PREFERRED FAMILY HEALTHCARE, INC. AND SUBSIDIARY AUDITED CONSOLIDATED FINANCIAL STATEMENTS Year Ended 2012 (With Comparative Consolidated Totals Only for 2011)
TABLE OF CONTENTS Page Report of Independent Auditors 1 Consolidated Financial Statements Statement of Financial Position 2 Statement of Activities 3 Statement of Functional Expenses 4 Statement of Cash Flows 5 Notes to Financial Statements 6
REPORT OF INDEPENDENT AUDITORS To the Board of Directors Preferred Family Healthcare, Inc. We have audited the accompanying consolidated statement of financial position of Preferred Family Healthcare, Inc. and Subsidiary (PFH), as of 2012, and the related consolidated statements of activities, functional expenses, and cash flows for the year then ended. These consolidated financial statements are the responsibility of PFH's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The summarized comparative information has been derived from PFH s consolidated financial statements for the year ended 2011, and, in our report dated October 31, 2011, we expressed an unqualified opinion on those consolidated financial statements. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Preferred Family Healthcare, Inc. and Subsidiary as of 2012, and changes in their net assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated October 25, 2012, on our consideration of PFH s internal control over financial reporting and on 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 the audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. St. Louis, Missouri October 25, 2012 A member of UHY International, a network of independent accounting and consulting firms Page 1
CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,303,982 $ 3,514,580 Contracts and accounts receivable, net 4,351,810 4,137,824 Grants receivable 116,002 83,749 Other receivables 157,873 162,426 Prepaid expenses 105,843 78,252 Total current assets 11,035,510 7,976,831 INVESTMENT - CERTIFICATE OF DEPOSIT 245,000 - PROPERTY AND EQUIPMENT 17,926,243 19,373,099 OTHER ASSETS Intangible assets 712,214 729,613 Deferred financing costs 113,666 226,797 Other 82,138 59,671 908,018 1,016,081 Total assets $ 30,114,771 $ 28,366,011 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Current portion of long-term debt $ 1,304,727 $ 3,019,071 Accounts payable 969,896 1,156,758 Accrued payroll and related expenses 1,100,864 919,559 Accrued paid time off 666,547 580,456 Accrued interest 23,140 43,422 Deferred revenue 34,673 78,435 Total current liabilities 4,099,847 5,797,701 LONG-TERM DEBT 9,258,307 11,597,262 Total liabilities 13,358,154 17,394,963 NET ASSETS - UNRESTRICTED 16,756,617 10,971,048 Total liabilities and net assets $ 30,114,771 $ 28,366,011 See notes to consolidated financial statements. Page 2
CONSOLIDATED STATEMENT OF ACTIVITIES Year Ended Years Ended PUBLIC SUPPORT AND REVENUES Grants and contracts $ 35,311,976 $ 30,498,999 Program services 1,950,718 1,398,800 Donations 33,385 7,271 Interest income 20,476 29,899 Rental income 59,286 32,979 Gain on sale of property and equipment 2,174,077 85,442 Other 211,409 92,995 Total public support and revenues 39,761,327 32,146,385 EXPENSES Program services Adult services 8,879,422 8,537,380 Adolescent services 12,214,093 10,652,832 Behavioral health 4,942,137 4,217,424 26,035,652 23,407,636 Supporting activities Management and general 7,512,461 6,830,405 Fundraising 427,645 160,319 Total expenses 33,975,758 30,398,360 CHANGES IN NET ASSETS 5,785,569 1,748,025 NET ASSETS, Beginning 10,971,048 9,223,023 NET ASSETS, Ending $ 16,756,617 $ 10,971,048 See notes to consolidated financial statements. Page 3
Page 4 PREFERRED FAMILY HEALTHCARE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year Ended Adult Adolescent Behavioral Management Services Services Health Total and General Fundraising Total Total SALARIES AND EMPLOYEE BENEFITS Salaries $ 4,947,916 $ 6,931,408 $ 2,858,504 $ 14,737,828 $ 4,012,296 $ 295,505 $ 19,045,629 $ 17,637,119 Other personnel costs 1,139,331 1,696,677 743,875 3,579,883 1,215,079 57,136 4,852,098 4,115,468 6,087,247 8,628,085 3,602,379 18,317,711 5,227,375 352,641 23,897,727 21,752,587 SERVICE AND SUPPLIES Communications 121,624 137,002 132,112 390,738 120,922 2,556 514,216 410,755 Insurance 14,491 12,401 13,514 40,406 42,846-83,252 65,739 Maintenance and repairs 117,251 169,028 66,657 352,936 265,920-618,856 504,068 Professional fees 446,753 108,934 126,320 682,007 427,891 59,093 1,168,991 932,331 700,119 427,365 338,603 1,466,087 857,579 61,649 2,385,315 1,912,893 BUILDINGS AND OCCUPANCY