CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 AND SUPPLEMENTAL SCHEDULES REQUIRED BY UNIFORM GUIDANCE FOR THE YEAR ENDED DECEMBER 31, 2016
CONTENTS INDEPENDENT AUDITOR S REPORT 1 2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 21 SUPPLEMENTAL INFORMATION Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Consolidated Financial Statements Performed in Accordance With Government Auditing Standards 22 23 Report on Compliance for Each Major Federal Program; Report on Internal Control over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 24 26 Schedule of Expenditures of Federal Awards 27 Note to Schedule of Expenditures of Federal Awards 28 Schedule of Findings and Questioned Costs 29 30 Schedule of Prior Year Audit Findings 31 Page
INDEPENDENT AUDITOR'S REPORT To the Board of Directors Community Health Systems, Inc. and Subsidiary Moreno Valley, California Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Community Health Systems, Inc. and Subsidiary (collectively, the Organization ), which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audit. We conducted our audit 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 Sates. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
To the Board of Directors Community Health Systems, Inc. and Subsidiary Page 2 of 2 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Organization as of, and the change 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. Internal Control over Financial Reporting In accordance with Government Auditing Standards, we have also issued our report dated April 25, 2017 on our consideration of the Organization's internal control over financial reporting and our tests of its 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. April 25, 2017
CONSOLIDATED STATEMENT OF FINANCIAL POSITION Current assets Cash and cash equivalents $ 1,008,524 Assets limited as to use 50,000 Patient accounts receivable, net of allowance for doubtful accounts of $35,669 603,029 Grants receivable Note receivable 1,277,731 100,000 Prepaids and other assets 165,928 Total current assets 3,205,212 Assets limited as to use Held by trustee 154,391 Restricted cash 887,158 Less amount required to meet current obligations (50,000) Total assets limited as to use 991,549 Property and equipment, net 6,519,606 Security deposits 87,675 Total assets $ 10,804,042 Current liabilities Accounts payable and accrued expenses $ 2,171,082 Line of credit 200,948 Current portion of capital lease obligations 67,729 Due to third party payer 187,398 Current portion of related party long-term debt 50,526 Current portion of long-term debt 124,467 Total current liabilities 2,802,150 Capital lease obligations, net of current portion 85,630 Related party long-term debt, net of current portion 237,662 Long-term debt, net of current portion 4,225,000 Total liabilities 7,350,442 Commitments, contingencies and related parties ASSETS LIABILITIES AND NET ASSETS Net assets Unrestricted - undesignated 1,642,505 Temporarily restricted 1,811,095 Total net assets 3,453,600 Total liabilities and net assets $ 10,804,042 The accompanying notes are an integral part of these financial statements. 3
CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended Operating revenues Net patient services $ 13,627,942 Grants 5,360,400 Contributions 18,334 Net assets released from restrictions 837,190 Total operating revenues 19,843,866 Operating expenses Salaries and wages 11,587,720 Employee benefits 2,178,074 Medical supplies and clinic expenses 3,069,968 Purchased services and professional fees 658,375 Rent 1,271,204 Depreciation and amortization 756,867 Total operating expenses 19,522,208 Excess of operating revenues over operating expenses 321,658 Other income (expense) Interest expense (147,767) Other income 19,719 Rental income 33,678 Total other income (expense) (94,370) Change in unrestricted net assets 227,288 Changes in temporarily restricted net assets Contributions 1,811,095 Net assets released from restrictions (837,190) Changes in temporarily restricted net assets 973,905 Change in net assets 1,201,193 Net assets at beginning of year 2,252,407 Net assets at end of year $ 3,453,600 The accompanying notes are an integral part of these financial statements. 4
CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended Cash flows from operating activities Change in net assets $ 1,201,193 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization 756,866 Provision for doubtful accounts (44,203) (Increase) decrease in operating assets and liabilities Patient accounts receivable (97,076) Grants receivable (945,720) Note receivable (100,000) Prepaid expenses and other current assets (111,216) Security deposits (5,000) Increase (decrease) in Accounts payable and accrued expenses Estimated amount due to third party 611,169 74,950 Net cash flows from operating activities 1,340,963 Cash flows from investing activities Additions of assets limited as to use (180,317) Assets held by trustee (1,057) Purchase of property and equipment (651,050) Net cash flows from investing activities (832,424) Cash flows from financing activities Payments on line of credit (123,569) Principal payments on capital lease (94,262) Principal payments on long-term debt (295,422) Net cash flows from financing activities (513,253) Net decrease in cash and cash equivalents (4,714) Cash and cash equivalents, beginning of year 1,013,238 Cash and cash equivalents, end of year $ 1,008,524 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 147,767 The accompanying notes are an integral part of these financial statements. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS The accompanying consolidated statement of financial position, statement of activities and statement of cash flows include the accounts of Community Health Systems, Inc., and JLJ Consolidated, LLC (collectively, the Organization ) for their respective year ended December 31, 2016. Community Health Systems, Inc. ( CHS ) is a Federally Qualified Health Center ( FQHC ) that works to improve, promote and maintain the physical and emotional health in the communities it serves. The Organization primarily earns revenues by providing physician and related health care services to patients in San Bernardino, Riverside and San Diego counties in California. JLJ Consolidated, LLC ( JLJ ) is a California limited liability company that was organized in December 2011. JLJ owns the building in Fallbrook, California which is rented exclusively to CHS. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of CHS and its wholly-owned subsidiary, JLJ Consolidated, LLC. All significant intercompany transactions and balances have been eliminated in consolidation. Basis of Presentation The consolidated financial statements are presented utilizing the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Organization reports information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets, as follows: Unrestricted net assets - Net assets that are not subject to donor-imposed restrictions and that may be expendable for any purpose in performing the primary objectives of the Organization. Temporarily restricted net assets - Net assets subject to donor-imposed restrictions that may or will be met either by actions of the Organization and/or the passage of time. As the restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying consolidated financial statements as net assets released from restrictions. Permanently restricted net assets - Net assets subject to donor-imposed restrictions requiring that the amounts contributed be invested in perpetuity. The investment income generated from these funds is available for general support of the Organization s programs and operations. The Organization had no permanently restricted net assets as of. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Cash Equivalents For the purpose of the statement of cash flows, the Organization considers all temporary, shortterm, highly liquid investments purchased with original maturities of three months or less to be cash and cash equivalents. Use of Estimates The preparation of consolidated 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 consolidated financial statements. Management s estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Measurements Fair value is defined 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. Assets and liabilities recorded at fair value in the statement of financial position are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The fair value hierarchy described by U.S. GAAP is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value and include the following: 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 assets 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. 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Measurements (Continued) The Organization classified all its cash equivalents in Level 1 of the fair value hierarchy. U.S. GAAP regarding fair value disclosures of financial instruments requires disclosure of fair value information about certain financial instruments for which it is practical to estimate that value. The carrying amounts reported in the Organization s statement of financial position for cash, patient accounts receivable, grants receivable, accounts payable and accrued expenses approximate fair value due to the short maturity of these financial instruments. The carrying amounts reported for debt obligations approximate fair value due to the effective interest rate of these obligations reflecting the Organization s current borrowing rate. Considerable judgment is required to develop such estimates of fair value. Accordingly, such estimates would not necessarily be indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Assets Limited as to Use Assets limited as to use include assets held by the trustee in accordance with the requirements of the California Health Facilities Financing Authority Insured Health Facility Revenue Bonds, Series 2000A (see Note 9). Amounts required to meet current liabilities of the Organization are included in current assets. Restricted Cash The Organization pays monthly interest of 1.50% on a note payable (as part of a New Market Tax Credit ( NMTC )) and makes a monthly principal deposit of $15,000 for 7 years into the restricted cash account for a future loan refinance. Patient Accounts Receivable Patient accounts receivable are recorded at the invoiced amount for non-contracted payers and net of contractual allowances for contracted payers and do not bear interest. Amounts collected on patient accounts receivable are included in net cash provided by operating activities in the statements of cash flows. The Organization maintains an allowance for doubtful accounts for estimated losses inherent in its patient accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging, and existing industry and national economic data. The Organization reviews its allowance for doubtful accounts monthly. Past-due balances over ninety (90) days and over a specified amount are reviewed individually for collectability. Allowance for doubtful accounts recognized in the period from third party payers was $35,669. 