building and improvements Office furniture and equipment Equipment and tools Computer equipment Transportation equipment Leasehold improvements 7-40 years 5-7 years 5-10 years 3 years 3-5 years Lesser of 15 years or remaining lease term Donations of property and equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Donations of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported as released from restriction when the donated or acquired long-lived assets are placed in service. 12

13 Note 2 - Summary of significant accounting policies (continued) Impairment of long-lived assets HOPE reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value may not be fully recoverable. HOPE evaluates the recoverability of long-lived assets by measuring the carrying amount of such assets against the estimated undiscounted future cash flows associated with them. At the time such evaluation indicates that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair value. To date, HOPE has not recorded any impairment of its long-lived assets as a result of this analysis. Tax exempt status HOPE has been approved to be exempt from federal income taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3) of the Code. HOPE is also exempt from California franchise taxes under Section 23701(d) of the California Revenue and Taxation Code. Although HOPE is recognized as a tax-exempt nonprofit organization, it is still liable for tax on any unrelated business taxable income (UBTI). HOPE does not believe it has UBTI that should have been reported for tax purposes. HOPE has adopted the accounting standard related to uncertainties in income taxes. Management has considered its tax positions and believes that all of the positions taken by HOPE in its federal and state exempt organization tax returns are more likely than not to be sustained upon examination; therefore, no liability for unrecognized income tax benefits has been recorded as of 2014 and HOPE is subject to examination by a major tax jurisdiction back to the fiscal year ended Functional expenses The costs of providing HOPE's various programs and services have been summarized on a functional basis in the statements of functional expenses. Directly identifiable expenses are charged to the related program or service benefited. Indirect expenses are allocated to programs and services based principally on the percentage of personnel time spent in each area. Advertising Costs associated with advertising are expensed when incurred. Advertising expenses were $174,599 and $118,051 for the years ended, respectively. Subsequent events In preparing its financial statements, HOPE has evaluated subsequent events through October 29, 2014, which is the date the financial statements were available to be issued. 13

14 Note 3 - Fair value measurements Fair values of assets measured on a recurring basis as of 2014 are as follows: Quoted Prices In Active Significant Significant Markets for Other Other Identifiable Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) Equity securities: Consumer goods $ 429,145 $ 429,145 $ $ Energy and precious metals 436, ,526 Financial services 631, ,721 Healthcare 620, ,904 Industrial 147, ,551 Technology 684, ,202 Telecommunication services 100, ,136 Other 837, ,563 Total equity securities 3,887,748 3,887,748 Fixed income securities: Government 106, ,665 Foreign 422, ,682 Total fixed income securities 529, ,347 Mutual funds: Bond funds 479, ,482 Blended funds 662, ,137 Total mutual funds 1,141,619 1,141,619 Exchange traded funds 1,038,762 1,038,762 Total investments at fair value $ 6, $ $ 2,709,728 $ 14

15 Note 3 - Fair value measurements (continued) Fair values of assets measured on a recurring basis as of 2013 are as follows: Quoted Prices In Active Significant Significant Markets for Other Other Identifiable Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) Equity securities: Consumer goods $ 298,413 $ 298,413 $ $ Energy and precious metals 371, ,353 Financial services 380, ,595 Healthcare 511, ,898 Manufacturing 130, ,364 Technology 487, ,967 Telecommunication services 76,960 76,960 Other 336, ,190 Total equity securities 2,593,740 2,593,740 Fixed income securities: Government 471, ,448 Corporate 528, ,442 Foreign 6,873 6,873 Total fixed income securities 1,006,763 1,006,763 Mutual funds: Bond funds 787, ,025 Blended funds 299, ,923 Total mutual funds 1,086,948 1,086,948 Exchange traded funds 1,009,420 1,009,420 Total investments at fair value $ 5 696,871 $ 2, $ 3, $ Fair values for Level 1 investments are determined by reference to quoted market prices and other relevant information generated by market transactions. Fair value of Level 2 investments are determined by reference to quoted market transactions in a less active market for assets similar to those held to support the underlying assets. There have been no changes in valuation techniques and related inputs between the years ended. 15

16 Note 3 - Fair value measurements (continued) Total investments at fair value are reflected on the accompanying statements of financial position for the years ended 2014 and 2013, as follows: Investments, current Investments restricted for endowment $ 5,624, ,435 $ 4,773, ,698 Note 4 - Investments Investments consisted of the following as of : Equity securities Fixed income securities Mutual funds Exchange traded funds $ 3,887, ,347 1,141,619 1,038,762 $ 2,593,740 1,006,763 1,086,948 1,009,420 Investments are classified as follows as of : $ $ Unrestricted and temporarily restricted investments Investments restricted for endowment $ 5,624, ,435 $ 4,773, ,698 $ $ Unrestricted investment income is comprised of the following for the years ended June 30,2014 and 2013: Dividends and interest $ 176,939 $ 194,537 Net realized and unrealized gains 869, ,319 1,046, ,856 Less investment expenses (73,443) (72,256) $ $

