Christ Community Health Services, Inc. and CCHS Properties, LLC. Independent Auditor s Reports and Consolidated Financial Statements

Transcription

1 Christ Community Health Services, Inc. and Independent Auditor s Reports and Consolidated Financial Statements

2 Contents Independent Auditor s Report on Financial Statements and Supplementary Information... 1 Consolidated Financial Statements Balance Sheets... 3 Statements of Operations... 4 Statements of Changes in Net Assets... 5 Statements of Cash Flows... 6 Notes to Financial Statements... 7 Supplementary Information Schedule of Expenditures of Federal Awards Schedule of Expenditures of State Awards Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 34

3 Independent Auditor s Report on Financial Statements and Supplementary Information Board of Directors Christ Community Health Services, Inc. and Memphis, Tennessee Report on the Financial Statements We have audited the accompanying consolidated financial statements of Christ Community Health Services, Inc. and (the Organization ), which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, changes in net assets and cash flows for the years 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 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 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Board of Directors Christ Community Health Services, Inc. and Page 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Christ Community Health Services, Inc. and as of, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1, in 2013 the Organization changed its method of presentation and disclosure of patient service revenue, provision of uncollectible accounts and the allowance for uncollectible accounts in accordance with Accounting Standards Update Our opinion is not modified with respect to this matter. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information, including the schedule of expenditures of federal awards required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, as listed in the table of contents, is presented for purposes of additional analysis 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 additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 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 December 4, 2013, on our consideration of the Organization s internal control over financial reporting and 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 the 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 Christ Community Health Services, Inc. and s internal control over financial reporting and compliance. Springfield, Missouri December 4, 2013

5 Consolidated Balance Sheets Assets Current Assets Cash and cash equivalents $ 306,949 $ 147,514 Short-term investments 7,819 1,377 Patient accounts receivable, net of allowance; $2,754,738, $1,546,489 1,383,167 2,154,966 Grants and other receivables 480, ,825 Estimated amounts due from third-party payers 1,085,901 1,219,574 Pharmacy inventory 93, ,514 Prepaid expenses 68, ,921 Total current assets 3,426,749 4,351,691 Assets Limited As To Use Internally designated 250, ,000 Property and Equipment, At Cost Land and land improvements 915, ,687 Buildings and leasehold improvements 6,790,365 6,790,365 Equipment 2,497,469 2,480,752 Furniture and fixtures 914, ,604 Construction in progress 281, ,231 11,399,384 10,995,639 Less accumulated depreciation 4,183,871 3,472,395 7,215,513 7,523,244 Other Assets 374, ,877 Total assets $ 11,267,213 $ 12,741,812 See Notes to Consolidated Financial Statements

6 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 339,089 $ 478,448 Accounts payable 1,124, ,571 Accrued expenses 1,067,149 1,032,097 Total current liabilities 2,530,484 2,045,116 Notes Payable to Bank 3,568,336 2,455,300 Long-Term Debt 3,227,601 3,566,609 Total liabilities 9,326,421 8,067,025 Net Assets Unrestricted Undesignated 1,310,532 3,946,158 Designated 250, ,000 Temporarily restricted 380, ,629 Total net assets 1,940,792 4,674,787 Total liabilities and net assets $ 11,267,213 $ 12,741,812 3

7 Consolidated Statements of Operations Years Ended 2012 (Adjusted Note 1 ) Unrestricted Revenues, Gains and Other Support Patient service revenue (net of contractual discounts and allowances) $ 18,905,255 $ 16,187,354 Provision for uncollectible accounts (3,821,763) (1,334,174) Net patient service revenue less provision for uncollectible accounts 15,083,492 14,853,180 Grant revenue 4,190,143 4,967,132 Contract revenue 770, ,175 Contributions 400, ,991 Other 779, ,882 Net assets released from restrictions used for operations 106,969 16,193 Total unrestricted revenues, gains and other support 21,331,484 22,193,553 Expenses and Losses Salaries and wages 14,330,486 13,804,615 Employee benefits 2,370,245 2,382,404 Purchased services and professional fees 676, ,072 Supplies and other 5,758,674 5,154,652 Rent 466, ,308 Depreciation and amortization 714, ,455 Interest 238, ,218 Total expenses and losses 24,554,688 23,260,724 Operating Loss (3,223,204) (1,067,171) Other Income Investment return 8,572 17,529 Deficiency of Revenues Over Expenses (3,214,632) (1,049,642) Contributions for acquisition of property and equipment 230, ,000 Grants for acquisition of property and equipment 99,006 - Decrease in Unrestricted Net Assets $ (2,885,626) $ (478,642) See Notes to Consolidated Financial Statements 4

