Report of Independent Auditors and Financial Statements. Institute on Aging

Transcription

1 Report of Independent Auditors and Financial Statements Institute on Aging June 30, 2017 and 2016

2 Table of Contents REPORT OF INDEPENDENT AUDITORS... 1 FINANCIAL STATEMENTS Statements of Financial Position... 4 Statement of Operations and Changes in Net Assets... 5 Statement of Functional Expenses... 6 Statements of Cash Flows

3 Report of Independent Auditors To the Board of Directors Institute on Aging Report on the Financial Statements We have audited the accompanying financial statements of Institute on Aging (the Organization ), a California nonprofit corporation, which comprise the statements of financial position as of June 30, 2017, and the related statements of operations and changes in net assets, functional expenses and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 2017, and the related changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Report on Summarized Comparative Information We have previously audited the Organization s 2016 financial statements, and we expressed an unmodified audit opinion on those financial statements in our report dated November 2, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016, is consistent, in all material respects, with the audited financial statements from which it has been derived. San Francisco, California October 31,

5 Financial Statements

6 Statements of Financial Position June 30, 2017 and ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,684,680 $ 1,112,666 Investments 1,672,902 1,327,181 Grants receivable 305, ,048 Accounts receivable, net of provision for bad debts 4,152,271 3,215,104 Trust accounts related to bonds, required for current liabilities 241,108 1,927,538 Prepaid expenses and other current assets 434, ,070 Total current assets 8,490,469 8,031,607 TRUST ACCOUNTS RELATED TO BONDS, net of current 500, ,000 INVESTMENTS, restricted 1,052,996 1,052,996 PROPERTY AND EQUIPMENT, net of accumulated depreciation 36,412,414 37,413,980 Total assets $ 46,456,874 $ 46,998,583 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 1,097,648 $ 906,717 Accrued bond interest 142, ,674 Accrued expenses 2,538,259 2,599,443 Line of credit 3,900,000 3,000,000 Bonds payable - 885,000 Advances from third-party payors 2,878,154 2,001,012 Total current liabilities 10,556,711 10,173,846 BONDS PAYABLE, net of current portion 38,157,599 34,419,182 Total liabilities 48,714,310 44,593,028 NET ASSETS Unrestricted (3,677,721) 1,070,177 Temporarily restricted 367, ,382 Permanently restricted 1,052,996 1,052,996 Total net assets (2,257,436) 2,405,555 Total liabilities and net assets $ 46,456,874 $ 46,998,583 4 See accompanying notes.

7 Statement of Operations and Changes in Net Assets Year Ended June 30, 2017 (With Summarized Comparative Totals for the Year Ended June 30, 2016) Temporarily Permanently Total 2016 Unrestricted Restricted Restricted 2017 Comparative Totals Only REVENUES, GAINS, AND OTHER SUPPORT Capitation revenue $ 17,619,005 $ - $ - $ 17,619,005 $ 15,558,457 Net patient service revenue 10,625, ,625,794 9,790,185 Government contracts 9,387, ,387,071 8,320,972 Health plan revenue 4,137, ,137,302 2,638,476 Grant and contribution revenue 1,389, ,818-1,937,237 1,688,216 Other revenue 1,377, ,377, ,919 Investment income 130, , ,482 Realized (loss) gain on sale of investments (1,447) - - (1,447) 213 Net assets released from restrictions 462,911 (462,911) Total revenues, gains, and other support 45,128,035 84,907-45,212,942 38,949,920 EXPENSES Operating expenses Program services PACE 13,891, ,891,799 13,039,967 Home care 9,917, ,917,058 8,253,769 Community care programs 6,730, ,730,939 5,901,878 Multi-purpose senior services 1,877, ,877,725 1,861,139 Health plans 3,974, ,974,572 2,594,982 Adult day centers 848, ,861 1,107,328 Other programs 1,966, ,966,401 1,661,044 39,207, ,207,355 34,420,107 Supporting Services Management and general 5,584, ,584,288 4,921,857 Fundraising 588, , ,028 Total supporting services 6,172, ,172,467 5,558,885 Total operating expenses 45,379, ,379,822 39,978,992 Excess expenses over revenues, gains, and other support (251,787) 84,907 - (166,880) (1,029,072) Net unrealized gains (losses) on investments 114, ,368 (133,406) Changes in net assets before loss on defeasance of bonds payable (137,419) 84,907 - (52,512) (1,162,478) Loss on defeasance of bonds payable (4,610,479) - - (4,610,479) - CHANGES IN NET ASSETS (4,747,898) 84,907 - (4,662,991) (1,162,478) NET ASSETS, beginning of year 1,070, ,382 1,052,996 2,405,555 3,568,033 NET ASSETS, end of year $ (3,677,721) $ 367,289 $ 1,052,996 $ (2,257,436) $ 2,405,555 See accompanying notes. 5