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Patient Accounts Receivable (Continued) All other balances are reviewed on a pooled basis by payer category. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Organization does not have any off-balancesheet credit exposure related to its patients. Property and Equipment Property and equipment are stated at cost or, for those assets acquired by gift or bequest, the estimated fair market value at the date of contribution. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. Depreciation is computed using the straight-line method over estimated useful lives as follows: Building and improvements Leasehold improvements Furniture and equipment, including software 39 years Shorter of initial lease period or useful life of asset 5 years Ordinary repair and maintenance costs are charged to operations as incurred. Repair and maintenance costs are included in operating expenses on the statement of activities. Repair and maintenance expense for equipment was $535,274 for the year ended December 31, 2016. Accounting for the Impairment of Long-Lived Assets In accordance with the Financial Accounting Standards Board ( FASB ) Accounting Standards Codification No. 360, Property, Plant and Equipment, impairment losses are recorded on longlived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Management has determined that there is no impairment of long-lived assets as of. Functional Allocation of Expenses Expenses that can be identified with a specific program or supporting service are charged directly to the related program or supporting service. Expenses that are associated with more than one program or supporting service are allocated based on an evaluation by management. 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Patient Service Revenue Net patient service revenue includes health clinic fees, which are recorded net of any billing adjustments given to patients because of economic status or billing limitations imposed by Medi-Cal, Medicare reimbursements, and other public/private health insurance programs. Retroactive adjustments, if any, are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. The Organization also has agreements with third party payers that provide for payments to the Organization at amounts different from its established rates. The Organization is reimbursed for outpatient services by Medi-Cal and Medicare by means of an all-inclusive rate for each visit, with final settlement determined after submission of annual reconciliation reports and cost reports, respectively, and audits thereof by the fiscal intermediary. Patient revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payer sources, was as follows: Third-party payers $12,884,684 Self-pay 743,258 Total all payers $13,627,942 Contributions and Grants Contributions and grant revenue consists of grants received from the U.S. Department of Health and Human Services ( HHS ), various governmental funding sources, and contributions from private foundations and individuals. These sources of support are to be spent for specific purposes. Medical services and general and administrative expenses are funded in part by HHS and other grants, which are subject to annual budget negotiations and availability of funds. Consequently, revenues for these transactions are recognized as the expenditures are incurred. Any difference between expenses incurred and the total funds received (not to exceed the grant maximum) is recorded as grant receivable or unearned grant revenue. The Organization reports contributions of cash and other assets as restricted support 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 and/or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of activities as net assets released from restrictions. 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Government Grants 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 granting agencies, and as a result of such audits, adjustments could be required. Charity Care The Organization provides care to patients who meet certain criteria under its charity care policies without charge. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenues. The Organization defines costs to administer charity care as healthcare services that are never expected to result in cash flows, provided to patients with a demonstrated inability to pay. For the year ended, there were no costs incurred to administer charity care. Income Taxes The Organization has been designated as tax-exempt under Internal Revenue Code Section 501(c)(3) and is also exempt from state franchise taxes under Section 23701(d) of the California Revenue and Taxation Code and is not generally subject to federal or state income taxes. However, the Organization is subject to income taxes on any net income that is derived from a trade or business, regularly carried on, and not in furtherance of the purposes for which it was granted exemption. No income tax provision has been recorded as