AUDITED FINANCIAL STATEMENTS VISITING NURSE ASSOCIATION COMMUNITY HEALTHCARE, INC. AND AFFILIATES GUILFORD, CONNECTICUT JUNE 30, 2012

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1 AUDITED FINANCIAL STATEMENTS VISITING NURSE ASSOCIATION COMMUNITY HEALTHCARE, INC. AND AFFILIATES GUILFORD, CONNECTICUT JUNE 30, 2012

2 CONTENTS INDEPENDENT AUDITOR S REPORT Page 3 AUDITED FINANCIAL STATEMENTS: Combined Balance Sheets Combined Statements of Operations Combined Statements of Changes in Net Assets Combined Statements of Cash Flows NOTES TO COMBINED FINANCIAL STATEMENTS

3 PEACH & MCPHERSON CERTIFIED PUBLIC ACCOUNTANTS 110 WASHINGTON AVENUE NORTH HAVEN, CONNECTICUT TELEPHONE (203) FACSIMILE (203) INDEPENDENT AUDITOR S REPORT Board of Directors Visiting Nurse Association Community Healthcare, Inc. and Affiliates We have audited the accompanying combined balance sheets of Visiting Nurse Association Community Healthcare, Inc. and Affiliates as of June 30, 2012 and 2011 and the related combined statements of operations, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the management of Visiting Nurse Association Community Healthcare, Inc. and Affiliates. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Visiting Nurse Association Community Healthcare, Inc. and Affiliates as of June 30, 2012 and 2011, and the combined results of its operations, changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. North Haven, Connecticut September 26, 2012

4 COMBINED BALANCE SHEETS June 30, 2012 and 2011 ASSETS Current Assets: Cash and Cash Equivalents $ 640,822 $ 112,198 Accounts Receivable, Less Allowance for Doubtful Accounts of $201,000 and $209,000 2,780,318 3,280,107 Grants and Other Receivables 2,000 6,891 Prepaid Expenses 341, ,653 Total Current Assets 3,764,814 3,734,849 Property and Equipment, Less Accumulated Depreciation of $1,309,918 and $1,117, , ,291 Other Assets: Security Deposits 26,680 43,329 Non-compete Agreement, Net - 325,000 Total Other Assets 26, ,329 Assets Limited as to Use: Cash Temporarily Restricted 13,337 18,892 Investments Board Designated 1,036,455 1,308,765 Investments Board Designated as Collateral - 282,430 Total Assets Limited as to Use 1,049,792 1,610,087 Total Assets $5,652,559 $6,581,556 LIABILITIES AND NET ASSETS Current Liabilities: Line of Credit $ - $ 300,000 Current Portion of Note Payable - 125,000 Accounts Payable and Accrued Expenses 271, ,953 Accrued Payroll and Compensated Absences 1,858,863 1,695,002 Deferred Grant Revenue 640 6,140 Advances From Third-Party Payors 28, ,020 Estimated Third-Party Payor Reserves 760, ,000 Total Current Liabilities 2,920,115 3,316,115 Long-term Debt: Note Payable - 133,125 Total Liabilities 2,920,115 3,449,240 Net Assets: Unrestricted 2,719,107 3,113,424 Temporarily Restricted 13,337 18,892 Total Net Assets 2,732,444 3,132,316 Total Liabilities and Net Assets $5,652,559 $6,581,556 See accompanying notes to combined financial statements. -4-

5 COMBINED STATEMENTS OF OPERATIONS Revenue, Gains and Other Support: Net Patient Service Revenue $27,825,765 $27,344,543 Contracted Clinical Services 331, ,879 Grants 17,818 39,795 Municipal Appropriations 125, ,953 United Way Other Revenue 47,416 40,248 Net Assets Released From Restrictions Used For Operations 50,555 68,256 Total Revenue, Gains and Other Support 28,397,916 28,023,940 Expenses: Salaries and Wages 20,846,785 20,699,191 Payroll Taxes and Employee Benefits 3,874,646 3,973,757 Office Expenses 999, ,574 Other 726, ,590 Occupancy Expense 590, ,296 Provision for Losses on Accounts Receivable 231, ,637 Transportation 602, ,358 Depreciation and Amortization 517, ,876 Professional Fees and Contracted Services 309, ,042 Contracted Patient Services 67, ,837 Medical Supplies 182, ,514 Interest 17,933 31,721 Total Expenses 28,967,355 28,687,393 Operating Loss ( 569,439 ) ( 663,453 ) Other Income: Contributions and Bequests 228,776 60,568 Interest and Investment Income 38,284 37,312 Total Other Income 267,060 97,880 Deficiency of Revenue Over Expenses, Before Net Appreciation (Depreciation) on Investments ( 302,379 ) ( 565,573 ) Net Appreciation (Depreciation) on Investments ( 91,938 ) 410,046 Deficiency of Revenue Over Expenses ($ 394,317 ) ($ 155,527 ) See accompanying notes to combined financial statements. -5-