COSTS Equipment and furnishings 39,317 68,446 42,761 150,524 43,068-193,592 158,068 Food service 398,304 374,483 144,539 917,326 101-917,427 984,260 Materials and supplies 411,544 201,549 87,479 700,572 64,637 1,426 766,635 627,331 Facility costs 414,776 376,473 32,818 824,067 115,567-939,634 889,220 Utilities 135,809 161,159 85,391 382,359 87,823-470,182 490,956 1,399,750 1,182,110 392,988 2,974,848 311,196 1,426 3,287,470 3,149,835 TRAVEL AND EDUCATION Staff training 28,448 36,401 46,735 111,584 46,990 2,045 160,619 95,636 Staff travel 53,768 141,369 87,838 282,975 118,629 4,041 405,645 300,754 Transportation 128,010 131,460 140,269 399,739 206,668 5,843 612,250 474,105 210,226 309,230 274,842 794,298 372,287 11,929 1,178,514 870,495 OTHER Donations - (60) 497 437 359,234-359,671 119,584 Interest expense 96,210 287,612 50,615 434,437 64,401-498,838 591,771 Loss on sale of property and equipment 14,788 15,446 2,358 32,592 10,156-42,748 48,418 Impairment of long-lived assets - 601,863-601,863 - - 601,863 432,418 Miscellaneous 77,533 232,514 71,844 381,891 30,429-412,320 339,327 Provision for bad debts 37,392 20,048 1,077 58,517 - - 58,517 103,902 Total expenses before depreciation and amortization Program Services Years Ended Supporting Activities 225,923 1,157,423 126,391 1,509,737 464,220-1,973,957 1,635,420 8,623,265 11,704,213 4,735,203 25,062,681 7,232,657 427,645 32,722,983 29,321,230 DEPRECIATION AND AMORTIZATION 256,157 509,880 206,934 972,971 279,804-1,252,775 1,077,130 TOTAL EXPENSES - 2012 $ 8,879,422 $ 12,214,093 $ 4,942,137 $ 26,035,652 $ 7,512,461 $ 427,645 $ 33,975,758 PERCENTAGE - 2012 26.13 % 35.95 % 14.55 % 76.63 % 22.11 % 1.26 % 100.00 % COMPARATIVE CONSOLIDATED TOTALS ONLY - 2011 $ 8,537,380 $ 10,652,832 $ 4,217,424 $ 23,407,636 $ 6,830,405 $ 160,319 $ 30,398,360 PERCENTAGE - 2011 28.09 % 35.04 % 13.87 % 77.00 % 22.47 % 0.53 % 100.00 % 2012 2011 See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended Years Ended OPERATING ACTIVITIES Changes in net assets $ 5,785,569 $ 1,748,025 Adjustments to reconcile changes in net assets to net cash provided by operating activities Noncash reduction of long-term debt due to debt forgiveness (24,265) - Depreciation and amortization 1,252,775 1,077,130 Amortization of deferred financing costs 103,129 77,338 Gain on sale of property and equipment (2,174,077) (85,442) Loss on sale of property and equipment 42,748 48,418 Impairment of long-lived assets 601,863 432,418 Provision for bad debts 58,517 103,902 Changes in Contracts and accounts receivable (272,503) (1,508,876) Grants receivable (32,253) (7,198) Prepaid expenses (27,591) (4,492) Other assets (17,914) (152,773) Accounts payable 336,851 (121,594) Accrued payroll and related expenses 181,305 129,893 Accrued paid time off 86,091 74,631 Accrued interest (20,282) 7,839 Deferred revenue (43,762) 25,118 Net cash provided by operating activities 5,836,201 1,844,337 INVESTING ACTIVITIES Proceeds from short-term investment - certificate of deposit - 101,550 Purchase of investment - certificate of deposit (245,000) - Purchase of property and equipment (3,810,006) (4,175,868) Purchase of intangible assets (590,000) - Proceeds from sale of property and equipment 6,112,837 212,585 Net cash provided (used) by investing activities 1,467,831 (3,861,733) FINANCING ACTIVITIES Issuance of long-term debt - 3,696,000 Financing costs - (110,613) Repayments of long-term debt (4,514,630) (1,216,135) Net cash provided (used) by financing activities (4,514,630) 2,369,252 NET INCREASE IN CASH AND CASH EQUIVALENTS 2,789,402 351,856 CASH AND CASH EQUIVALENTS, Beginning 3,514,580 3,162,724 CASH AND CASH EQUIVALENTS, Ending $ 6,303,982 $ 3,514,580 See notes to consolidated financial statements. Page 5
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist in understanding the consolidated financial statements of Preferred Family Healthcare, Inc. and Subsidiary (PFH). These accounting policies conform to accounting principles generally accepted in the United States of America. History and Business Activity Preferred Family Healthcare, Inc. (PFH, Inc.), established in 1979, is a voluntary health agency and operates drug and alcohol treatment facilities in Missouri and Kansas. Services are also available for individuals affected by a mental illness or who are unable to live independently. PFH, Inc. is a not-forprofit organization and receives a major portion of its support from its fee for service contracts with the Missouri Department of Mental Health. PFH Aviation, Inc. (PFH Aviation) is a wholly-owned subsidiary of