17 Note 4 - Investments (continued) Risks and uncertainties HOPE holds investments in various securities which are exposed to risks such as interest rate and market risks. Due to the level of risk associated with these securities and the level of uncertainty related to changes in value, it is at least reasonably possible that changes in the risk factors will occur in the near term that could materially affect the value of the investments reported in the accompanying financial statements. Note 5 - Property and equipment Property and equipment consisted of the following as of 2014 and 2013: Building and improvements Land Transportation equipment Computer equipment Equipment and tools Leasehold improvements Office furniture and equipment $ 11,079,439 $ 11,052,903 5,239,795 5,239,795 2,206,765 1,917,018 2,106,232 1,917, , , , , , ,407 22,253,681 21,617,682 Less accumulated depreciation and amortization Property and equipment, net (8,928,655) (8,222,871) $ ,026 $13,394,811 I Depreciation and amortization expense for the years ended totaled $833,831 and $844,813, respectively. Note 6 - Accrued expenses Accrued expenses consisted of the following as of 2014 and 2013: Accrued vacation Accrued payroll and related taxes Employee benefits Accrued rent Accrued interest Other accrued expenses $ 1,345,734 1,023,000 69,378 56,959 9,265 81,116 $ 2,585,452 $ 1,250, ,477 62,103 10,917 10,548 75,287 $

18 Note 7 - Borrowing arrangements Notes payable Notes payable consisted of the following as of 2014 and 2013: Mortgage note with bank, payable in monthly installments of $2,549 plus variable interest at bank's prime rate (3.25 A> at ), with all principal due in January 2015; secured by deed of trust on real property. $ 21,456 $ 52,044 Vehicle notes, payable in varying monthly installments, including interest from 0.90/0-8.24% due at various dates through April 2019; secured by vehicles. 350, ,022 Mortgage note with bank, payable in monthly installments of $1,960, including interest at 7.25 A> through December 2026; secured by deed of trust on real property. 192, ,160 Mortgage note with bank, payable in monthly installments of $952, including interest at 7.25 A> through December 2026; secured by deed of trust on real property. 93,772 98,226 Mortgage note with individuals, payable in monthly installments of $1,000, including interest at 7.0% through June 2025; secured by deed of trust on real property. 91,595 96, , ,428 Less current maturities (159,288) (134,662) Aggregate principal payments required are as follows: $ 590,718 $ For the Years Ending Thereafter Amount $ 159,288 99, ,784 88,288 40, ,999 $

19 Note 7 - Borrowing arrangements (continued) Bonds payable Bonds payable consisted of California Health Facilities Financing Authority Insured Health Facility Refunding Revenue Bonds, as follows as of 2014 and 2013: Serial bonds (1.5% - 2.5%) Less current maturities $ 2,800,000 $ 3,185,000 (1,630,000) (385,000) In May 2002, the California Health Facilities Financing Authority (the "Authority") issued $5,845,000 Series A Bonds, which consisted of both serial and term bonds, to refinance all of HOPE's previously outstanding bonds. The term bonds were due on November 1, 2020, and required mandatory sinking fund payments beginning in The serial bonds required annual principal payments due each November 1st, with interest payments due each November 1st and May 1st. Bonds maturing on or after November 1, 2011, are subject to redemption prior to their respective dates at the option of the Authority and at the direction of HOPE. HOPE pledged unrestricted gross revenues, as defined, under the bond agreement. The obligation is secured by deeds of trust on HOPE's facilities. In September 2012, HOPE entered into a bond purchasing agreement to refinance the full outstanding balance of the serial bonds and the term bonds, in order to receive a more favorable interest rate. The total refinance of the bonds included the outstanding amount of $3,150,000, plus an additional $35,000 as a result of additional bond service costs and interest costs associated with the refinancing. As a result of the refinancing, the total amount due on the term bonds and serial bonds as of 2012 was settled and converted into lower interest serial bonds. The maturity date of these new serial bonds has remained as due on November 1, 2020, and all due dates of principal and interest payments remain the same. The full amount of principal and interest of the serial bonds is insured by the Office of Statewide Health Planning and Development (OSHPD) of the State of California. The bond agreement provides for various restrictive covenants including, among other things, maintaining a minimum debt coverage ratio, timely financial reporting, and repaying all outstanding short-term indebtedness for a 30 day period during the year. As of and for the year ended 2014, HOPE was not in compliance with these three covenants which are calculated on an annual basis, and was in technical default. In a letter dated subsequent to 2014, OSHPD provided a waiver which stated OSHPD agreed not to take any action against HOPE related to covenant violations for the year ended

