Heartland International Health Center. Financial Report June 30, 2013

Transcription

1 Heartland International Health Center Financial Report June 30, 2013

2 Contents Independent Auditor's Report 1 2 Financial Statements Statements of Financial Position 3 Statements of Operations 4 Statements of Changes in Net Assets 5 Statements of Cash Flows 6 Statements of Functional Expenses 7 8 Notes to Financial Statements 9 18

3 Independent Auditor's Report To the Board of Directors Heartland International Health Center Chicago, Illinois Report on the Financial Statements We have audited the accompanying financial statements of Heartland International Health Center (the Health Center ) which comprise the statements of financial position as of June 30, 2013 and 2012, and the related statements of operations, changes in net assets, cash flows, and functional expenses for the years then ended and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Health Center as of June 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Chicago, Illinois November 7,

5 Statements of Financial Position June 30, 2013 and 2012 Assets Current Assets Cash $ 877,736 $ 1,078,143 Accounts receivable Program service grants and fees 657, ,644 Patient services, net of allowance for doubtful accounts of $184,527 in 2013 and $338,247 in , ,081 Capital grant receivable 1,200, ,000 Prepaid expenses 43,356 50,436 Total current assets 3,388,165 2,500,304 Other Assets Property and equipment, net 3,271,903 2,007,170 Capital grant receivable, excluding current portion 300,000 - Restricted cash 26,773 - Other 15,000-3,613,676 2,007,170 Total assets $ 7,001,841 $ 4,507,474 Liabilities and Net Assets Current Liabilities Current portion of note payable to Heartland Alliance for Human Needs & Human Rights and Affiliates $ - $ 86,080 Current portion of notes payable 67,758 62,103 Accounts payable 236, ,164 Accounts payable to Heartland Alliance for Human Needs & Human Rights and Affiliates 32,378 69,645 Accrued payroll and related liabilities 368, ,036 Amounts due to third-party payors 29,148 86,069 Total current liabilities 733, ,097 Noncurrent Liabilities Notes payable, excluding current portion 817, , , ,169 Total liabilities 1,550,813 1,716,266 Commitments and Contingencies (Note 12) Net Assets Unrestricted 3,806,411 2,140,021 Temporarily restricted 1,644, ,187 Total net assets 5,451,028 2,791,208 Total liabilities and net assets $ 7,001,841 $ 4,507,474 See Notes to Financial Statements. 3

6 Statements of Operations Years Ended June 30, 2013 and 2012 Unrestricted revenues: Patient services $ 4,857,105 $ 3,864,167 Capitation revenue 155, ,744 Quality incentives from third-party payors 27,005 2,600 Program services: Grants, contracts and reimbursements 3,274,331 2,601,714 Contributions 18,045 13,808 In-kind contributions and other income 247, ,523 Net assets released from restrictions used for operations 607, ,650 9,186,753 7,374,206 Expenses: Program services 6,322,253 4,949,655 Management and general 2,204,031 1,628,149 8,526,284 6,577,804 Increase in net assets from budgetary operations 660, ,402 Nonbudgetary items: Depreciation and amortization (421,351) (384,797) Excess of revenues over expenses 239, ,605 Other changes in unrestricted net assets: Net assets released from restrictions used for capital 1,399,272 73,955 Forgiveness of debt 28,000 28,000 Increase in unrestricted net assets $ 1,666,390 $ 513,560 See Notes to Financial Statements. 4

7 Statements of Changes in Net Assets Years Ended June 30, 2013 and 2012 Unrestricted net assets: Excess of revenues over expenses $ 239,118 $ 411,605 Net assets released from restrictions used for capital 1,399,272 73,955 Forgiveness of debt 28,000 28,000 Increase in unrestricted net assets 1,666, ,560 Temporarily restricted net assets: Contributions 3,000, ,935 Net assets released from restriction (2,006,570) (717,605) Increase (decrease) in temporarily restricted net assets 993,430 (111,670) Increase in net assets 2,659, ,890 Net assets: Beginning of year 2,791,208 2,389,318 End of year $ 5,451,028 $ 2,791,208 See Notes to Financial Statements. 5

