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HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION YEARS ENDED SEPTEMBER 30, 2018 AND 2017

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY TABLE OF CONTENTS YEARS ENDED SEPTEMBER 30, 2018 AND 2017

INDEPENDENT AUDITORS’ REPORT

1

CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

3

CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS

4

CONSOLIDATED STATEMENTS OF CASH FLOWS

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6

SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF FINANCIAL POSITION

19

CONSOLIDATING STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS

21

INDEPENDENT AUDITORS’ REPORT

Board of Directors Hope Hospice and Community Services, Inc. and Subsidiary Fort Myers, Florida

Report on the Financial Statements We have audited the accompanying consolidated financial statements of Hope Hospice and Community Services, Inc. and Subsidiary, which comprise the consolidated statements of financial position as of September 30, 2018 and 2017, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

(1)

Board of Directors Hope Hospice and Community Services, Inc. and Subsidiary

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hope Hospice and Community Services, Inc. and Subsidiary as of September 30, 2018 and 2017, and the results of their operations and changes in net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Consolidating Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information in the consolidating statements of financial position and operations and changes in net assets is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies, and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

CliftonLarsonAllen LLP Fort Myers, Florida January 22, 2019

(2)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION SEPTEMBER 30, 2018 AND 2017

2018

2017

ASSETS

CURRENT ASSETS Cash and Cash Equivalents

15,271,700 $

22,157,700 $

Accounts Receivable, Net of an Allowance for Uncollectible Accounts of $465,300 and $397,700, Respectively

8,500,300 23,345,300 498,900 2,203,000 4,405,200 -

5,898,600 22,078,600 5,265,000 488,300 2,072,400 529,100 4,381,200 62,878,500 7,600

Investments

Certificate of Deposit

Inventory

Prepaid Expenses Other Receivables

Capital Campaign Pledges, Net Real Estate Held for Sale

- -

Total Current Assets

54,224,400

NONCURRENT ASSETS Other Assets Real Estate Held for Sale

2,604,500 9,915,500 12,520,000

1,801,900 6,104,700 7,906,600

Total Noncurrent Assets

PROPERTY AND EQUIPMENT , Net of Accumulated Depreciation

40,282,100

42,260,600

Total Assets

107,026,500 $

113,045,700 $

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES Bonds Payable

$

930,900 3,869,300 1,795,300 1,848,600 827,200 643,000 471,900 190,400 2,129,200 12,705,800

$

-

Accounts Payable Accrued Expenses: Payroll

4,294,800

1,575,200 1,776,600 638,300 702,300 224,600 228,500 2,162,900 11,603,200

Compensated Absences

Patient Care

Retirement Plan Contribution

Insurance

Due to Third-Party Payors

Other

Total Current Liabilities

LONG-TERM DEBT , Net of Current Maturities

23,871,700

24,771,700

Total Liabilities

36,577,500

36,374,900

NET ASSETS Unrestricted

70,269,200

76,491,000

Temporarily Restricted

179,800

179,800

Total Net Assets

70,449,000

76,670,800

Total Liabilities and Net Assets

107,026,500 $

113,045,700 $

See accompanying Notes to Consolidated Financial Statements. (3)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS YEARS ENDED SEPTEMBER 30, 2018 AND 2017

2018

2017

CHANGES IN UNRESTRICTED NET ASSETS Revenues: Net Patient Revenue

103,503,600 $ 9,774,600 1,195,600 114,473,800 64,877,600 37,922,700 9,672,800 1,124,200 2,615,600 1,719,000 117,931,900

103,272,400 $ 5,550,200 647,500 109,470,100 63,530,700 31,756,300 9,462,800 1,042,400 2,554,500 1,656,500 110,003,200

Contributions

Investment Earnings Total Revenues

Expenses: Employee Salaries, Payroll Taxes, and Benefits

Medical Supplies and Expenses Office Supplies and Expenses

Lease Expense Depreciation

Other

Total Expenses

Operating Loss

(3,458,100)

(533,100)

Other Income (Expense): BP Settlement Proceeds

-

193,000 1,799,700

Unrealized Gain on Investments Gain on Sale of Real Estate Impairment Loss on Real Estate Loss on Bond Refinancing

