Financial Statements June 30, 2016 Arapahoe Mental Health Center, Inc.
Table of Contents June 30, 2016 Independent Auditor s Report... 1 Financial Statements Balance Sheet... 3 Statement of Operations... 5 Statement of Changes in Net Assets... 6 Statement of Cash Flows... 7 Notes to Financial Statements... 8 Independent Auditor s 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... 19 Independent Auditor s Report on Compliance for Each Major Federal Program; Report on Internal Control over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance... 21 Schedule of Expenditures of Federal Awards... 24 Notes to Schedule of Expenditures of Federal Awards... 25 Schedule of Findings and Questioned Costs... 26 Summary Schedule of Prior Year Audit Findings... 33
Independent Auditor s Report To the Board of Directors Arapahoe Mental Health Center, Inc. Englewood, Colorado Report on the Financial Statements We have audited the accompanying financial statements of Arapahoe Mental Health Center, Inc. d/b/a AllHealth Network, which comprise the balance sheet as of June 30, 2016, and the related statements of operations, changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Arapahoe Mental Health Center, Inc. as of June 30, 2016, and the results of its operations, change in its net assets and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. www.eidebailly.com 1 5299 DTC Blvd., Ste. 1000 Greenwood Village, CO 80111-3329 TF 877.882.9856 T 303.770.5700 F 303.770.7581 EOE
Change in Accounting Policy As discussed in Note 12 to the financial statements, Arapahoe Mental Health Center, Inc. has changed its accounting policy for accounting for debt issuance costs by adopting the provisions of FASB Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs. Our opinion is not modified with respect to this matter. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated January 5, 2017 on our consideration of Arapahoe Mental Health Center, Inc. s internal control over financial reporting and on our test of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of 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 Arapahoe Mental Health Center, Inc. s internal control over financial reporting and compliance. Greenwood Village, Colorado January 5, 2017 2
Balance Sheet June 30, 2016 Assets Current Assets Cash and cash equivalents $ 1,701,229 Receivables Patient, net of estimated uncollectible accounts of approximately $401,000 569,576 Grants 1,166,640 Related party 139,667 Pharmacy 483,162 Contributions 1,392,011 Supplies 189,145 Prepaid expenses 348,882 Total current assets 5,990,312 Assets Limited as to Use Under indenture agreements 350,473 Department of Housing and Urban Development funds 30,166 Board-designated for capital improvements and other projects 261,668 Total assets limited as to use 642,307 Property and Equipment, Net 18,135,393 Other Assets Investments in affiliated companies 1,581,860 Beneficial interest in assets held by community foundation 48,886 Total other assets 1,630,746 Total assets $ 26,398,758 See Notes to Financial Statements 3
d/b/a/ AllHealth Network Balance Sheet June 30, 2016 Liabilities and Net Assets Current Liabilities Current maturities of long-term debt $ 397,592 Accounts payable Trade 483,005 Related party 355,105 Accrued expenses Salaries and wages 1,182,455 Vacation 829,807 Other 273,173 Total current liabilities 3,521,137 Long-term Liabilities Long-term debt, less current maturities 8,387,587 Total liabilities 11,908,724 Net Assets Unrestricted Undesignated 3,436,220 Board-designated 261,668 Invested in property and equipment, net of related debt 9,350,214 13,048,102 Temporarily restricted 1,392,011 Permanently restricted 49,921 Total net assets 14,490,034 Total liabilities and net assets $ 26,398,758 See Notes to Financial Statements 4
Statement of Operations Year Ended June 30, 2016 Unrestricted Net Assets Unrestricted Revenues and Other Support Net patient and client service revenue, net of provision for bad debts of $241,085 $ 5,562,719 Capitation revenue 17,954,169 Government revenue Federal 1,460,465 State of Colorado - Office of Behavioral Health 2,343,598 State of Colorado - Other 1,943,059 Local 274,452 Signal 567,120 Public support 242,933 Pharmacy 4,414,194 Other revenue 758,947 Total operating revenues and other support 35,521,656 Expenses Salaries and benefits 25,387,850 Contract labor 364,085 Pharmacy 4,900,728 Supplies 247,785 Professional fees 2,493,333 Building expenses 1,653,916 Depreciation 928,118 Interest 286,786 Telecommunications 486,428 Other 1,304,262 Total expenses 38,053,291 Operating Loss (2,531,635) Other Income Interest income 3,491 Equity earnings on investments in affiliated companies 115,690 Total other income 119,181 Expenses in Excess of Revenues and Change in Unrestricted Net Assets $ (2,412,454) See Notes to Financial Statements 5
Statement of Changes in Net Assets Year Ended June 30, 2016 Unrestricted Net Assets Expenses in excess of revenues and change in unrestricted net assets $ (2,412,454) Temporarily Restricted Net Assets Restricted contributions 1,392,011 Change in Net Assets (1,020,443) Net Assets, Beginning of Year 15,510,477 Net Assets, End of Year $ 14,490,034 See Notes to Financial Statements 6
