AUDITED FINANCIAL STATEMENTS VISITING NURSE ASSOCIATION COMMUNITY HEALTHCARE, INC. AND AFFILIATES GUILFORD, CONNECTICUT JUNE 30, 2014
CONTENTS INDEPENDENT AUDITOR S REPORT........................ Page 3 AUDITED FINANCIAL STATEMENTS: Combined Balance Sheets.............................. 4 Combined Statements of Operations......................... 5 Combined Statements of Changes in Net Assets.................. 6 Combined Statements of Cash Flows........................ 7 NOTES TO COMBINED FINANCIAL STATEMENTS................. 8-19
PEACH & MCPHERSON CERTIFIED PUBLIC ACCOUNTANTS 110 WASHINGTON AVENUE NORTH HAVEN, CONNECTICUT 06473 TELEPHONE (203)234-9426 INDEPENDENT AUDITOR S REPORT To The Board of Directors of Visiting Nurse Association Community Healthcare, Inc. and Affiliates Report on the Financial Statements We have audited the accompanying combined financial statements of Visiting Nurse Association Community Healthcare, Inc. and Affiliates, which comprise the combined balance sheets as of June 30, 2014 and 2013, 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 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Visiting Nurse Association Community Healthcare, Inc. and Affiliates as of June 30, 2014 and 2013, and the combined results of its operations, changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. North Haven, Connecticut September 24, 2014
COMBINED BALANCE SHEETS June 30, 2014 and 2013 ASSETS Current Assets: Cash and Cash Equivalents $ 912,859 $ 687,309 Accounts Receivable 2,985,810 2,908,162 Grants and Other Receivables 18,560 17,527 Prepaid Expenses 355,357 359,236 Total Current Assets 4,272,586 3,972,234 Property and Equipment, Less Accumulated Depreciation of $1,596,612 and $1,435,171 865,264 732,524 Other Assets: Security Deposits 13,825 13,025 Assets Limited as to Use: Cash Temporarily Restricted - 16,856 Grant Receivable Temporarily Restricted - 40,000 Investments Board Designated 1,762,382 1,502,475 Total Assets Limited as to Use 1,762,382 1,559,331 Total Assets $6,914,057 $6,277,114 LIABILITIES AND NET ASSETS Current Liabilities: Accounts Payable and Accrued Expenses $ 381,940 $ 238,959 Accrued Payroll and Compensated Absences 2,159,226 2,121,326 Deferred Grant Revenue - 35,389 Advances From Third-Party Payers 39,596 16,598 Total Current Liabilities 2,580,762 2,412,272 Long-Term Liabilities: Estimated Third-Party Payer Reserves 760,000 760,000 Total Liabilities 3,340,762 3,172,272 Net Assets: Unrestricted 3,573,295 3,047,986 Temporarily Restricted - 56,856 Total Net Assets 3,573,295 3,104,842 Total Liabilities and Net Assets $6,914,057 $6,277,114 See accompanying notes to combined financial statements. -4-
COMBINED STATEMENTS OF OPERATIONS Operating Revenues: Net Patient Service Revenue $28,766,385 $27,873,486 Provision for Uncollectible Accounts ( 379,399 ) ( 188,118 ) Net Patient Service Revenue, Less Provision for Uncollectible Accounts 28,386,986 27,685,368 Contracted Clinical Services 338,666 329,811 Grants and Municipal Appropriations 210,290 201,504 Other Revenue 77,284 51,179 Net Assets Released From Restrictions Used For Operations 16,856 41,481 Total Operating Revenues 29,030,082 28,309,343 Operating Expenses: Salaries and Wages 21,059,571 20,761,643 Payroll Taxes and Employee Benefits 3,905,780 3,851,727 Office Expenses 1,090,265 1,064,021 Other 807,123 743,570 Occupancy Expense 639,125 617,033 Transportation 565,735 593,430 Depreciation and Amortization 161,442 165,314 Professional Fees and Contracted Services 549,724 325,087 Medical Supplies 167,718 185,321 Interest 1,162 383 Total Operating Expenses 28,947,645 28,307,529 Operating Income 82,437 1,814 Other Income: Contributions and Bequests 144,319 158,312 Interest and Investment Income 70,070 37,994 Total Other Income 214,389 196,306 Excess of Revenue Over Expenses, Before Net Appreciation on Investments 296,826 198,120 Net Assets Released From Restrictions for Capital Acquisitions 40,000 - Net Appreciation on Investments 188,483 130,759 Excess of Revenue Over Expenses $ 525,309 $ 328,879 See accompanying notes to combined financial statements. -5-