the net income, if any, from any unrelated trade or business, in the opinion of management, is not material to the basic consolidated financial statements taken as a whole. The LLC is a disregarded entity for tax purposes. The Organization will recognize the impact of tax positions in the consolidated financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. To date, the Organization has not recorded any uncertain tax positions. The Organization recognizes potential accrued interest and penalties related to uncertain tax positions in income tax expense. During the year ended, the Organization did not recognize any amount in potential interest and penalties associated with uncertain tax positions. The following table summarizes the open tax years for each major jurisdiction: Jurisdiction Open Tax Year Federal 2013 2016 State 2012 2016 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Advertising The Organization expenses advertising costs as incurred. During the year ended December 31, 2016, the Organization did not incur any advertising costs. Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No. 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation. ASU No. 2014-09 will be effective for annual reporting periods beginning after December 15, 2018. Management is in the process of evaluating the impact of this accounting pronouncement on the Company s consolidated financial statements. In February 2015, the FASB issued Accounting Standards Update ( ASU ) No. 2015-02, Amendments to the Consolidation Analysis, Consolidation (Topic 810). This ASU is intended to make targeted improvements to the consolidation guidance. This ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2015, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this ASU: (a) using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (b) retrospectively. Management is in the process of evaluating the impact of this accounting pronouncement on the Company s consolidated financial statements. 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recently Issued Accounting Pronouncements (Continued) In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. Management is in the process of evaluating the impact of this accounting pronouncement on the Company s consolidated financial statements. NOTE 3 NET PATIENT SERVICE REVENUE The Organization is approved as an FQHC for both Medicare and Medi-Cal reimbursement purposes. The Organization has agreements with third party payers that provide for payments to the Organization at amounts different from its established rates. These payment arrangements include: Medicare: Covered FQHC services rendered to Medicare program beneficiaries are paid based on a cost reimbursement methodology. The Organization is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of an annual cost report by the Organization and audit thereof by the Medicare fiscal intermediary. Services not covered under the FQHC benefit are paid based on established fee schedules. Medi-Cal: Covered FQHC services rendered to Medi-Cal program beneficiaries are paid based on a prospective reimbursement methodology. The Organization is reimbursed a set encounter rate for all services provided under this plan. Services not covered under the FQHC benefit are paid based on established fee schedules. Approximately 6% and 83% of net patient service revenue is from participation in the Medicare and state-sponsored Medi-Cal programs, respectively, for the year ended. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 CONCENTRATIONS OF RISK Reimbursement Both governmental and private pay sources have instituted cost-containment measures designed to limit payments made to providers of health services, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect reimbursement to the Organization. Furthermore, government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which could materially decrease the services covered or the rates paid to the Organization for its services. The Organization grants credit to its patients, the majority of whom are area residents and are insured under third party payer agreements. The mix of receivables from patients and third party payers at is: Medicare 6% Medi-Cal 83% Other third party payers 11% 100% Funding A large part of the Organization s annual funding, $6,197,590 or 31%, of total operating revenues is derived from grant agreements with federal and nonfederal agencies. The Organization has no reason to believe that relationships with these agencies will be discontinued in the foreseeable future. However, any interruption of these relationships (i.e. the failure to renew grant agreements or withholding of funds) would adversely affect the Organization s ability to finance ongoing operations. Cash and cash equivalents The Organization maintains its cash and cash equivalents in several financial institutions which, from time to time, exceed amounts insured by the Federal Deposit Insurance Corporation ("FDIC"). Deposits held in non-interest-bearing transaction accounts are aggregated with any interest-bearing deposits the owner may hold in the same ownership category, and the combined total insured up to at least $250,000. As of, the Organization had deposits of $1,773,342 in excess of federally insured amounts. The Organization has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 PROPERTY AND EQUIPMENT As