8 Statements of Cash Flows Years Ended June 30, 2013 and 2012 Cash Flows from Operating Activities Change in net assets $ 2,659,820 $ 401,890 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 421, ,797 Bad debt expense 6,662 58,754 Forgiveness of debt (28,000) (28,000) Contributions received for property and equipment (1,200,000) (300,000) Changes in operating assets and liabilities: Accounts receivable (202,010) (238,273) Capital grant receivable (1,200,000) - Prepaid expenses 7,080 (31,217) Other assets (15,000) - Accounts payable 74,228 (18,824) Accounts payable to Heartland Alliance for Human Needs & Human Rights and Affiliates (37,267) (79,151) Accrued payroll and related liabilities 44, ,871 Amounts due to third-party payors (56,921) - Net cash provided by operating activities 474, ,847 Cash Flows from Investing Activities Purchases of property and equipment (1,728,434) (108,792) Change in restricted cash (26,773) - Net cash used in investing activities (1,755,207) (108,792) Cash Flows from Financing Activities Contributions received for property and equipment 1,200, ,000 Payments on notes payable to Heartland Alliance for Human Needs & Human Rights and Affiliates (58,080) (57,137) Payments on notes payable (61,261) (58,424) Net cash provided by financing activities 1,080, ,439 Net (decrease) increase in cash (200,407) 349,494 Cash: Beginning of year 1,078, ,649 End of year $ 877,736 $ 1,078,143 Supplemental Schedule of Noncash Investing and Financing Activities Capital acquisitions funded through accounts payable $ - $ 42,350 Donated medical equipment $ 7,992 $ - Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 52,564 $ 58,235 See Notes to Financial Statements. 6

9 Statement of Functional Expenses Year Ended June 30, 2013 Program Management Services and General Total Salaries and wages $ 3,587,710 $ 1,074,292 $ 4,662,002 Payroll taxes and employee benefits 634, , ,205 Staff expenses 53,382 59, ,931 Professional services 686, ,635 1,463,122 Office services 126,467 34, ,272 Occupancy 213,556 38, ,966 Equipment 64,463 9,338 73,801 Client support 662 1,506 2,168 Medical supplies 600,749 (512) 600,237 Real estate taxes and insurance - 18,439 18,439 Other - 2,815 2,815 In-kind rent expense 106, ,900 Bad debt expense 6,662-6,662 Subrecipient expense 240, ,764 6,322,253 2,204,031 8,526,284 Depreciation and amortization 421, ,351 Total expenses $ 6,743,604 $ 2,204,031 $ 8,947,635 See Notes to Financial Statements. 7

10 Statement of Functional Expenses Year Ended June 30, 2012 Program Management Services and General Total Salaries and wages $ 2,732,569 $ 771,783 $ 3,504,352 Payroll taxes and employee benefits 486, , ,048 Staff expenses 34,418 44,006 78,424 Professional services 511, ,399 1,118,156 Office services 152,201 23, ,551 Occupancy 210,686 34, ,689 Equipment 8, ,168 Client support Medical supplies 381, ,433 Real estate taxes and insurance - 14,974 14,974 Other - 3,027 3,027 In-kind rent expense 97,192-97,192 Bad debt expense 58,754-58,754 Subrecipient expense 274, ,708 4,949,655 1,628,149 6,577,804 Depreciation and amortization 384, ,797 Total expenses $ 5,334,452 $ 1,628,149 $ 6,962,601 See Notes to Financial Statements. 8