COMBINED STATEMENTS OF CHANGES IN NET ASSETS Unrestricted Net Assets: Excess of Revenue Over Expenses, Before Net Appreciation on Investments $ 296,826 $ 198,120 Net Assets Released From Restrictions for Capital Acquisitions 40,000 - Net Appreciation on Investments 188,483 130,759 Excess of Revenue Over Expenses 525,309 328,879 Temporarily Restricted Net Assets: Contributions - 85,000 Net Assets Released From Restrictions Used For Operations ( 16,856 ) ( 41,481 ) Net Assets Released From Restrictions Used For Capital Acquisitions ( 40,000 ) - Increase (Decrease) in Temporarily Restricted Net Assets ( 56,856 ) 43,519 Change in Net Assets 468,453 372,398 Net Assets, Beginning of Year 3,104,842 2,732,444 Net Assets, End of Year $3,573,295 $3,104,842 See accompanying notes to combined financial statements. -6-
COMBINED STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities: Change in Net Assets $468,453 $372,398 Adjustments to Reconcile Change in Net Assets to Net Cash Provided by Operating Activities: Depreciation and Amortization 161,442 165,316 Restricted Contributions Received - ( 85,000 ) Net Appreciation on Investments and Reinvested Income ( 259,908 ) ( 166,020 ) Changes in Assets and Liabilities: (Increase) Decrease In: Accounts Receivable ( 77,648 ) ( 127,844 ) Grants and Other Receivables 38,967 ( 39,828 ) Prepaid Expenses 3,879 ( 17,562 ) Security Deposits ( 800 ) 13,655 Increase (Decrease) In: Accounts Payable and Accrued Expenses 142,981 ( 32,790 ) Accrued Payroll and Compensated Absences 37,900 262,463 Deferred Grant Revenue ( 35,389 ) 34,749 Advances From Third-Party Payers 22,998 ( 12,265 ) Net Cash Provided by Operating Activities 502,875 367,272 Cash Flows From Investing Activities: Purchase Of: Property and Equipment ( 294,181 ) ( 86,567 ) Investments - ( 300,000 ) Net Cash Used From Investing Activities ( 294,181 ) ( 386,567 ) Cash Flows From Financing Activities: Restricted Contributions Received - 85,000 Increase in Cash and Cash Equivalents 208,694 65,705 Cash and Cash Equivalents at Beginning of Year 704,165 638,460 Cash and Cash Equivalents at End of Year $912,859 $704,165 Supplemental Disclosure: Interest Paid $ 1,162 $ 383 See accompanying notes to combined financial statements. -7-
Note 1 Description of Organization Organization and Principles of Combination NOTES TO COMBINED FINANCIAL STATEMENTS The combined financial statements of Visiting Nurse Association Community Healthcare, Inc. and Affiliates (the Organization) include the financial statements of Visiting Nurse Association Community Healthcare, Inc. (VNA), LifeTime Care at Home, LLC (LTC), and LifeTime Helping Hands, LLC (LHH). Intercompany accounts and transactions have been eliminated in combination. The VNA is a non-stock, non-profit Connecticut corporation. The mission of the VNA is to promote and preserve the health, safety, dignity, and independence of individuals and families by providing therapeutic and preventive health care services in their places of residence and in the community. In addition, the VNA operates an adult day center and staffs a municipal school program with nurses and aides. The VNA is the sole member of LTC and LHH. LTC is a limited liability company organized in Connecticut and is considered a disregarded entity for federal and state tax purposes and follows the tax status of its sole member, VNA. The mission of LTC is to provide homemaker, companion, and private duty services to the elderly and disabled; provide any other services to assist people at home; and to do any and all other activities allowed by law. LHH is a limited liability company organized in Connecticut and is considered a disregarded entity for federal and state tax purposes and follows the tax status of its sole member, VNA. LHH was a referral source for home and personal services and has been inactive for the years ended June 30, 2014 and 2013. Note 2 Significant Accounting Policies The Organization prepares its financial statements in accordance with generally accepted accounting principles promulgated in the United States of America (U.S. GAAP) for Health Care Entities. The significant accounting and reporting policies used by the Organization are described subsequently to enhance the usefulness and understandability of the financial statements. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include checking and temporary savings and deposit accounts. -8-