20 Note 7 - Borrowing arrangements (continued) Bonds payable (continued) In addition, HOPE is required to maintain a bond reserve account in an amount equal to the maximum annual bond service requirement under the bond agreement. As a result, cash of $630,099 and $623,710 as of 2014 and 2013, respectively, has been restricted for debt service to satisfy this requirement. During August 2012, HOPE sold a building which resulted in net proceeds of $1,217,497. According to the bond agreement, the proceeds from the sale are restricted for a period of 24 months after the sale to be used to finance the acquisition of land or the improvement of HOPE's facilities. HOPE used the proceeds for future debt service after the 24 month period, and has recorded the proceeds as cash restricted for debt service in the accompanying statements of financial position and cash flows. In August 2014, HOPE used the full amount of the building sale proceeds along with an additional $17,503, for a total of $1,235,000, to pay the future maturity obligation of the bonds for the years ending 2016,2017, and As a result, HOPE will have no cash outlay for each of these years to cover the maturing bonds. Future maturity obligations of the serial bonds are as follows: Years Ending Thereafter Amount $ 395, , ,000 $ 1, Line of credit HOPE has a $3,200,000 line of credit with a bank bearing interest at the bank's Prime Reference Rate (3.25 % at 2014 and 2013). Borrowings against the line of credit were $2,619,582 and $2,004,919 as of, respectively. The line of credit was renewed on October 1, 2014, and will expire on October 1, The line of credit is collateralized by HOPE's cash and investment accounts with that bank, which have an aggregate fair market value of $7,015,414 at

21 Note 8 - Net assets Temporarily restricted assets are restricted by donors for the purposes and periods described below. Temporarily restricted net assets consisted of the following as of 2014 and 2013: Pledge receivable (time restrictions) Program services (time and purpose restrictions) $ 15, ,853 $ 369,329 $ 62, ,105 $ 289,798 Permanently restricted net assets consist of cash and investments held in perpetuity and totaled $1,107,927 and $1,102,927 for the years ended 2014 and 2013, respectively. Note 9 - Net assets released from restrictions Net assets were released from donor restrictions by incurring expenses satisfying the restricted purpose or by occurrence of other events specified by donors, including the passage of time. Net assets were released from restrictions as follows for the years ended : Pledge receivable (time restrictions) Program services (time and purpose restrictions) $ 62, ,429 $ 254,122 $ 30, ,406 $ 228,406 Note 10 - Endowment HOPE's endowment consists of both contributions receivable or received with donorrestrictions and funds designated by the Board of Directors to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. HOPE's Board of Directors has interpreted the State Prudent Management of Institutional Funds Act ("SPMIFA") 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, HOPE 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 in temporarily restricted net assets until those amounts are appropriated for expenditure by HOPE in a manner consistent with the standard of prudence prescribed by SPMIFA. 21

22 Note 10 - Endowment (continued) In accordance with SPMIFA, HOPE 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 HOPE 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 HOPE (7) HOPE's investment policies Endowment net assets consist of the following as of 2014: Permanently Unrestricted Restricted Total Donor-restricted endowment funds Board-designated funds $ 1,107,927 $ 1,107,927 1,576,422 $ 2,684,349 Endowment net assets consist of the following as of 2013: Permanently Unrestricted Restricted TotaL Donor-restricted endowment funds Board-designated funds $ 1,102,927 $ 1,102,927 1,576,422 The unrestricted and board-designated endowment funds of $1,576,422 relate to a portion of proceeds received from an estate that the Board of Directors designated in $ 2, HOPE has adopted an investment policy for endowment assets with the primary objective to preserve principal, while generating a competitive rate of return and maintaining liquidity. Under this policy, funds are invested in cash and cash equivalents, and readily marketable equity and fixed income securities, unless otherwise approved by HOPE's Board of Directors. Limiting risks and protecting principal is an integral part of the investment policy objectives. HOPE has not appropriated any endowment funds for expenditure at 2014 and 2013, with the exception of the endowment investment income and gains which have been classified as unrestricted net assets to recoup endowment investment losses recognized in prior years. 22