11 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies Nature of operations: Heartland International Health Center (the Health Center ) is a nonprofit Federally Qualified Health Center (FQHC) that receives federal grant funds pursuant to Section 330 of the Public Health Service Act, 42 U.S.C. 254b, which program is administered by the Bureau of Primary Health Care (BPHC) within the United States Department of Health and Human Services (DHHS). The mission of the Health Center is to improve the well being of the communities it serves by providing accessible, highquality health care. The Health Center currently operates clinics in the following communities: Lincoln Square, Rogers Park, Uptown, a pediatric health center on the campus of Illinois Masonic Hospital, and three clinics co-located at partner behavioral health organizations. It operates four school-based health centers at Senn, Uplift, and Roosevelt High Schools, and Hibbard Elementary School. Basis of accounting: The financial statements of the Health Center have been prepared on the accrual basis, whereas, revenue is recognized when earned, and expenses are recognized when incurred, which is in accordance with accounting principles generally accepted in the United States of America. The Health Center s significant accounting policies are described below. Basis of presentation: The Health Center classifies its net assets into three categories, which are unrestricted, temporarily and permanently restricted. Unrestricted net assets are reflective of revenue and expenses associated with the principal operating activities of the Health Center and are not subject to donor-imposed stipulations. Temporarily restricted net assets are subject to donor-imposed stipulations that will be met either by actions of the Health Center and/or the passage of time. When a donor restriction expires, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of operations and changes in net assets as net assets released from restrictions. Permanently restricted net assets are subject to donor-imposed stipulations that require that they be maintained permanently by the Health Center. The Health Center had no permanently restricted net assets at June 30, 2013 and Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, losses, and other changes in net assets during the reporting period. Actual results could differ from those estimates. Accounts receivable for program services: Accounts receivable include program service grants and fees which are uncollateralized funding source obligations and are stated at the invoice amount. Payments of accounts receivable are generally applied to the specific invoices identified on the funding source's remittance advice. Patient services receivable: Patient services receivable where a third-party payer is responsible for the payment, are carried at a net amount determined by the original charge for the service provided, less an estimate for contractual adjustments or discounts provided to third-party payors. Patient services receivable due directly from patients are carried at the original charge for the service provided, less amounts covered by third-party payors and less an estimated allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by historical experience applied to an aging of accounts. Patient accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as a reduction of the provision for uncollectible accounts when received. The Health Center determines when an account is past due based on payer classifications. The Health Center does not charge interest on past due accounts. 9

12 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Pledges receivable: Pledges receivable are unconditional promises to give and are recognized as revenues or gains in the period that the promise is made and as net assets, decreases in liabilities, or expenses depending on the form of the benefit received. Property and equipment: Property and equipment are recorded at cost, except for donated assets, which are recorded at fair value at the time of receipt. In general, capital expenditures of $5,000 or greater are recorded as additions to property and equipment. Depreciation is being provided over the estimated useful lives of the assets ranging from five to 25 years for building and improvements, and from three to seven years for furniture, fixtures and equipment, using the straight-line method. Impairment of long-lived assets: The Health Center reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or the fair value less costs to sell. Grant revenue: Grants are recognized as revenue when earned. Expense-driven grants are recognized as revenue when the qualifying expenses have been incurred and all other grant requirements have been met. Grant funding from the federal government represents approximately 30% and 33% of total support and revenue for the years ended June 30, 2013 and 2012, respectively. If this support were discontinued, it would have a material adverse effect on the Health Center. The Health Center must comply with certain grant requirements and is required to have periodic audits. Certain costs may be questioned, as a result of these audits, due to noncompliance with agreements. Such audits may require repayment of grant funds to the grantor. Management believes that the Health Center is in compliance with all applicable laws, regulations, and grant conditions. Contributions: Contributions received, including unconditional promises to give, are recorded as revenue in the period the promise is received at its fair value. Conditional promises to give, whether received or made, are recognized when they become unconditional, that is, when the conditions are substantially met. Gifts of cash and other assets are presented as restricted support if they are received with donor stipulations that limit the use of the donated assets. 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 support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Health Center reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service (as the assets are used in the Health Center's activities). Patient services revenue, net: The Health Center has agreements with third-party payors that provide for payments to the Health Center at amounts different from its established rates. Payment arrangements include predetermined fee schedules and discounted charges. Patient fees are reported at estimated net realizable amounts from patients, third-party payors and other payors for services rendered, including retroactive adjustments under reimbursement agreements with third-party payors, which are subject to audit by administrating agencies. These adjustments are considered in the recognition of revenue on an estimated basis and are adjusted in future periods, as final settlements are determined. The Health Center provides care to certain patients under Medicare and Medicaid payment arrangements. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action. 10