Note 2 Significant Accounting Policies Cont d. Investments and Investment Policy Investments in equity securities and in debt securities are measured at fair value in the balance sheet, in accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures. Investments are classified as trading. Investment income (including realized and unrealized gains and losses on investments, interest and dividends) is included in excess of revenue over expenses, unless the income is restricted by donor or law. The Organization has adopted investment policies for its long-term investment portfolio. The investment policy is established by the Finance Committee of the Board of Directors and is monitored and reviewed on an ongoing basis. Assets Limited as to Use Investments Board-designated Investments (Endowments) represent resources set aside by the Board of Directors over which the Board of Directors retains control and may, at its discretion, subsequently use for other purposes. Board-designated investments include all of the Organization s long-term investments (see Notes 4 and 5). Donor-restricted Term Investment (Endowments) represents resources restricted by donors for use as specified by the donor or by the passage of time. Currently, the Organization has no term-restricted investments. Donor-restricted Permanent Investment (Endowments) represents resources restricted by donors with the stipulation that the contribution must remain intact in perpetuity. Currently, the Organization has no permanently restricted investments. FASB ASC 958-205, Not-for-Profit Entities Presentation of Financial Statements, provides guidance on net asset classification of donor-restricted funds for not-for-profit organizations that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and also requires additional disclosures about an organization s endowment funds (both donor restricted endowment funds and boarddesignated endowment funds), whether or not the organization is subject to UPMIFA. The State of Connecticut has adopted UPMIFA, which established law for the management and investment of donorrestricted funds. The Board of Directors and Management have determined that the Organization s investment portfolios meet the definition of endowment under FASB ASC 958-205. However, the Board of Directors and Management have determined that the Organization s net assets do not meet the definition of endowment under UPMIFA. Assets Limited as to Use Other Assets limited as to use also includes cash of $0 in 2014 and $16,856 in 2013, which is restricted by a donor for financial assistance and health services for those sixty years of age or older and residing in Hamden, Connecticut and a grant receivable of $40,000 in 2013 from the U.S. Department of Transportation for the purchase of a vehicle for the Adult Day Center. -9-
Note 2 Significant Accounting Policies Cont d. Accounts Receivable, Allowance for Uncollectibles and Provision for Bad Debts The Organization s accounts receivable collection process includes reviewing aging reports, contacting payers to determine why payment has not been made, resubmitting claims when appropriate, and filing appeals with payers for claims that have been denied. The Organization records an estimated allowance for uncollectible accounts by applying estimated bad debt percentages to its patient accounts receivable aging. The percentages to be applied are based on the Organization s historical collection and loss experience. The Organization s allowance for doubtful accounts at June 30, 2014 and 2013 was approximately $234,000 and $214,000, respectively, and is recorded as a reduction against Accounts Receivable. The Organization s provision for bad debts at June 30, 2014 and 2013 was approximately $379,000 and $188,000, respectively, and is recorded as a reduction against Net Patient Service Revenue. The allowance for doubtful accounts is maintained at a level that management believes is sufficient to cover potential losses. However, actual collections could differ from estimates. Property and Equipment and Depreciation Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. Estimated useful lives range from three to ten years. Net Asset Classifications In accordance with the provisions of FASB ASC 958-205, Not-for-Profit Entities Presentation of Financial Statements, the Organization is required to report net assets and changes in net assets in three classes that are based upon the existence or absence of restrictions on use that are placed by its donors, as follows: 1) Unrestricted Net Assets represents unrestricted resources available for support of the Organization, including assets set aside by the Board of Directors, over which the Board of Directors retains control and may, at its discretion, subsequently use for other purposes. 