8 Consolidated Statements of Changes in Net Assets Years Ended Unrestricted Net Assets Deficiency of revenues over expenses $ (3,214,632) $ (1,049,642) Contributions for acquisition of property and equipment 230, ,000 Grants for acquisition of property and equipment 99,006 - Decrease in unrestricted net assets (2,885,626) (478,642) Temporarily Restricted Net Assets Contributions 258, ,072 Net assets released from restriction (106,969) (16,193) Increase in temporarily restricted net assets 151, ,879 Change in Net Assets (2,733,995) (347,763) Net Assets, Beginning of Year 4,674,787 5,022,550 Net Assets, End of Year $ 1,940,792 $ 4,674,787 See Notes to Consolidated Financial Statements 5

9 Consolidated Statements of Cash Flows Years Ended Operating Activities Change in net assets $ (2,733,995) $ (347,763) Items not requiring (providing) cash Depreciation and amortization 714, ,455 Net unrealized (gain) loss on investments 12,048 13,057 Contributions for acquisition of property and equipment (230,000) (571,000) Grants for acquisition of property and equipment (99,006) - Forgiveness of long-term debt (151,590) (151,560) Changes in Patient accounts receivable, net 771,799 (611,716) Grants and other receivables 130, ,776 Estimated amounts due from third-party payers 133,673 (152,993) Accounts payable and accrued expenses 624, ,140 Other current assets and liabilities 43,626 (454,345) Net cash used in operating activities (783,591) (936,949) Investing Activities Purchase of investments (238,457) (301,978) Proceeds from disposition of investments 219, ,635 Proceeds from disposition of assets limited as to use 250,000 - Purchase of property and equipment (403,749) (566,078) Net cash used in investing activities (172,239) (424,421) Financing Activities Proceeds from contributions for acquisition of property and equipment 230, ,000 Proceeds from grants for acquisition of property and equipment 99,006 - Proceeds from issuance of long-term debt - 365,353 Principal payments on long-term debt (326,777) (1,096,815) Proceeds from issuance of notes payable to bank 4,858,036 9,545,000 Principal payments on notes payable to bank (3,745,000) (8,094,700) Net cash provided by financing activities 1,115,265 1,289,838 Increase (Decrease) in Cash and Cash Equivalents 159,435 (71,532) Cash and Cash Equivalents, Beginning of Year 147, ,046 Cash and Cash Equivalents, End of Year $ 306,949 $ 147,514 Supplemental Cash Flows Information Interest paid $ 220,905 $ 224,402 Forgiveness of long-term debt $ 151,590 $ 151,560 See Notes to Consolidated Financial Statements 6

10 Notes to Consolidated Financial Statements Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Christ Community Health Services, Inc. and (collectively, the Organization ) are a not-for-profit corporation and supporting not-for-profit limited liability company located in Memphis, Tennessee. Christ Community Health Services, Inc. primarily earns revenues by providing physician and related health care services to a largely medically underserved population using a faith-based methodology. was created solely to support the charitable purpose of its sole member, Christ Community Health Services, Inc. Principles of Consolidation The consolidated financial statements include the accounts and transactions of Christ Community Health Services, Inc. and. During the years ended, the only transactions recorded by related to the issuance of Revenue Bonds and payment activity as described in Note 8. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Organization considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market accounts. At June 30, 2013, the Organization s cash accounts exceeded federally insured limits by approximately $121,000. Investments and Investment Return Investments in debt securities are carried at fair value. Investment return includes dividend, interest and other investment income and realized and unrealized gains and losses on investments carried at fair value. 7