13 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Capitation revenue: The Health Center has agreements with the Department of Public Health and certain health maintenance organizations (HMOs) to provide medical services to subscribing participants. Under these agreements, the Health Center receives monthly capitation payments based on the number of each HMO s participants assigned to the Health Center, regardless of services actually performed by the Health Center. Excess of revenues over expenses: The statements of operations include excess of revenues over expenses. Changes in unrestricted net assets, which are excluded from excess of revenues over expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions restricted by donors for the purpose of acquiring such assets), and grants for the acquisition of long-lived assets. Donated services, supplies, equipment and in-kind rent: Contributions of donated services that create or enhance non-financial assets or that require specialized skills which are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation, are recorded at fair value in the period received. There were no donated services recorded during the years ended June 30, 2013 and For the years ended June 30, 2013 and 2012, the Health Center has recorded in-kind contribution and expense in the amount of $106,900 and $97,192, respectively, for leased space which was contributed at a rate below fair market value. Functional allocation of expenses: The costs of providing various programs and other activities have been summarized on a functional basis in the statements of operations and changes in net assets. Accordingly, certain costs have been allocated among programs and supported services benefited. Medicaid Electronic Health Records ( EHR") Incentive Program: The American Recovery and Reinvestment Act of 2009 provides for a Medicaid Incentive Program beginning in Federal fiscal year 2011 for eligible professionals that are meaningful users of certified EHR technology, as defined by the Federal Register. Certain of the Health Center s physicians implemented certified EHR technology that enabled them to demonstrate their meaningful use and to qualify for the incentive program. The Health Center recognized $85,000 and $297,500 of Medicaid EHR incentive, reported in grants, contracts and reimbursements revenue, in the accompanying consolidated statements of operations for the years ended June 30, 2013 and 2012, respectively. The Health Center accounts for EHR incentive funds using the contingency model. Under this model, the Health Center records EHR incentive revenue in the period in which the last remaining contingency associated with its recognition is resolved. Income taxes: The Health Center is a tax-exempt organization under Internal Revenue Code Section 501(c)(3) and as required files a Form 990 (Return of Organization Exempt from Income Tax) annually. Accordingly, income taxes are not provided for in the accompanying financial statements. The Health Center files a Form 990 (Return of Organization Exempt from Income Tax) annually. When this return is filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes that it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Forms 990 filed by the Health Center are subject to examination by the Internal Revenue Service (IRS) up to three years from the extended due date of each return. Forms 990 filed by the Health Center are no longer subject to examination for the years 2009 and prior. 11