8 Statement of Functional Expenses Year Ended June 30, 2017 (With Summarized Comparative Totals for the Year Ended June 30, 2016) Program Services Supporting Services Community Multi-Purpose Total Management Total Community Senior Adult Day Other Program and Fund Supporting Total Comparative PACE Home Care Programs Services Health Plans Centers Programs Services General Raising Services Expenses Totals Only Salaries $ 7,059,030 $ 6,588,546 $ 2,758,452 $ 1,065,014 $ 1,147,873 $ 481,256 $ 1,101,727 $ 20,201,898 $ 2,569,343 $ 372,066 $ 2,941,409 $ 23,143,307 $ 20,330,368 Payroll taxes and benefits 1,719,038 1,475, , , , , ,345 4,709, ,633 80, ,142 5,467,554 5,077,410 Interest 1,277, , , ,168 19,597 49,875 91,383 1,853, ,472 29, ,079 2,258,534 2,320,983 Professional fees and contract labor 716, , ,003 64, ,108 38, ,326 2,167, ,345 38,360 1,021,705 3,189,181 2,571,934 Waived and special services - - 2,007, ,111 1,829, ,048, ,048,569 2,569,622 Occupancy 791,759 1,239, , , ,501 44, ,922 2,990, ,978 65, ,953 3,698,296 2,984,091 Supplies 673,501 58,059 8,337 2,873 6,682 70,716 10, ,667 47,913 1,662 49, , ,325 Client transportation 1,169, ,461-1,198, ,198,261 1,151,648 Legal and accounting 58,528 7,832 22,504 6,303 13,731 3,863 7, ,075 36,269-36, , ,015 Insurance 54,791 30,736 27,633 16,200 46,286 3,616 6, ,109 33,953-33, , ,087 Depreciation and amortization 372, , ,502 37,951 86,651 23,259 44, , , ,382 1,119,472 1,183,509 $ 13,891,799 $ 9,917,058 $ 6,730,939 $ 1,877,725 $ 3,974,572 $ 848,861 $ 1,966,401 $ 39,207,355 $ 5,584,288 $ 588,179 $ 6,172,467 $ 45,379,822 $ 39,978,992 See accompanying notes. 6

9 Statements of Cash Flows Years Ended June 30, 2017 and CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (4,662,991) $ (1,162,478) Adjustments to reconcile the decrease in net assets to net cash from operating activities Unrealized (gains) losses on investments (114,368) 133,406 Depreciation and amortization 1,119,472 1,180,282 Amortization of bond issuance 131, ,477 Amortization of bond premium (22,980) - Loss on defeasance of bonds payable 4,610,479 - Provision for bad debts 43,895 10,234 Changes in assets and liabilities Grants and contract funds receivable (134,957) 32,404 Accounts receivable (981,062) 59,721 Prepaid expenses and other current assets (155,433) (96,168) Accounts payable 190, ,907 Accrued bond interest (639,024) (18,428) Accrued expenses (61,184) (260,899) Advances from third parties 877, ,956 Net cash provided by operating activities 201, ,414 CASH FLOWS FROM INVESTING ACTIVITIES Change trust accounts related to bonds 1,685,435 (301,006) Purchases of investments (231,353) (218,094) Purchases of property and equipment (117,906) (25,300) Net cash provided by (used in) investing activities 1,336,176 (544,400) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of revenue bonds 40,203,443 - Repayment of revenue bonds (37,260,000) - Principal payments on revenue bonds (885,000) (840,000) Payment of interest to escrow agent (1,892,931) - Cash paid for issuance of revenue bonds (2,030,844) - Borrowings on line of credit 900, ,225 Net cash used in financing activities (965,332) (217,775) NET CHANGE IN CASH AND CASH EQUIVALENTS 572,014 (367,761) CASH AND CASH EQUIVALENTS, beginning of year 1,112,666 1,480,427 CASH AND CASH EQUIVALENTS, end of year $ 1,684,680 $ 1,112,666 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 2,406,232 $ 2,208,161 7 See accompying notes.