6 COMBINED STATEMENTS OF CHANGES IN NET ASSETS Unrestricted Net Assets: Deficiency of Revenue Over Expenses, Before Net Appreciation (Depreciation) on Investments ($ 302,379 ) ($ 565,573 ) Net Appreciation (Depreciation) on Investments ( 91,938 ) 410,046 Deficiency of Revenue Over Expenses ( 394,317 ) ( 155,527 ) Temporarily Restricted Net Assets: Contributions 45,000 45,285 Net Assets Released From Restrictions Used For Operations ( 50,555 ) ( 68,256 ) Decrease in Temporarily Restricted Net Assets ( 5,555 ) ( 22,971 ) Change in Net Assets ( 399,872 ) ( 178,498 ) Net Assets, Beginning of Year 3,132,316 3,310,814 Net Assets, End of Year $2,732,444 $3,132,316 See accompanying notes to combined financial statements. -6-

7 COMBINED STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities: Change in Net Assets ($ 399,872 ) ($ 178,498 ) Adjustments to Reconcile Change in Net Assets to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 517, ,876 Provision for Losses on Accounts Receivable 231, ,637 Contributions and Bequests ( 125,000 ) - Restricted Contributions Received ( 45,000 ) ( 45,285 ) Net (Appreciation) Depreciation on Investments and Reinvested Income 54,689 ( 446,605 ) Changes in Assets and Liabilities: (Increase) Decrease In: Accounts Receivable 268,670 ( 1,272,453 ) Grants and Other Receivables 4,891 ( 6,396 ) Prepaid Expenses ( 6,021 ) ( 9,761 ) Security Deposits 16,649 ( 18,793 ) Increase (Decrease) In: Accounts Payable and Accrued Expenses 43,796 ( 148,945 ) Accrued Payroll and Compensated Absences 163,861 22,758 Deferred Grant Revenue ( 5,500 ) ( 18,509 ) Advances From Third-Party Payors ( 173,157 ) 2,097 Estimated Third-Party Payor Reserves - 100,000 Net Cash Provided (Used) by Operating Activities 546,198 ( 1,361,877 ) Cash Flows From Investing Activities: Sale (Purchase) Of: Property and Equipment ( 135,054 ) ( 563,560 ) Investments 500,050 1,050,100 Net Cash Provided From Investing Activities 364, ,540 Cash Flows From Financing Activities: Proceeds From Line of Credit 1,050,000 1,500,000 Repayment of Line of Credit ( 1,350,000 ) ( 1,200,000 ) Repayment of Note Payable ( 125,000 ) - Accrued Interest on Note Payable ( 8,125 ) 8,125 Restricted Contributions Received 45,000 45,285 Net Cash Provided (Used) From Financing Activities ( 388,125 ) 353,410 Increase (Decrease) in Cash and Cash Equivalents 523,069 ( 521,927 ) Cash and Cash Equivalents at Beginning of Year 131, ,017 Cash and Cash Equivalents at End of Year $ 654,159 $ 131,090 Supplemental Disclosure: Interest Paid $ 26,058 $ 23,596 See accompanying notes to combined financial statements. -7-