14 Notes to Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) New accounting guidance: The Health Center adopted ASU , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities during the year ended June 30, This guidance requires health care entities that recognize significant amounts of patient service revenue at the time the services are provided, even though they do not assess the patient s ability to pay, to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue rather than an operating expense in the statement of operations. This guidance also requires additional disclosures related to sources of patient service revenue and changes in the allowance of doubtful accounts. The Health Center s adoption of ASU did not have a significant effect on the financial statements. Note 2. Net Patient Service Revenue The Health Center has agreements with third-party payors which provide for reimbursement at amounts different from their established rates. Contractual adjustments under third-party reimbursement programs principally represent the differences between the Health Center's billings at standard list prices and the amounts reimbursed by Medicare, Medicaid, and certain other third-party payors; they also include any differences between estimated retroactive third-party reimbursement settlements for prior years and subsequent final settlements. A summary of the basis of reimbursement with major third-party payors follows: Medicare: The Health Center is paid for services rendered to Medicare program beneficiaries under prospectively determined rates. The rates vary according to patient classification systems that are based on clinical, diagnostic, and other factors. The Health Center's classification of patients under the prospective payment systems is subject to validation reviews by the Medicare peer review center, which is under contract with the Health Center to perform such reviews. Reimbursement rates are based on the Health Center's annual cost report and Medicare Economic Index (MEl). Medicaid: The Health Center is paid for services rendered to Medicaid program beneficiaries based on a fee schedule. The prospectively determined rates are not subject to retroactive adjustment. The Health Center also receives Medicaid reimbursement for specific programs and services at the discretion of the State of Illinois Medicaid program. Medicaid reimbursement may be subject to periodic adjustment, as well as to changes in annual reimbursement rates. Reimbursement rates are based on MEl and annual cost reports. Patient services revenue was derived from the following payors for the years ended June 30, 2013 and 2012: Medicare 7 % 3 % Medicaid Self pay 11 9 Other third-party payors % 100 % 12

15 Notes to Financial Statements Note 3. Concentrations of Credit Risk The Health Center grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors, before allowances for doubtful accounts, is as follows at June 30, 2013 and 2012: Medicare 5 % 10 % Medicaid Self pay Other third-party payors % 100 % Throughout the year, the Health Center may have amounts on deposit with financial institutions in excess of FDIC insurance limits. Management does not anticipate nonperformance by the financial institutions. Note 4. Charity Care In the ordinary course of business, the Health Center renders services to patients who are financially unable to pay for medical care. The Health Center provides care to these patients who meet certain criteria under its charity care policy without charge or at amounts less than the established rates. Charity care eligibility is established based on limited or no insurance coverage, income compared to published poverty levels and family size, as well as other factors. Because the Health Center does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. The Health Center maintains records to identify and monitor the level of charity care it provides. Charity care is measured based on the Health Center s estimated unreimbursed direct and indirect costs of providing charity care services. That estimate is made by multiplying the Health Center s cost per encounter by total charity encounters, reduced by any payments received relating to those charity encounters. The amount of charity care provided during the years ended June 30, 2013 and 2012, was approximately $1,347,142 and $1,283,705, respectively. Note 5. Capital Grant Receivable Capital grant receivable are as follows at June 30, 2013 and 2012: Receivable in less than one year $ 1,200,000 $ 300,000 Receivable in one to five years 300,000 - $ 1,500,000 $ 300,000 Grants that are receivable in more than one year are discounted using a risk free rate of return. 13

16 Notes to Financial Statements Note 6. Property and Equipment Property and equipment consist of the following at June 30, 2013 and 2012: Land $ 426,927 $ - Buildings 1,010,305 1,010,305 Computer equipment 342, ,123 Office equipment 96,301 82,810 Furniture and fixtures 23,186 23,186 Building and leasehold improvements 1,565,701 1,186,942 Medical equipment 384, ,797 Construction in process 782,660 45,199 4,632,441 2,946,362 Less accumulated depreciation 1,360, ,192 $ 3,271,903 $ 2,007,170 Depreciation expense on property and equipment was $421,351 and $384,797 for the years ended June 30, 2013 and 2012, respectively. Note 7. Notes Payable Notes payable consist of the following at June 30, 2013 and 2012: Note payable to Illinois Facilities Fund with a maturity date of March The note bears an interest rate of 5.25 percent, subject to adjustment at the 10-year anniversary date. Monthly principal and interest payments are $2,844. Collateralized by a building. $ 279,936 $ 296,855 Note payable to Illinois Facilities Fund with a maturity date of December The note bears an interest rate of 5.25 percent, subject to adjustment at the 10-year anniversary date. Monthly principal and interest payments are $5,571. Collateralized by a building. 576, ,936 Note payable to Washington Square Health Foundation with a maturity date of October The note bears an interest rate of 5 percent. Principal and interest payments are due twice a year. In May, the payments are $3,003. In October, the payments are $8,546. Collateralized by certain medical equipment at the Health Center. 28,856 38, , ,272 Less: current portion 67,758 62,103 $ 817,253 $ 884,169 14