852,800 91,900

- -

(3,314,700)

-

(391,000) (215,800) 1,385,900

Interest Expense, Net of Amounts Capitalized

(393,700) (2,763,700)

Total Other Income (Expense)

INCREASE (DECREASE) IN NET ASSETS

(6,221,800)

852,800

Net Assets - Beginning of Year

76,670,800

75,818,000

NET ASSETS - END OF YEAR

70,449,000 $

76,670,800 $

See accompanying Notes to Consolidated Financial Statements. (4)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2018 AND 2017

2018

2017

CASH FLOWS FROM OPERATING ACTIVITIES Change in Net Assets

$

(6,221,800)

$

852,800

Noncash Adjustments: Depreciation

2,615,600

2,554,500 174,400 (1,799,700) (124,200) 50,600

Amortization

30,900 81,300

Loss on Sale of Fixed Assets Unrealized Gains on Investments Realized Gains on Investments Gain on Sale of Real Estate Impairment Loss on Real Estate Loss on Bond Refinancing (Increase) Decrease in Current Assets: Inventory

(852,800) (604,300) (91,900) 3,314,700 (10,600) (130,600) (2,601,700) (3,876,100) (802,600) (463,500) (38,100) (352,500) (9,996,400) 7,600 -

- -

391,000

(135,100) (341,700) 2,575,600 (249,600) (942,400) (17,400) 228,500 567,000 3,791,400 7,100 (3,628,500) (4,259,400) 3,356,100 (6,065,500) (21,000,000) 25,000,000 (372,800) 3,627,200 12,900 (1,546,600) - -

Prepaid Expenses Accounts Receivable Pledges Receivable Other Receivables

Other Assets

(Decrease) Increase in Current Liabilities: Accounts Payable

Due to Third-Party Payors Accrued Expenses

Net Cash Provided (Used) by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Fixed Assets Proceeds from Sale of Fixed Assets Proceeds from Sale of Real Estate Purchase of Real Estate Held for Sale Proceeds from Sale of Certificates of Deposit Proceeds from Sale of Investments Purchase of Investments CASH FLOWS FROM FINANCING ACTIVITIES Payments on Long-Term Debt Cash Paid for Bond Issuance and Other Costs Net Cash Provided by Financing Activities Proceeds from Long-Term Debt

(2,095,300)

-

5,768,400 (6,018,100) (5,308,400) 5,274,800 5,489,000 3,110,400

Net Cash Provided (Used) by Investing Activities

- - - -

NET INCREASE (DECREASE) IN CASH

(6,886,000)

1,353,100

22,157,700

20,804,600

Cash and Cash Equivalents - Beginning of Year

CASH AND CASH EQUIVALENTS - END OF YEAR

15,271,700 $

22,157,700 $

SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES Construction in Progress Purchased Through Accounts Payable

$

771,300

$

733,300

SUPPLEMENTAL DISCLOSURE Interest Paid

$

645,600

$

73,800

See accompanying Notes to Consolidated Financial Statements. (5)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization Hope Hospice and Community Services, Inc. (Hope) is a nonprofit corporation providing counseling, spiritual support, and medical assistance to the terminally ill and their families. The majority of Hope’s revenue is from providing hospice services to patients insured by Medicare, Medicaid, or private insurance companies. Hope also provides other services to elderly individuals under state and federal contracts. Hope became the sole member of Visiting Nurses Association of Southwest Florida, Inc. (VNA) on August 7, 2013. VNA is a nonprofit corporation providing the highest quality home and community based health care services to all people in the community. Principles of Consolidation These consolidated financial statements include the accounts of Hope and VNA (collectively, the Organization). All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Standards of Accounting and Financial Reporting The accounting and reporting policies of the Organization conform to accounting principles generally accepted in the United States of America. Net Assets Net Assets are classified into unrestricted, temporarily restricted, and permanently restricted categories to properly disclose the nature and amount of resources that have been restricted in accordance with specified donor objectives. The net assets of the Organization are reported as follows: Unrestricted Net Assets – Represent funds that are not subject to donor-imposed stipulations and may be designated for specific purposes by action of the board of directors. Temporarily Restricted Funds – Represent funds subject to donor-imposed stipulations that will be met either by actions of the Organization and/or the passage of time. Donor- restricted contributions whose restrictions are met in the same reporting period, are reported as unrestricted support. Permanently Restricted Funds – Represent funds that are subject to restrictions of gift instruments requiring that the principal be invested in perpetuity and the income only be used for specific purposes.