2) Temporarily Restricted Net Assets represents resources that are restricted by a donor for use for a particular purpose or in a particular future period, and income derived from permanently restricted net assets not yet expended in accordance with the donor s restriction. When the donor s restriction is satisfied, either by using the resources in the manner specified by the donor or by the passage of time, the expiration of the restriction is reported in the financial statements by reclassifying the net assets from temporarily restricted to unrestricted net assets. 3) Permanently Restricted Net Assets represents resources received with the donor s stipulation that the contribution must remain intact in perpetuity. However, the income derived from permanently restricted net assets must be used in accordance with the donor s restriction. Currently, the Organization has no permanently restricted net assets. -10-
Note 2 Significant Accounting Policies Cont d. Net Patient Service Revenue The Organization has reimbursement agreements with third-party payers, including Medicare and Medicaid, that provide for payments to the Organization at amounts different from it established rates. Standard charges for services to all patients are recorded as revenue when services are rendered. Patients unable to pay full charge, who do not have other third-party resources, are charged a reduced amount based on the Organization s published sliding fee scale. Reductions in full charge are recognized when the service is rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid programs. The Organization believes that it is in compliance with all applicable laws and regulations. However, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term. Differences between amounts previously estimated and amounts subsequently determined to be recoverable or payable are included in operating revenue in the year that such amounts become known. Charity Care The Organization provides care to patients, who meet certain criteria under its charity care policy, without charge or at amounts less than its established rates. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Accounting for Contributions Unconditional promises to give cash and other assets to the Organization are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. Unrestricted contributions are reported as increases in unrestricted net assets. Restricted contributions are reported as either temporarily or permanently restricted revenue if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying financial statements. -11-
Note 2 Significant Accounting Policies Cont d. Income Taxes The Organization is exempt from income taxes under Section 501(c) (3) of the Internal Revenue Code and, accordingly, there is no provision for income taxes. Income determined to be unrelated business taxable income would be taxable. During the years ended June 30, 2014 and 2013, the Organization had no unrelated business income. The Organization is no longer subject to federal, state or local tax examinations by tax authorities for years before and including fiscal year ended June 30, 2010. The Organization, in accordance with the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes, evaluates its uncertain tax positions, if any, on a continual basis through review of its policies and procedures, review of any required tax filings and discussions with outside experts. Excess of Revenue Over Expenses The statement of operations includes excess of revenue over expenses. Changes in unrestricted net assets, which are excluded from excess of revenue over expenses, consistent with industry practice, include permanent transfers of assets to and from affiliates for other than goods and services, and contributions of long-lived assets (including assets acquired using contributions which, by donor restriction, were to be used for purposes of acquiring such assets). Subsequent Events The Organization has evaluated events and transactions for potential recognition or disclosure through September 24, 2014, which is the date the financial statements were available to be issued. Note 3 Fair Value Measurements In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the Organization is required to measure fair value of its assets and liabilities. Fair value measurements are based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard established a fair value hierarchy that prioritizes observable and unobservable inputs to measure fair value into three levels, as follows: Level 1: Valuations based on quoted prices in active markets for identical asset or liabilities to which an entity has access at the measurement date. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Valuations based on inputs and information other than quoted market indices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Valuations based on unobservable inputs for the asset or liability. Unobservable inputs should be used to measure the fair value to the extent that observable inputs are not available. The Organization s carrying amounts for all assets and liabilities, which are required to be measured at fair value, with the exception of investments, approximate fair value under Level 1. Investments approximate fair value based on Level 1 and Level 2 and are presented in Note 4. -12-
Note 4 Investments Board Designated Long-term investments at June 30, 2014 and 2013 consist of: Fair Value Measurements Using: Quoted Prices Significant In Active Other Market For Observable Identical Assets Inputs Fair Value (Level 1) (Level 2) June 30, 2014 Cash and Cash Equivalents $ 18,223 $18,223 $ - Certificates of Deposit 100,248 100,248 - Stock 1,078 1,078 - Fixed Income: Corporate Bonds 301,467-301,467 U.S. Bonds 48,916-48,916 Mutual Funds: Large Blend 327,250 327,250 - Large Growth 168,320 168,320 - Large Value 160,842 160,842 - Mid Growth 168,588 168,588 - Mid Value 168,995 168,995 - Small Blend 124,119 124,119 - Intermediate-Term Bond 56,626 56,626 - Short-Term Bond 90,600 90,600 - World Bond 27,110 27,110 - Total $1,762,382 $1,411,999 $ 350,383 June 30, 2013 Cash and Cash Equivalents $ 105,031 $ 105,031 $ - Fixed Income: Corporate Bonds 300,797-300,797 Mutual Funds: Large Blend 284,123 284,123 - Large Growth 139,040 139,040 - Large Value 132,190 132,190 - Mid Growth 132,667 132,667 - Mid Value 140,874 140,874 - Small Blend 100,705 100,705 - Intermediate-Term Bond 53,939 53,939 - Short-Term Bond 87,818 87,818 - World Bond 25,291 25,291 - Total $1,502,475 $1,201,678 $ 300,797 As of June 30, 2014 and 2013, Janney Montgomery Scott, LLC held the investments in street name. The Organization s investments are managed by an independent third-party investment manager. -13-
Note 5 Changes in Board-Designated Investments The Board of Directors has designated investments of $1,762,382 in 2014 and $1,502,475 in 2013 as long-term investments. Changes in Board-designated investments for the years ended June 30, 2014 and 2013 are as follows: Beginning Balance $1,502,475 $1,036,455 Donated Investments 1,054 - Transfer - 300,000 Investment Return: Investment Income 70,370 35,261 Net Appreciation 188,483 130,759 Ending Balance $1,762,382 $1,502,475 Note 6 Assets Held in Trust The Organization is one of four beneficiaries of the Frederick C. Spencer Trust (Trust). Because the assets of the Trust are neither in the possession of, nor under the control of, the Organization (they are held and administered by an outside trustee), the assets are not included in the Organization s balance sheet. The fair value of the assets totaled $1,406,558 and $1,311,121 at June 30, 2014 and 2013, respectively. Included in contributions and bequests in the accompanying statement of operations for the years ended June 30, 2014 and 2013 was $15,050 and $8,200, respectively, which was distributed from the Trust during each fiscal year. Note 7 Property and Equipment Property and equipment at June 30, 2014 and 2013 consisted of: Leasehold Improvements $ 859,750 $ 859,750 Furniture and Equipment 554,538 519,989 Computer Equipment and Software 947,092 787,956 Vehicles 100,496-2,461,876 2,167,695 Less, Accumulated Depreciation: Leasehold Improvements 389,488 307,323 Furniture and Equipment 488,369 467,867 Computer Equipment and Software 708,705 659,981 Vehicles 10,050-1,596,612 1,435,171 Net $ 865,264 $ 732,524-14-
