The Rehabilitation Institute of Kansas City and The Rehabilitation Institute Industries, Inc.

Transcription

1 Accountants Report and Consolidated Financial Statements

2 Contents Independent Accountants Report... 1 Consolidated Financial Statements Balance Sheets... 2 Statements of Operations... 3 Statements of Changes in Net Assets... 4 Statements of Cash Flows... 5 Notes to Financial Statements... 6

3 Independent Accountants Report Boards of Directors and The Rehabilitation Institute Industries, Inc. Kansas City, Missouri We have audited the accompanying consolidated balance sheets of The Rehabilitation Institute of Kansas City (collectively referred to as the Institute) as of, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Institute s management. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Institute as of, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. April 24, 2012

4 Consolidated Balance Sheets Assets Current Assets Cash and cash equivalents $ 191,915 $ 50,583 Patient accounts receivable, net of allowance; 2011 $96,260, 2010 $86,130 1,077, ,271 Vocational accounts receivable 669, ,721 Workshop accounts receivable 56,509 57,239 Contributions receivable, net of allowance; 2011 $6,737, 2010 $12,145 60, ,304 Due from affiliate 6,107 19,319 Other receivables 127, ,951 Prepaid expenses and other 55,217 59,861 Total current assets 2,245,276 2,065,249 Assets Limited as to Use Internally designated 12,352 12,351 Externally restricted by donors 463, ,539 Total assets limited as to use 476, ,890 Investments 29,091 - Property and Equipment, net 371, ,420 Total assets $ 3,122,427 $ 2,748,559 See

5 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 276,263 $ 265,353 Accounts payable 301, ,926 Accrued expenses 385, ,516 Total current liabilities 963,148 1,030,795 Long-term Debt 213, ,171 Total liabilities 1,177,056 1,520,966 Net Assets Unrestricted 1,114, ,273 Temporarily restricted 757, ,320 Permanently restricted 73,000 73,000 Total net assets 1,945,371 1,227,593 Total liabilities and net assets $ 3,122,427 $ 2,748,559 2

6 Consolidated Statements of Operations Years Ended Unrestricted Revenues, Gains and Other Support Net patient service revenue $ 4,174,496 $ 3,699,558 Workshop sales 493, ,626 Vocational services 1,593,690 1,726,168 Government reimbursement sheltered workshop 1,136,851 1,089,480 Public support United Way 271, ,303 Grant income 17,905 15,220 In-kind rent contribution 490, ,850 Other 164, ,513 Net assets released from restrictions used for operations 42,646 42,514 Total unrestricted revenues, gains and other support 8,385,540 7,939,232 Expenses Salaries and wages 5,183,351 5,067,490 Employee benefits 1,041, ,319 Supplies and other 1,370,345 1,607,122 Purchased services and professional fees 429, ,662 Depreciation and amortization 69,423 82,660 Interest 27,654 37,991 Provision for uncollectible accounts 70, ,999 Total expenses 8,192,408 8,276,243 Operating Income (Loss) 193,132 (337,011) Other Income Investment return 1, Contributions 413, ,370 Total other income 414, ,660 Excess (Deficiency) of Revenues Over Expenses 608,130 (5,351) Contributions for acquisition of property and equipment 36,305 6,796 Increase in Unrestricted Net Assets $ 644,435 $ 1,445 See 3

7 Consolidated Statements of Changes in Net Assets Years Ended Unrestricted Net Assets Excess (deficiency) of revenues over expenses $ 608,130 $ (5,351) Contributions for acquisition of property and equipment 36,305 6,796 Increase in unrestricted net assets 644,435 1,445 Temporarily Restricted Net Assets Contributions 115, ,802 Net assets released from restriction (42,646) (42,514) Increase in temporarily restricted net assets 73, ,288 Permanently Restricted Net Assets Contributions Increase in Net Assets 717, ,233 Net Assets, Beginning of Year 1,227, ,360 Net Assets, End of Year $ 1,945,371 $ 1,227,593 See 4