10 NOTE 1 DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of organization Institute on Aging (the Organization ), is a California nonprofit public benefit corporation, which commenced operations on July 1, The Organization provides a broad range of services primarily benefiting older adults. These services include health care clinics, day programs for seniors with memory loss, an art program that brings elders and youth together, education and advocacy around elder abuse prevention, education programs for professionals in geriatrics, care management, fiduciary services, personal care in clients homes, and a 24-hour phone support for depressed, lonely, or suicidal seniors. Basis of presentation The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net assets, revenues, expenses, gains, and losses are classified based on the existence or absence of donorimposed restrictions. Accordingly, net assets of the Organization and changes therein, are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations and can be expendable for any purpose in performing the primary objective of the Organization. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Organization and/or the passage of time. When a restriction is met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of operations as net assets released from restrictions. Permanently restricted net assets Net assets that are subject to donor-imposed stipulations that will be maintained permanently by the Organization. Generally, the Organization is permitted to use or expend part or all of the income and gains derived from the donated assets unless restricted by a donor s wishes. The Board of Directors has interpreted the California Prudent Management of Institutional Funds Act ( CPMIFA ) as requiring the preservation of the fair value of the original gift as of the date of the donorrestricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment, (b) the original value of the subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard prudence prescribed by CPMIFA. In the absence of donor stipulations or law to the contrary, losses on the investments of a donor-restricted endowment fund shall reduce temporarily restricted net assets to the extent that donorimposed temporary restrictions on net appreciation of the fund have not been met before a loss occurs. Any remaining loss shall reduce unrestricted net assets. 8

11 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. Estimates include allowance for uncollectible accounts, useful lives of property and equipment, liability for claims that may be covered under a professional liability claims-made policy, and liability for claims that may be covered under workers compensation occurrence policy. Actual results could differ from those estimates. Fair value of financial instruments Financial Accounting Standards Board ( FASB ), Accounting Standards Codification ( ASC ) Topic 820, Fair Value Measurements and Disclosures, prescribes fair value measurements and disclosures for financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements. FASB ASC Topic 820 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. FASB ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements. Disclosure of fair value of financial instruments The carrying amounts reported in the statement of financial position for cash and cash equivalents, prepaid expenses and other current assets, and accrued expenses approximate fair value. The fair values of investments are disclosed in Note 4. The fair value of bonds payable (Note 8) is estimated based on discounted cash flow analysis, based on the Organization s current incremental borrowing rates for similar types of borrowing arrangements. The bonds payable instruments as of June 30, 2017 and 2016, have a fair value of approximately $40,833,148 and $41,716,556, respectively (Note 8). Summarized financial information The financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient information to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Organization s financial statements for the year ended June 30, 2016, from which the summarized information was derived. Cash and cash equivalents For purposes of the statement of cash flows, the Organization considers all unrestricted highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consisted of demand deposit and money market accounts at June 30, 2017 and Receivables No allowance for grants receivables is considered necessary as they primarily relate to nongovernmental entities. No allowance for contract funds receivable, which are included in accounts receivable, is considered necessary as they primarily relate to government entities. An allowance for accounts receivable for client fees is provided based on management s evaluation of historical collections. It is the Organization s policy to charge off uncollectible accounts when management determines they will not be collected. Provision for bad debts of $43,895 and $10,234 is included in general and administrative expense for the years ended June 30, 2017and 2016, respectively. 9

12 Trust Accounts Related to Bonds In December 2010, the Organization moved into a new building at 3575 Geary Boulevard in San Francisco. The first floor of the building houses programs relocated from four leased facilities in San Francisco. A portion of the second floor holds the Organization offices. The basement offers parking for automobiles as well as an auditorium and meeting rooms. Floors three through six and a portion of the second floor are owned by Bridge Housing and have been developed into 153 affordable apartments for seniors. Bond reserve accounts held by trustee are required to be maintained in accordance with the Series 2017 bond financing agreement for the purpose of the debt service reserve and making the scheduled principle and interest payments to bond holders. These accounts are held by Bank of New York Mellon, bond trustee, under strict, conservative investment guidelines. Amounts required to meet current liabilities of the Organization are included in current assets. Investments Investments are stated at their fair value. If available, quoted market prices are used to value investments. Corporate bonds and notes are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Amounts reported for privately held stock that have no quoted market price represent estimated fair value. Investments received by donation are recorded at their fair market value on the date received. Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in the excess of revenues, gains, and other support over expenses. Unrealized gains and losses are excluded from revenues, gains, and other support over expenses. Property and equipment Property and equipment acquisitions are reported at cost or, if donated, at the approximate fair market value at the date of donation. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the improvements. The Organization capitalizes property and equipment with a cost of greater than $5,000. Costs of maintenance and repairs are charged to expense as incurred. Depreciation expenses for the years ended June 30, 2017 and 2016, were $1,119,471 and $1,180,282 respectively. Buildings Equipment Leasehold improvements 40 years 5-10 years 2-10 years Debt issuance costs The Orgainzation refinanced its Series 2008 bonds during the year ended June 30, Costs associated with the issuance of these bonds were written off during the year ended June 30, Debt issuance costs are being amortized using the straight-line method over the term of the related financing agreement. Amortization expense was $131,250 and $134,477, for the years ended June 30, 2017 and 2016, respectively. Accumulated amortization was $7,980 and $619,713 at June 30, 2017 and 2016, respectively. Bond premium The bond premium is netted with the related Series 2017 bonds and is amortized of the term of the bonds using the effective interest method. As of June 30, 2017, accumulated amortization was $22,980. There was no accumulated amortization of bond premium as of June 30, For the years ended June 30, 2017 and 2016, amortization of bond premium included in interest expense was $22,908 and $0, respectively. In connection with the issuance of $34,355,000 bonds (see Note 8), the Office of Statewide Health Planning and Development of the State of California ( Cal-Mortgage ) was paid $1,276,937 at the bond closing May 31, 2017, for the cost of insuring the bonds over the 30-year term. Other costs of issuance at the bond closing totaled $753,907, for total cost of issuance for the Series 2017 bonds of $2,030,

