VISITING NURSE ASSOCIATION HEALTH GROUP, INC. AND AFFILIATES Financial Statements and Additional Information December 31, 2016 and 2015 With Independent Auditors Report
December 31, 2016 and 2015 TABLE OF CONTENTS Independent Auditors' Report 1-2 Financial Statements Combined Balance Sheets 3 Combined Statements of Operations 4 Combined Statements of Changes in Net Assets 5 Combined Statements of Cash Flows 6 Notes to Combined Financial Statements 7-35 Additional Information Independent Auditors Report 32 Combining Balance Sheet Information 33 Combining Statement of Operations Information 34 Combining Statement of Changes in Net Assets (Deficit) Information 35 Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 36-37 Independent Auditors Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal, State and Local Awards Required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and New Jersey Department of the Treasury Circular Letter 15-08 OMB 38-39 Schedule of Findings and Questioned Costs 40-41 Supplementary Information Schedule of Expenditures of Federal, State and Local Awards 42-46 Notes to Schedule of Expenditures of Federal, State and Local Awards 47-48 Schedules of Budgeted and Actual Expenditures Applicable to Various State of New Jersey/Department of Health Grant Programs 49-66
INDEPENDENT AUDITORS REPORT The Board of Trustees Visiting Nurse Association Health Holmdel, New Jersey Report on the Financial Statements We have audited the accompanying combined financial statements of Visiting Nurse Association Health Group, Inc. and Affiliates, which comprise the combined balance sheets as of December 31, 2016 and 2015, and the related combined statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the Auditors judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Visiting Nurse Association Health as of December 31, 2016 and 2015, and the results of their operations, changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Supplemental Information Our audit was conducted for the purpose of forming an opinion on the combined financial statements as a whole. The accompanying Schedules of Expenditures of Federal, State and Local Awards are presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and New Jersey Department of the Treasury Circular Letter 15-08 OMB, and are not a required part of the combined financial statements. The Schedules of Budgeted and Actual Expenditures as described in the table of contents on pages 49 66 are presented for additional analysis as required by the Department of Health. Such information is the responsibility of management and was derived from and relates directly to underlying accounting and other records use to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedules of Expenditure of Federal, State and Local Awards and Budgeted and Actual Expenditures are fairly stated in all material respects in relation to the combined financial statements as a whole. Report on Other Legal and Regulatory Requirements In accordance with Government Auditing Standards, we have also issued our report dated June 6, 2017 on our consideration of Visiting Nurse Association Health internal control over financial reporting and on our tests of their compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Visiting Nurse Association Health internal control over financial reporting and compliance. Red Bank, New Jersey June 6, 2017 (except for supplemental information paragraph on the Schedules of Federal, State and Local Awards, for which the date is September 12, 2017)
Combined Balance Sheets As of December 31, 2016 and 2015 Assets 2016 2015 Current assets Cash and cash equivalents $ 5,036,556 $ 7,687,864 Patient accounts receivable, less allowance for doubtful accounts of $180,000 (2016) and $1,050,000 (2015) 954,448 10,944,246 Prepaid expenses and other current assets 2,108,099 3,895,071 Due from affiliates 3,050,244 1,850,592 Pledges receivable, net 851,204 310,798 Grants, contracts and other receivables 1,349,969 1,533,706 Total current assets 13,350,520 26,222,277 Assets whose use is limited 14,946,407 13,515,892 Pledges receivable, net 1,612,598 1,770,680 Investment in joint ventures 24,878,425 9,562,220 Intangible assets 3,353,000 7,755,396 Property, plant and equipment, net 12,772,541 12,313,806 Note receivable from joint ventures - 300,000 Other assets 155,416 183,896 Total assets $ 71,068,907 $ 71,624,167 Liabilities and Net Assets Current liabilities Line of credit $ 5,000,000 $ 7,410,000 Current portion of long-term debt 1,837,935 1,784,007 Current portion of capital lease obligation 58,617 28,377 Accounts payable and accrued expenses 10,287,606 15,862,189 Estimated amounts due to third-party payors and other liabilities 1,066,844 1,141,000 Loss in excess of investment in joint venture - 371,913 Due to affiliates 615,783 43,788 Unearned and deferred revenue 702,030 2,124,116 Total current liabilities 19,568,815 28,765,390 Long-term debt, net of current portion 1,713,706 3,551,626 Capital lease obligation, excluding current portion 204,274 - Accrued pension liability, excluding current portion 2,209,269 1,255,262 Estimated amounts due to third-party payors and other liabilities, excluding current portion 2,407,756 3,246,000 Total liabilities 26,103,820 36,818,278 Net assets Unrestricted 39,653,252 30,722,303 Temporarily restricted 4,361,407 3,133,158 Permanently restricted 950,428 950,428 Total net assets 44,965,087 34,805,889 Total liabilities and net assets $ 71,068,907 $ 71,624,167 The Notes to Combined Financial Statements are an integral part of these statements. 3