of, property and equipment consisted of the following: Buildings, building improvements and leasehold improvements $ 8,038,807 Furniture, fixtures and equipment 2,841,122 10,879,929 Less accumulated depreciation and amortization 4,590,323 Depreciable property and equipment, net 6,289,606 Land 230,000 Property and equipment, net $ 6,519,606 Depreciation and amortization expense for the year ended amounted to $756,866. NOTE 6 ACCOUNTS PAYABLE AND ACCRUED EXPENSES As of, accounts payable and accrued expenses consisted of the following: Accounts payable $ 634,707 Medi-Cal 499,745 Accrued payroll and payroll related expenses 336,004 Accrued vacation 338,321 Deferred rent 256,805 Deferred revenue 105,500 Total $ 2,171,082 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 LINE OF CREDIT The Organization maintains a revolving line of credit with a financial institution to borrow a maximum amount of $500,000. Interest is payable monthly at the Wall Street Journal Prime Rate (3.75% as of ) and is secured by substantially all the Organization s property and assets. As of, there was $200,948 outstanding on the line of credit. The agreement states that upon cancellation of the agreement, the amount shall be paid in 48 equal consecutive monthly installments of principal, with accrued monthly interest based on the Wall Street Journal Prime Rate beginning the first calendar month after the cancellation date. The Organization s right to obtain advances under this agreement is valid until the lender cancels the agreement. Each of the following shall constitute an event of default under the agreement: payment default, failure to comply to the terms, default in favor of third party, false statement, insolvency, creditor or forfeiture proceedings, events affecting guarantor, change in ownership, adverse change and insecurity as defined by the agreement. As of, the available balance on the line of credit was $299,052. NOTE 8 CAPITAL LEASE OBLIGATIONS As of, capital lease obligations consisted of the following: Equipment lease - Payable in monthly installments of $5,945, including interest at 6.89% per annum. Debts mature through April 2019. $ 153,359 Less current portion 67,729 Long-term portion $ 85,630 The following is a schedule by years of future minimum lease payments under capital leases and the present values of net minimum lease payments at as follows: Year Ending 2017 $ 76,336 2018 71,335 2019 18,779 166,450 Less amount representing interest 13,091 Present value of future minimum lease payments $ 153,359 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 CAPITAL LEASE OBLIGATIONS (Continued) The following is an analysis of the leased equipment under capital leases as of December 31, 2016, which is included in computer equipment: Computer equipment $ 232,488 Less accumulated depreciation 87,829 Total $ 144,659 NOTE 9 LONG-TERM DEBT Long-term debt as of consisted of the following: Note payable secured by a building. Payable in monthly payments of interest only at 1.5% per annum. The full principal is due on maturity in December 2018. $ 3,600,000 Revenue bonds, Series 2000A 685,000 Note payable secured by substantially all assets of the Organization. Payable in monthly payments of $10,828 interest at 3.175% per annum. The full principal is due on maturity in June 2017. 64,467 4,349,467 Less current portion 124,467 Long-term debt $ 4,225,000 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 LONG-TERM DEBT (Continued) California Health Facilities Financing Authority Insured Health Facility Revenue Bonds, Series 2000A consists of tax-exempt revenue bonds payable in the original amount of $1,295,000 bearing interest at a rate of $5.80%. The Revenue Bonds are due in graduated annual installments beginning August 1, 2001 through August 1, 2025 and are secured by a pledge of the Organization s gross revenues. Interest on the Revenue Bonds is payable semiannually on February 1 and August 1 of each year. Payment of principal and interest of the Revenue Bonds is insured by the Office of Statewide Health Planning and Development of the State of California through the California Health Facility Construction Loan Insurance Program. Provisions included with the Organization s loan agreement require that the Organization maintain certain trust funds to which revenues will be credited in specified amounts for the purpose of providing for the payment of principal, sinking fund installments and interest. In addition, the loan agreement requires the Organization to comply with certain restrictive covenants including maintenance of a minimum debt service coverage ratio and minimum insurance coverage. As of, the Organization was in compliance with these. As of, the Company was in compliance with all the bank covenant requirements. Scheduled annual principal maturities of long-term debt at are as follows: Year Ending 2017 $ 124,467 2018 3,665,000 2019 65,000 2020 70,000 2021 75,000 Thereafter 350,000 Total $ 4,349,467 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets of $1,811,095 at, represent contributions received by the Organization for the following purposes: HIIP $ 955,964 PCMH 569,322 Uncompensated care 143,659 Pediatric dental 56,737 Women s health 49,996 Behavioral health care 35,000 Pediatric medical 417 Total $ 1,811,095 NOTE 11 CLASSIFICATION OF OPERATING EXPENSES The Organization provides general healthcare services to residents within its geographic locations. Expenses as of related to providing these services are as follows: Program activities $ 15,082,270 General and administrative 4,439,938 Total $ 19,522,208 NOTE 12 RETIREMENT PLAN The Organization sponsors a 403(b) retirement plan, which covers substantially all employees. Organization contributions to the 403(b) retirement plan are at the discretion of management and the Board of Directors. There were no contributions for the year ended December 31, 2016. 