(6)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Patient Service Revenue Medicare and Medicaid Revenue Revenue for services rendered to patients covered under the Medicare and Medicaid programs are recorded based on date of service at amounts equal to payment rates specific to the Organization that are set by the Medicare and Medicaid programs. The payment rates are daily or hourly rates for each of the four levels of care provided by the Organization (i.e., routine home care, general inpatient care, continuous care, and respite care). Adjustments are made to revenue due to various eligibility restrictions by the payor and other reasons unrelated to credit risk. The Organization estimates the impact of these adjustments based on historical experience, which primarily includes historical claims adjustments, and records it during the period services are rendered as an estimated revenue adjustment and as a reduction to patient accounts receivable. Approximately 93% and 95% of net patient service revenue was earned from the Medicare and Medicaid Programs for the years ended September 30, 2018 and 2017, respectively. Due to the significance of Medicare and Medicaid program revenues to the Organization, any change in the reimbursement methodologies employed by the Medicare and Medicaid program for hospice services could significantly impact the financial operations and financial position of the Organization. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Organization believes that it is in material compliance with applicable laws and regulations. Compliance with laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. Other Third-Party Payor Revenue Revenue for services rendered to patients covered by other third-party payors (e.g., commercial insurance carriers, health maintenance organizations, and preferred provider organizations, etc.) are recorded based on date of service at amounts equal to the Organization’s established rate or a rate negotiated with the third-party payor. Contractual adjustments are recorded for the difference between the Organization’s established rate and the amounts estimated to be realized from third-party payors and are deducted from revenues and patient accounts receivable. Charity Care The Organization provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than its established rates. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The Organization estimates costs of providing charity care by applying a cost to gross charges ratio to the gross uncompensated charges related with providing charity care to its patients. The estimated cost of charity care during the years ended September 30, 2018 and 2017 was approximately $597,500 and $488,100, respectively.

(7)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash The majority of the Organization’s cash balances are deposited in noninterest-bearing accounts. The balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits and certain accounts may exceed these limits. Cash Equivalents The Organization defines any highly liquid debt instrument with a maturity date of three months or less at the time of purchase to be a cash equivalent. Accounts Receivable and Concentration of Credit The Organization’s net accounts receivable are due from the federal Medicare program, the state and managed Medicaid programs, and various private insurers. At September 30, 2018, the percentages of the net accounts receivable due from each of these three parties were 29%, 60%, and 11%, respectively. At September 30, 2017, the percentages of the net accounts receivable due from each of these three parties were 39%, 42%, and 19%, respectively. The Organization maintains a policy for reserving for uncollectible accounts. The Organization reserves for uncollectible accounts based on historical results. Bequests Receivable Bequests receivable are stated at the amount that management expects to collect of the outstanding balances. Management determines the allowance for doubtful accounts by identifying troubled accounts, considering the donor’s financial condition and current economic condition, and using historical experience applied to an aging of bequests receivables. These amounts are due to the Organization in the next year and the Organization believes that all bequests receivable at September 30, 2018 will be fully collected. Accordingly, no allowance for doubtful accounts is required. Inventory Inventory of pharmaceuticals and health care supplies is carried at the lower of cost or net realizable value using the first-in, first-out method. Inventory consisting of donated items received by the Organization for resale in its thrift shops is recorded at the estimated fair market value of donated items on hand at the end of the year. Investments Investments held by the Organization are stated at the readily determinable fair market value in accordance with guidance regarding accounting for certain investments held by nonprofit organizations.