Combined Statements of Operations Years Ended December 31, 2016 and 2015 2016 2015 Revenue, support and gains Net patient service revenue $ 7,160,957 $ 66,076,386 Provision for bad debts related to patient service revenue (232,990) (1,078,591) Net patient service revenue less provision for bad debts 6,927,967 64,997,795 Grants and contracts 12,752,401 13,073,611 Management fees and other revenue 21,565,039 3,716,389 Contributions 976,671 1,215,720 Net assets released from restrictions for operations 147,241 203,072 Total revenue 42,369,319 83,206,587 Expenses Salaries 28,514,151 53,839,138 Fringe benefits 5,668,235 12,104,105 Contract services 144,336 2,155,660 Supplies and other expenses 9,692,885 13,658,631 Depreciation and amortization 1,378,977 1,331,274 Interest 369,005 286,910 Provision for bad debts, net 138,031 358,716 Total expenses 45,905,620 83,734,434 Loss from operations (3,536,301) (527,847) Nonoperating income Investment income 351,620 374,841 Net realized gain on investments 292,439 211,685 Net unrealized gain (loss) on investments 789,408 (1,132,667) Income on investment in joint ventures 8,729,267 2,107,133 Realized gain on sale or transfer of licenses and certificate of need rights 3,065,000 - Excess of revenue over expenses 9,691,433 1,033,145 Change in pension benefit liability to be recognized in future periods (760,484) (525,151) Changes in unrestricted net assets $ 8,930,949 $ 507,994 The Notes to Combined Financial Statements are an integral part of these statements. 4
Combined Statements of Changes in Net Assets Years Ended December 31, 2016 and 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Balance, December 31, 2014 $ 30,214,309 $ 1,703,161 $ 950,428 $ 32,867,898 Excess of revenue over expenses 1,033,145 - - 1,033,145 Net assets released from restrictions for operations - (203,072) - (203,072) Change in pension benefit liability to be recognized in future periods (525,151) - - (525,151) Restricted pledges, gifts and bequests - 1,633,069-1,633,069 Changes in net assets 507,994 1,429,997-1,937,991 Balance, December 31, 2015 30,722,303 3,133,158 950,428 34,805,889 Excess of revenue over expenses 9,691,433 - - 9,691,433 Net assets released from restrictions for operations - (147,241) - (147,241) Change in pension benefit liability to be recognized in future periods (760,484) - - (760,484) Restricted pledges, gifts and bequests - 1,375,490-1,375,490 Changes in net assets 8,930,949 1,228,249-10,159,198 Balance, December 31, 2016 $ 39,653,252 $ 4,361,407 $ 950,428 $ 44,965,087 The Notes to Combined Financial Statements are an integral part of these statements. 5
Combined Statements of Cash Flows Years Ended December 31, 2016 and 2015 2016 2015 Cash flows from operating activities Changes in net assets $ 10,159,198 $ 1,937,991 Adjustments to reconcile changes in net assets to net cash provided by operating activities and gains: Depreciation and amortization 1,378,977 1,331,274 Provision for bad debts, net 371,021 1,437,307 Unrealized (gain) loss on investments (789,408) 1,132,667 Realized (gain) loss on investments (292,439) (211,695) Realized gain on sale or transfer of licenses (3,065,000) - (Income) loss on investment in joint ventures, net (8,729,267) (2,107,133) Unamortized discount and valuation allowance on pledges receivable (87,025) 163,373 (Increase) decrease in operating assets: Patient accounts receivable 9,756,808 (2,134,556) Due from affiliates (1,409,672) (1,790,803) Prepaid expenses and other current assets 620,395 (285,215) Pledges receivable, net (295,299) (1,122,264) Grants, contracts and other receivables 183,737 241,748 Other assets, net 28,556 2,755,070 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses (4,453,030) 2,964,463 Estimated amounts due to third-party payors andother liabilities (912,400) (184,000) Due to affiliates 571,995 (1,017,709) Unearned and deferred revenue (1,422,086) (1,298,134) Accrued pension liability 954,007 607,784 Net cash provided by operating activities 2,569,068 2,420,168 Cash flows from investing activities Purchase of investments (8,037,253) (11,620,499) Proceeds from sale of investments 7,688,585 11,269,581 Capital expenditures (1,438,474) (625,386) Acquisition of intangible assets - (3,470,000) Proceeds from disposal of intangible assets 2,900,000 - Distributions from joint ventures 2,350,000 1,700,000 Investment in joint ventures (4,410,000) - Net cash used by investing activities (947,142) (2,746,304) Cash flows from financing activities Repayment on long term debt (1,783,992) (1,110,234) Proceeds from long term debt - 3,000,000 Repayment on line of credit (2,910,000) (2,500,000) Proceeds from line of credit 500,000 5,410,000 Repayment on capital lease obligation (79,242) (28,376) Net cash (used) provided by financing activities (4,273,234) 4,771,390 Net (decrease) increase in cash and cash equivalents (2,651,308) 4,445,254 Cash and cash equivalents, beginning of year 7,687,864 3,242,610 Cash and cash equivalents, end of year $ 5,036,556 $ 7,687,864 Supplemental disclosures of cash flow information: Cash paid for interest $ 367,792 $ 276,083 Supplemental disclosures of noncash activities: Change in insurance indemnification receivable included in other current assets and estimated malpractice liability in accrued expenses $ (1,121,553) $ 604,213 Capital lease obligation incurred as a result of new equipment lease $ 313,756 $ - Transfer of property and equipment and intangibles to joint venture $ 4,526,938 $ - The Notes to Combined Financial Statements are an integral part of these statements. 6