PFH, Inc. and provides transportation services for the employees of PFH, Inc. Comparative Consolidated Totals The consolidated financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with PFH s consolidated financial statements for the year ended 2011, from which the summarized information was derived. Principles of Consolidation The consolidated financial statements include the accounts of PFH, Inc. and PFH Aviation. significant intercompany items have been eliminated upon consolidation. All Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures. Accordingly, actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include bank accounts as well as money market accounts and repurchase agreements. PFH s cash deposits in financial institutions are insured by FDIC insurance which is subject to certain limitations and conditions. Investment - Certificate of Deposit Investment - certificate of deposit matures on March 13, 2013 and bears interest at 1.35%. Interest income on the certificate of deposit is recorded as income when earned. Page 6
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Contracts, Accounts and Grants Receivable Contracts, accounts and grants receivable are carried net of allowance for doubtful accounts. The allowance for doubtful accounts is increased by provisions charged to expense and reduced by accounts charged off, net of recoveries. The allowance is maintained at a level considered adequate to provide for potential account losses based on management's evaluation of the anticipated impact on the balance of current economic conditions, changes in the character and size of the balance, past and expected future loss experience and other pertinent factors. The total allowance for doubtful accounts related to these receivables was $100,000 for the years ended 2012 and 2011. Concentration of Credit Risk PFH generates accounts receivable in the normal course of business. PFH grants credit to customers in Missouri and Kansas and does not require collateral to secure accounts receivable. However, most clients are insured under sponsored programs or other third-party payor agreements. Property and Equipment Property and equipment are recorded at cost if purchased or at fair value if donated, net of accumulated depreciation. Significant repairs that extend the life of an asset are capitalized; all other repairs are charged to expense as incurred. Depreciation of property and equipment is provided on a straight-line method over the following estimated useful lives: Years Land Improvements 5-25 Leasehold Improvements 5-40 Buildings and Improvements 5-40 Furniture, Fixtures, and Equipment 5-20 Aircraft 15 Vehicles 5 Asset Impairment Assessments PFH reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is recognized to the extent that the sum of undiscounted estimated future cash flows expected to result from use of the assets is less than carrying value. If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value. Page 7
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible Assets Intangible assets consist of covenants not-to-compete and customer lists and are amortized using the straight-line method over their useful lives. The carrying value of intangibles is evaluated at least annually for impairment. Unamortized intangible assets consist of goodwill and a certificate of need. Goodwill resulted from the acquisition of assets for an amount in excess of the fair value of the net assets acquired. Amortization expense was being recorded over 5-10 years using the straight-line method through 2010. As of 2011, PFH stopped amortizing goodwill and begun measuring for impairment annually. The certificate of need represents a license to operate a 52-bed residential care facility. Deferred Financing Costs Deferred financing costs consist of legal, issuance and accounting fees related to the issuance of debt. These costs are amortized on the straight-line method over the life of the loans. Unrestricted Net Assets Unrestricted net assets are those resources over which the Board of Directors has discretionary control. Designated amounts represent those resources that the Board has set aside for a particular purpose. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Temporarily Restricted Net Assets Temporarily restricted net assets are those resources subject to donor-imposed restrictions that will be satisfied by actions of PFH or the passage of time. As of 2012 and 2011, PFH held no temporarily restricted net assets. Permanently Restricted Net Assets Permanently restricted net assets are those resources subject to donor-imposed restrictions that will be maintained by PFH. The donors of these resources permit PFH to use all or part of the income earned, including capital appreciation, on related investments for unrestricted or temporarily restricted purposes. As of 2012 and 2011, PFH held no permanently restricted net assets. Uncompensated Care PFH provides services to patients under government reimbursed public aid programs as well as other payor programs; often the amounts paid are less than the cost of rendering such services. The cost of uncompensated care was $686,368 and $490,719 for the years ended 2012 and 2011, respectively, which are not reflected in the accompanying consolidated statement of activities. Page 8
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition - Donations Unconditional promises-to-give cash and other assets to PFH are reported at fair value at the date the promise is received. Conditional promises-to-give are reported at fair value at the date the condition is satisfied. Indications of intentions-to-give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently 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 or purpose restriction is accomplished, temporarily restricted net assets are classified as unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Revenue Recognition - Other Contract revenue is generally recognized as revenue in the period that specific services are performed. Grant revenue is recognized as revenue only to the extent allowable expenses have been incurred under the terms of the agreement. The remaining portion is recorded as deferred revenue. However, certain grants may qualify as contributions and, accordingly, they are recognized as support when made. Program services and other revenue, which arises principally from delivery of services, is generally recognized upon delivery of the services to the client. Description of Program Services and Supporting Activities The following program services and supporting activities are included in the accompanying consolidated financial statements: Programs include those expenditures that enable PFH to operate drug and alcohol treatment facilities in numerous locations across the States of Missouri and Kansas. Adult Services - includes professional substance abuse treatment for adults in day treatment, outpatient, or residential treatment environments, while using a combination of group and individual counseling, alcohol and drug education, life skills training, personal therapy, and community support workers. Adolescent Services - includes professional substance abuse treatment for adolescents in day treatment, outpatient, or residential treatment environments, while using a combination of group and individual counseling, alcohol and drug education, life skills training, personal therapy, and community support workers. Behavioral Health - includes assisted living with meals, laundry, local transportation, daily activities, and medical care available as well as three Community Psychiatric Rehabilitation Centers which focus on avoiding hospitalization and on developing stable and productive lifestyles. Page 9
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Description of Program Services and Supporting Activities (Continued) Advertising Management and General - includes the functions necessary to maintain an equitable employment program; ensure an adequate working environment; provide coordination and articulation of PFH s program strategy; secure proper administrative functioning of the Board; and manage the financial and budgetary responsibility, including procurement and monitoring of grants and contracts. Fundraising - provides the structure necessary to secure private financial support from corporations and foundations in the form of grants. Advertising costs, which are included in communications expense, are charged to operations when incurred and were $76,470 and $29,921 for the years ended 2012 and 2011, respectively. Income Taxes PFH is a Missouri not-for-profit organization as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. As such, PFH is only taxed on the income from any activities unrelated to its charitable purposes. PFH files a Form 990 for its exempt activities and a Form 990-T for its unrelated activity (share of PFH Aviation taxable income (loss)). PFH Aviation is a Missouri for-profit corporation and has elected to be taxed as an S Corporation under the provisions of the Internal Revenue Code. In lieu of corporation income taxes, PFH is taxed on PFH Aviation s