13 Advances from third-party payors The Organization receives various advances from third-party payors as part of its agreements. The advances are applied towards future payments due to the Organization from the thirdparty payors. Included in advances from third-party payors are settlement liabilities payable to the State of California Department of Health Care Services ( DHCS ) for advances not earned during the contract period. As of June 30, 2017, DHCS audits have been completed for all contract years through June 30, 2013, and for the period July 1, 2015 to June 30, Settlement liabilities were $259,855 and $304,974, at June 30, 2017 and 2016, respectively. Professional liability insurance The Organization insures for professional liability claims under a claimsmade policy. Under the policy, insurance premiums cover only those claims actually reported during the policy term up to $1,000,000 of coverage for each occurrence. Should the claims-made policy not be renewed or replaced with equivalent insurance, claims related to occurrences during their terms, but reported subsequent to their termination, may be uninsured. Management is not aware of any pending claims that exceed the coverage limitations provided by their policy. Management is of the opinion that the impact, if any, is immaterial, and any settlement would not have a material adverse effect on the Organization s financial position. Management s estimate of the Organization s liability for expected losses from reported and unreported incidents is based on the Organization s historical claim experience within stop-loss coverage limits. There are no accrued professional liability claims included in accrued expenses in the statement of financial position or insurance recovery receivables recorded under prepaid expenses and other assets in the statement of financial position at June 30, 2017 and Workers compensation insurance The Organization is insured for workers compensation claims under an occurrence policy with a $250,000 deductible for each occurrence. The accrual for these costs includes the unpaid portion of claims that have been reported and estimates of amounts for claims that have been incurred but not reported and is included in accrued expenses in the statement of financial position. Any related insurance recovery receivables are recorded under prepaid expenses and other current assets in the statement of financial position. Management recognizes an estimated liability based upon the Organization s historical claims experience within stop-loss coverage limits. Effective May 11, 2017, the Organization is insured for workers compensation claims under a fully-insured policy, with an annual cost of $1,124,508. There is no deductible under this policy, as all claims are handled by the carrier from the first dollar. The claim reserve is based on the best data available to the Organization; however, the estimate is subject to a significant degree of inherent variability. Such an estimate is continually monitored and reviewed and, as the reserve is adjusted, the difference is reflected in current operations. While the ultimate amount of workers compensation liability is dependent on future developments, management is of the opinion that the associated liabilities recognized in the Organization s financial statements are adequate to cover such claims. There are accrued workers compensation claims of $310,036 and $393,092 included in accrued expenses in the statement of financial position at June 30, 2017 and 2016, respectively. There are insurance recovery receivables of $217,266 and $85,583 recorded under prepaid expenses and other current assets in the statement of financial position at June 30, 2017 and 2016, respectively. Net patient service revenue 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. 11