17 Notes to Financial Statements Note 7. Notes Payable (Continued) Future principal payments required under the above obligations are as follows at June 30, 2012: Years ending June 30: 2014 $ 67, , , , ,784 Thereafter $ 536, ,011 Total interest expense incurred on the notes payable was $52,564 and $58,235 for the years ended June 30, 2013 and 2012, respectively. The Health Center s debt agreements include various covenants, including a limitation on additional indebtedness. Note 8. Temporarily Restricted Net Assets During the year ended June 30, 2012, the Health Center was awarded a grant, considered to be a contribution, by the State of Illinois Capital Development Board in the amount of $3,000,000 to fund designated capital projects. The grant term begins September 20, 2011 and ends September 19, As of June 30, 2012, $300,000 of the grant had been received. Because of contingencies relating to the receipt of additional funds under the grant, the remaining $2,700,000 had not been recorded as of June 30, During the year ended June 30, 2013, an additional $1,200,000 was received and in management s opinion, receipt of the remaining $1,500,000 is no longer contingent. The remaining $1,500,000 has been recorded in the accompanying financial statements as a capital grant receivable and temporary restricted contribution. Temporarily restricted net assets were available for the following purposes at June 30, 2013 and 2012: Capital projects $ 1,528,491 $ 227,763 Program services 116, ,424 $ 1,644,617 $ 651,187 Net assets were released from donor restrictions by incurring costs satisfying the restricted purposes specified by donors as follows for the years ended June 30, 2013 and 2012: Capital projects $ 1,399,272 $ 73,955 Program services 607, ,650 $ 2,006,570 $ 717,605 15

18 Notes to Financial Statements Note 9. Transactions With Affiliates The Health Center has entered into an agreement with Heartland Alliance for Human Needs & Human Rights (Heartland Alliance), an affiliated human services agency, which provides management and administrative services. These management and administrative services consist of fiscal management, accounting, human resources support, information technology, and insurance and facilities management. The agreement with Heartland Alliance is in effect through June Expenses incurred by the Health Center under this agreement amounted to $553,882 and $526,373 for the years ended June 30, 2013 and 2012, respectively. These are included as part of management and general expenses and various program services expenses on the Statements of Functional Expenses. In addition, the Health Center's employees are eligible to participate in the Heartland Alliance 401(k) plan, which is a defined contribution plan that provides retirement, disability or death benefits to eligible employees. Total expenses incurred under this plan amounted to $89,599 and $60,573 for the years ended June 30, 2013 and 2012, respectively. These are included as part of payroll taxes and employee benefits on the Statements of Functional Expenses. The Health Center has also entered into an agreement with Heartland Health Outreach (HHO), an affiliate organization of Heartland Alliance, which provides clinical management and common vendor expenses. Expenses incurred by the Health Center under this agreement were $101,324 and $121,640 for the years ended June 30, 2013 and 2012, respectively. As of June 30, 2013 and 2012, the Health Center has $32,378 and $69,645, respectively, recorded as accounts payable to Heartland Alliance and Affiliates. During the year ended June 30, 2008, the Health Center and Heartland Alliance entered into an agreement that resulted in a reassessment of previous years' management and general expense charges and a forgiveness of certain other management and general expense charges. At the time of the agreement, $279,357 was converted into an unsecured promissory note payable maturing on June 30, The note was payable in monthly installments of $4,931, including interest at a rate of 2.28%. The agreement also included a provision where $140,000 of the original amount owed was reduced by $28,000 per year, over a five-year period, provided all management, general and administrative payments are made on time. The balance on that amount was $0 and $28,000 at June 30, 2013 and 2012, respectively, and as of June 30, 2012 it was included in note payable to Heartland Alliance for Human Needs & Human Rights and Affiliates on the Statement of Financial Position. The note was fully repaid during the year ended June 30, Note 10. Professional Liability Insurance The Federally Supported Health Centers Assistance Act of 1992 and 1995 granted medical malpractice liability protection through the Federal Tort Claims Act (FTCA) to Federally Qualified Health Centers. Under this legislation, the Health Center, employees, and eligible contractors are considered Federal employees immune from suit with the Federal government acting as their primary insurer. 16