taxable income (loss). PFH s federal Exempt Organization Business income tax returns and PFH Aviation s income tax returns are subject to examination by the IRS for the statutory period. Functional Expenses PFH allocates its expenses on a functional basis among its various program and supporting services. Expenses that can be directly associated with a specific program are allocated directly according to their functional expense classification. Other expenses that are common to several functions are allocated by various statistical bases. Fair Value Measurements The fair value measurements standard defines fair value as the exchange price that would be received for the asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. PFH determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Page 10
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value Measurements (Continued) Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using 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 of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. Reclassifications Certain reclassifications have been made to the consolidated financial statements for the year ended 2011 to conform to the presentation for the year ended 2012. Subsequent Events PFH has performed a review of events subsequent to the date of the consolidated statement of financial position through October 25, 2012, the date the consolidated financial statements were available to be issued. NOTE 2 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following: Cash - Interest Bearing (*) $ 3,677,554 $ 2,546,370 Cash - Non-Interest Bearing (**) 2,624,156 966,899 Petty Cash 2,272 1,311 $ 6,303,982 $ 3,514,580 (*) Includes funds held in escrow of $-0- and $1,211,448 as of 2012 and 2011, respectively. (**) Includes funds held in escrow of $80,000 and $-0- as of 2012 and 2011, respectively. Page 11
NOTE 3 PROPERTY AND EQUIPMENT Property and equipment consists of the following: Land $ 1,649,736 $ 1,649,736 Land Improvements 338,680 290,782 Leasehold Improvements 259,467 195,965 Buildings and Improvements 14,666,268 13,620,571 Furniture, Fixtures, and Equipment 2,764,319 2,365,239 Aircraft 655,285 314,844 Vehicles 2,187,226 2,099,204 22,520,981 20,536,341 Construction in Progress (Note 9) Software Program 744,572 486,514 Jamison Location - 27,725 Joplin Building 1 (Note 12) - 3,689,153 Joplin Building 2 732,397 7,172 Dunnica St. Louis Project 21,910 - Data Domain Project 135,554 - Electronic Medical Records (EMR) Project 58,179 58,179 Other 59,940 30,163 1,752,552 4,298,906 24,273,533 24,835,247 Less Accumulated Depreciation 6,347,290 5,462,148 $ 17,926,243 $ 19,373,099 Depreciation and amortization expense on property and equipment was $1,237,238 and $1,067,844 for the years ended 2012 and 2011, respectively. NOTE 4 INTANGIBLE ASSETS Intangible assets consist of the following: Amortized Intangible Assets Covenants not-to-compete $ 40,000 $ 40,000 Less accumulated amortization 21,786 16,250 18,214 \\\\\\ 23,750 Unamortized Intangible Assets Goodwill 590,000 601,863 Certificate of need 104,000 104,000 694,000 705,863 Total intangible assets $ 712,214 $ 729,613 Page 12
NOTE 4 INTANGIBLE ASSETS (Continued) Amortization charged to amortization expense was $15,537 and $9,286 for the years ended 2012 and 2011, respectively. PFH s future cash flows are not materially impacted by its ability to extend or renew agreements related to its amortizable intangible assets. None of the intangible assets have renewal or extension terms. Estimated aggregate amortization expense on intangible assets is as follows: Year Ending 2013 $ 4,286 2014 4,286 2015 4,286 2016 4,286 Thereafter 1,070 $ 18,214 The changes in the carrying amount of goodwill are as follows: Carrying Value $ 601,863 $ 1,034,281 Goodwill Acquired 590,000 - Impairment Loss (601,863) (432,418) $ 590,000 $ 601,863 During the year ended 2012, PFH recorded an impairment loss of $601,863 as a result of ceasing operations at their Joplin, Missouri facility. During the year ended 2011, PFH determined the carrying amount of goodwill related to their operations in Kansas exceeded fair value, which was estimated on the present value of expected future cash flow. Accordingly, an impairment of long-lived assets of $432,418 was recognized (Note 6). NOTE 5 DEFERRED FINANCING COSTS Deferred financing costs consist of the following: Deferred Financing Costs $ 307,555 $ 358,274 Less Accumulated Amortization 193,889 131,477 $ 113,666 $ 226,797 Page 13