8 Note 1 Summary of Significant Accounting Policies Organization and Principals of Combination NOTES TO COMBINED FINANCIAL STATEMENTS The combined financial statements of VNA Community Healthcare, Inc. and Affiliates (the Organization) include the financial statements of VNA Community Healthcare, Inc. (VNA), LifeTime Care at Home, LLC (LTC), and LifeTime Helping Hands, LLC (LHH). Intercompany accounts and transactions have been eliminated in combination. The VNA is a non-stock, non-profit Connecticut corporation. The VNA provides home care services and administers a comprehensive, multi-disciplinary, therapeutic and public health program. In addition, the VNA operates an adult day care center and staffs a municipal school program with nurses and aides. The VNA is the sole member of LTC and LHH. LTC is a limited liability company organized in Connecticut and is considered a disregarded entity for federal and state tax purposes and follows the tax status of its sole member, VNA. LTC provides live-in, homemaker and companion services. LTC was formerly known as LifeTime Solutions, LLC. LHH is a limited liability company organized in Connecticut and is considered a disregarded entity for federal and state tax purposes and follows the tax status of its sole member, VNA. LHH was a referral source for home and personal services and has been inactive for the years ended June 30, 2012 and On June 7, 2010, VNA purchased certain assets of VNA Services, Inc. (SVS), a non-profit Connecticut corporation. SVS was an affiliate of the Saint Raphael Healthcare System, Inc. (SRHS). The purchase was financed through a term note payable and unrestricted, undesignated investments. As a condition of the term note payable (see Note 10), the VNA granted SRHS a security interest in a portion of its investment portfolio (see Note 3). 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. -8-

9 Note 1 Summary of Significant Accounting Policies Cont d. Net Patient Services Revenue Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Laws and regulations governing Medicare, Medicaid and other governmental reimbursement programs are complex and subject to audit, interpretation, and punitive adjustment. The federal and state governments continue to place increased scrutiny on compliance with regulations. As a result, there is a possibility that recorded estimates could change. It is management s opinion that the Organization is in compliance with all applicable laws and regulations, and any retroactive audit adjustments would not be material to the financial position or results of operations of the Organization. Accounts Receivable The Organization s accounts receivable collection process includes reviewing aging reports, contacting payers to determine why payment has not been made, resubmitting claims when appropriate, and filing appeals with payers for claims that have been denied. The Organization s bad debt policy includes escalation procedures and guidelines for write-offs of an account, including proper authorization. The Organization has implemented a standardized approach to estimate and review the collectability of its receivables based on accounts receivable aging trends. The Organization analyzes historical collection trends and payers as an integral part of the estimation process related to determining the valuation of the allowance for doubtful accounts. Changes in reserve estimates are recorded as an adjustment to the provision for doubtful accounts. Cash and Cash Equivalents Cash and cash equivalents include checking and temporary savings and deposit accounts from surplus operating funds. Investments and Investment Policy Investments in equity securities and in debt securities are measured at fair value in the balance sheet, in accordance with FASB Codification , Fair Value Measurements and Disclosures. Investments are classified as trading. Investment income (including realized and unrealized gains and losses on investments, interest and dividends) is included in deficiency of revenue over expenses, unless the income is restricted by donor or law. The Organization has adopted investment policies for its long-term investment portfolio. The investment policy is established by the Finance Committee of the Board of Directors and is monitored and reviewed on an ongoing basis. -9-

10 Note 1 Summary of Significant Accounting Policies Cont d. Fair Value Measurements In accordance with FASB ASC , Fair Value Measurements and Disclosures, the Organization is required to measure fair value of its assets and liabilities. Fair value measurements are based on the prices 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. The standard established a fair value hierarchy that prioritizes observable and unobservable inputs to measure fair value into three levels, as follows: Level 1: Valuations based on quoted prices in active markets for identical asset or liabilities to which an entity has access at the measurement date. The fair value hierarchy gives the highest priority to level 1 inputs. Level 2: Valuations based on inputs and information other than quoted market indices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Valuations based on unobservable inputs for the asset or liability. Unobservable inputs should be used to measure the fair value to the extent that observable inputs are not available. The Organization s carrying amounts for all assets and liabilities, which are required to be measured at fair value, with the exception of investments, approximate fair value under Level 1. Investments approximate fair value based on Level 1 and Level 2 and are presented in Note 3. Assets Limited as to Use Board-designated Investments (Endowments) represent resources set aside by the Board of Directors over which the Board of Directors retains control and may, at its discretion, subsequently use for other purposes. Donor-restricted Term Investment (Endowments) represents resources restricted by donors for use as specified by the donor or by the passage of time. Donor-restricted Permanent Investment (Endowments) represents resources restricted by donors with the stipulation that the contribution must remain intact in perpetuity. Currently, the Organization has no permanently restricted investments. Assets limited as to use includes investments set aside by the Board of Directors (board designated) for long-term investments (see Notes 3 and 4) and investments required to be set aside as collateral (see Notes 3 and 4) for the note payable (see Note 10). In addition, assets limited as to use include cash of $13,337 in 2012 and $18,892 in 2011, which is restricted by a donor for financial assistance and health services for those sixty years of age or older and residing in Hamden, Connecticut. Property, Equipment and Depreciation Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. Estimated useful lives range from three to ten years. -10-