Statement of Cash Flows Year Ended June 30, 2016 Operating Activities Change in net assets $ (1,020,443) Adjustments to reconcile change in net assets to net cash used for operating activities Depreciation 928,118 Amortization of bond issuance costs included in interest expense 11,108 Gain on investments in affiliated companies recognized on the equity method (115,690) Provision for bad debts 241,085 Changes in operating assets and liabilities Receivables 685,948 Supplies (35,403) Prepaid expenses (105,796) Accounts payable (862,566) Accrued expenses (99,722) Net Cash used for Operating Activities (373,361) Investing Activities Purchases of property and equipment (669,678) Investment in affiliated companies (50,000) Proceeds from the sale of assets limited as to use 2,708,463 Distribution from community foundation 1,035 Net Cash from Investing Activities 1,989,820 Financing Activities Principal payments on long-term debt (397,570) Net Change in Cash and Cash Equivalents 1,218,889 Cash and Cash Equivalents, Beginning of Year 482,340 Cash and Cash Equivalents, End of Year $ 1,701,229 Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ 275,678 See Notes to Financial Statements 7
Notes to Financial Statements June 30, 2016 Note 1 - Organization and Significant Accounting Policies Organization Arapahoe Mental Health Center, Inc. (the Network) is a private, nonprofit corporation formed provide mental health services to a catchment area that includes Douglas County and portions of Arapahoe County in Colorado. The Network is supported primarily through client service revenue and governmental revenue. Income Taxes The Network is organized as a Colorado nonprofit corporation and has been recognized by the Internal Revenue Service (IRS) as exempt from federal income taxes under Internal Revenue Code Section 501(c)(3). The Network is annually required to file a Return of Organization Exempt from Income Tax (Form 990) with the IRS. The Network has determined it is not subject to unrelated business income tax and has not filed an Exempt Organization Business Income Tax Return (Form 990T) with the IRS. The Network believes that it has appropriate support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the financial statements. The Network would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents We consider all cash and highly liquid financial instruments with original maturities of three months or less, excluding assets limited as to use. Patient Receivables Patient receivables are uncollateralized noninterest bearing patient and third-party payor obligations. Payments of patient receivables are allocated to the specific claims identified in the remittance advice or, if unspecified, are applied to the earliest unpaid claim. Patient accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Network analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. 8
Notes to Financial Statements June 30, 2016 For receivables associated with services provided to patients who have third party coverage, the Network analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Network records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. The Network s process for calculating the allowance for doubtful accounts for self-pay patients has not significantly changed from June 30, 2015 to June 30, 2016. The Network does not maintain a material allowance for doubtful accounts from third-party payors, not did it have significant write-offs from third-party payors. The network has not significantly changed its charity care policy during fiscal year 2016. Contributions Receivable Contributions receivable are unconditional promises to give that are recognized as contributions when the promise is received. Contributions receivable that are expected to be collected in less than one year are reported at net realizable value. Contributions receivable that are expected to be collected in more than one year are recorded at fair value at the date of promise. As all contributions receivable are expected to be collected within one year, these amounts have not been discounted. Management has not recorded an allowance on contributions receivable as amounts are expected to be fully collected within the year. Supplies Supplies are stated at lower of cost (first-in, first-out) or market. Assets Limited as to Use Assets limited as to use include assets set aside by the Board of Directors for future capital improvements and other purposes, over which the Board retains control and may at its discretion subsequently use for other purposes; assets restricted under the HUD program; and assets held by trustees under indenture agreements. Assets limited as to use that are available for obligations classified as current liabilities are reported in current assets. All assets limited as to use are held in cash and cash equivalents at June 30, 2016. 9