NOTE 5 DEFERRED FINANCING COSTS (Continued) Amortization of bond issuance costs were charged to interest expense and were $103,129 and $77,338 for the years ended 2012 and 2011, respectively. Estimated aggregate amortization expense on deferred financing costs is as follows: Year Ending 2013 $ 31,602 2014 31,602 2015 31,602 2016 18,860 $ 113,666 NOTE 6 ASSET ACQUISITIONS On May 1, 2012, PFH acquired the assets of Kings Treatment Center (KTC), located in the State of Kansas, for a purchase price of $650,000. The operations of KTC are included in the consolidated statement of activities from the date of acquisition. PFH acquired equipment and intangible assets. Intangible assets consist of a non-compete agreement of $10,000 (expensed during the year) and goodwill of $590,000. NOTE 7 NOTE PAYABLE TO BANK PFH has a demand note payable issued under a $652,200 line of credit. There were no outstanding borrowings at 2012 and 2011. Interest is payable monthly at the prime rate plus 0.25%. The note is collateralized by real estate. The bank s prime interest rate was 3.25% at 2012 and 2011. NOTE 8 LONG-TERM DEBT Long-term debt consists of the following: Bonds payable to bank - balloon payment due December 2015, principal and interest payable in monthly installments of $52,758, including interest at 2.87%, secured by real estate (a) $ 6,020,917 $ 6,400,088 Page 14
NOTE 8 LONG-TERM DEBT (Continued) Note payable to bank - balloon payment due January 2013, principal and interest payable in monthly installments of $3,292, including interest at 6.24%, secured by real estate $ 358,260 $ 374,468 Note payable to bank - due January 30, 2017, principal and interest payable in monthly installments of $2,516, including interest at 4.1%, secured by real estate 276,494 289,559 Note payable to bank - due May 25, 2015, principal and interest payable in monthly installments of $9,154, including interest at 3.75%, secured by real estate (b) 1,374,525 1,421,260 Bonds payable to bank - due June 2031, principal payable in monthly installments of $12,010, plus interest, through June 2014 and $5,590 from July 2014 through June 2031, including interest at the United States Swap Rate plus 3.35% multiplied by 0.65% (rate at 3.48% not to fall below 2.60%), secured by real estate (c) 1,428,557 4,800,000 Various notes payable to banks and financing companies - due from dates February 2012 through July 2015, payable in monthly installments of between $429 to $1,797, including interest between 0.00% and 7.50%, secured by vehicles 278,796 557,181 Note payable to bank - due October 2012, payable in monthly installments of $2,124, including interest at 8.75%, secured by computer software - 30,397 Note payable to agency - due August 2021, principal and interest payment of $29,118 to be forgiven annually, including interest at 4%, secured by certain deed of trust (d) 266,915 - Notes payable to individuals - due various dates through September 2019, payable in monthly installments of between $1,221 to $10,790, including interest at 5.00% to 6.00%, secured by business interests and operations at various locations 558,570 743,380 10,563,034 14,616,333 Less current portion of long-term debt 1,304,727 3,019,071 $ 9,258,307 $ 11,597,262 Page 15
NOTE 8 LONG-TERM DEBT (Continued) (a) Note payable to bank requires PFH to meet certain quarterly financial statement covenants. PFH must maintain a ratio of debt to tangible net worth at not more than 3.00 to 1.00, maintain a debt service coverage ratio at not less than 1.15 to 1.00 and to maintain a tangible net worth at not less than $6,000,000. PFH was in compliance with these covenants as of and for the years ended 2012 and 2011. (b) Note payable to bank requires PFH to meet certain quarterly financial statement covenants. PFH must maintain earnings before interest, taxes, depreciation, amortization and rent of not less than 1.15. PFH was in compliance with these covenants as of and for the years ended 2012 and 2011. (c) Note payable to bank requires PFH to meet certain quarterly financial statement covenants. PFH must maintain unrestricted net assets of not less than $5,900,000 at all times, maintain a ratio of total liabilities to unrestricted net assets of not more than 3.00 to 1.00 and maintain a debt service ratio of at least 1.20 to 1.00. PFH was in compliance with these covenants as of and for the years ended 2012 and 2011. A partial paydown on the note was made during the year ended 2012 of $3,105,470 including interest and a prepayment premium of $4,334 and $126,561, respectively. (d) Proceeds from note payable to agency are to be used to finance renovation and improvement of