11 Note 1 Summary of Significant Accounting Policies Cont d. Intangible Asset, Amortization and Valuation of Intangible Asset The intangible asset, a non-compete agreement, was stated at cost, net of accumulated amortization and was amortized over three years. The Organization reviews the intangible asset for recoverability when changes in circumstances indicate the carrying value may not be recoverable and recognize an impairment loss for the excess of carrying value over the estimated fair value. As of June 30, 2012, the Organization determined that it would not be able to recover the carrying value of the non-compete agreement with SRHS. SRHS has entered into an agreement to sell its assets to the Yale New Haven Health System and, therefore, will no longer be an operating entity. The Organization recorded an impairment charge of $108,333. The impairment charge is included in depreciation and amortization on the statement of operations. Net Asset Classifications In accordance with the provisions of FASB ASC , Not-for-Profit Entities Presentation of Financial Statements, the Organization is required to report net assets and changes in net assets in three classes that are based upon the existence or absence of restrictions on use that are placed by its donors, as follows: 1) Unrestricted Net Assets represents unrestricted resources available for support of the Organization, including assets set aside by the Board of Directors, over which the Board of Directors retains control and may, at its discretion, subsequently use for other purposes. 2) Temporarily Restricted Net Assets represents resources that are restricted by a donor for use for a particular purpose or in a particular future period, and income derived from permanently restricted net assets not yet expended in accordance with the donor s restriction. When the donor s restriction is satisfied, either by using the resources in the manner specified by the donor or by the passage of time, the expiration of the restriction is reported in the financial statements by reclassifying the net assets from temporarily restricted to unrestricted net assets. 3) Permanently Restricted Net Assets represents resources received with the donor s stipulation that the contribution must remain intact in perpetuity. However, the income derived from permanently restricted net assets must be used in accordance with the donor s restriction. Currently, the Organization has no permanently restricted net assets. FASB ASC , Not-for-Profit Entities Presentation of Financial Statements, provides guidance on net asset classification of donor-restricted funds for not-for-profit organizations that are subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and also requires additional disclosures about an organization s endowment funds (both donor restricted endowment funds and boarddesignated endowment funds), whether or not the organization is subject to UPMIFA. The State of Connecticut has adopted UPMIFA, which established law for the management and investment of donorrestricted funds. -11-

12 Note 1 Summary of Significant Accounting Policies Cont d. The Board of Directors and Management have determined that the majority of the Organization s net assets do not meet the definition of endowment under UPMIFA. However, the Board of Directors and Management have determined that the Organization s investment portfolios do meet the definition of endowment under FASB ASC Deficiency of Revenue Over Expenses The statement of operations includes deficiency of revenue over expenses. Changes in unrestricted net assets, which are excluded from deficiency of revenue over expenses, consistent with industry practice, include permanent transfers of assets to and from affiliates for other than goods and services, and contributions of long-lived assets (including assets acquired using contributions which, by donor restriction, were to be used for purposes of acquiring such assets). Charity Care The Organization provides care to patients who meet certain criteria under its charity care policy, without charge or at amounts less than its established rates. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Donated Services Donated services received by the Organization are not recognized as support in the accompanying statement of operations since such services either do not require specialized skills or would not typically be purchased if not provided by donation. Income Taxes The Organization is exempt from income taxes under Section 501(c) (3) of the Internal Revenue Code and, accordingly, there is no provision for income taxes. Income determined to be unrelated business taxable income would be taxable. During the years ended June 30, 2012 and 2011, the Organization had no unrelated business income. The Organization is no longer subject to federal, state or local tax examinations by tax authorities for years before and including fiscal year ended June 30, Contributions to the Organization are tax deductible to donors under Section 170 of the Internal Revenue Code. The Organization, in accordance with the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes, evaluates its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of any required tax filings and discussions with outside experts. -12-