11 Notes to Consolidated Financial Statements Assets Limited As To Use Assets limited as to use include investments set aside by the Board of Directors for future capital improvements and unanticipated operating expenses over which the Board retains control and may at its discretion subsequently use for other purposes. Change in Accounting Principle In 2013, the Organization changed its method of presentation and disclosure of patient service revenue, provision for uncollectible accounts and the allowance for doubtful accounts in accordance with Accounting Standards Update (ASU) , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities. The major changes associated with ASU are to reclassify the provision for uncollectible accounts related to patient service revenue to a deduction from patient service revenue and to provide enhanced disclosures around the Organization s policies related to uncollectible accounts. The change had no effect on prior year change in net assets. As Adjusted As Previously Reported Effect of Change Provision for uncollectible accounts $ (1,334,174) $ - $ (1,334,174) Net patient service revenue less provision for uncollectible accounts $ 14,853,180 $ 16,187,354 $ (1,334,174) Total expenses and losses $ 23,260,724 $ 24,594,898 $ (1,334,174) Patient Accounts Receivable Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectibility of accounts receivable, the Organization analyzes its past history and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for uncollectible accounts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Organization analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for uncollectible accounts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payer has not yet paid, or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). 8

12 Notes to Consolidated Financial Statements For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Organization records a significant provision for uncollectible accounts in the period of services on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated or provided by the sliding fee or other policy) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Organization s allowance for doubtful accounts for self-pay patients increased from 86% of self-pay accounts receivable at June 30, 2012, to 92% of self-pay accounts receivable at June 30, In addition, the Organization s write-offs increased approximately $1,300,000 from approximately $1,300,000 for the year ended June 30, 2012, to approximately $2,600,000 for the year June 30, This is the result of continuing claims experience in the collections from selfpay patients in fiscal year Pharmacy Inventory The Organization states pharmacy inventory at the lower of cost, determined using the first-in, first-out method, or market. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. Leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. Certain property and equipment have been purchased with grant funds received from the U.S. Department of Health and Human Services. Such items or a portion thereof may be reclaimed by the federal government if not used to further the grant s objectives. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Long-Lived Asset Impairment The Organization evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No asset impairment was recognized during the years ended. 9

13 Notes to Consolidated Financial Statements Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Organization has been limited by donors to a specific time period or purpose. Net Patient Service Revenue The Organization has agreements with third-party payers that provide for payments to the Organization at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and includes estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered and such estimated amounts are revised in future periods as adjustments become known. Contributions Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are initially reported at fair value determined using the discounted present value of estimated future cash flows technique. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions. Conditional contributions are reported as liabilities until the condition is eliminated or the contributed assets are returned to the donor. Income Taxes The Organization has been recognized as exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the Organization is subject to federal income tax on any unrelated business taxable income. 10

14 Notes to Consolidated Financial Statements Electronic Health Records Incentive Program The Electronic Health Records Incentive Program, enacted as part of the American Recovery and Reinvestment Act of 2009, provides for one-time incentive payments under both the Medicare and Medicaid programs to eligible federally qualified health centers that demonstrate meaningful use of certified electronic health records technology (EHR). Payments under the Medicare program are generally made for up to four years based on a statutory formula. Payments under the Medicaid program are generally made for up to four years based upon a statutory formula, as determined by the state, which is approved by the Centers for Medicare and Medicaid Services. Payment under both programs are contingent on the hospital continuing to meet escalating meaningful use criteria and any other specific requirements that are applicable for the reporting period. The final amount for any payment year is determined based upon an audit by the fiscal intermediary. Events could occur that would cause the final amounts to differ materially from the initial payments under the program. The Organization recognizes revenue ratably over the reporting period starting at the point when management is reasonably assured it will meet all of the meaningful use objectives and any other specific grant requirements applicable for the reporting period. The Organization recorded revenue of approximately $246,500 and $425,000 for the years ended, respectively, which is included in other revenue within operating revenues in the consolidated statements of operations. Deficiency of Revenues Over Expenses The statements of operations include deficiency of revenues over expenses. Changes in unrestricted net assets which are excluded from deficiency of revenues over expenses, consistent with industry practice, include contributions and grants of long-lived assets (including assets acquired using contributions or grants which by donor or granting agency restriction were to be used for the purpose of acquiring such assets). Reclassifications Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 financial statement presentation. These reclassifications had no effect on the change in net assets. Subsequent Events Subsequent events have been evaluated through the date of the Independent Auditor s Report, which is the date the financial statements were available to be issued. 11