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 RELATED PARTY TRANSACTIONS Note Receivable Related Party As of, the Organization had a note receivable from PCHN in the amount of $100,000 due on December 31, 2020. No interest was charged for the year ended December 31, 2016. Note Payable Related Party The Organization holds a note payable due to related parties related to building and leasehold improvements. Long-term debt due to related parties as of consisted of the following: Note payable secured by a building and building improvements. Payable in monthly payments of $5,426, interest at 5.5% per annum. The full principal is due on maturity in January 2022. $ 288,188 Less current portion 50,526 Long-term debt $ 237,662 NOTE 14 COMMITMENTS AND CONTINGENCIES Leases The Organization leases various facilities and equipment under operating leases expiring at various dates through 2027. Future minimum lease payments due under these leases are as follows: Year Ending 2017 $ 971,849 2018 853,679 2019 591,950 2020 631,878 2021 612,278 Thereafter 2,087,451 Total $ 5,749,085 Rental expense for facilities includes common area maintenance charges. Total rental expense for these facilities was $1,164,531 for the year ended. 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 COMMITMENTS AND CONTINGENCIES (Continued) Insurance The Organization maintains general liability and malpractice insurance on a claims-made basis covering losses of $1,000,000 per occurrence and $2,000,000 in the aggregate per year. In addition, as an FQHC, the Organization has additional malpractice liability protection under the Federal Tort Claims Act ( FTCA ). FTCA coverage is comparable to an occurrence basis policy without a monetary cap. Litigation From time to time, the Organization is involved in certain legal matters which arise in the normal course of operations. Management believes, based in part on the advice of legal counsel, that the resolution of such matters will not have a material adverse effect on the financial position of the Organization. NOTE 15 SUBSEQUENT EVENTS Management has evaluated all activity through April 25, 2017 (the issue date of the financial statements) and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements. 21
SUPPLEMENTAL INFORMATION
Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Consolidated Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Directors Community Health Systems, Inc. Moreno Valley, California We have audited, in accordance with the 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, the consolidated financial statements of Community Health Systems, Inc. and Subsidiary (collectively, the Organization ) as of and for the year ended, and the related notes to the consolidated financial statements, which collectively comprise the Organization s consolidated financial statements, and have issued our report thereon dated April 25, 2017. Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization s internal control over financial reporting ( internal control ) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
To the Board of Directors Community Health Systems, Inc. and Subsidiary Page 2 of 2 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization's consolidated financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Organization s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. April 25, 2017
Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance To the Board of Directors Community Health Systems, Inc. Moreno Valley, California Report on Compliance for Each Major Federal Program We have audited Community Health Systems, Inc. and Subsidiary s (collectively, the Organization ) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of the Organization s major federal programs for the year ended. The Organization s major federal programs are identified in the summary of auditor s results section of the accompanying Schedule of Findings and Questioned Costs. Management s Responsibility Management is responsible for compliance with federal statues, regulations, and terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the Organization s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization s compliance. Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended.
To the Board of Directors Community Health Systems, Inc. Page 2 of 3 Report on Internal Control over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.
To the Board of Directors Community Health Systems, Inc. Page 3 of 3 Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the consolidated financial statements of the Organization as of and for the year ended, and have issued our report thereon dated April 25, 2017, which contained an unmodified opinion on those consolidated financial statements. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the consolidated financial statements as a whole. April 25, 2017