Notes to Financial Statements June 30, 2016 Property and Equipment Property and equipment acquisitions in excess of $5,000 are capitalized and recorded at cost. Depreciation is provided over the estimated useful life of each depreciable asset and is computed using the straight-line method. The estimated useful lives of property and equipment are as follows: Building and improvements Furniture and equipment Computer equipment Vehicles 5-40 years 3-10 years 3-20 years 5 years Gifts of long-lived assets such as land, buildings, or equipment are reported as additions to unrestricted net assets, and are excluded from expenses in excess of revenues, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted net assets. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when donated or when acquired long-lived assets are placed in service. Investments in Affiliated Companies Investments in entities in which the Network has the ability to exercise significant influence over operating and financial policies but does not have operational control are recorded under the equity method of accounting. Under the equity method, the initial investment is recorded at cost and adjusted annually to recognize the Network s share of earnings and losses of those entities, net of any additional investments or distributions. The Network s share of net earnings or losses of the entities is included in other income. Investments in affiliated organization also include various investments for which the ownership percentage and ability to exercise significant influence is limited. These investments are recorded at cost. Any dividends received from these organizations are recorded as income in the period received. Beneficial Interest in Assets Held by Community Foundation During 2010, the Network established a permanent endowment the Fund under a community foundation s (the CF) Non-profit Preservation Endowment Challenge Grant program, and named the Network as beneficiary. The Network granted variance power to the CF which allows the CF to modify any condition or restriction on its distributions for any specified charitable purpose or to any specified organization if, in the sole judgment of the CF s Board of Directors, such restriction or condition becomes unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community. The Fund is held and invested by the CF for the Network s benefit, and is reported at fair value in the balance sheet, with distributions and changes in fair value recognized in the statements of operations and changes in net assets. Debt Issuance Costs Debt issuance costs are amortized over the period the related obligation is outstanding using the straight-line method, which is a reasonable estimate of the effective interest method. Debt issuance costs are included within long-term debt on the balance sheet. Amortization of debt issuance costs is included in interest expense in the accompanying financial statements. 10
Notes to Financial Statements June 30, 2016 Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Network has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Network in perpetuity. Revenue and Revenue Recognition Capitated Revenue The Network receives payment for behavioral and mental health services for Medicaid patients in their catchment area on the basis of a sub-capitation agreement with Behavioral Healthcare, Inc. (BHI). In accordance with this agreement the Network gets paid 22.91% of BHI s net Medicaid revenue, subject to retroactive adjustment. Retroactive adjustments are accrued on an estimated basis in the period the contract period and adjusted in future periods as final settlements are determined. Net Patient and Client Service Revenue The Network has agreements with third-party payors that provide for payments to the Network at amounts different from its established rates. Payment arrangements include capitated payments, prospectively determined rates, discounted charges, and per diem payments. Net patient and client service revenue is reported at the estimated net realizable amounts from patients, clients, and third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. 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. The Network recognizes patient and client service revenue associated with services provided to patients and clients who have third-party payor coverage on the basis of contractual rates for the services rendered, as noted above. For uninsured patients and clients that do not qualify for charity care, the Network recognizes revenue on the basis of its standard rates for services provided. On the basis of historical experience, a significant portion of the Network s uninsured and other self-pay patients and clients will be unable or unwilling to pay for the services provided. Thus, the Network records a significant provision for bad debts related to uninsured and other self-pay patients and clients in the period the services are provided. Net patient and client service revenue, but before the provision for bad debts, recognized for the year ended June 30, 2016 from these major payor sources, is as follows: Net patient and client service revenue Third-party payors $ 4,596,318 Uninsured 966,401 Total all payors $ 5,562,719 11