15 Notes to Consolidated Financial Statements Note 2: Grant Revenue The Organization is the recipient of a Consolidated Health Centers (CHC) grant from the U.S. Department of Health and Human Services (the granting agency ). The general purpose of the grant is to provide expanded health care service delivery for the medically underserved population in Memphis, Tennessee. Terms of the grant generally provide for funding of the Organization s operations based on an approved budget. Grant revenue is recognized as qualifying expenditures are incurred over the grant period. During the years ended, the Organization recognized $2,853,990 and $2,840,163 in CHC grant revenue, respectively. The Organization s present CHC grant award covers the grant year ending April 30, 2014, and is approved at $3,304,696. Future funding will be determined by the granting agency based on an application to be submitted by the Organization prior to expiration of the present grant award. The Organization opened the University Family Medicine Center in July 2011 in conjunction with Methodist University Hospital (the Hospital ) and UT Saint Francis Family Medicine Program to serve as a residency training program for family medicine residents interested in the Underserved and International Tracks. These tracks primarily serve individuals in low-income communities in Memphis and Shelby County and internationally in Asia and Africa. The Organization received a grant for up to three years from the Hospital for an amount not to exceed $2,528,240 to offset the start-up costs and costs associated with providing uncompensated services. During the years ended, the Organization recognized $664,258 and $1,507,453 in grant revenue associated with this agreement, respectively. As part of the Patient Protection and Affordable Care Act, the federal government passed legislation appropriating grant dollars to community health centers under the Capital Development (CD) grant. The Organization has been awarded $4,841,577 for the May 1, 2012, to April 30, 2015, period to fund construction of a new facility. The Organization has also been awarded $150,420 for the May 1, 2012, to April 30, 2014, period to fund facility improvements. During the years ended, the Health Center recorded revenue of $99,006 and $0, respectively, related to the CD grants. In addition to the above grants, the Organization receives additional financial support from other state, local and private sources. Generally, such support requires compliance with terms and conditions specified in grant agreements and must be renewed on an annual basis. Note 3: Net Patient Service Revenue The Organization recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for the sliding fee program, the Organization recognizes revenue on the basis of its standard rates for services provided. On the basis of historical experience, a significant portion of the Organization s uninsured patients who do not qualify for the sliding fee program will be unable or unwilling to pay for the services provided. Thus, the 12

16 Notes to Consolidated Financial Statements Organization records a significant provision for uncollectible accounts related to uninsured patients who do not qualify for the sliding fee program in the period the services are provided. This provision for uncollectible accounts is presented on the statement of operations as a component of net patient service revenue. The Organization is approved as a Federally Qualified Health Center (FQHC) for both Medicare and Medicaid reimbursement purposes. The Organization has agreements with third-party payers that provide for payments to the Organization at amounts different from its established rates. These payment arrangements include: Medicare. Covered FQHC services rendered to Medicare program beneficiaries are paid based on a cost reimbursement methodology. The Organization is reimbursed for cost reimbursable items at tentative rates with final settlement determined after submission of annual cost reports by the Organization and audits thereof by the Medicare fiscal intermediary. Services not covered under the FQHC benefit are paid based on established fee schedules. Medicaid. Covered FQHC services rendered to Medicaid program beneficiaries are paid based on a prospective reimbursement methodology. The Organization is reimbursed a set encounter rate for all services provided. Services not covered under the FQHC benefit are paid based on established fee schedules. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. The Organization has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Organization under these agreements includes prospectively determined rates per unit of service and discounts from established charges. Patient service revenue, net of contractual allowances and discounts (but before the provision for uncollectible accounts), recognized in the years ended, was: Medicare $ 1,374,216 $ 1,306,437 Medicaid 10,259,434 9,608,378 Other third-party payers 3,881,844 2,258,061 Self-pay 3,389,761 3,014,478 Total $ 18,905,255 $ 16,187,354 13

17 Notes to Consolidated Financial Statements Note 4: Concentration of Credit Risk The Organization grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers at June 30 is: Medicare 21% 28% Medicaid 60% 29% Other third-party payers 15% 39% Self-pay 4% 4% 100% 100% Note 5: Investments and Investment Return Assets Limited As to Use Assets limited as to use include: Internally designated Cash and cash equivalents $ 28,055 $ 82,466 Corporate bonds 221, ,534 $ 250,000 $ 500,000 Short-Term Investments Short-term investments include: Corporate bonds $ 7,819 $ 1,377 14