Notes to Combined Financial Statements December 31, 2016 and 2015 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Visiting Nurse Association Health Group, Inc. (Health Group) is a nonprofit organization and was established to oversee the policies and activities of the Visiting Nurse Association of Central Jersey, Inc. (VNACJ), Visiting Nurse Association of Central Jersey Foundation, Inc. (Foundation), MCOSS Ventures, Inc. (Ventures), Visiting Nurse Association of Central Jersey Personal Care, Inc. (Personal Care) and Visiting Nurse Association of Central Jersey Properties, Inc. (Properties) (collectively, the Affiliates), all of which are nonprofit organizations operating throughout New Jersey, to provide health care services or to administer education and research activities and to encourage contributions from the general public. In April 2008, Health Group completed a Corporate Restructuring transaction with Visiting Nurse and Homemaker Services, Inc. (VNHS), a nonprofit organization operating in Burlington and Gloucester Counties in New Jersey providing health care services and community health programs, at which time Health Group became the sole member of VNHS. On April 29, 2016, Health Group entered into an Asset Purchase Agreement to sell and transfer the Gloucester County license and certificate of need rights for a purchase price of $2,900,000. In August 2009, VNACJ purchased certain assets of Essex Valley Visiting Nurse Association, Inc. for the purpose of providing home health services to the people of Essex and Hudson Counties in New Jersey. VNACJ commenced operations in such counties on September 1, 2009. In addition, during December 2009, Personal Care purchased certain assets of Caregivers Resources, Inc. in order to expand its private duty services. In November 2014, Health Group purchased substantially all of the assets of Visiting Physician Services, P.C. with an effective closing date of January 1, 2015 in order to better serve the elderly and homebound in New Jersey who need health care at home. Effective January 1, 2016 Visiting Nurse Association of Central Jersey, Inc. (VNACJ) entered into a Contribution and Reorganization Agreement with Mega Care, Inc. (Mega Care) and Saint Barnabas Hospice and Palliative Care Center, Inc. (collectively referred to as Barnabas Health) to form VNA Health Group of New Jersey, LLC (VNAHGNJ), a New Jersey nonprofit Organization. The Organization was formed for the purpose of continuing to provide high quality home care, hospice and private care services to patients in the State of New Jersey. Each party contributed the service assets associated with the stated businesses (excluding the VNACJ Gloucester County license) into VNAHGNJ. Concurrently with the reorganization, VNACJ and Barnabas Health transferred their entire ownership interests in VNAHGNJ to Visiting Nurse Association Health Group, Inc. (Health Group) and Mega Care, respectively. The resulting ownership percentages of each member are 49% for Health Group and 51 % for Mega Care. The transaction resulted in significant financial impacts to the Organization in 2016 as a result of the business being contributed into VNAHGNJ. Business VNACJ provides care for patients in their homes and at clinic sites using employee or contract nurses, home health aides, therapists, medical social workers, nurse practitioners, nutritionists, and physicians. VNACJ earns the majority of its revenue from Medicare, Medicaid, federal, state and local government grants and municipality contracts and private insurance programs. 7
Notes to Combined Financial Statements December 31, 2016 and 2015 Foundation is a fundraising organization that supports the community services and programs of its affiliated nonprofit organizations. The Foundation s revenue is derived from special events and the solicitation of contributions and pledges from the community. Personal Care provides private duty care for patients in their homes using employees and contract home health aides and nurses. Ventures operates exclusively for the benefit of Health Group in its efforts to promote, support and develop charitable, educational and scientific activities. Ventures combined financial statements include the operating results of Properties, which operates as a holding company for certain real estate properties. Summary of Significant Accounting Policies The combined financial statements of Health Group and Affiliates (Organization) are presented in accordance with accounting principles generally accepted in the United States of America. The Organization follows the Audit and Accounting Guide for Health Care Organizations, published by the American Institute of Certified Public Accountants. The significant accounting policies of the Organization are as follows. Basis of Accounting The combined financial statements have been prepared on the accrual basis of accounting and include the accounts of Health Group and its Affiliates, VNACJ, Foundation, Personal Care, Ventures and Properties. All significant intercompany balances and transactions have been eliminated in combination. Financial Statement Presentation Net assets not restricted by a donor are accounted for as unrestricted net assets. Temporarily restricted net assets are those net assets restricted by