(8)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value Measurements The Organization categorizes its assets and liabilities measured at fair value into a three- level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows: Level 1 – Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access. Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 3 – Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Organization adopted the policy to value certain financial instruments at fair value. The Organization has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future. The Organization’s other financial instruments consist primarily of cash and cash equivalents, receivables, other accounts receivable, accounts payable, accrued expenses, and long-term debt. The carrying value of these items, with the exception of long-term debt, approximates fair value due to their short maturity. The carrying value of the Organization’s long-term debt approximates fair value because the interest rate associated with the Series 2017 bonds are variable based on 67% of the 30-day London Interbank Offered Rate (LIBOR) plus a LIBOR Margin of 1.35%. Subsequent to initial recognition, the Organization may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

(9)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment are carried at cost. All capital expenditures over $1,000 are capitalized. Additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Interest is capitalized on funds used during construction by the Organization on its long-term debt. Buildings and Improvements 5 to 40 years Office Equipment 7 years Motor Vehicles 5 years Depreciation Depreciation is based on rates calculated to provide for the retirement of property and equipment at the end of their estimated useful lives using the straight-line method and generally follows the guidelines established for hospitals and other medical organizations. Depreciation expense for 2018 and 2017 was $2,615,600 and $2,554,500, respectively. Amortization Bond issue costs are amortized over the term of the related bond issue. Amortization expense for 2018 and 2017 was $30,900 and $174,400, respectively, is reported as a component of interest expense. Real Estate Held for Sale Real estate held for sale consists of land and land improvements under development. Land under development is carried at cost, unless events and circumstances indicate that the carrying value may be impaired. In addition to costs of direct land acquisition, land under development includes capitalized interest, real estate taxes, and development costs. Land costs are allocated to each parcel on a per acre basis. Common costs are allocated to each parcel based on the approximate relative sales value of each parcel. Certain other costs specific to a parcel are assigned to that parcel. During 2018, an impairment loss of $3,314,700 was recognized to reduce the carrying amount of the land under development to its fair value less costs to sell. This loss is reported as Impairment Loss on Real Estate in the consolidated statements of operations and changes in net assets. Capitalized Interest Interest is capitalized on funds used during construction by the Organization on its long-term debt. Capitalized interest consists of the following as of September 30:

2018

2017

Amounts Capitalized into Real Estate Held for Sale Amounts Capitalized into Construction in Progress

$

281,300 32,300 313,600

$

60,800 30,400 91,200

Total

$

$

(10)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other Assets Other assets consist of refundable deposits paid towards utilities, insurance policies, and various other vendors. All deposits are expected to be refunded at a future agreed upon date. At September 30, 2018 and 2017, these deposits totaled $2,604,500 and $1,801,900, respectively. Gift Annuities The Organization enters into gift annuity agreements with individuals. The individuals contribute an amount to the Organization in exchange for an agreement that obligates the Organization to pay a defined amount to the individuals for the remainder of their life. The amount to be paid is based on a specified interest rate contained in the agreement. These obligations are recorded at the expected discounted future cash outflow of the agreement based on the individual’s expected life expectancy. The difference between the amount received and the amount of the expected discounted cash outflow is recognized as a current year unrestricted contribution. The recorded annuity obligation at September 30, 2018 and 2017 was $557,600 and $518,200, respectively, and is included in Accrued Expenses – Other, in the accompanying consolidated statements of financial position. Long-Term Debt The Organization’s long-term debt consists primarily of industrial revenue bonds. Contributions and Net Assets All contributions, other than capital campaign pledges, are considered to be available for unrestricted use, unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted then reclassified to unrestricted net assets upon expiration of the time or use restriction. The Organization’s temporarily restricted assets represent contributions received for specific projects, which have not yet been satisfied. The Organization has no permanently restricted net assets. Bequests are recognized as revenue upon the donor’s death and the Organization is notified of the gift. Income Taxes The Organization is a nonprofit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal and state income taxes. The Organization’s income tax returns are subject to review and examination by federal and state authorities. The Organization is not aware of any activities that would jeopardize its tax-exempt status. The Organization is also not aware of any activities that are subject to tax as unrelated business income, excise, or other taxes.

(11)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes (Continued) The Organization is in compliance with the income tax standard regarding the recognition and measurement of uncertain tax positions. This guidance clarifies the accounting for uncertainty in income taxes recognized in an Organization’s financial statements. The implementation of this standard had no impact on the Organization’s financial statements. Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the current year presentation. The reclassifications have no effect on the overall net assets. Subsequent Events In preparing these financial statements, the Organization has evaluated events and transactions for potential recognition or disclosure through January 22, 2019, the date the financial statements were issued.