Note 8 Line of Credit On February 24, 2012, the Organization entered into a commercial revolving line of credit agreement with Guilford Savings Bank for up to $1 million. The guarantors of the line of credit are the VNA, LTC, and LHH. The Organization may draw advances up to the lesser of $1 million or 70% of eligible patient accounts receivable. Interest is calculated at prime plus 0.75%. The line of credit agreement with Guilford Savings Bank has an expiration date of February 24, 2015. On July 25, 2014, the Organization was approved for an increase in the line of credit for up to $1.5 million with Guilford Savings Bank under the same terms and conditions as the original credit agreement. The expiration date was extended to February 25, 2017. The outstanding balance on the line of credit with Guilford Savings Bank as of June 30, 2014 and 2013 was $0. The Organization will draw advances on the line of credit for various reasons. The Organization had a maximum amount outstanding at any one time of $250,000 and $0 during fiscal years 2014 and 2013, respectively. Note 9 Net Patient Service Revenue Approximately 72% in 2014 and 74% in 2013 of net patient service revenue was derived under federal (Medicare) and state (Medicaid and Medicaid Waiver) third-party reimbursement programs. These revenues are subject to audit and retroactive adjustment by the respective third-party fiscal intermediaries. The Organization maintains a third-party payer reserve for potential revenue adjustments, disallowances or denials that arise from third-party or internal audit activities. The Organization s internal accounting policies and procedures states that a contingency reserve, based upon audit experience and other assumptions, must be maintained on the books. The reserve as of June 30, 2014 and 2013 was $760,000. The Organization has entered into agreements with certain commercial insurance carriers, managed care organizations, and other health care groups. The bases for payment to the Organization under these agreements are negotiated rates. Net patient service revenue is as follows for the years ended June 30, 2014 and 2013: Federal Programs $12,229,838 $11,920,552 State Programs 8,343,208 8,837,217 Other Third Parties 4,211,190 3,598,692 Private Pay 3,982,149 3,517,025 $28,766,385 $27,873,486-15-
Note 10 Pension Plans The Organization sponsors a defined contribution pension plan. Total pension expense for the years ended June 30, 2014 and 2013 was $352,816 and $346,942, respectively. Note 11 Workers Compensation The Organization is a member of the Workers Compensation Trust, Inc. (the Trust), which was established as an employer mutual association to provide workers compensation coverage to injured employees of Connecticut health care organizations. The Trust is designed to provide member workers compensation insurance, improved loss control programs and other services to help minimize workers compensation claims and the associated costs. The Organization has workers compensation insurance premium expense paid to the Trust of $532,147 and $541,029 for the years ended June 30, 2014 and 2013, respectively, and is included in Payroll Taxes and Employee Benefits. Note 12 Operating Leases In October 2010, the Organization exercised the option to renew its lease for office space in Guilford, Connecticut (its main headquarters) for five years at an annual rate of $248,914 for the period November 2010 to October 2012 and $256,235 for the period November 2012 to October 2015. In December, 2013 the Organization extended the lease to October, 2020 at an annual rate of $256,235. In July 2010, the Organization entered into a ten year two month operating lease for office space in Hamden, Connecticut to operate a branch office. The commencement date was March 2011 with a starting annual rate of $145,503. Annual rent increased by 9.2% in year three and will increase 1.4% for each year thereafter. In May 2010, the Organization entered into a lease agreement for LTC at the Guilford location at an annual rate of $45,375 for the period November 2010 to October 2013 and an annual rate of $46,750 for the period November 2013 to October 2015. In October 2010, the Organization exercised the option to renew its lease for additional space at the Guilford location for five years at an annual rate of $54,400 for the period November 2010 to October 2015. In June 2011, the Organization exercised the option to renew its lease for additional space at the Guilford location for four years at an annual rate of $74,181 for the period December 2011 to November 2012 and $75,322 for the period December 2012 to October 2015. The Organization subleases a substantial portion of this space at an annual rate of $56,100, which is recorded as a reduction in occupancy expense. In June 2011, the Organization exercised the option to renew its lease for LTC in North Haven, Connecticut for two years at an annual rate of $10,800 for the period July 2011 to June 2013. In June 2013, the Organization exercised the option to renew its lease for five additional years at an annual rate of $11,400 in year 1 and 2, $11,700 in year 3, $12,000 in year 4, and $12,300 in year 5. -16-