certain multi-tenant residential building in St. Louis, Missouri. The note requires PFH to comply with certain Project Development Agreement and principal and accrued interest may be forgiven as prescribed in the note. PFH was in compliance with the term of the Project Development Agreement as of and for the year ended 2012. Maturities of long-term debt are as follows: Year Ending 2012 $ 1,304,727 2013 893,028 2014 1,960,210 2015 4,775,917 2016 373,021 Thereafter 1,256,131 $ 10,563,034 Interest charged to expense was $453,679 and $514,433 for the years ended 2012 and 2011, respectively, for notes payable and long-term debt. Interest capitalized as part of new construction was $34,051 and $16,706 for the years ended 2012 and 2011, respectively. NOTE 9 COMMITMENTS AND CONTINGENCIES Lease Commitments PFH leases certain equipment and office space under various operating lease agreements. The leases are noncancelable and expire on various dates through 2026. Page 16
NOTE 9 COMMITMENTS AND CONTINGENCIES (Continued) Lease Commitments (Continued) Total future minimum lease payments are as follows: Year Ending 2013 $ 994,790 2014 415,657 2015 168,308 2016 78,636 2017 43,636 Thereafter 2,412 $ 1,703,439 Rent expense, included in facility expense, was $831,697 and $808,752 for the years ended 2012 and 2011, respectively. Other Commitments During 2008, PFH s information technology (IT) staff started developing a computer software program to accommodate the unique client billing needs of PFH. Employee salaries and related costs for time spent on software development are included in construction in progress as incurred (Note 3). Management estimates total costs related to this project to be approximately $850,000. PFH estimates this project will be completed April 2013. During the year ended 2010, PFH began operations to construct a new building in Joplin, Missouri. Management estimates total costs related to this project to be approximately $4,000,000. Costs are included in construction in progress as incurred (Note 3). The building was completed in July 2011 and subsequently sold. PFH began to construct another Joplin facility during the year ended 2012 to replace the adolescent residential facility sold. Management estimates total costs related to this project to be approximately $5,000,000. Costs are included in construction in progress as incurred (Note 3). PFH estimates this project will be completed June 2013. During the year ended 2011, PFH began a project for electronic medical records (EMR). Management estimates total costs related to the project to be approximately $75,000. Costs are included in construction in progress as incurred (Note 3). PFH estimates this project will be completed September 2012. During the year ended 2012 and 2011, PFH began several other various projects to rebuild the airplane engine, IT projects and other. Management estimates total costs for these other projects to be approximately $300,000. Costs are included in construction in progress as incurred (Note 3). These other projects have various completion dates. Page 17
NOTE 9 COMMITMENTS AND CONTINGENCIES (Continued) Other Commitments (Continued) During the year ended 2010, PFH began operations to expand their Jamison location. Management estimates total costs related to this project to be approximately $300,000. Costs were included in construction in progress as incurred (Note 3). Construction project was completed and placed into service during the year ended 2012. Contingencies PFH is involved in litigation and a regulatory investigation arising in the ordinary course of business activities. While the ultimate outcome of these matters is not presently determinable, after consultation with legal counsel, it is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or activities of PFH. Employment Contract PFH entered into a consulting agreement with a former employee. The benefits include compensation and continuation of health care benefits in exchange for services rendered from July 31, 2010 through December 31, 2010. PFH recognizes the costs of these benefits when incurred. NOTE 10 STATEMENT OF CASH FLOWS Supplemental disclosures of cash flows information is as follows: Years Ended Interest Paid $ 553,171 $ 600,638 Non-Cash Investing and Financing Activities Acquisition of property and equipment through issuance of of long-term debt $ 485,596 $ 410,720 Acquisition of property and equipment included in accounts payable $ 172,921 $ 696,634 Reduction of long-term debt through forgiveness of annual debt payments $ 24,265 $ - Impairment of Long-Lived Assets $ 601,863 $ 432,418 Refinancing of Long-Term Debt $ - $ 3,064,816 Page 18