outside sources as to time or purpose. To the extent temporarily restricted net assets are utilized during the period, they are reflected as net assets released from restrictions. Temporarily restricted contributions received and related expenses expended during the same year are recorded as unrestricted revenue and expenses in the combined statements of operations. Permanently restricted net assets are subject to the restrictions of gift instruments requiring that the principal be maintained in perpetuity with the use of the income only. Patient Accounts Receivable Patient accounts receivable are recorded at established rates net of contractual and other allowances and do not bear interest. The allowance for doubtful accounts is the Organization s best estimate of the amount of credit losses which could result on the Organization s accounts receivable from patients, insurance companies and others. The Organization reviews its allowance for doubtful accounts periodically and determines the estimated amount for the allowance based on management s assessment of historical and expected collections, business economic conditions, trends in healthcare coverage and other collection indicators. Past due balances are determined based on payment history and are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 8
Notes to Combined Financial Statements December 31, 2016 and 2015 Promises to Give The Organization reports promises to give (pledges) in accordance with the accounting standard relating to accounting for contributions received and contributions made. These standards require the Organization to record unconditional promises to give as revenue when the promise is made. Conditional promises to give are not recognized until they become unconditional, that is when the conditions are substantially met. The cash flows are discounted at a discount rate commensurate with the risks involved. The discount rate is equal to the current interest rate on outstanding debt and will be revised as terms change. That rate was approximately 4% at December 31, 2016. Amortization of the discount is included in contribution revenue. When considered necessary, an allowance is recorded based on management s estimate of uncollectability including such factors as prior collection history of donors, type of contribution and the nature of the fundraising activity. Investments Investments include certificates of deposit, money market funds and marketable fixed income and equity securities. Marketable securities are measured at fair market value in the accompanying combined financial statements. Investment income and net realized and unrealized gains or losses on investments are recorded as nonoperating income (losses) in the accompanying combined statements of operations. Inventories Inventories of supplies are not material and, therefore, are charged to expense as acquired. Joint Ventures Joint ventures relate to the Health Group s investment in Robert Wood Johnson Visiting Nurses, Inc., Cape Visiting Nurse Association, Inc., Visiting Nurse Association of Englewood, Inc., and VNA Health Group of New Jersey, LLC, all of which are accounted for under the equity method of accounting. If Health Group s equity in a joint venture falls below zero, it records the investment at the lesser of zero or the amount by which the cumulative losses exceed the value of its contributions limited by the value of any amounts due from the joint venture. Health Group recorded a liability at December 31, 2015 for its loss in excess of investment in Cape Visiting Nurse Association, Inc. in the accompanying combined balance sheets. During 2016, Cape Visiting Nurse Association, Inc. was dissolved and such liability was written off by Health Group resulting in the recognition of income. Intangible Assets In 2009, VNACJ acquired licenses, permits, certifications, Certificates of Need and other governmental authorizations to operate a home health agency in Essex and Hudson Counties, New Jersey with a fair value of $4,314,196, and Personal Care acquired Goodwill associated with the acquisition of certain assets of Caregivers Resources, Inc. with a fair value of $111,200. These assets were determined to have an indefinite life and accordingly, were not being amortized. Effective January 1, 2016, these assets were transferred as part of Health Group s investment in VNA Health Group of New Jersey, LLC. In 2015, Health Group acquired Goodwill and other intangible assets associated with the purchase of substantially all of the assets of Visiting Physicians Services. These assets were deemed to have an initial fair value of $3,470,000, including $3,143,000 for Goodwill, $45,000 for Trademarks and $282,000 for a Patient List. The Goodwill and Trademarks are determined to have an indefinite life and accordingly, are not being amortized. The Patient List was determined to have a two-year life and is being amortized accordingly. Amortization expense amounted to $142,000 and $140,000 in 2016 and 2015, respectively. 9