NOTE 2 FAIR VALUE MEASUREMENTS

The Organization uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. For additional information on how the Organization measures fair value, refer to Note 1 – Summary of Significant Accounting Policies. Assets Recorded at Fair Value on a Recurring Basis The following table presents the fair value hierarchy for the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:

Level 1

Level 2

Level 3

Total

Assets: Available-for-Sale Securities: Common Stock Corporate/Government Bonds

15,510,500 $

$

-

$

- - - - -

15,510,500 $

-

243,200

243,200

7,266,100

- -

7,266,100

Fixed Income Funds

325,500

325,500

Commodities and Real Estate Index Funds

Total

23,102,100 $

$

243,200

$

23,345,300 $

(12)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 2 FAIR VALUE MEASUREMENTS (CONTINUED)

Assets Recorded at Fair Value on a Recurring Basis (Continued) The following table presents the fair value hierarchy for the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:

Level 1

Level 2

Level 3

Total

Assets: Available-for-Sale Securities: Common Stock

14,588,600 $

$

- - -

$

- - - -

14,588,600 $

6,923,504

6,923,504

Fixed Income Funds

315,221

315,221

Commodities and Real Estate Index Funds

Total

21,827,325 $ 22,078,600 $ Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Securities valued using Level 1 inputs include those traded on an active exchange, such as the New York Stock Exchange. Securities values using Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Organization does not have any securities that are valued using Level 3 inputs. 251,275 $ $

NOTE 3 PROPERTY AND EQUIPMENT FAIR VALUE MEASUREMENTS Property and equipment are composed of the following at September 30:

2018

2017

Land

$

4,079,800 50,394,500 9,149,900 3,862,200 899,500 1,191,300 69,577,200 (29,295,100)

$

5,436,500 49,326,300 9,967,800 2,793,100 821,100 2,594,900 70,939,700 (28,679,100)

Buildings

Office Equipment

Leasehold Improvements

Vehicles

Construction in Progress

Total

Accumulated Depreciation

Total

40,282,100 $

42,260,600 $

(13)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 4 BONDS PAYABLE

In July of 2008, Hope issued $27,200,000 of industrial revenue bonds to finance the construction of a facility with 24 private patient-care suites, bereavement counseling offices, a chapel, community rooms, and administrative offices in Lehigh Acres, Lee County, Florida, and to refund an outstanding 2005 bond issue. In September 2017, Hope issued $25,000,000 of industrial revenue bonds (Series 2017) for the purpose of refinancing the previous indebtedness and financing certain qualified project costs related to the acquisition, construction, renovation and equipping of the PACE facility, Hospice facility, patient rooms at the Health Park Hospice House, infrastructure costs for Hope Preserve and financing certain issuance costs related to the issuance of the Series 2017 Bonds. The Series 2017 bonds were issued in conjunction with the Lee County Industrial Development Authority and have a final maturity of October 1, 2024. Substantially all of the assets of Hope are pledged as collateral for the bond issue. Hope must also comply with various financial and operating covenants required by the bond issue. As of September 30, 2018, Hope was in compliance with these requirements. Interest on the Series 2017 bonds is payable on the first day of each January, April, July, and October with the first payment due January 1, 2018. Interest is a variable rate equal to 67% of the monthly LIBOR rate plus 1.35%. Commencing on October 1, 2018, payments of principal and interest equal to $398,100 shall be payable in quarterly installments on the first day of each January, April, July, and October, with payment first being allocated to interest then due and payable, and the remainder being allocated to principal with all remaining principal due and payable on October 1, 2024. Interest on the 2008 bonds was payable monthly. The bonds were variable rate obligations with the interest rate determined by the remarketing agent on a weekly basis. For the year ended September 30, 2017, the interest rates ranged from 0.57% to 0.92%. The effective interest rate for the years ended September 30, 2018 and 2017, without any of the amortization of the issue costs included, was 2.70% and 0.83%, respectively. If the amortization of the issue costs were included, the effective interest rate for the years ended September 30, 2018 and 2017 was 2.83% and 1.68%, respectively. The scheduled payments based on the variable interest rate of 2.77% at September 30, 2018, under the Series 2017 bond agreement, are as follows:

Total

Principal

Interest

Payments

Year Ending September 30,

2019 2020 2021 2022 2023

$

930,900 934,600 960,700 987,700

$

661,300 657,600 631,500 604,500 576,900 681,100

$

1,592,200 1,592,200 1,592,200 1,592,200 1,592,200 20,851,900

1,015,300 20,170,800

Thereafter

Total

25,000,000 $

$

3,812,900

28,812,900 $

(14)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 4 BONDS PAYABLE (CONTINUED)

Issuance costs incurred in connection with the debt issuance are reported as a reduction to long-term debt and amortized over the term of the respective bond issue using the straight- line method, which does not materially differ from the effective interest method. Amortization expense of issuance costs for 2018 and 2017 was $30,900 and $174,400, respectively. As of September 30, 2018, unamortized issuance costs totaled $197,400. As noted above, the Organization refinanced the 2008 bonds with the issuance of the 2017 bonds. The Organization has recognized an accounting loss of $391,000 which represents the balance of the unamortized issuance costs on the date of the refinancing related to the 2008 bonds.

NOTE 5 TEMPORARILY RESTRICTED NET ASSETS

Temporarily restricted net assets are available for use as of September 30 as follows:

2018

2017

Labelle Hospice House

$

179,800

$

179,800

NOTE 6 INVESTMENT EARNINGS

Investment earnings for the years ended September 30 is composed of:

2018

2017

Interest and Dividends

$

591,300 604,300 1,195,600

$

523,300 124,200 647,500

Realized Gains

Total

$

$

NOTE 7 CLASSIFICATION OF EXPENSES

2018

2017

113,901,000 $

106,570,500 $

Program Activities

General and Administrative

2,272,600 1,758,300

1,980,900 1,451,800

Fundraising

Total

117,931,900 $

110,003,200 $

(15)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 8 COMMITMENTS AND CONTINGENCIES

Hope is committed under operating leases for its branch locations and certain equipment. Total lease expense under these obligations was $1,124,200 and $1,042,400 for the years ended September 30, 2018 and 2017, respectively. Future lease obligations under these operating leases are as follows:

Year Ending September 30,

Amount

2019 2020 2021 2022 2023 Total

$

1,240,000 977,000 865,700 579,900 530,000 4,192,600

$

The Organization engaged a company to perform site improvements totaling approximately $10 million related to real estate held for sale and land being retained by the Organization. At September 30, 2018, approximately $7.5 million has been incurred for site improvement work completed. On September 29, 2016, the Organization entered an agreement with a company to provide contract developer and owner representation services. The fee for services under this agreement is 3.75% of all costs incurred in the development of the real estate held for sale and the parcels being retained by the Organization. The Organization receives payment from Medicare and Medicaid for hospice services provided to patients. These payments are subject to audit and investigation by these agencies. An audit of claims for Medicaid reimbursement for dates of service during the period of September 30, 2010, through December 31, 2013, was performed on behalf of the Centers for Medicaid and Medicare Services and the state of Florida Agency for Health Care Administration (AHCA), Medicaid Program Integrity with the final audit report issued on September 7, 2017. The results of the audit indicated that the Organization was overpaid approximately $824,600. In addition, penalties of approximately $164,900 have been assessed. On October 5, 2017, the Organization filed a petition for administrative hearing with AHCA. Pursuant to the applicable Florida Statutes and Florida Administrative Code, the Organization was required to submit a pre-resolution repayment agreement pending the administrative hearing. This agreement required the Organization to make monthly payments through June 2018 for the total amount of approximately $824,600 which have been made. Management believes the Organization will be successful upon the conclusion of the administrative hearing and that such payments will be returned to the Organization. As such, a deposit for these amounts paid has been recorded and are included in Other Assets on the Statement of Financial Position. No amount was accrued in the 2017 financial statements for this matter.