14 Capitation revenue The Organization has an agreement (the Agreement ) with On Lok Lifeways to provide medical services to subscribing patients in the federal Program of All-Inclusive Care for the Elderly ( PACE ). Under the Agreement, the Organization receives monthly capitation payments based on the number of participants enrolled. Capitation payments are recognized as capitation revenue during the period in which the Organization is obligated to provide services to participants. Grant revenue Support funded by grants is recognized as the Organization performs the contracted services or incurs outlays eligible for reimbursement under the grant agreements. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Restricted and unrestricted contributions Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire (that is, when a stipulated time restriction ends or purpose restriction is accomplished) in the reporting period in which the revenue is recognized. All other donorrestricted contributions are reported as increases in temporarily or permanently restricted net assets, depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of operations and changes in net assets as net assets released from restrictions. Government contracts Government contracts revenue is funded primarily by federal, state, and county contracts, which generally restrict the use of such funds to cover the operating expenses directly related to providing home care services. These contracts are recognized as revenue over the periods specified in the related contract award agreements. The Organization is a pass-through grantee of the City and County of San Francisco, the California Department of Aging, along with various other program grants from the State of California. Health plan revenue Health plan revenue is funded primarily by health plans, which restrict the use of such funds to cover the operating expenses directly related to providing home care services. These contracts are recognized as revenue over the periods specified in the related contract award agreements. The Organization is a direct recipient vendor of the Health Plan of San Mateo and the Santa Clara Department of Aging and Adult Services. Excess expenses over revenues, gains, and other support The statement of operations and changes in net assets include excess of expenses over revenues, gains, and other support. Changes in unrestricted net assets, which are excluded from excess of expenses over revenues, gains, and other support, consistent with industry practice, include unrealized gains and losses on investments. Expense allocation The costs of providing various programs and other activities have been summarized on a functional basis in the statement of operations and changes in net assets and in the statement of functional expenses. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Advertising Institute on Aging uses advertising to promote its programs and to recruit staff. The production costs of advertising are expensed in management and general expenses as incurred. Advertising expense was approximately $334,375 and $265,686 for the years ended June 30, 2017 and 2016, respectively. 12

15 Concentration of risk The Organization has a concentration risk with respect to financial instruments, which consist of cash deposits in excess of federally insured limits. The Organization maintains its cash with high-credit quality financial institutions. For the year ended June 30, 2017 and 2016, approximately 39% and 40%, respectively, of the Organization s revenue is derived from a contract from On Lok Lifeways ( On Lok ), for the year ended June 30, The Organization s Agreement with On Lok is effective through June 30, On Lok has contracted with the Organization since 1997 without an interruption in contract. On Lok receives its funding for this program from the federal government. Although it is not anticipated, loss of or significant changes in funding for contracts with On Lok would materially affect the financial position of the Organization. In the event funding is terminated, the Organization s programs would be significantly altered. The mix of accounts receivables as of June 30, 2017 and 2016, was as follows: Government contracts 28% 49% Self-pay 29% 32% Other contracts 43% 19% 100% 100% Collective bargaining The Organization has 400 employees. A concentration of labor supply in employees working under union collective bargaining agreements represents approximately 65% of its hourly workforce in two different collective bargaining units. Of these represented employees, 75% of hourly employees are working under one collective bargaining agreement that expired in August 2015 and was renewed through September The organization s salaried workforce is not represented by unions. Income taxes The Organization is a not-for-profit corporation and has been recognized as tax-exempt pursuant to Section 501(c)(3) of the Internal Revenue Code and Section 2370(d) of the California Revenue and Taxation Code. The Organization qualifies for the charitable contribution deduction under Section 170(b)(1)(A) and has been classified as an organization that is not a private foundation under Section 509(a)(2). As of June 30, 2015, the Organization had no unrecognized tax positions or uncertain tax positions requiring accrual. Therefore, no provision for income taxes has been provided in the financial statements. The Organization files tax returns in the U.S. federal jurisdiction. With few exceptions, the Organization is no longer subject to U. S. federal examination by tax authorities for years prior to June 30,