Notes to Combined Financial Statements December 31, 2016 and 2015 In 2016, pursuant to a Settlement and Dissolution Agreement, Cape Visiting Nurse Association, Inc. transferred its license to operate a hospice care program in Cape May County to VNACJ, which resulted in the recognition of income. The asset was deemed to have a fair value of $165,000 and an indefinite life and accordingly, is not being amortized. At December 31, 2016 and 2015, the fair value of intangible assets included on the accompanying combined balance sheets was $3,353,000 and $7,755,396, respectively. The Organization s intangible assets are reviewed for impairment annually or whenever events or circumstances indicate a possible impairment of the carrying amount. There were no impairment losses recorded for the years ended December 31, 2016 and 2015 as fair value for all assets exceeded book value. Property, Plant and Equipment Property, plant and equipment are recorded at cost, except for donated assets which are recorded at fair value at the date of donation. Depreciation and amortization is provided over the estimated useful life of each class of depreciable asset (ranging from 3 to 40 years) and is computed using the straight-line method. Equipment under capital lease obligations is recorded at the net present value of required total minimum lease payments at the date of acquisition. Gifts of long-lived assets such as land, buildings or equipment are reported as other changes in unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Where applicable, gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash and other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed into service. Operating Indicator The accompanying combined statements of operations include excess of revenue over expenses as the operating indicator. Changes in unrestricted net assets which are excluded from the excess of revenue over expenses, consistent with industry practice, include the change in pension benefit liability to be recognized in future periods. The Organization differentiates its ongoing operating activities through the loss from operations as an intermediate measure of operations. For purposes of financial statement display, investment income, net realized and unrealized gains (losses) on investments and joint ventures and realized gain on the sale of intangible assets are excluded from loss from operations and reported as nonoperating income (losses) in the accompanying combined statements of operations. Grants and Contracts VNACJ annually receives a number of grants and also contracts with municipalities within New Jersey and with certain county, state, federal and private organizations to render services. The funds received under these grants and contracts are generally designated to cover current operating costs for specific programs. Revenue related to these programs is recognized as related expenses are incurred. 10
Notes to Combined Financial Statements December 31, 2016 and 2015 Assets Whose Use Is Limited Assets whose use is limited are resources that are limited as to use based upon donor restrictions, contractual agreements and designations by the Board of Trustees. Assets limited as to use consist of cash equivalents, mutual funds, common stocks, government obligations and corporate bonds which are measured at fair market value in the accompanying combined balance sheets. Donated investments are recorded at the fair market value at the date of receipt. The cost of marketable equity securities used to compute gains and losses is determined by the average cost method. Fair market value for debt and equity securities is based upon quoted market prices. Investment income and realized and unrealized gains and losses on investments classified as assets whose use is limited are recorded as nonoperating income (losses). Net Patient Service Revenue Net patient service revenue represents the estimated net realizable amount from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Prior to January 1, 2015, revenue for Medicare beneficiaries was recognized over a 60-day Episode of Care. Subsequent to that date and in order to facilitate a more precise revenue calculation in connection with the transaction with Barnabas Health, VNACJ changed its accounting for revenue over an estimated 60-day episode to an actual length of episode based on information that was more readily available. Revenue received under prospective contractual agreements represents a substantial portion of the Organizations combined revenue and is subject to audit and possible adjustment by third-party reimbursement agencies. Retroactive receivables and payables, if any, from such third-party reimbursement agencies are accrued on an estimated basis in the period the services are rendered and adjusted in future periods as required. Charity Care The Organization has a policy of providing charity care to patients who are unable to pay. Such patients are identified based on financial information obtained from the patient and subsequent analysis. Since the Organization does not expect payment applicable to charity care services, estimated charges for charity care are not included in net patient service revenue. During the years ended December 31, 2016 and 2015, the Organization did not receive any cash reimbursements for providing charity care. 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, including estimated uncollectibles and allowances for accounts receivable from services to patients, and liabilities, including estimated payables to third-party payors and medical claims payable, and disclosures of contingent assets and liabilities at the date of the combined financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. The allowance for doubtful accounts, the estimated contractual allowances, the estimated payable to third-party payors and the estimated payable for denial of medical claims, among other accounts, require the significant use of estimates. Actual results could differ from those estimates. 11