13 Note 1 Summary of Significant Accounting Policies Cont d. Subsequent Events The Organization has evaluated events and transactions for potential recognition or disclosure through September 26, 2012, which is the date the financial statements were available to be issued. Reclassifications Certain 2011 account balances have been reclassified to conform with the 2012 presentation. Note 2 Net Patient Service Revenue Approximately 77% in 2012 and 76% in 2011 of net patient service revenue was derived under federal and state third-party reimbursement programs. These revenues are subject to audit and retroactive adjustment by the respective third-party fiscal intermediaries. The Organization maintains a third-party payor reserve for potential revenue adjustments, disallowances or denials that arise from third-party or internal audit activities. The Organization s internal accounting policies and procedures states that a contingency reserve based on VNA net patient service revenues must be maintained. The reserve as of June 30, 2012 and June 30, 2011 was $760,000. The Organization has entered into agreements with certain commercial insurance carriers and health maintenance organizations. The basis for payment to the Organization under these agreements are negotiated rates at less than the Organization s regular published charges. -13-

14 Note 3 Investments Board Designated Long-term investments at June 30, 2012 and 2011 consist of: Fair Value Measurements Using: Quoted Prices Significant In Active Other Market For Observable Identical Assets Inputs Fair Value (Level 1) (Level 2) June 30, 2012 Cash and Cash Equivalents $ 60,358 $ 60,358 $ - Corporate Obligations: Fixed Income 204, ,170 Mutual Funds: Large Blend 213, ,905 - Large Growth 119, ,180 - Large Value 58,728 58,728 - Mid Growth 113, ,263 - Mid Value 92,893 92,893 - Small Blend 58,434 58,434 - Intermediate-Term Bond 53,677 53,677 - Short-Term Bond 61,847 61, , ,927 - Total $1,036,455 $ 832,285 $ 204,170 June 30, 2011 Cash and Cash Equivalents $ 13,085 $ 13,085 $ - Corporate Obligations: Fixed Income 308, ,629 Mutual Funds: Large Blend 496, ,338 - Large Growth 134, ,360 - Large Value 102, ,060 - Mid Growth 254, , , ,051 - Total $1,308,765 $1,000,136 $ 308,

15 Note 3 Investments Board Designated (Cont d.) Collateral investments at June 30, 2012 and 2011 consist of: Fair Value Measurements Using: Quoted Prices Significant In Active Other Market For Observable Identical Assets Inputs Fair Value (Level 1) (Level 2) June 30, 2012 Cash and Cash Equivalents $ - $ - $ - Corporate Obligations: Fixed Income Mutual Funds: Intermediate-Term Bond Short-Term Bond Total $ - $ - $ - June 30, 2011 Cash and Cash Equivalents $ 27,730 $ 27,730 $ - Corporate Obligations: Fixed Income 153, ,644 Mutual Funds: Intermediate-Term Bond 50,593 50,593 - Short-Term Bond 50,463 50, , ,056 - Total $282,430 $128,786 $153,644 As of June 30, 2012 and 2011, Janney Montgomery Scott, LLC held the investments in street name. The Organization s investments are managed by an independent third-party investment manager. -15-

16 Note 4 Assets Limited as to Use - Investments The Board of Directors has designated investments of $1,036,455 in 2012 and $1,308,765 in 2011 as long-term investments; and $0 in 2012 and $282,430 in 2011 as collateral for the note payable (see Note 10). Changes in long-term investments for the years ended June 30, 2012 and 2011 are as follows: Beginning Balance $1,308,765 $1,915,126 Transfer ( 212,094 ) ( 1,050,000 ) Investment Return: Investment Income 31,787 27,707 Net Appreciation (Depreciation) ( 92,003 ) 415,932 Ending Balance $1,036,455 $1,308,765 Changes in collateral investments for the year ended June 30, 2012 and 2011 are as follows: Beginning Balance $ 282,430 $ 279,563 Transfer ( 287,906 ) - Investment Return: Investment Income 5,462 8,852 Net Appreciation (Depreciation) 14 ( 5,985 ) Ending Balance $ - $ 282,430 Note 5 Property and Equipment Property and equipment at June 30, 2012 and 2011 consisted of: Leasehold Improvements $ 859,751 $ 788,535 Furniture and Equipment 529, ,144 Computer Equipment and Software 731, ,456 2,121,191 1,986,135 Less, Accumulated Depreciation: Leasehold Improvements 224, ,264 Furniture and Equipment 465, ,853 Computer Equipment and Software 619, ,727 1,309,918 1,117,844 Net $ 811,273 $ 868,