16 New accounting pronouncements Effective July 1, 2016, the Organization adopted Accounting Standards Update ( ASU ) No , Interest - Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs ( ASU ). ASU requires debt issuance costs related to a recognized debt liability to be presented in the statements of financial position as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of ASU , debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU does not change the recognition and measurement requirements for debt issuance costs. The standard requires retrospective application and represents a change in accounting principle. As a result of the retrospective adoption, the Organization reclassified unamortized debt issuance costs of $2,840,818 as of June 30, 2016, from deferred financing costs, net to a direct reduction from the carrying amount of the revenue bonds on the statement of financial position. In accordance with FASB ASC Topic 250, Accounting Changes and Error Corrections, these financial statements present the adoption of ASU as a change in accounting principle, and accordingly, the 2016 financial statements presented have be adjusted to apply the new accounting method retrospectively as follows: June 30, 2016 As Previously Reported Adjustment As Adjusted Unrestricted net assets, end of year $ 1,070,177 $ - $ 1,070,177 Total assets, end of year $ 49,839,401 $ (2,840,818) $ 46,998,583 Debt issuance costs, net of accumulated amortization $ 2,840,818 $ (2,840,818) $ - Bonds payable, net of current portion $ 37,260,000 $ (2,840,818) $ 34,419,182 Depreciation and amortization $ 1,314,759 $ (131,250) $ 1,183,509 Interest $ 2,189,733 $ 131,250 $ 2,320,983 In August 2014, the FASB issued ASU No , Presentation of Financial Statements Going Concern (Subtopic ) Disclosures of Uncertainties about an Entity s Ability to Continue as a Going Concern ( ASU ) to provide guidance about management s responsibility to evaluate whether there is a substantial doubt about an entity s ability to continue as a going concern and to provide related footnote disclosures. Management adopted ASU for the year ended June 30, In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers ( ASU ) to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption of ASU and related amendments are effective for the Organization beginning July 1, Management is currently evaluating the impact of adoption on the financial statements. In January 2016, the FASB issued ASU No , Financial Instruments Overall (Subtopic ) Recognition and Measurement of Financial Assets and Liabilities ( ASU ) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The adoption of ASU is effective for the Organization beginning July 1, Management is currently evaluating the impact of adoption on the financial statements. In February 2016, the FASB issued ASU No , Leases (Topic 842) ( ASU ) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of ASU is effective for the Organization beginning July 1, Management is currently evaluating the impact of adoption on the financial statements. 14

17 In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities ( ASU ) to improve current net asset classification requirements and the information presented in financial statements and notes about a not-for-profit entity s liquidity, financial performance, and cash flows. The adoption of ASU is effective for the Organization beginning July 1, Management is currently evaluating the impact of adoption on the financial statements. NOTE 2 FINANCIAL STRATEGY The Organization, in accordance with FASB Accounting Standards Codification ( ASC ) Subtopic Presentation of Financial Statements Going Concern, has identified conditions that raise substantial doubt about the ability of the Organization to continue as a going concern in the near future. The following is our evaluation of those conditions and the financial strategy plan that alleviates those conditions: The principle conditions that raise substantial doubt about the Organization s ability to continue as a going concern is our current ratio of 0.80 as of June 30, 2017, the use of the line of credit for operations, and the maturity of the line of credit in March If the line of credit is not renewed in March 2018, the full amount becomes due. Since the Organization is not likely to be able to make payment in full upon demand, the Organization would notify the State of California Office of Statewide Health Planning and Development Agency ( Office ), to request payment in full be made in accordance with the Contract of Insurance, securing the line of credit. Per the Regulatory Agreement filed with the Contract of Insurance, any payment made as a result of default or amounts due upon demand would be deemed by the Regulatory Agreement as an event of Default, which would provide the Office remedies in accordance with California Health and Safety code section , which include any or all of the following: conduct an evaluation of the Organization, direct the management and operations of the Organization, or hire a management agent. The Organization plans to renew the line of credit prior to March 2018 to prevent an event of default. The Contract of Insurance, securing the line of credit alleviates concerns about the ability to meet current obligations as they come due. Although recognizing conditions that create substantial doubt about the ability to continue as a going concern, management believes that these substantial doubts have been alleviated. 15

18 NOTE 3 ACCOUNTS RECEIVABLE Accounts receivable consisted of the following as of June 30, 2017 and 2016: Government contracts $ 1,363,532 $ 1,606,251 Self-pay 1,280,184 1,071,864 Other contracts 1,607, ,592 Total accounts receivable 4,250,874 3,313,707 Less: provision for bad debts 98,603 98,603 Accounts receivable, net $ 4,152,271 $ 3,215,104 NOTE 4 INVESTMENTS AND ASSETS LIMITED AS TO USE FASB ASC Topic 820, Fair Value Measurements and Disclosures, 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. FASB ASC 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 active 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. 16