Note 12 Operating Leases Cont d. In August 2012, the Organization exercised the option to renew its lease for LTC in Old Saybrook, Connecticut at an annual rate of $9,814 for the period September 2012 to August 2013. In June 2013, the Organization exercised the option to renew its lease for an additional year at an annual rate of $10,000 for the period September 2013 to August 2014. In August 2014, the Organization entered into a two year lease agreement at an annual rate of $10,153 in year 1 and $10,440 in year 2 for the period September 2014 to August 2016. In June 2013, the Organization extended its lease for office space in Madison, Connecticut to operate an adult day center for a rental period starting June 2013 and ending June 2018, at a nominal annual rate. The annual fair market value of the lease is estimated to be $25,000, which has not been recorded in the Statement of Operations as Contribution revenue or Space Occupancy expense, as the effect has been determined to be immaterial for 2014 and 2013. In October 2013, the Organization entered into a lease agreement for office space in New Haven, Connecticut at an annual rate of $4,800 for the period October 2013 to September 2014. At June 30, 2014, minimum future rental payments, exclusive of options to extend, for each of the next five years and in the aggregate, are as follows: 2015 $ 620,830 2016 505,927 2017 441,124 2018 442,058 2019 432,133 Subsequent to 2020 660,328 Total $3,102,400 Total minimum future rental payments have not been reduced by sublease rentals to be received in the future under non-cancelable subleases. The following is a summary of rental expense under all operating leases: Minimum Rentals $634,891 $601,352 Less, Sublease Rentals 56,100 56,504 Total Rent Expense $578,791 $544,848 Certain operating leases provide for renewal options for periods from 1 to 5 years at their fair rental value at the time of renewal. In the normal course of events, operating leases are generally renewed or replaced by other leases. -17-
Note 13 Functional Expenses Expenses, by function, for the years ended June 30, 2014 and 2013 were as follows: Skilled Home Care Skilled Service $19,233,067 $19,224,644 Home Care Support Service 2,591,616 2,309,878 School Program 273,079 287,652 Adult Day Center 306,904 330,709 General and Administrative 6,530,760 6,146,719 Investment Management Fees 12,219 7,927 Total $28,947,645 $28,307,529 Note 14 Concentration of Risk Amounts held in financial institutions are in excess of the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation limits. The Organization deposits its funds with high quality financial institutions, and management believes the Organization is not exposed to significant credit risk on those amounts. The Organization grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers is as follows: Federal Programs 49% 47% State Programs 21 22 Other Third Parties 21 22 Private Pay 9 9 100% 100% A significant portion of the Organization s net patient service revenue comes from federal and state reimbursement programs. (See Note 9) Note 15 Related-Party Transactions The Organization has a banking relationship with Guilford Savings Bank. A member of the Organization s Board of Directors is a Vice President with Guilford Savings Bank. A member of the Board of Directors is a physician that refers patients and certifies to the patient s need for home care services in the ordinary course of their business. The patient s services are paid by a third-party payer, and no compensation is paid to or received from the board member related to the aforementioned patients. In addition, the physician provided consulting services related to community health education and received $2,900 in compensation for 2014. -18-
Note 16 Risks and Uncertainties Because a high percentage of the Organization s revenue is derived from Federal and State reimbursement programs, reductions in rates, rate increases that do not cover cost increases, and/or significant changes to the payment methodologies could have a material adverse effect on the Organization s financial condition, including results of operations and cash flows, and may require the Organization to revise ways in which business is conducted. The Organization invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and such changes could materially affect the amounts reported. -19-