17 Note 6 Line of Credit On February 24, 2012, the Organization entered into a commercial revolving line of credit agreement with Guilford Savings Bank for up to $1 million. The guarantors of the line of credit are the VNA, LTC, and LHH. The Organization may draw advances up to the lesser of $1 million or 70% of eligible patient accounts receivable. Interest is calculated at prime plus 0.75%. The line of credit bank agreement with Guilford Savings Bank has an expiration date of February 24, On February 28, 2012, a $1 million line of credit agreement with Webster Bank expired, and the Organization opted not to renew. The guarantors were the VNA, LTC and LHH. Interest was calculated at the lower of a LIBOR based rate or prime with a floor of 4%. The outstanding balance on the line of credit with Guilford Savings Bank as of June 30, 2012 was $0, and the outstanding balance on the line of credit with Webster Bank as of June 30, 2011 was $300,000. The Organization will draw advances on the line of credit for various reasons. The Organization had a maximum amount outstanding at any one time of $1,000,000 and $900,000 during fiscal years 2012 and 2011, respectively. Note 7 Pension Plans The Organization sponsors a defined contribution pension plan. Total pension expense for the years ended June 30, 2012 and 2011 was $422,768 and $535,822, respectively. Note 8 Assets Held in Trust The Organization is one of two beneficiaries of the Frederick C. Spencer Trust (Trust). Because the assets of the Trust are neither in the possession of, nor under the control of, the Organization (they are held and administered by an outside trustee), the assets are not included in the Organization s balance sheet. The fair value of the assets totaled $1,266,533 and $1,260,429 at June 30, 2012 and 2011, respectively. Included in contributions and bequests in the accompanying statement of operations for the years ended June 30, 2012 and 2011 was $9,750 and $9,000, respectively, which was distributed from the Trust during each fiscal year. Note 9 Concentration of Credit Risk The Organization grants credit without collateral to its patients, most of whom are insured under third-party payor agreements. The mix of receivables from patients and third-party payors was as follows: Federal Programs 44% 48% State Programs Other Third Parties Private Pay % 100% In addition, the Organization maintains cash balances at a financial institution which are in excess of Federal Deposit Insurance Corporation (FDIC) limits. -17-

18 Note 10 Note Payable The note payable of $250,000 had an interest rate of 3.25% per annum. The principal and interest payments were to be made in two installments, with the first 50% of the principal balance due on June 1, 2012 and the remaining balance of the note, including interest, due on June 1, There was no penalty for prepayment. As part of a settlement agreement dated February 4, 2012 related to a bequest that both the Organization and SVS were claiming rights to, all interest and the payment due on June 1, 2013 was waived. The interest that accrued as of June 30, 2011 of $8,125 was reversed and reduced other current year interest expense. There was no interest recorded related to the note payable for the year ended June 30, The final note payment was removed as of the settlement agreement date and is included in contributions. Note 11 Operating Leases In November 1997, the Organization entered into an operating lease for office space in as its main headquarters with an initial term expiring in November In December 2002, the Organization exercised the option to renew the lease for five additional years. In July 2007, the Organization exercised the option to renew the lease for three more years. In October 2010, the Organization exercised the option to renew the lease for five more years at an annual rate of $248,914 for the period November 2010 to October 2012 and $256,235 for the period November 2012 to October In June 2004, the Organization entered into another lease agreement for additional space at the Guilford location with an initial term expiring in November In December 2006, the Organization exercised the option to renew the lease for three additional years. In December 2009, the Organization exercised the option to renew the lease for two more years. In June 2011, the Organization exercised the option to renew the lease for four more years at an annual rate of $74,181 for the period December 2011 to November 2012 and $75,322 for the period December 2012 to October The Organization subleases a substantial portion of this space at an annual rate of $56,100, which is recorded as a reduction in occupancy expense. In October 2005, the Organization entered into another lease agreement at the Guilford location with an initial term expiring in October In October 2010, the Organization exercised the option to renew the lease for five more years at an annual rate of $54,400 for the period November 2010 to October In May 2010, the Organization entered into another lease agreement at the Guilford location at an annual rate of $45,375 for the period November 2010 to October 2013 and an annual rate of $46,750 for the period November 2013 to October In July 2007, the Organization entered into an operating lease for LTC in Old Saybrook, Connecticut with an initial term expiring in August In June 2008, June 2009, June 2010 and June 2011, the Organization exercised the option to renew the lease for an additional year. In August 2012, the Organization exercised the option to renew the lease for an additional year at an annual rate of $9,814 for the period September 2012 to August In May 2009, the Organization entered into an operating lease for LTC in North Haven, Connecticut with an initial term expiring May In June 2011, the Organization exercised the option to renew the lease for an additional two years at an annual rate of $10,800 for the period July 2011 to June