18 Notes to Consolidated Financial Statements Total investment return is reflected in the statement of operations and changes in net assets as follows: Interest and dividend income $ 20,620 $ 30,586 Unrealized gains (losses) on trading securities (12,048) (13,057) $ 8,572 $ 17,529 Note 6: Professional Liability Claims The U.S. Department of Health and Human Services deemed the Organization and its practicing medical professionals covered under the Federal Tort Claims Act (FTCA) for damage for personal injury, including death, resulting from the performance of medical, surgical, dental and related functions. FTCA coverage is comparable to an occurrence policy without a monetary cap. Prior to being deemed for coverage under the FTCA, the Organization purchased medical malpractice insurance under a claims-made policy on a fixed premium basis. Claim liabilities are determined without consideration of insurance recoveries. Expected recoveries are presented separately. An estimate is accrued for expected losses of medical malpractice claims and includes an estimate of the ultimate costs of both reported claims and claims incurred but not reported. The expected recovery from the Organization s insurance provider has been recorded within other assets. It is possible that an event has occurred which will be the basis of a future material claim. Note 7: Notes Payable to Bank The Organization has a $4,000,000 revolving bank line of credit that expires November 30, At, there was $3,568,336 and $2,000,000 borrowed against this line, respectively. The line of credit is guaranteed by two unrelated not-for-profit hospitals and is further secured by the Organization s patient accounts receivable. Interest is payable monthly at the bank s prime rate (3.25% at June 30, 2013). On August 12, 2011, the Organization entered into an additional $500,000 line of credit, which was increased to $1,000,000 on January 23, Interest was payable at the bank s prime rate. The line of credit was closed on April 5, At, there was $0 and $455,300 borrowed against this line, respectively. The line of credit was secured by the Organization s patient accounts receivable. 15

19 Notes to Consolidated Financial Statements In connection with the business agreement for the line of credit, the Organization is required to comply with certain restrictive covenants including maintaining a cash flow to current maturity of long-term debt ratio in excess of 1.2 to 1 and maintaining a debt-to-worth ratio in excess of 2.5 to 1. The covenants also require submission of annual audited financial statements within 120 days of fiscal year end. Required operating covenants (the cash flow to current maturity of long-term debt ratio, the debtto-worth ratio and the requirement to submit audited financial statements within 120 days of fiscal year end) were not met for the year ended June 30, Management has reported the noncompliance to the bank and the bank has decided to take no action against the Organization based solely on the default status of these covenants for the year ended June 30, Note 8: Long-Term Debt Long-term debt at, consisted of the following: Note payable (A) $ 1,054,145 $ 1,157,953 Note payable (B) 146, ,293 Note payable (C) 33,371 39,332 Note payable (D) 48,374 80,865 Note payable (E) 81, ,210 Note payable (F) 79,243 91,786 Recruitment loan payable (G) - 151,590 Revenue bonds (H) 2,123,382 2,210,028 3,566,690 4,045,057 Less current maturities 339, ,448 $ 3,227,601 $ 3,566,609 (A) (B) Due March 28, 2022; payable in installments of $9,898 monthly including interest; interest rate is to be adjusted annually to the most recently published Fannie Mae 12-month average of 1-month LIBOR (3.00% at June 30, 2013). Note is unsecured. The forgiveness of the notes payable subsequent to year end is described in Note 17. Due October 13, 2017; payable in installments of $3,066 monthly including interest at 3.70%. Note is collateralized by certain equipment. (C) Due May 27, 2018; payable in installments of $631 monthly including interest at 4.31%. Note is collateralized by certain equipment. 16