19 Notes to Financial Statements Note 11. Operating Leases The Health Center has operating leases for two of its health center locations. The leases are net leases which provide for current monthly base rentals ranging from $3,180 to $4,670, plus the Health Center's proportionate share of building expenses and real estate taxes. Approximate future minimum rental payments at June 30, 2013 under the operating leases, not including any renewal options, are as follows: Years ending June 30: 2014 $ 65, $ ,339 Total rent expense for these operating leases was $102,492 and $86,900 for the years ended June 30, 2013 and 2012, respectively. Rent expense is included in occupancy expense on the Statements of Functional Expenses. During the year ended June 30, 2011, the Health Center entered into a lease agreement with the City of Chicago to operate a health clinic facility at a new location. The lease term is through December 2017 at a total rental cost of $1. The Health Center has two year-to-year program operating agreements with other independent not-for-profit agencies that include a provision for leased facility space to the Health Center at an annual rental cost of $1. The difference between actual cost and fair market value under these agreements has been estimated at $106,900 and $97,192 for the years ended June 30, 2013 and 2012, respectively, and has been recorded as an in-kind contribution and expense within the Statements of Operations and Changes in Net Assets. Note 12. Commitments, Contingencies, and Subsequent Events Regulatory Environment Including Fraud and Abuse Matters The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity continues with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well significant repayments for patient services previously billed. Management believes that the Health Center is in compliance with fraud and abuse, as well as other applicable government laws and regulations. While no regulatory inquiries that are expected to have a material adverse effect on the Health Center have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. Payments from the State of Illinois A significant portion of patient services provided by the Health Center is reimbursed through the State of Illinois. Extended delays in payments by the State could severely disrupt cash flow and negatively impact the Health Center's operations. 17

20 Notes to Financial Statements Note 12. Commitments, Contingencies, and Subsequent Events (Continued) Together4Health On December 17, 2012 the Health Center entered into an agreement with Together4Health, LLC, an Illinois limited liability company, to acquire one Membership interest in Together4Health. Through its network of hospitals, healthcare and social service partners, Together4Health will provide coordinated services to vulnerable people, including those living with chronic and multiple medical and mental health conditions, people living in poverty, people experiencing homelessness, the unemployed and underemployed, and those with limited access to services due to cultural or language barriers. Together4Health expects to participate in the state Medicaid Care Coordination Program as early as The Membership interest agreement requires a total payment of $25,000 payable in 5 installments. The payments totaling $15,000 as of June 30, 2013 are reported within other assets in the accompanying statement of financial position. Construction in progress: The Health Center has one construction project related to its new Rogers Park health clinic. On May 16, 2013, the Health Center entered into a development agreement with Three Corners Development, Inc. (Developer) for the construction of a 9,200 sq. ft., LEED certified, community health center at 1300 W. Devon Avenue in Chicago. On June 28, 2013, the Developer closed on the purchase of the property and transferred title to the Health Center. Construction, beginning with the demolition of an existing building on site, is scheduled to commence in September The building is expected to be ready for occupancy in August A grant from the Illinois Capital Development Board is providing primary funding for this community health clinic. Construction is expected to be completed in September This project is budgeted to cost $3,475,000. The Health Center plans to pay for these costs through operations as well as through grants. Subsequent to year-end, the Health Center expects to enter into a construction commitment in the amount of $387,594 to add energy efficiency elements to the new Rogers Park Clinic. The Health Center plans to fund this commitment through grants. Subsequent events: Management has evaluated subsequent events through November 7, 2013, which is the date the financial statements were available to be issued. 18