23 Note 11 - Operating lease arrangements HOPE leases fourteen separate facilities under non-cancellable operating lease agreements, many with renewal options, which expire at various dates through Management expects that in the normal course of business the leases will be renewed, or replaced, either by other leases or by acquisition or construction of similar facilities. HOPE also leases equipment and vehicles under non-cancellable operating lease agreements of five years or less. Future minimum lease payments, net of sublease income, for equipment, vehicles and facilities are as follows: For the Years Ending Thereafter Amount $ 1,490,231 1,432,328 1,253,770 1,135, ,258 9,166,958 $ Facilities rent expense under operating leases totaled $1,271,755 and $1,193,720 for the years ended, respectively, exclusive of in-kind rent. Equipment rent expense under operating lease agreements totaled $93,100 and $89,395 for the years ended 2014 and 2013, respectively. HOPE leased a building in San Jose, California under an agreement expiring in 2022, which provides for annual rent of $1. The lessor has the right to terminate this agreement upon 180 days written notice. Effective October 1, 2013, HOPE terminated the lease in agreement with the terms of the lease. The fair value of this rent in 2014 and 2013 has been estimated by HOPE at approximately $64,000 and $192,000, respectively, and is reflected as contributed use of facilities revenue and rent expense. HOPE leases a building in San Jose, California under an agreement expiring in 2016, which provides for annual rent of $1. The lessor has the right to terminate this agreement upon 30 days written notice. The fair value of this rent in 2014 has been estimated by HOPE at approximately $33,000, and is reflected as contributed use of facilities revenue and rent expense. A small portion of the Children's Discovery Museum of San Jose, California is leased for the purpose of providing a training program for HOPE clients. This program provides food service for museum visitors. The lease agreement provides for annual rent of $2,400, plus one-half of the surplus of program income (should there be any) net of all expenses, including general, administrative and overhead costs. The lease agreement expired in August 2014 and was not renewed. The fair value of this rent for 2014 and 2013 has been estimated by HOPE at $9,

24 Note 11 - Operating lease arrangements (continued) The land which houses the Whittier facility is leased under a 48-year operating lease agreement which expires in Prior to an amendment effective, June 1, 2013, the basic monthly rental payments under this lease were subject to two possible adjustments: (1) a consumer price index (CPI) based adjustment which occurs every three years, and (2) a market value adjustment which can occur, at the option of either the landlord or HOPE, every ten years. The amendment effectively eliminated the CPI adjustment and replaced it with a 5 % periodic rate adjustment occurring every 5 years, with the first adjustment occurring on June 5, The amendment also changed the date of the next market rate adjustment to occur on June 5, 2026, with the following market adjustment occurring ten years later. The market value adjustment is determined by an appraisal that can occur every ten years at the option of the landlord or HOPE. The market value adjustment establishes the new base rent although the appraised value of the property can never result in a base rent that is less than the rent determined in the appraisal from ten years earlier. The last appraisal and market value adjustment took place in June The landlord waived his right to revalue the base rent in June However, the landlord retained his right to the future lease adjustments under the lease. Future minimum lease payments of this lease have been computed and are included in the above schedule based on the June 2001 market value base rent amount. Note 12 - Related parties A former member of HOPE's Board of Directors, whose term officially ended effective October 2012, is the owner of the firm that brokered life insurance and long-term disability benefits for certain HOPE employees. There were no administrative fees paid directly by HOPE to the former Board member's firm in 2014 or A former member of HOPE's Board of Directors, whose real estate firm handled the sale of a property HOPE sold during 2013, earned 3% commission on the sale, totaling $39,164. In 1997, South County/Hope Villa Esperanza, Inc. (SCHVE), a nonprofit organization, was incorporated with a mission to build and maintain a housing facility for persons with disabilities financed by the U.S. Department of Housing and Urban Development. Representatives from HOPE and South County Housing Corporation serve as directors of SCHVE. While HOPE has control through majority representation on the Board of Directors, it does not have an economic interest in, or any financial commitments to, SCHVE. Therefore, SCHVE operations are not consolidated into HOPE's financial statements. For purposes of making this determination, control is defined as the direct or indirect ability to determine the direction of management and policies through ownership, contract or otherwise. Economic interest is defined as an interest in SCHVE that exists if SCHVE holds or utilizes significant resources that must be used for the unrestricted or restricted purposes of HOPE, either directly or indirectly by producing income or providing services, or if HOPE is responsible for the liabilities of SCHVE. 24