Notes to Combined Financial Statements December 31, 2016 and 2015 Prior to January 1, 2015, revenue for Medicare beneficiaries was recognized over a 60-day Episode of Care. Subsequent to that date and in order to facilitate a more precise revenue calculation in connection with the transaction with Barnabas Health (see note 24), the Organization changed its accounting for revenue over an estimated 60-day episode to an actual length of episode based on information that was more readily available. This change to the assumptions related to the term of care provided to Medicare beneficiaries, which also included changes in reimbursement rates, increased the difficulty in making the estimates necessary under the revenue recognition policy. Because the effect of this change in accounting principle was inseparable from the effect of the change in the accounting estimates therein, the change was accounted for as a change in estimate. As a result, the Organization recorded a noncash increase in net patient service revenue of approximately $1,500,000 during 2015. Tax Status Health Group and its Affiliates are not-for-profit corporations and are exempt from Federal income taxes as described in Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for federal or state income taxes has been provided for in the accompanying combined financial statements. The Organization s accounting policy is to evaluate uncertain tax positions in accordance with professional accounting standards. Pursuant to the guidance in the standards, the Organization has determined that no unrecognized tax benefits exist as of December 31, 2016 and 2015 and does not expect this determination to change significantly over the next 12 months. The Organization has not incurred any income tax related penalties or interest for the years ended December 31, 2016 and 2015. Should any such penalties and interest be incurred, the Organization policy would be to recognize them as operating expenses. Cash and cash equivalents For the accompanying combined statements of cash flows, The Organization considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Volunteer Services A portion of the Organization s operations is conducted by volunteers. The value of this contributed time is not reflected in the accompanying combined financial statements since the services do not require specialized skills, and therefore do not qualify for recognition in the financial statements. Reclassifications Certain reclassifications have been made to the accompanying 2015 combined financial statements to conform with the 2016 presentation. These reclassifications had no effect on the net assets of the combined organizations. 12
Notes to Combined Financial Statements December 31, 2016 and 2015 2. PLEDGES RECEIVABLE Pledges receivable related to the 2020 Vision Campaign at December 31, 2016 and 2015 are as follows: 2016 2015 Unconditional promises to give $ 2,742,282 $ 2,446,983 Less: valuation allowance (68,457) (77,082) 2,673,825 2,369,901 Less: unamortized discount (210,023) (288,423) $ 2,463,802 $ 2,081,478 The unconditional promises to give, net of discounts, are due as follows at December 31, 2016 and 2015: 2016 2015 Less than one year $ 851,204 $ 310,798 One to five years 1,612,598 1,770,680 $ 2,463,802 $ 2,081,478 At December 31, 2016 and 2015, there were $63,115 and $63,191, respectively, of unpaid pledges related to a prior capital campaign which have been fully reserved in the accompanying combined balance sheets and excluded from the above details. 3. ASSETS WHOSE USE IS LIMITED As of December 31, 2016 and 2015, assets whose use is limited consists of the following: 2016 2015 Cost Fair Value Cost Fair Value Cash equivalents $ 3,309,374 $ 4,150,571 $ 964,398 $ 964,398 Mutual funds 1,344,385 1,377,554 399,809 411,124 Equities 5,180,691 5,917,322 8,287,755 9,138,517 U.S. Government obligations 914,501 921,192 455,898 441,793 Municipal bonds 50,849 50,600 - - Corporate bonds 2,481,295 2,529,168 2,532,128 2,560,060 Assets w hose use is limited $ 13,281,095 $ 14,946,407 $ 12,639,988 $ 13,515,892 13
Notes to Combined Financial Statements December 31, 2016 and 2015 The above assets whose use is limited are based upon donor restrictions, contractual agreements and designations by the Board of Trustees as follows: 2016 2015 Permanently restricted by donors $ 950,428 $ 950,428 Temporarily restricted by donors 4,361,407 3,133,158 Board Designated 9,634,572 9,432,306 $ 14,946,407 $ 13,515,892 Investment income related to investments, exclusive of realized and unrealized gains and losses, for the years ended December 31, 2016 and 2015 amounted to approximately $334,000 and $339,000, respectively, and represented annual returns of approximately 2.4% and 2.5%, respectively, based on the average market values of the investments for each year. In accordance with their investment policy, the Organization maintains a diversified investment portfolio with no significant concentrations in any particular industry segment or sector. At December 31, 2016, any unrealized losses on investments within the above categories are not deemed to be other than temporary impairments based on the expectation of recovery in value. 4. FAIR VALUE Accounting Standards Codification (ASC) Topic 820 framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described below: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, 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 asset or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 14