8 Consolidated Statements of Cash Flows Years Ended Operating Activities Change in net assets $ 717,778 $ 247,233 Items not requiring (providing) operating cash flow Depreciation and amortization 69,423 82,660 Contributions for acquisition of property and equipment (36,305) (6,796) Changes in Patient, vocational, workshop, contribution and other accounts receivable, net (43,339) 106,945 Prepaid expenses and other 4,644 6,064 Accounts payable (94,063) 54,079 Accrued expenses 15,506 (47,483) Net cash provided by operating activities 633, ,702 Investing Activities Increase in assets limited as to use (155,271) (124,806) Net purchase of investments (29,091) - Purchase of property and equipment (78,902) (32,432) Net cash used in investing activities (263,264) (157,238) Financing Activities Contributions for acquisition of property and equipment 36,305 6,796 Principal payments on long-term debt (265,353) (249,352) Net cash used in financing activities (229,048) (242,556) Increase in Cash and Cash Equivalents 141,332 42,908 Cash and Cash Equivalents, Beginning of Year 50,583 7,675 Cash and Cash Equivalents, End of Year $ 191,915 $ 50,583 Supplemental Cash Flows Information Interest paid $ 27,654 $ 37,991 See 5

9 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations and Principles of Consolidation The accompanying consolidated financial statements include the accounts of The Rehabilitation Institute of Kansas City (collectively referred to as the Institute), both of which are Missouri nonprofit corporations. Consolidated financial statements are presented as is the sole member of The Rehabilitation Institute Industries, Inc. and the organizations have the same Board of Directors. All significant intercompany accounts and transactions have been eliminated in consolidation. provides outpatient rehabilitation services and operates a vocational center for the purposes of rehabilitating persons with physical disabilities. The Rehabilitation Institute Industries, Inc. operates a sheltered workshop program to provide employment opportunities to persons with physical disabilities. Use of Estimates The preparation of consolidated 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 Institute 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 with brokers. Effective July 21, 2010, the FDIC s insurance limits were permanently increased to $250,000. At December 31, 2011, the Institute s cash accounts exceeded federally insured limits by approximately $75,000. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDICinsured institutions. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Investment return includes dividend and interest income and realized and unrealized gains and losses on investments carried at fair value. 6

10 Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the consolidated statements of operations and changes in net assets as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Assets Limited as to Use Assets limited as to use include (1) assets restricted by donors and (2) assets set aside by the Board of Directors for various designated projects and future capital improvements over which the Board retains control and may at its discretion subsequently use for other purposes. Patient Service Revenue and Accounts Receivable The Institute reports patient accounts receivable for services rendered at net realizable amounts from third-party payers, patients and others. The Institute provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. As a service to the patient, the Institute bills third-party payers directly and bills the patient when the patient s liability is determined. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives. 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. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Institute has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Institute in perpetuity. 7

11 Excess (Deficiency) of Revenues Over Expenses The consolidated statements of operations include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers to and from affiliates for other than goods and services and contributions of long-lived assets, including assets acquired using contributions that, by donor restriction, were to be used for the purpose of acquiring such assets. Charity Care The Institute provides care without charge or at amounts less than its established rates to patients meeting certain criteria under its charity care policy. Because the Institute does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. The costs of charity care provided were approximately $56,000 and $63,000 in 2011 and 2010, respectively. The cost of charity care is estimated by applying the ratio of cost to gross charges to the gross uncompensated charges. 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. Contributed Rent The Institute operates a sheltered workshop at 1020 East 12 th Street in a building owned by Empowering Individuals Through Advocacy and Support (EITAS). EITAS charges the Institute a nominal rate for the lease of this space. In addition, EITAS provides for the repairs and maintenance of this building. The estimated value of the contributed rent was approximately $125,000 for both the years ended. Repairs and maintenance expense for the building paid by EITAS was $13,175 and $2,616 for the years ended, respectively. 8