Notes to Financial Statements June 30, 2016 Other Revenues Revenue is recognized when earned. Program service fees and payments under cost-reimbursable contracts received in advance are deferred to the applicable period in which the related services are performed or expenditures are incurred, respectively. Contributions are recognized when cash, securities or other assets, an unconditional promise to give, or notification of a beneficial interest is received. Donated Services and In-Kind Contributions Contributed services are recognized as contributions if the services (a) create or enhance nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased by the Network. During 2016, the Network did not record any donated service contributions. Donated goods are recorded at fair value on the date of donation. During 2016, the Network received donated pharmacy materials totaling $44,581 which have been recorded as in-kind contributions and supplies expense. Expenses in Excess of Revenues Expenses in excess of revenues excludes transfers of assets to and from related parties for other than goods and services, and contributions of long-lived assets, including assets acquired using contributions which were restricted by donors. Charity Care The Network has a policy of providing charity care to persons who are unable to pay. Charges for these persons are made on an estimated ability to pay. Since management does not expect payment for charity care, revenue is recognized only to the extent of ability to pay. The estimated cost of providing these services was $322,000 for the year ended June 30, 2016, calculated by multiplying the ratio of cost to gross charges for the Network by the gross uncompensated charges associated with providing charity care to its patients. These costs are fully subsidized in accordance with an agreement between the Network and the Office of Behavioral Health. Note 2 - Net Patient and Client Service Revenue The Network has agreements with third-party payors that provide for payments to the Network at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: Medicaid. Outpatient services related to Medicaid program beneficiaries are reimbursed on a fee screen basis. Inpatient services provided to Medicaid program beneficiaries are paid at per diem rates. The Network also entered into payment agreements with Medicare, certain commercial insurance carriers and other organizations. The basis for payment under these agreements includes prospectively determined rates per treatment, discounts from established charges, and fee for service arrangements. 12
Notes to Financial Statements June 30, 2016 Revenue from the Medicaid programs accounted for approximately 86% of the Network s net patient and client service revenue for the year ended June 30, 2016. Laws and regulations governing the Medicare, Medicaid, and other programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The net patient and client service revenue for the year ended June 30, 2016 decreased approximately $450,000 due to actual collections of patient and client receivables being less than previously estimated amounts. Note 3 - Property Plant and Equipment A summary of property and equipment at June 30, 2016 is as follows: Cost Accumulated Depreciation Land $ 3,908,045 $ - Building and improvements 18,801,754 5,495,509 Furniture and equipment 997,095 761,809 Computer equipment 1,795,742 1,398,449 Vehicles 195,025 177,914 Construction in process 271,413 - $ 25,969,074 $ 7,833,681 Net property and equipment $ 18,135,393 Construction in process at June 30, 2016 consists primarily of a building remodel and a new EHR system. The building remodel is expected to be completed in November 2017 with additional costs of $400,000. The EHR system is expected to be completed at an additional cost of approximately $400,000 which is has been fully committed. The go-live date for the EHR upgrade is expected to be July 2017. Note 4 - Investments in Affiliated Companies Equity Method Investment The Network is a 22.9% owner in Behavioral Healthcare, Inc. (BHI). BHI is a Colorado nonprofit behavioral health management organization. The investment in BHI is recorded on the equity method. The net gain on this investment, totaling $115,690, is included in other income. The Network did not receive any distributions or make any additional investments in BHI during 2016. Revenue from BHI totaled $17,954,169 during the year ended June 30, 2016. Amounts due BHI for liabilities associated with the sub-capitation agreement totaled $355,105 at June 30, 2016. 13
Notes to Financial Statements June 30, 2016 Summary financial statement information for BHI as of June 30, 2016 is as follows: Assets $ 32,318,970 Liabilities $ 25,920,067 Net assets 6,398,903 Total liabilities and net assets $ 32,318,970 Total revenues $ 131,124,331 Total expenses (130,584,897) Change in net assets $ 539,434 Cost Method Investments The Network also has investments in Community Crisis Connections, LLC (16.7% owner), Progressive Health Options, LLC (7.1% owner), and Signal (16.7% owner) which are recorded on the cost method. No dividends were received from these investments during 2016. As of June 30, 2016, the Network had a receivable totaling $139,667 from Signal for providing chemical dependency and related behavioral health services to clients. Note 5 - Leases The Network leases certain equipment under noncancelable long-term lease agreements which have been recorded as operating leases. Total lease expense for the year ended June 30, 2016 was $482,354. Minimum future lease payments are as follows: For the Years Ending June 30: 2017 $ 435,053 2018 2019 2020 178,723 97,793 72,307 2021 48,672 $ 832,548 14