Notes to Combined Financial Statements December 31, 2016 and 2015 The following table presents the Organization s fair value hierarchy for its financial assets (investments) that are measured at fair value on a recurring basis as of December 31, 2016 and 2015: Level 1 Level 2 Level 3 Total Cash equivalents $ 4,124,060 $ 26,511 $ - $ 4,150,571 Mutual funds 1,377,554 - - 1,377,554 Equities 5,917,322 - - 5,917,322 U.S. Government obligations 921,192 - - 921,192 Municipal bonds - 50,600-50,600 Corporate bonds - 2,529,168-2,529,168 2016 $ 12,340,128 $ 2,606,279 $ - $ 14,946,407 Level 1 Level 2 Level 3 Total Cash equivalents $ 937,968 $ 26,430 $ - $ 964,398 Mutual funds 411,124 - - 411,124 Equities 9,138,517 - - 9,138,517 U.S. Government obligations 441,793 - - 441,793 Corporate bonds - 2,560,060-2,560,060 2015 $ 10,929,402 $ 2,586,490 $ - $ 13,515,892 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 2016 and 2015 consists of the following: 2016 2015 Land and land improvements $ 1,686,048 $ 1,686,048 Buildings and improvements 13,635,813 13,916,066 Furniture and fixtures 2,004,589 2,202,986 Automobiles 132,630 132,630 Equipment held under capital lease obligations 313,756 85,128 Computer equipment 11,095,504 11,066,423 Construction in progress 394,638 --- 29,262,978 29,089,281 Less: Accumulated depreciation and amortization (16,490,437) (16,775,475) $ 12,772,541 $ 12,313,806 Depreciation expense for the years ended December 31, 2016 and 2015 applicable to the above assets amounted to $1,191,953 and $1,154,436, respectively. Effective January 1, 2016, the Organization transferred property and equipment with a book value of $101,541 as part of Health Group s investment in VNA Health Group of New Jersey, LLC. 15
Notes to Combined Financial Statements December 31, 2016 and 2015 6. LONG-TERM DEBT On March 30, 2012, the Organization entered into a Loan and Security Agreement (Agreement) with a Bank in the amount of $5,000,000. The loan matures on March 30, 2018. Interest only payments on the loan were due and payable monthly commencing May 1, 2012 and each month thereafter through April 1, 2013. Thereafter, the term loan shall be paid in fifty-nine (59) consecutive equal monthly installments of principal and interest of approximately $92,400 commencing on May 1, 2013 and a final payment of the balance due on March 30, 2018. The interest rate on the loan is fixed at 4.06% per annum. Interest expense on this facility for the years ended December 31, 2016 and 2015 amounted to $78,726 and $119,927, respectively. In connection with an Asset Purchase Agreement, effective January 1, 2015, the Organization entered into a two-year promissory note with Visiting Physician Services, P.C. in the amount of $1,000,000. The note matures in January 2017 and is payable in two annual installments of $500,000 due on the first and second anniversary of the closing date. The note bears interest at 1% during the first year and 3% during the second year of the note. Interest expense on this facility for the years ended December 31, 2016 and 2015 amounted to $5,000 and $6,667, respectively. On May 27, 2015, the Organization entered into a Loan and Security Agreement (Agreement) with a Bank in the amount of $2,000,000. The loan matures on June 1, 2022. The term loan shall be paid in eightythree (83) consecutive equal monthly payments of principal and interest of approximately $27,300 commencing on July 1, 2015 and a final payment of the balance due on June 1, 2022. The interest rate on the loan is fixed at 3.91% per annum. Interest expense on this facility for the years ended December 31, 2016 and 2015 amounted to $69,014 and $46,126, respectively. The following is a summary of long-term debt at December 31, 2016 and 2015: 2016 2015 Loan payable Interest only payments fixed at 4.06% through April 2013 followed by monthly principal and interest payments ending on March 30, 2018. The loan is collateralized by a first security interest on certain business assets of the Organization, subject to existing liens, and covered under mortgage and pledge agreements executed by applicable entities. $ 1,434,596 $ 2,460,760 Note payable Annual installments of $500,000 due by January 15, 2016 and January 15, 2017, respectively, with interest at 1% and 3%. The note is collateralized by the assets identified in the Asset Purchase Agreement. 500,000 1,000,000 16
Notes to Combined Financial Statements December 31, 2016 and 2015 Loan payable Monthly principal and interest payments ending on June 1, 2022 bearing interest at 3.91%. The note is collateralized by a security interest on certain business assets of the Organization, subject to existing liens, and covered under mortgage and pledge agreements executed by applicable entities. 