19 Note 11 Operating Leases Cont d. In June 2010, the Organization entered into an operating lease for office space in Hamden, Connecticut to operate a temporary branch office with a rental period starting June 2010 and ending June 2011, at an annual rate of $119,776. The lease agreement had an option to cancel the lease with 30-day notice. The Organization gave 30-day notice and vacated the property in March In June 2010, the Organization entered into an operating lease for office space in Madison, Connecticut to operate a temporary branch office with a rental period starting June 2010 and ending September 2010, at a monthly rate of $2,149. The lease agreement had an option to cancel the lease with 30-day notice. The Organization gave 30-day notice and vacated the property at the end of July In June 2010, the Organization entered into an operating lease for office space in Madison, Connecticut to operate an adult day center with a rental period starting June 2010 and ending June 2013, at a nominal annual rate. The annual fair market value of the lease is estimated to be $25,000, which has not been recorded in the Statement of Operations as Contribution revenue or Space Occupancy expense, as the effect has been determined to be immaterial for 2012 and In July 2010, the Organization entered into a ten year two month operating lease for office space in Hamden, Connecticut to operate a branch office. The commencement date was March 2011 with a starting annual rate of $145,503. The Organization received two months free rent for March and April Annual rent will increase by 9.2% in year three and 1.4% for each year thereafter. At June 30, 2012, minimum future rental payments, exclusive of options to extend, for each of the next five years and in the aggregate, are as follows: 2013 $ 596, , , , ,064 Subsequent to ,812 Total $2,973,050 Total minimum future rental payments have not been reduced by sublease rentals to be received in the future under non-cancelable subleases. The following is a summary of rental expense under all operating leases: Minimum Rentals $588,997 $533,077 Less, Sublease Rentals 55,857 55,857 Total Rent Expense $533,140 $477,220 Certain operating leases provide for renewal options for periods from 1 to 5 years at their fair rental value at the time of renewal. In the normal course of events, operating leases are generally renewed or replaced by other leases. -19-

20 Note 12 Related-Party Transactions The Organization had a banking relationship with Guilford Savings Bank. A member of the Organization s Board of Directors is a Vice President with Guilford Savings Bank. Two members of the Board of Directors are physicians that refer patients and certify to the patient s need for home care services in the ordinary course of their business. The patient s services are paid by a third-party payor. No compensation is paid to or received from the board members. A member of the Board of Directors is the Director of the Yale New Haven Hospital Shoreline Medical Center. The Yale New Haven Hospital Health System refers patients in need of home care services in the ordinary course of business. The patient s services are paid by a third-party payor. No compensation is paid to or received from the board member. The Organization paid $20,000 to an employee recruiting placement firm for services provided in fiscal year A principal with the placement firm is also a member of the Board of Directors. Note 13 Functional Expenses Expenses, by function, for the years ended June 30, 2012 and 2011 were as follows: Home Care Skilled Service $19,749,023 $19,600,700 Home Care Support Service 2,304,315 1,761,086 School Program 271, ,154 Adult Day Care Center 329, ,647 General and Administrative 6,306,145 6,758,019 Investment Management Fees 7,623 10,787 Total $28,967,355 $28,687,393 Note 14 Risks and Uncertainties Because a high percentage of the Organization s revenue is derived from Medicare and Medicaid, reductions in rates, rate increases that do not cover cost increases and/or significant changes to the payment methodologies could have a material adverse effect on the Organization s business and combined financial condition, results of operations and cash flows and/or require the Organization to revise ways in which business is conducted. There is significant uncertainty in the home care industry due to government health care reform. Effective April 1, 2011, the Center for Medicare Services implemented new requirements regarding face-to-face physician encounters for authorization of home health and hospice services. These and other regulations may increase the Organization s costs, decrease revenues, expose the Organization to expanded liability or require the Organization to revise ways in which business is conducted. 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 values of investment securities may occur in the near term and that such changes could materially affect the amounts reported. -20-