Notes to Financial Statements June 30, 2016 Note 6 - Long-term Debt Long-term debt consists of the following at June 30, 2016: City of Littleton, Colorado - Colorado Mental Health Facilities Development Revenue Refunding Bond, Series 2013 (A) $ 8,742,596 Promissory Note Payable (B) 203,062 Mortgage Payable (C) 36,552 8,982,210 Less debt issuance costs (197,031) Total long-term debt 8,785,179 Less current maturities (397,592) Long-term debt, less current maturities $ 8,387,587 Effective December 20, 2013, the Network obtained a $9,680,000 Revenue Refunding Bond (A). The bond incurs interest at 2.75% per annum through December 20, 2018, when the rate will be reset to the 5-year U.S. Treasury Constant Maturity Note Index Rate plus 0.6%, with a floor of 2.75%. The interest rate will be reset in the same manner in 2023 and 2028. Principal and interest payments totaling $52,673 are due monthly through December 2033. The bond is secured by the Network s property and equipment. The $220,000 promissory note (B) bears an interest rate of 5% and was effective December 30, 2013. The note is secured by the Network s land and buildings. Monthly principal and interest payments totaling $1,461 are due through December 2033. The Network has a mortgage payable to the Department of Housing and Urban Development (C), collateralized by land and buildings. The note is payable in monthly installments totaling $994 through 2019 and carries an interest rate of 7.625%. Bond issuance costs of $226,603 were incurred as a result of the December 2013 Revenue Refunding Bond and are being amortized over twenty years, resulting in an effective annual interest rate of 2.9%. Under the terms of the bond and promissory note, the Network is required to maintain certain financial covenants. Management believes it is in compliance with these covenants at June 30, 2016. 15
Notes to Financial Statements June 30, 2016 Future minimum principal payments on long-term debt are as follows: For the Years Ending June 30: Amount 2017 2018 2019 $ 397,592 422,380 435,011 441,406 2020 2021 448,656 Thereafter 6,837,165 Total $ 8,982,210 Note 7 - Restricted Net Assets Temporarily restricted net assets as of June 30, 2016 consist of promises to give that are not restricted by donors, but which are unavailable for expenditure until received. Permanently restricted net assets at June 30, 2016 consist of a beneficial interest in assets held in endowment. There were no releases of temporarily or permanently restricted net assets during the year ended June 30, 2016. Note 8 - Retirement Plan The Network maintains a company sponsored defined benefit retirement plan (the Plan) which covers substantially all employees who have attained the age of 21. Under the Plan, the Network matches 50% of the employee s contributions up to a maximum of 3%. Employees vest in the Network s contributions at a rate of 20% per year, with full vesting after five years of service. Employees immediately vest in contributions they make to the Plan. Pension expense totaled $120,650 during the year ended June 30, 2016. Note 9 - Functional Expenses The Network provides health care services to patients and client within its geographic location. Expenses related to providing these services by functional class for the year ended were as follows: Program services $ 32,347,692 General and administrative 4,906,121 Fundraising 799,478 $ 38,053,291 16
Notes to Financial Statements June 30, 2016 Note 10 - Concentrations of Credit Risk The Network issues credit without collateral to its patients and clients, most of whom are local residents and are insured under third-party payor agreements. The concentrations of receivables from patients and third-party payors are as follows at June 30, 2016: Medicare 11% Medicaid 12% Other third-party payors 54% Uninsured 23% At June 30, 2016, one donor accounted for 100% of the contributions receivable. Additionally, 60% of the balance in grants receivable is due from the Office of Behavioral Health. The Network s cash balances are maintained in various bank deposit accounts at various times during the year, the balance of these deposits may be in excess of federally insured limits. To date, the Network has not experienced losses in any of these accounts. 100% Note 11 - Contingencies Malpractice Insurance The Network has malpractice insurance coverage to provide protection for professional liability losses on a claims-made basis subject to a limit of $1 million per claim and an annual aggregate limit of $3 million. Should the claims-made policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term, but reported subsequently, would be uninsured. Litigation, Claims, and Disputes The Network is subject to the usual contingencies in the normal course of operations relating to the performance of its tasks under its various programs. In the opinion of management, the ultimate settlement of any litigation, claims, and disputes in process will not be material to the financial position, operations, or cash flows of the Network. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations, specifically those relating to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Federal government activity with respect to investigations and allegations concerning possible violations by health care providers of regulations could result in the imposition of significant fines and penalties, as well as significant repayments of previously billed and collected revenues from patient and resident services. 17
Notes to Financial Statements June 30, 2016 Note 12 - Change in Accounting Policy As of July 1, 2015, the Network adopted the provisions of Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. The Network adopted this standard as management believes this presentation more accurately reflects the costs of borrowing for arrangements in which debt issuance costs are incurred. Note 13 - Subsequent Events During September 2016, the Network entered into a letter of intent to acquire a retail pharmacy operation. The purchase price is estimated at $500,000 including the cost of inventory. A term debt agreement for funding has been approved by a lender and is expected to be secured by real estate. Closing of the acquisition is anticipated in early January 2017. Management has evaluated subsequent events through January 5, 2017, the date the financial statements were available to be issued. 18
Schedule of Expenditures of Federal Awards, and Reports Required by Government Auditing Standards And Uniform Guidance June 30, 2016 Arapahoe Mental Health Center, Inc.
Independent Auditor s 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 Board of Directors Arapahoe Mental Health Center, Inc. Englewood, Colorado 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 financial statements of Arapahoe Mental Health Center, Inc. (the Network), which comprise the balance sheet as of June 30, 2016, and the related statements of operations, and changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated January 5, 2017. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Network 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 financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Network s internal control. Accordingly, we do not express an opinion on the effectiveness of the Network s internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses. 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 financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and questioned costs to be material weaknesses: 2016-A, 2016-B, 2016-C, 2016-D, and 2016-E. 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. www.eidebailly.com 19 5299 DTC Blvd., Ste. 1000 Greenwood Village, CO 80111-3329 TF 877.882.9856 T 303.770.5700 F 303.770.7581 EOE
Compliance and Other Matters As part of obtaining reasonable assurance about whether the Network s financial statements are free from 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. Management s Responses to Findings Management s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. Management s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them 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 entity 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 entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Greenwood Village, Colorado January 5, 2017 20
Independent Auditor s Report on Compliance for Each Major Federal Program; Report on Internal Control over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance Board of Directors Arapahoe Mental Health Center, Inc. Englewood, Colorado Report on Compliance for Each Major Federal Program We have audited Arapahoe Mental Health Center, Inc. s (the Network) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Network s major federal programs for the year ended June 30, 2016. The Network 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 the 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 Network 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 Network 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 Network s compliance. Basis for Qualified Opinion on Block Grants for Prevention and Treatment of Substance Abuse As described in the accompanying schedule of findings and questioned costs, the Network did not comply with requirements regarding CFDA 93.959 - Block Grants for Prevention and Treatment of Substance Abuse as described in finding numbers 2016-001 for Allowable Activities. Compliance with such requirements is necessary, in our opinion, for the Network to comply with the requirements applicable to that program. www.eidebailly.com 21 5299 DTC Blvd., Ste. 1000 Greenwood Village, CO 80111-3329 TF 877.882.9856 T 303.770.5700 F 303.770.7581 EOE