12 Income Tax Status are not-for-profit organizations as described in Section 501(c)(3) of the Internal Revenue Code, and are exempt from income taxes on related income under Section 501(a) of the Code and a similar provision of state law. The Institute files tax returns in the U.S federal jurisdiction. With a few exceptions, the Institute is no longer subject to U.S. federal examinations by tax authorities for years before Subsequent Events Subsequent events have been evaluated through the date of the Independent Accountants Report, which is the date the financial statements were available to be issued. Reclassifications Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 financial statement presentation. These reclassifications had no effect on the change in net assets. Note 2: Property and Equipment Property and equipment at consisted of the following: Equipment $ 1,138,122 $ 1,059,220 Leasehold improvements 2,268,208 2,268,208 3,406,330 3,327,428 Less accumulated depreciation and amortization 3,034,431 2,965,008 $ 371,899 $ 362,420 Note 3: Net Patient Service Revenue The Institute has agreements with third-party payers that provide for payments to the Institute at amounts different from its established rates. Services rendered to Medicare and Medicaid beneficiaries are paid based on fee schedules. The Institute has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Institute under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. 9

13 Note 4: Concentration of Credit Risk The Institute grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The mix of patient accounts receivable at were: Medicare 12% 17% Medicaid 15% 9% Other third-party payers 62% 62% Patients 11% 12% 100% 100% Substantially all of the vocational accounts receivable are due from the State of Missouri. Note 5: Investments and Investment Return Assets limited as to use at December 31 include: Internally designated for various designated projects and future capital improvements Money market mutual funds $ 12,352 $ 12,351 Externally restricted by donors Cash and cash equivalents $ 341,017 $ 308,539 Investments 122,792 - $ 463,809 $ 308,539 Investments at December 31, which were reported at cost which approximated fair value, consisted of the following: Money market mutual funds $ 45,315 $ 18,131 Equity mutual funds 37,090 - Fixed income mutual funds 87,610 - $ 170,015 $ 18,131 10

14 Total investments are reflected in the consolidated balance sheets as follows: Cash and cash equivalents $ 5,780 $ 5,780 Internally designated for various designated projects and future capital improvements 12,352 12,351 Externally restricted by donors 122,792 - Investments 29,091 - $ 170,015 $ 18,131 Total investment return is comprised of the following: Interest and dividend income $ 1,119 $ 290 Note 6: Contributions Receivable Contributions receivable consisted of the following at December 31: Temporarily Restricted Due within one year $ 33,500 $ 55,000 Due in one to five years 36,000 71,000 69, ,000 Less Allowance for uncollectible contributions (6,737) (12,145) Unamortized discount at 2% (2,130) (4,551) $ 60,633 $ 109,304 11

15 Note 7: Functional Expenses The Institute provides health care and vocational rehabilitation services to persons with physical disabilities within its geographic location. Expenses related to providing these services are as follows: Health care and vocational rehabilitation services $ 5,833,246 $ 6,078,930 General and administrative 2,359,162 2,197,313 $ 8,192,408 $ 8,276,243 Note 8: Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets amounting to $757,663 and $684,320 at December 31, 2011 and 2010, respectively, are available for specific program and department activities. Permanently restricted net assets at are restricted by donors to be invested in perpetuity, the income of which is unrestricted. During 2011 and 2010, net assets were released from donor restrictions by incurring expenses, satisfying the restricted purposes of program and department activities in the amounts of $42,646 and $42,514, respectively. Note 9: Endowment The Institute s endowment consists of several donor-restricted funds established for a variety of purposes. As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board-designated endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The Institute s governing body has interpreted the State of Missouri Prudent Management of Institutional Funds Act (SPMIFA) as requiring 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, the Institute 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 donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Institute in a manner consistent with the standard of prudence prescribed by SPMIFA. 12