20 Notes to Consolidated Financial Statements (D) (E) (F) Due November 22, 2014; payable in installments of $2,943 monthly including interest at 4.10%. Note is collateralized by certain equipment. Due November 18, 2014; payable in installments of $4,945 monthly including interest at 4.10%. Note is collateralized by certain equipment. Due November 18, 2018; payable in installments of $1,384 monthly including interest at 4.66%. Note is collateralized by certain equipment. (G) Due April 1, 2013; payable in 36 monthly installments including interest at 4.25%. Alternately, the outstanding balance including accrued interest is to be forgiven in three installments on the anniversary date of the note provided there is no event of default. Outstanding principal in the amount of $151,590 and $151,560 was forgiven during the years ended, respectively. (H) The Revenue Bonds (the Bonds ) consist of Qualified Section 501(c)(3) Revenue Bonds ( Project) in the original amount of $2,380,000 dated May 1, 2010, which bear interest at 3.73%. The Bonds are payable through monthly installments of $14,060 through May 1, 2015, upon which time the bond may be payable in full or new terms will be negotiated. The Industrial Development Board of the City of Memphis and County of Shelby, Tennessee, issued the bonds and loaned the proceeds to the Organization in exchange for a bank note payable. The Bonds are secured by a Deed of Trust encumbering certain property owned by the Organization. In connection with the Bonds, the Organization is required to comply with certain restrictive covenants including maintaining a cash flow to current maturity of long-term debt ratio in excess of 1.2 to 1 and maintaining a debt-to-worth ratio in excess of 2.5 to 1. The covenants also require submission of annual audited financial statements within 120 days of fiscal year end. Required operating covenants (the cash flow to current maturity of long-term debt ratio, the debt-to-worth ratio and the requirement to submit audited financial statements within 120 days of fiscal year end) were not met for the year ended June 30, Management has reported the noncompliance to the bank and the bank has decided to take no action against the Organization based solely on the default status of these covenants for the year ended June 30,

21 Notes to Consolidated Financial Statements Aggregate annual maturities of long-term debt at June 30, 2013, are: 2014 $ 339, ,235, , , ,096 Thereafter 492,622 $ 3,566,690 Note 9: Temporarily Restricted Net Assets Temporarily restricted net assets at June 30 are available for the following purpose or periods: Health care services $ 330,260 $ 223,629 Panorama event 50,000 - For periods after June 30-5,000 $ 380,260 $ 228,629 During the year ended June 30, 2013, $106,969 was released from donor restrictions by incurring expenses satisfying the restricted purposes of health care services. During the year ended June 30, 2012, $16,193 was released from donor restrictions by incurring expenses satisfying the restricted purposes of health care services. Note 10: Functional Expenses The Organization provides health care services primarily to residents within its geographic area. Expenses related to providing these services for the years ended June 30 are as follows: Health care services $ 21,195,913 $ 19,800,204 General and administrative 3,357,514 3,407,961 Fundraising 1,261 52,559 $ 24,554,688 $ 23,260,724 18

22 Notes to Consolidated Financial Statements Note 11: Operating Leases The Organization leases facilities under operating leases expiring at various dates through Future minimum lease payments at June 30, 2013, were: 2014 $ 333, , , , ,715 Thereafter 51,143 Future minimum lease payments $ 1,490,625 Note 12: Retirement Plan The Organization has a 401(k) defined contribution retirement plan covering substantially all employees who have completed one year of service. The Organization s matching contribution changed from 100% to 50% of each participant s eligible contributions that do not exceed 3% of compensation in March Retirement expense was $73,759 and $118,126 for the years ended, respectively. Note 13: Disclosures About Fair Value of Assets and Liabilities Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. 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 for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 19

23 Notes to Consolidated Financial Statements Recurring Measurements The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at : Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Fair Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) 2013 Money market funds $ 28,055 $ 28,055 $ - $ - Corporate bonds 229, , Money market funds $ 82,466 $ 82,466 $ - $ - Corporate bonds 418, ,911 - Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended June 30, Investments and Cash Equivalents Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include money market funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows are classified within Level 2. Level 2 securities include corporate bonds. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Organization has no securities classified within Level 3 of the hierarchy. 20

24 Notes to Consolidated Financial Statements Note 14: Construction in Progress At June 30, 2013, the balance classified as construction in progress primarily consists of costs associated with two projects. The Frayser project, which consists of the construction of a new health care facility, is expected to be completed in September 2014 at a total costs of approximately $5,065,000. The Orange Mound project, which consists of the alteration and renovation of the existing pharmacy facility, is expected to be completed in December 2013 at a total costs of approximately $150,000. The Organization is financing these projects through a combination of grant revenue and other contributions. Note 15: Related Party Transactions The Organization is affiliated with Christ Community Ministries, Inc. (the Ministries ). Prior to the Ministries registration with the State of Tennessee and subsequent recognition in 2007 by the Internal Revenue Service as a 501(c)(3) Organization as a separate entity, the Ministries missionary activities were carried on through Christ Community Health Services, Inc. The entities currently share common administrative facilities, but have different boards of directors. The Organization appoints less than a majority of the board of directors of the Ministries. The Organization charges the Ministries for administrative overhead expenses. During the years ended, the Organization recognized $165,419 and $184,524, respectively, in other revenue on the statements of operations related to these charges. At, the Organization had a receivable due from Ministries of $13,726 and $25,592, respectively, included in grants and other receivables on the balance sheets. The Organization also has a promissory note payable to Ministries. See note payable (A) in Note 8. Ministries was acquired by the Organization subsequent to June 30, This subsequent event is described in Note 17. The Organization is affiliated with Christ Community Health Foundation, Inc. (the Foundation ). The entities currently share common administrative facilities, but have different boards of directors. The Organization does not have the ability to appoint or remove the board of directors of the Foundation. The Organization charges the Foundation for administrative overhead expenses. During the years ended, the organization recognized $122,964 and $128,926, respectively, in other revenue on the statements of operations related to these charges. At, the Organization had a receivable due from the Foundation of $23,908 and $22,602, respectively, included in grants and other receivables on the balance sheets. Note 16: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: 21