Qualified Opinion on Block Grants for Prevention and Treatment of Substance Abuse In our opinion, except for the noncompliance described in the Basis of Qualified Opinion paragraph, the Network complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on CFDA 93.959 - Block Grants for Prevention and Treatment of Substance Abuse for the year ended June 30, 2016. Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, the Network complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its other major federal program identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs for the year ended June 30, 2016. Other Matters The Network s response to the noncompliance findings identified in our audit are described in the corrective action plan. The Network s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control over Compliance Management of the Network 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 Network 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 Network s internal control over compliance. 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 that might be material weaknesses or significant deficiencies and therefore, material weaknesses and significant deficiencies may exist that were not identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and significant deficiencies. 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 compliance requirement will not be prevented, or detected and corrected, on a timely basis. We consider the deficiency in internal control over compliance described in the accompanying schedule of findings and questioned costs as item 2016-001 to be a material weakness. 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. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as item 2016-002 to be a significant deficiency. 22
The Network s response to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Network s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. 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. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the Network as of and for the year ended June 30, 2016, and have issued our report thereon dated January 5, 2017, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the 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 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 expenditure of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. Greenwood Village, Colorado January 5, 2017 23
Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/ Federal Pass-Through Pass-through Grantor/ CFDA Entity Identifying Federal Program or Cluster Title Number Number Expenditures U.S. Department of Housing and Urban Development Supportive Housing for the Elderly - Section 202 Direct Loans 14.157 N/A $ 36,552 Total U.S. Department of Housing and Urban Development 36,552 U.S. Department of Justice Pass-Through Program from State of Colorado, Department of Local Affairs: Department of Corrections: Second Chance Act Housing and Reentry Program 16.812 H4CSH14065 129,246 Total U.S. Department of Justice 129,246 U.S. Department of Education Pass-Through Program from State of Colorado, Division of Vocational Rehabilitation: Rehabilitation Services - Vocational Rehabilitation Grants to States 84.126 N/A 54,000 Total U.S. Department of Education 54,000 U.S. Department of Health and Human Services Pass-Through Program from State of Colorado, Office of Behavioral Health: Youth and Family Bridges 93.243 15 IHJA 74399 55,417 State of Colorado, Office of Behavioral Health: Youth and Family Bridges 93.243 16 IHJA 82396 266,128 Total CFDA #93.243 321,545 State of Colorado, Department of Health Care Policy and Financing: Medical Assistance Program 93.778 N/A 74,880 State of Colorado, Office of Behavioral Health: Block Grants for Community Mental Health Services 93.958 15 IDD 67992 28,631 State of Colorado, Office of Behavioral Health: Supported Employment Extended Services (non-medicaid and Medicaid Client) 93.958 15 IDD 67992 114,373 State of Colorado, Office of Behavioral Health: Individual Placement and Support Plan 93.958 15 IDD 67992 100,000 Total CFDA #93.958 243,004 Signal Behavioral Health Network: Block Grants for Prevention and Treatment of Substance Abuse 93.959 N/A 359,424 Total U.S. Department of Health and Human Services 998,853 Total Expenditures of Federal Awards $ 1,218,651 See Notes to Schedule of Expenditures of Federal Awards 24
Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Note 1 - Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of Arapahoe Mental Health Center, Inc. (the Network), and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the Uniform Guidance. The Network received federal awards both directly from federal agencies and indirectly through passthrough agencies. Note 2 - Subrecipients There were no subrecipients of federal awards during the year ended June 30, 2016. Note 3 - Significant Accounting Policies Expenditures reported on the schedule of expenditures of federal awards are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Subpart E Cost Principles of the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. The Network s summary of significant accounting policies is presented in Note 1 in the Network s basic financial statements. The Network has not elected to use the 10% de minimis cost rate. 25