(16)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Organization is subject to legal proceedings and claims that arise in the course of providing health care services. The Organization purchases professional liability insurance on a claims-made basis and excess liability insurance coverage from a commercial insurance company. In management’s opinion, adequate provision has been made for amounts expected to be paid under the policy’s deductible limits for unasserted claims not covered by the policy and any other uninsured liabilities.

NOTE 9 RETIREMENT PLANS

The Organization has three retirement plans available for its employees. Two of the plans only allow for employee contributions. The Organization does not contribute to either of these two plans. The third plan is a defined contribution plan for eligible employees at least 21 years of age and with one year of service. The plan is funded solely by the Organization. The contribution amount is determined on an annual basis by the board of directors. The Organization’s retirement expenses related to these plans were $912,500 and $842,900 for the years ended September 30, 2018 and 2017, respectively, and is included in the Employee Salaries, Payroll Taxes, and Benefits shown on the accompanying consolidated statement of operations and changes in net assets. Certain board members are employees or board members with businesses that have business dealings with the Organization. One board member is a principal of a trust institution that is used as a depository for cash equivalents and investments of the Organization totaling $16,136,400 and $14,857,300 at September 30, 2018 and 2017, respectively. The CEO of the Organization is a board member of that same trust institution. Investment management fees paid to the trust totaled $90,300 and $80,500 for the years ended September 30, 2018 and 2017, respectively. A board member is the president of the local branch of a national trust company that is the depository for cash, cash equivalents, and investments of the Organization totaling $16,829,800 and $30,300,000 at September 30, 2018 and 2017, respectively. This trust company was also the issuer of a letter of credit collateralizing the Organization’s 2008 bonds for the year ended September 30, 2017. Fees paid for this letter of credit totaled $122,100 for the year ended September 30, 2017. Investment management fees paid to the trust company totaled $31,500 and $44,500 and for the years ended September 30, 2018 and 2017, respectively. Bank fees paid to the trust company totaled $-0- and $14,400 for the years ended September 30, 2018 and 2017, respectively.

NOTE 10 RELATED PARTY TRANSACTIONS

(17)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2018 AND 2017

NOTE 10 RELATED PARTY TRANSACTIONS

A member of the board is the chief executive officer of an office machine sales company that provided office machines which are included in the lease obligations reflected in Note 8. Payments made directly to the office machine company totaled $63,700 for each of the years ended September 30, 2018 and 2017, respectively. A member of the board is the principal of an office furniture sales company that provided furniture. Payments made directly to the office furniture company totaled $409,000 and $202,900 for the years ended September 30, 2018 and 2017, respectively. A member of the board is the president and CEO of a medical supplies company that provided medical supplies. Payments made directly to the medical supplies company totaled $265,100 and $279,700 for the years ended September 30, 2018 and 2017, respectively. Amounts payable to the medical supplies company totaled $3,700 and $12,100 for the years ended September 30, 2018 and 2017, respectively. A member of the board is a representative of a financial services mutual organization that provided services to the Organization. Payments made directly to the financial services organization totaled $37,500 for each of the years ended September 30, 2018 and 2017. An employee of the Organization is a board member of a company that provides various technology – enabled products and services for medication risk management and organization performance optimization. Payments made directly to this company totaled $5,093,200 for the year ended September 30, 2018. Amounts payable to the company totaled $270,800 for the year ended September 30, 2018.

NOTE 11 BEQUEST RECEIVABLE

In December 2018, the Organization was notified that it was named a residual beneficiary of an estate that was opened in 2017. The notification indicated that the Organization would receive a partial distribution of the estate of $4,000,000. This bequest is included in Other Receivables in the consolidated statements of financial position and in Contributions on the consolidated statements of operations and changes in net assets.

(18)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATING STATEMENT OF FINANCIAL POSITION SEPTEMBER 30, 2018

Visiting Nurses Association of

Hope Hospice and Community Services, Inc.

Southwest Florida, Inc.