19 The following tables present the fair value measurements of assets recognized in the accompanying statement of financial position measured at fair value on a recurring basis and the level within FASB ASC Topic 820 fair value hierarchy in which the fair value measurements fall at June 30, 2017 and 2016: 2017 Total Level 1 Level 2 Level 3 Investments and assets limited as to use Mutual funds $ 2,725,898 $ 2,725,898 $ - $ - Total investments and assets limited as to use $ 2,725,898 $ 2,725,898 $ - $ - Trust accounts related to bonds Money market funds $ 742,103 $ 742,103 $ - $ - Total trust accounts related to bonds $ 742,103 $ 742,103 $ - $ Total Level 1 Level 2 Level 3 Investments and assets limited as to use Mutual funds $ 2,375,557 $ 2,375,557 $ - $ - Government and corporate bonds 4,620 4, Total investments and assets limited as to use $ 2,380,177 $ 2,380,177 $ - $ - Trust accounts related to bonds Money market funds 2,427,538 2,427, Total trust accounts related to bonds $ 2,427,538 $ 2,427,538 $ - $ - NOTE 5 ENDOWMENTS The Organization s endowment includes both donor-restricted funds and funds designated by the Board of Directors to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Organization classifies, as permanently restricted net assets, the original value of gifts donated to the permanent endowment. The remaining portion of the endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure. The decision on whether to appropriate endowment funds is based on the purposes of the donor-restricted endowment funds, the expected total return, over the long run, from income and the appreciation of investments, and the current-year cash needs of the Organization. 17

20 Endowment net assets composition by type of fund as of June 30, 2017 and 2016, were as follows: Unrestricted Temporarily Restricted 2017 Permanently Restricted Total Donor-restricted endowment funds $ - $ - $ 1,052,996 $ 1,052,996 Board designated endowments 1,672, ,672,902 $ 1,672,902 $ - $ 1,052,996 $ 2,725,898 Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Donor-restricted endowment funds $ - $ - $ 1,052,996 $ 1,052,996 Board designated endowments 1,327, ,327,181 $ 1,327,181 $ - $ 1,052,996 $ 2,380,177 The changes in endowment net assets for the years ended June 30, 2017 and 2016, were as follows: 2017 Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets, June 30, 2016 $ 1,327,181 $ - $ 1,052,996 $ 2,380,177 Investment return: Investment income, net 130, ,843 Realized and unrealized losses 112, ,921 Total investment return 243, ,764 Cash transfer 101, ,957 Endowment net assets, June 30, 2017 $ 1,672,902 $ - $ 1,052,996 $ 2,725,898 18

21 Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Endowment net assets, June 30, 2015 $ 1,240,687 $ 1,806 $ 1,052,996 $ 2,295,489 Investment return: Investment income, net 131,288 (1,806) - 129,482 Realized and unrealized gains (133,193) - - (133,193) Total investment return (1,905) (1,806) - (3,711) Appropriation of endowment assets for expenditures 88, ,399 Endowment net assets, June 30, 2016 $ 1,327,181 $ - $ 1,052,996 $ 2,380,177 NOTE 6 PROPERTY AND EQUIPEMENT Land, building, equipment, and leasehold improvements consisted of the following at June 30, 2017 and 2016: Land $ 2,803,620 $ 2,803,620 Building and building improvements 39,871,086 39,833,871 Leasehold improvements 41,216 41,216 Equipment 1,057, ,051 43,773,662 43,655,758 Less accumulated depreciation (7,361,248) (6,241,778) $ 36,412,414 $ 37,413,980 NOTE 7 LINE OF CREDIT On March 1, 2017, the Organization renewed and increased their line of credit with City National Bank to $4,000,000 and extended the due date to March 1, The Organization has renewed the line of credit annually since March 1, 2013, renewed it on March 1, 2017, and intends to renew it and annually, thereafter. The line of credit is secured by the State of California, Health and Human Services Agency, Cal-Mortgage Insurance Division. At June 30, 2017 and 2016, the outstanding balance is $3,900,000 and $3,000,000, respectively. Outstanding balance on the line accrues interest at prime plus 0.25%. 19