25 Note 12 - Related parties (continued) Condensed financial information from SCHVE's financial statements audited by other auditors is as follows at, and for the years then ended: Current assets $ 31,574 $ 45,499 Deposits and funded reserves 146, ,274 Land, buildings, equipment and fixtures, net 2,357,558 2,433,648 Total assets 2,535,782 2,616,421 Current liabilities (11,636) (14,754) Long-term liabilities (1,630,658) (1,608,144) Unrestricted net assets $ 893,488 $ 993,523 Total revenues $ 151,036 $ 146,896 Total operating expenses (174,981) (141,549) Change in unrestricted net assets before depreciation (23,945) 5,347 Depreciation expense (76,090) (76,841) Change in unrestricted net assets $ (100,035) $ (71 494) In 1995, Arroyo Commons, Inc. (Arroyo Commons), a nonprofit organization, was incorporated with a mission to own and operate a housing facility for persons with disabilities financed by the U.S. Department of Housing and Urban Development. The original sponsor of this project was AID Employment, a now dissolved California public benefit corporation. In March 2012, the SUbject project was approved for transfer to HOPE as its new sponsor by the Department of Housing and Urban Development. While HOPE is the sponsoring organization, it does not have an economic interest in, or any financial commitments to, Arroyo Commons. Therefore, Arroyo Commons operations are not consolidated into HOPE's financial statements. For purposes of making this determination, control is defined as the direct or indirect ability to determine the direction of management and policies through ownership, contract or otherwise. Economic interest is defined as an interest in Arroyo Commons that exists if Arroyo Commons holds or utilizes significant resources that must be used for the unrestricted or restricted purposes of HOPE, either directly or indirectly by producing income or providing services, or if HOPE is responsible for the liabilities of Arroyo Commons. 25

26 Note 12 - Related parties (continued) Condensed financial information from Arroyo Commons' financial statements audited by other auditors is as follows at 2014 and 2013, and for the years then ended: Current assets Tenant security deposits Restricted deposits Property and equipment, net Total assets Current liabilities Tenant security deposits Long-term liabilities Unrestricted net assets $ 3,282 $ 2,645 4,431 4,429 95, ,471 1,264,458 1,327,118 1,368,050 1,451,663 (8,503) (7,565) (4,430) (4,429) (5,888) (5,888) $ 1,349,229 $ 1,433,781 Total revenues Total operating expenses Change in unrestricted net assets before depreciation Depreciation expense Change in unrestricted net assets $ 82,892 $ 82,919 (104,784) (86,349) (21,892) (3,430) (62,660) (62,660) $ (84 552) $ (66,090) The above related party transactions have been reviewed and approved by HOPE's Board of Directors. Note 13 - Concentrations Financial instruments that potentially subject HOPE to concentrations of credit risk consist primarily of cash and cash equivalents, investments, accounts receivable and pledges receivable. Risks associated with cash and cash equivalents and investments are mitigated by maintaining deposits in multiple credit-worthy financial institutions. HOPE maintains its cash in bank deposit accounts which, at times, may exceed amounts insured by the Federal Deposit Insurance Corporation. HOPE's investment balances exceed the level insured by the Securities Investor Protection Corporation. As of 2014, HOPE has not experienced any losses in such accounts. Management believes it is not exposed to any significant risk on cash and cash equivalents or investment accounts. HOPE's investment portfolio and invested cash are managed by HOPE's Board of Directors and Investment Committee. One pledge represents 82% of total pledges receivable as of As of June 30, 2013, one pledge represented 50% of total pledges receivable. 26

27 Note 14 - Employee retirement plans Defined contribution retirement plan HOPE instituted a defined contribution retirement plan (the "Plan") in 1978 for employees meeting certain employment service requirements. The Plan operates under Internal Revenue Code Section 403(b). Eligible employees can defer a percentage of their gross salary into the Plan, not to exceed the annual IRS limits. Retirement benefits expense related to the plan totaled $558,796 and $539,296 for the years ended, respectively. The employer contributions are equal to the predetermined percentage of eligible compensation based on each participant's completed years of service. The benefits vest upon contribution. Deferred compensation plan HOPE has a deferred compensation plan covering certain key employees. Annual contributions to the plan are determined by HOPE's Executive Committee. HOPE contributed $114,500 and $120,750 to the plan during the years ended, respectively. Retirement pension HOPE currently provides one former employee with a retirement pension. The actuarially computed present value of the benefit was expensed over the period from the inception of the agreement through the employee's retirement date. Management has determined the accrued retirement payable and pension cost were not material as of and for the years ended 2014 or Retirement benefits were fully vested and unfunded at. Note 15 - Reclassification Certain amounts in the 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation. These reclassifications have no effect on net assets or changes in net assets. 27