Eliminating

Consolidated

Entries

Total

ASSETS

CURRENT ASSETS Cash and Cash Equivalents

$

11,463,700

$

3,808,000

$

-

$

15,271,700

Accounts Receivable, Net of an Allowance for Uncollectible Accounts of $465,300

8,385,900 23,345,300 498,900 2,190,400 4,405,200 5,701,200 55,990,600

114,400

- - - - -

8,500,300 23,345,300 498,900 2,203,000 4,405,200

Investments Inventory

- - - -

Prepaid Expenses Other Receivables

12,600

Intercompany Receivable Total Current Assets NONCURRENT ASSETS Other Assets Real Estate Held for Sale

(5,701,200) (5,701,200)

-

3,935,000

54,224,400

2,604,500 9,915,500 12,520,000

- - -

- - -

2,604,500 9,915,500 12,520,000

Total Noncurrent Assets

PROPERTY AND EQUIPMENT , Net of Accumulated Depreciation

40,282,100

-

-

40,282,100

Total Assets

108,792,700 $

$

3,935,000

$

(5,701,200)

107,026,500 $

(19)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATING STATEMENT OF FINANCIAL POSITION (CONTINUED) SEPTEMBER 30, 2018

Visiting Nurses Association of

Hope Hospice and Community Services, Inc.

Southwest Florida, Inc.

Eliminating

Consolidated

Entries

Total

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES Bonds Payable

$

930,900 3,860,800

$

-

$

- -

$

930,900 3,869,300

Accounts Payable Intercompany Payable Accrued Expenses: Payroll Compensated Absences

8,500

-

5,701,200

(5,701,200)

-

1,795,300 1,821,700 827,200 643,000 471,900 190,400 2,129,200 12,670,400

-

- - - - - - -

1,795,300 1,848,600 827,200 643,000 471,900 190,400 2,129,200 12,705,800

26,900

Patient Care

- - - - -

Retirement Plan Contribution

Insurance

Due to Third-Party Payors Other Current Liabilities Total Current Liabilities

5,736,600

(5,701,200)

LONG-TERM DEBT , Net of Current Maturities

23,871,700

-

-

23,871,700

Total Liabilities

36,542,100

5,736,600

(5,701,200)

36,577,500

NET ASSETS (DEFICIT) Unrestricted Temporarily Restricted

72,070,800

(1,801,600)

- - -

70,269,200

179,800

-

179,800

Total Net Assets (Deficit)

72,250,600

(1,801,600)

70,449,000

Total Liabilities and Net Assets

108,792,700 $

$

3,935,000

$

(5,701,200)

107,026,500 $

(20)

HOPE HOSPICE AND COMMUNITY SERVICES, INC. AND SUBSIDIARY CONSOLIDATING STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS YEAR ENDED SEPTEMBER 30, 2018

Visiting Nurses Association of Southwest Florida, Inc.

Hope Hospice and Community Services, Inc.

Eliminating

Consolidated

Entries

Total

CHANGES IN UNRESTRICTED NET ASSETS Revenues: Net Patient Revenue

103,503,600 $

102,267,700 $

$

1,235,900

$

- - -

9,774,600 1,195,600 114,473,800

9,768,000 1,194,500 113,230,200

6,600 1,100

Contributions

Investment Earnings

1,243,600

-

Total Revenues

Expenses: Employee Salaries, Payroll Taxes, and Benefits

64,877,600 37,922,700 9,672,800 1,124,200 2,615,600 1,719,000 117,931,900

63,277,000 37,817,300 9,462,500 1,124,200 2,615,600 1,715,400 116,012,000

1,600,600 105,400 210,300

- - - - - -

Medical Supplies and Expenses Office Supplies and Expenses

- -

Lease Expense Depreciation

3,600

Other

1,919,900

-

Total Expenses

Operating Loss

(2,781,800)

(676,300)

-

(3,458,100)

Other Income (Expense): Unrealized Gain on Investments Gain on Sale of Real Estate Impairment Loss on Real Estate

852,800 91,900

- - - - -

- - - - -

852,800 91,900

(3,314,700) (393,700) (2,763,700)

(3,314,700) (393,700) (2,763,700)

Interest Expense, Net of Amounts Capitalized

Total Other Expense

DECREASE IN NET ASSETS

(5,545,500)

(676,300)

-

(6,221,800)

Net Assets - Beginning of Year

77,796,100

(1,125,300)

-

76,670,800

NET ASSETS - END OF YEAR

$

72,250,600

$

(1,801,600)

$

-

$

70,449,000

(21)

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