22 NOTE 8 BONDS PAYABLE Bonds payable at June 30, 2017 and 2016, consisted of the following: Health Facility Revenue Bonds, Series 2008A, effective rate 4.375%, annual payments beginning August 15, 2017, continuing to August 15, 2018 $ - $ 1,290,000 Health Facility Revenue Bonds, Series 2008A, effective rate 5.150%, annual payments beginning August 15, 2019, continuing to August 15, ,465,000 Health Facility Revenue Bonds, Series 2008A, effective rate 5.650%, annual payments beginning August 15, 2028, continuing to August 15, ,865,000 Health Facility Revenue Bonds, Series 2008B, effective rate 5.850%, annual payments beginning August 15, 2009, continuing to August 15, ,525,000 Revenue Refunding Bonds, Series 2017, effective rate 4% annual payments 595,000 - Revenue Refunding Bonds, Series 2017, effective rate 5% annual payments 33,760,000-34,355,000 38,145,000 Add bond premium 5,825,463 Less current portion - (885,000) Less debt issuance, net of amortization (2,022,864) (2,840,818) $ 38,157,599 $ 34,419,182 In May 2017, the Organization refinanced its California Health Facilities Financing Authority Insured Revenue Bonds, Series 2008 ( Series 2008 Bonds ) through the issuance of the $34,355,000 California Municipal Finance Authority Insured Revenue and Refunding Bonds, Series 2017 ( Series 2017 Bonds ), net of bond premium of $5,825,463. Proceeds from the Series 2017 Bonds were used to refinance the Series 2008 Bonds. The Series 2017 Bonds are secured by and will be equally and ratably payable from payments made by the Organization to the Authority under the financing agreement. The bonds are also guaranteed by the Office of Statewide Health Planning and Development, an agency of the State of California. In accorance with the issuance of the Series 2017 Bonds, the Series 2008 Bonds were legally defeased and funded to an escrow account in accordance with the Escrow Agreement included with the Series 2017 Bonds in the amount of $39,152,931, which was comprised of bond principal of $37,260,000, plus funded interest of $1,892,931. Per the Escrow Agremement, the Sereies 2008 Bonds will be called on August 15, The Organization recorded a loss on defeasance in the amount of $4,610,479, which is comprised of the funded interest of $1,892,931 and unamortized Series 2008 Bond issue costs of $2,717,548. The bonds are subject to certain financial performance related covenants. Also, under the terms of the Series 2017 Bonds, the Organization is required to maintain certain deposits with a trustee. Management believes they are in compliance with these covenants as of June 30,

23 Scheduled long-term debt maturities for the next five years are as follows: Year Ending June 30, 2018 $ , , , ,200,000 Thereafter 32,560,000 $ 34,355,000 NOTE 9 NET ASSETS Temporarily restricted net assets at June 30, 2017 and 2016, consisted of $367,289 and $282,382, respectively, for the Organization s programs. Net assets of $462,911 and $953,207 were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors at June 30, 2017 and 2016, respectively. NOTE 10 OPERATING LEASES The Organization leases various program and administrative facilities and office equipment expiring in various years through The total rental expenses for the years ending June 30, 2017 and 2016, for these operating leases was approximately $380,000 and $291,000, respectively, included in occupancy in the statement of functional expenses. Following is a schedule of future minimum lease payments under operating leases as of June 30, 2017: Year Ending June 30, 2018 $ 271, , $ 386,860 NOTE 11 PENSION PLAN The Organization has a Tax Sheltered Annuity under IRC 403(b), which allows all employees with at least one hour of service to contribute through payroll deductions. The Organization makes no matching contributions under this plan. 21

24 NOTE 12 RETIREMENT PLAN The Organization is a participating employer in the Retirement Plan for Hospital Employees ( RPHE ). The plan is a multiemployer, defined benefit plan and follows the guidance set forth in FASB Accounting Standards Codification. The net pension cost for an employer in a multiemployer pension plan is equal to the required contributions to that plan. The Organization s contributions for the plan years ended December 31, 2016 and 2015, totaled $295,176 and $244,929 for the years ended June 30, 2017 and 2016, respectively. The Organization s unfunded liability as of December 31, 2016 and 2015, was $2,010,536 and $1,667,530, respectively. This will be paid off on a 10-year amortization. Actual payments will vary depending on market fluctuations of the underlying plan investments. NOTE 13 CONTINGENCIES In the ordinary course of business, the Organization may be a party to claims and legal actions. While the outcome cannot be determined at this time, management s opinion is the liability, if any, from these actions will not have a material adverse effect on the Organization s financial position. The Organization is subject to many complex federal, state, and local laws and regulations. Compliance with these laws and regulations is subject to government review and interpretation and unknown or unasserted regulatory actions. Government activity with respect to investigations and allegations regarding possible violations of these laws and regulations by health care providers, including those related to medical necessity, coding, and billing for services has increased significantly. Violations of these laws can result in large fines and penalties, sanctions on providing future services, and repayment of past patient service revenues. The Organization has implemented a voluntary corporate compliance program that includes guidance for all employees adherence to applicable laws and regulations. Management believes any actions that may result from investigations of noncompliance with laws and regulations will not have a material effect on the Organization s future financial position or changes in net assets. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditations, and government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity continues with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs, together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Organization is in compliance with fraud and abuse, as well as other applicable government laws and regulations. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions known or unasserted at this time. 22

25 NOTE 14 SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the statement of financial position date but before financial statements are issued. The Organization recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing the financial statements. The Organization s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the statement of financial position but arose after the statement of financial position date and before financial statements are issued. The Organization has evaluated subsequent events through October 31, 2017, which is the date the financial statements are issued. 23

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