NOTE 11 RELATED PARTY TRANSACTION PFH Aviation, Inc. sold property and related improvements (hangar building) to a Board Member in December 2011 for the purchase price of $50,000. PFH recognized a gain relating to this sale of $12,526 which is included in gain on sale of property and equipment in the consolidated statement of activities. PFH also assigned the existing lease relating to the property with the City of Kirksville. NOTE 12 GAIN ON SALE OF PROPERTY AND EQUIPMENT Due to the natural disaster which occurred in Joplin, Missouri during May 2011, PFH sold their recently constructed Joplin facility in July 2011 for the purchase price of $6,097,000, which resulted in a gain on sale of $2,161,551. NOTE 13 GRANT AND CONTRACT REVENUE Grant and contract revenue consists of the following: Years Ended Federal - U.S. Departments of Health and Human Services $ 3,327,391 $ 1,976,588 Agriculture Food and Nutrition Services 107,376 86,324 Justice, Federal Bureau of Prisons 49,993 55,109 Housing and Urban Development 65,075 19,466 Education - 15,568 3,549,835 2,153,055 State, Local and Other Missouri Department of Mental Health/Medicaid 25,825,353 24,327,983 County Resource Boards 4,413,914 3,128,000 Department of Corrections 2,311 4,223 Federal Probation 11,172 2,263 Drug Court 244,489 182,596 Mental Health Board of Saint Louis 186,270 220,000 Missouri Foundation for Health (a) 199,308 223,966 Kansas Department of Mental Health/Medicaid 376,205 129,110 Kansas Department of Mental Health - Block Grant 266,853 58,662 State of Kansas - Driving Under the Influence 38,083 68,641 State of Kansas - Juvenile Justice Authority 179,298 - United Way 12,000 - Other 6,885 500 31,762,141 28,345,944 $ 35,311,976 $ 30,498,999 (a) PFH has conditional promises-to-give of $316,984 for the year ended 2013 and $273,495 for the year ended 2014. These conditional amounts are not reflected in the accompanying consolidated financial statements. Page 19
NOTE 13 GRANT AND CONTRACT REVENUE (Continued) The Medicaid program is funded jointly by the federal and state governments. Fiscal considerations of both federal and state governments in establishing their budgets directly affect the funds available to providers for payment of services rendered to Medicaid beneficiaries. Particularly during economic downturns which adversely affect funds available under their budgets, the federal government and/or various states may seek to limit payments under the Medicaid program in a variety of ways. The vast majority of PFH s patients are expected to be covered by Medicaid. Reimbursement delays, decreases in coverage, changes in reimbursement rates or other changes in the Medicaid program could have a material adverse effect on PFH s financial condition. NOTE 14 CONCENTRATION OF REVENUES PFH received approximately 63% and 76% of total revenues from the Department of Health and Human Services in the years ended 2012 and 2011, respectively. Accounts receivables to this funder totaled $2,928,809 and $3,125,125 at 2012 and 2011, respectively. NOTE 15 RETIREMENT PLAN PFH sponsors a 401(k) defined contribution plan to provide retirement benefits for its employees. PFH may make a discretionary company match or a discretionary profit sharing contribution. Contributions by PFH into the plan were $331,532 and $284,991 for the years ended 2012 and 2011, respectively. NOTE 16 FAIR VALUE MEASUREMENTS The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of 2012, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3). Level 1 Level 2 Level 3 Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Assets Inputs Inputs Fair Value 2012 Assets Investment - certificate of deposit $ - $ 245,000 $ - $ 245,000 Assets measured at fair value on a recurring basis have been valued using a market approach. There have been no changes on valuation techniques and related inputs. Page 20
NOTE 17 SUBSEQUENT EVENTS In August 2012, PFH entered into a merger agreement with Cypress Recovery, Inc., a Kansas nonprofit corporation. The surviving corporation in the merger is Preferred Family Healthcare, Inc. and is effective September 15, 2012. PFH acquired assets, liabilities and net assets of $91,919, $75,029 and $16,890, respectively. Cypress Recovery, Inc. had revenues and expenses of $426,467 and $464,550, respectively, for the year ended September 30, 2011. On August 20, 2012, PFH purchased real estate in the City of St. Louis at a purchase price of $524,000 to provide adult services. Page 21