25 Notes to Consolidated Financial Statements Grant Revenue A concentration of revenues related to grant awards and other support is described in Note 2. Investments The Organization invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheets. Allowance for Net Patient Service Revenue Adjustments Estimates of allowances for adjustments included in net patient service revenue are described in Notes 1 and 3. Professional Liability Claims Estimates related to the accrual for medical malpractice claims are described in Note 6. Litigation In the normal course of business, the Organization is, from time to time, subject to allegations that may or do result in litigation. The Organization evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. Current Economic Conditions The current economic environment presents community health centers with difficult circumstances and challenges. As employers make adjustments to health insurance plans or more patients become unemployed, certain patients may find it difficult to pay for services rendered. The upcoming implementation of the Affordable Care Act, including the health insurance exchanges and the decision by the state regarding Medicaid expansion, will directly impact community health centers net revenues. Further, the effect of economic conditions on federal and state budgets could adversely impact the grant revenues available to community health centers and the programs they administer. Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change and negatively impact the Organization. The Organization has taken steps to address these possible future negative impacts on their financial position which include plans to increase patient volume and cost reduction efforts. 22

26 Notes to Consolidated Financial Statements Note 17: Subsequent Event The Organization began the process of acquiring Christ Community Ministries, Inc. (the Ministries ) subsequent to June 30, The Ministries, whose mission was conducted by the Organization until June 2005 when the Ministries became a separate legal entity, was acquired to consolidate the fundraising and health care missions activities back into the Organization. The Board of Directors of the Ministries released and discharged the Organization s debt, which is described as note payable (A) in Note 8, of approximately $1,050,00 on August 6, The Ministries transferred two properties valued at approximately $1,200,000 to the Organization in October The transfer of any additional assets to the Organization is pending the authorization of the Board of Directors of the Ministries. The Organization did not incur significant costs or assume debt of the Ministries in the acquisition. 23

27 Supplementary Information

28 Schedule of Expenditures of Federal Awards Year Ended June 30, 2013 Federal Agency/ Grant or Pass-Through CFDA Identifying Amount Cluster/Program Entity Number Number Expended Consolidated Health Centers U.S. Department of Health and Human Services H80CS $ 1,358,807 Affordable Care Act Grants for New and Expanded Services under the Health Center U.S. Department of Health Program and Human Services H80CS ,495,183 Total cluster 2,853,990 Affordable Care Acts Grants for Capital Development in U.S. Department of Health Health Centers and Human Services C8ACS ,867 Affordable Care Acts Grants for Capital Development in U.S. Department of Health Health Centers and Human Services C8BCS ,139 Total 99,006 Childrens Health Insurance Program Sickle Cell Treatment Demonstration Program Coordinated Services and Access to Research for Women, Infants, Children, and Youth U.S. Department of Health and Human Services/ Structured Employment Economic Development Corporation (Seedco) GR ,949 U.S. Department of Health and Human Services/ St. Jude Children s Research Hospital U1EMC ,280 U.S. Department of Health and Human Services/ Le Bonheur Community Health and Well-Being FCPCCHS-11/12.1 2,543 Family Planning Services U.S. Department of Health CA and Human Services/ Tennessee Department of Health/Shelby County Health Department ,083 Maternal and Child Health U.S. Department of Health CA Services Block Grant to and Human Services/ the States Tennessee Department of Health/Shelby County Health Department ,343 Total expenditures of federal awards $ 3,236,194 24