16 In accordance with SPMIFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the Institute and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the Institute 7. Investment policies of the Institute The Institute s endowment assets include those assets of donor-restricted endowment funds that must be held in perpetuity. The Institute invests its endowments in low risk assets such as FDICinsured bank deposits and money market mutual funds to maintain the corpus amounts. As there are no donor-restrictions on earnings from these assets, all income earned on the endowments is spent on operations as it is earned. A summary of the endowment follows: Endowment Funds - Permanently Restricted $ 73,000 $ 73,000 Endowment Income - Unrestricted Interest $ 171 $ 41 Note 10: Related Party Transactions The Institute and The Rehabilitation Institute Foundation (Foundation) are related parties. The Institute authorizes the Foundation to solicit contributions on its behalf. In the absence of donor restrictions, the Foundation s Board of Directors has discretionary control over the amounts, timing and recipient of any distributions. The Foundation s contributions to the Institute during the years ended December 31, 2011 and 2010 were $203,775 and $141,319, respectively, and are reported in the Institute s consolidated financial statements as other income unrestricted contributions. At, $6,107 and $19,319, respectively, of the committed support was outstanding. The Foundation has also agreed to lease its building to the Institute at a nominal rate through 2089, provided the Institute continues to use the property in accordance with terms specified in the lease agreement, which includes using the property to further the mission for which it was formed. As a result of the agreement, the Institute recorded rent expense of $490,850 and a corresponding amount as an in-kind contribution from the Foundation within unrestricted revenues, gains and other support in 2011 and

17 In March 2010, the Institute and Foundation consolidated various credit agreements into a promissory note due February 2015 with principal and accrued interest payable monthly. At, the balance on this note was $490,171 and $755,524, respectively (see Note 11). Note 11: Long-term Debt Long-term debt at consisted of the following: Note payable to the Foundation, a related party, principal and accrued interest to be paid monthly, due February 2015, interest rate is 4% $ 490,171 $ 755,524 Less current maturities 276, ,353 $ 213,908 $ 490,171 In March 2010, the Institute and Foundation consolidated the previous line of credit and note payable into a new note. The revised note is due February 28, 2015 with monthly payments of $18,122, including interest at 4%. In addition, principal payments of $75,000 are due at the end of each year and 50% of any unrestricted contributions over $100,000 from a single source the Institute receives must be used to reduce the outstanding principal balance. The note is secured by accounts receivable, equipment, fixtures and supplies. Aggregate annual maturities of long-term debt at December 31, 2011 are: 2012 $ 276, ,908 $ 490,171 14

18 Note 12: Pension Plan The Institute established a defined-contribution pension plan covering substantially all employees effective July 1, The Board of Directors annually determines the amount, if any, of the Institute s contributions to the plan. There were no contributions to the plan during 2011 and Note 13: Operating Leases Noncancellable operating leases for office space are renewed annually and require the Institute to pay all executory costs (property taxes, maintenance and insurance). Rental expense for all operating leases was $525,970 and $704,910 for the years ended, respectively. Note 14: Disclosures About Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 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 consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Investments 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 mutual funds, equity mutual funds and fixed income mutual funds. 15

19 The following table presents the fair value measurements of assets recognized in the accompanying consolidated 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 : Quoted Prices in Active Markets for Identical Assets Fair Value Measurements Using Significant Other Observable Inputs Significant Unobservable Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2011 Money market mutual funds $ 45,315 $ 45,315 $ - $ - Equity mutual funds 37,090 37, Fixed income mutual funds 87,610 87, $ 170,015 $ 170,015 $ - $ - December 31, 2010 Money market mutual funds $ 18,131 $ 18,131 $ - $ - Note 15: Significant Estimates and Concentrations Litigation 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: In the normal course of business, the Institute is, from time to time, subject to allegations that may or do result in litigation. Some of these allegations are in areas not covered by the Institute s commercial insurance; for example, allegations regarding employment practices or performance of contracts. The Institute 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. 16

20 Current Economic Conditions The current protracted economic decline continues to present healthcare organizations with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, large declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Institute. Current economic conditions, including the rising unemployment rate, have made it difficult for certain patients to pay for services rendered and many donors to continue to contribute to not-forprofit organizations. As employers make adjustments to health insurance plans or more patients become unemployed, services provided to self-pay and other payers may significantly impact net patient service revenue, which could have an adverse impact on the Institute s future operating results. Further, the effect of economic conditions on the federal and state governments may have an adverse effect on cash flows related to the Medicare and Medicaid programs. Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in investment values and allowances for accounts receivable and contributions receivable that could negatively impact the Institute s ability to maintain sufficient liquidity. 17