1,617,045 1,874,873 3,551,641 5,335,633 Less: Current portion (1,837,935) (1,784,007) Long-term debt, net current portion $ 1,713,706 $ 3,551,626 These facilities are subject to various financial covenants. At December 31, 2016 and 2015, the Organization was in compliance with all of its financial covenants. Aggregate maturities of debt obligations for the next five years ended December 31 and thereafter are as follows: Year Amount 7. LINE OF CREDIT 2017 $ 1,837,935 2018 644,412 2019 290,570 2020 302,219 2021 314,502 Thereafter 162,003 $ 3,551,641 The Organization (Borrower) has a revolving credit agreement (Agreement) with a Bank applicable to a line of credit. On January 15, 2012, the Agreement was amended to increase the maximum principal amount available to $13,000,000, revise the interest rate and extend the maturity date to July 31, 2014. The maturity date was extended in 2016 through October 31, 2017. Interest only is required to be paid during the term of the revolving credit agreement for any advances drawn down on the line of credit. The interest is to be paid at a rate per annum equal to the higher of (i) 3% and (ii) adjusted LIBOR rate plus two hundred fifty (250) basis points such rate being 3% at December 31, 2016 and 2015. The line of credit is collateralized by a first security interest on certain business assets of the Borrower, subject to existing liens, and covered under mortgage and pledge agreements executed by applicable entities. The line of credit is subject to various financial covenants. At December 31, 2016 and 2015, the Organization was in compliance with all of its financial covenants. The amount drawn down on the line of credit as of December 31, 2016 and 2015 was $5,000,000 and $7,410,000, respectively. Interest expense on the line of credit for the years ended December 31, 2016 and 2015 was $200,423 and $114,190, respectively. 17
Notes to Combined Financial Statements December 31, 2016 and 2015 8. OPERATING LEASE OBLIGATIONS The Organization has noncancelable operating leases for the rental of various facilities and equipment, which expire at varying times through 2023. Future minimum lease payments for the next five (5) years subsequent to December 31, 2016 and thereafter are approximately as follows: Year Amount 2017 $ 1,162,000 2018 1,188,000 2019 1,154,000 2020 1,113,000 2021 1,076,000 Thereafter 1,788,000 $ 7,481,000 Facility and equipment rental expense amounted to approximately $627,000 and $1,074,000 for the years ended December 31, 2016 and 2015, respectively. 9. CAPITAL LEASE OBLIGATION The capital lease obligation consists of the following at December 31, 2016 and 2015: 2016 2015 During 2016, Health Group entered into a capital lease agreement for telephone equipment with a fair market value of $313,756. Under the lease, Health Group is required to make monthly payments of $6,064 for 60 months at 5.99% interest through January 2021. At the end of the lease, a $1 option to buy the equipment is available to Health Group. $ 262,891 $ --- During 2014, Health Group entered into a capital lease agreement for computer equipment with a fair market value of $85,128. Under the lease, Health Group is required to make three annual payments of $28,376 at 0% interest through August 2016. At the end of the lease, a $1 option to buy the equipment was exercised by Health Group. --- 28,377 Less: Current portion (58,617) (28,377) Long-term portion $ 204,274 $ --- 18
Notes to Combined Financial Statements December 31, 2016 and 2015 Future minimum lease payments on the lease obligation subsequent to December 31, 2016 are approximately as follows: Year Amount 2017 $ 58,617 2018 62,226 2019 66,056 2020 70,124 2021 5,868 $ 262,891 Interest expense incurred on the capital lease obligation for the year ended December 31, 2016 amounted to $15,842. 10. PENSION PLANS Defined Contribution Plans Health Group, VNACJ, Foundation and Personal Care sponsor a noncontributory defined contribution pension plan which covers substantially all of their employees other than those hired prior to May 3, 2006 located in certain Middlesex County, New Jersey locations. Under the terms of the plan, 7.5% of pensionable compensation for vested employees hired on or before December 31, 2000 and 4% for employees hired after that date is contributed to the Plan Custodian on behalf of all employees with two (2) years of service who have attained twenty-one (21) years of age. Contribution expense relative to this Plan amounted to approximately $976,000 and $1,841,000 for the years ended December 31, 2016 and 2015, respectively. Defined Benefit Plan VNACJ and Personal Care have a defined benefit pension plan which covers their employees located in certain Middlesex County, New Jersey locations hired prior to May 3, 2006. Employees are eligible to participate in the plan when they have completed one (1) year of service, attained the age of twenty-one (21) and have provided 1,000 hours of service. Benefits are paid to retirees based upon their respective years of service and level of compensation. Employees hired after May 3, 2006 are eligible to participate in the VNACJ and Personal Care sponsored defined contribution plan. The funding policy provides that payments to the pension trust should be at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) plus other amounts as determined by management. The plan s assets are not reflected in the accompanying combined financial statements and are invested in cash equivalents, fixed income, equity and U.S. Government securities. Generally accepted accounting principles require the Organization to recognize in its balance sheet an asset, for a defined benefit postretirement plan s overfunded status, or a liability, for a plan s underfunded status; measure a defined benefit postretirement plan s assets and obligations that determine funded status as of the end of the employer s fiscal year; and recognize the periodic change in the funded status of a defined benefit postretirement plan as a component of changes in unrestricted net assets in the year in which the change occurs. 19