FINANCIAL FEASIBILITY OF NEW FRONTIER TREATMENT CENTER FALLON, NEVADA

TECHNICAL REPORT UCED 2007/08-12 FINANCIAL FEASIBILITY OF NEW FRONTIER TREATMENT CENTER FALLON, NEVADA UNIVERSITY OF NEVADA, RENO

Financial Feasibility of New Frontier Treatment Center Fallon, Nevada Report Prepared by Robert R. Fletcher and Shannon Price Robert R. Fletcher is Emeritus Professor with the University of Wyoming and Research and Emeritus Professor with the University Center for Economic Development at the University of Nevada, Reno Shannon Price is a Research Analyst for the University Center for Economic Development and Department of Resource Economics at the University of Nevada, Reno University Center for Economic Development Department of Resource Economics University of Nevada, Reno Reno, Nevada (775) 784-1681 March 2008 The University of Nevada, Reno is an equal opportunity, affirmative action employer and does not discriminate on the basis of race, color, religion, sex, age, creed, national origin, veteran status, physical or mental disability or sexual orientation in any program or activity it operates. The University of Nevada employs only United States citizens and aliens lawfully authorized to work in the United States.

This publication, Financial Feasibility of New Frontier Treatment Center Fallon, Nevada, was published by the University of Nevada Economic Development Center. Funds for the publication were provided by the United States Department of Agricultural Rural Development and the United States Department of Commerce Economic Development Administration under University Centers Program contract #07-66-05878-01. This publication's statements, findings, conclusions, recommendations, and/or data represent solely the findings and views of the author and do not necessarily represent the views of the United States Department of Agriculture Rural Development, New Frontier Treatment Center, the United States Department of Commerce, the Economic Development Administration, University of Nevada, or any reference sources used or quoted by this study. Reference to research projects, programs, books, magazines, or newspaper articles does not imply an endorsement or recommendation by the author unless otherwise stated. Correspondence regarding this document should be sent to: Thomas R. Harris, Director University Center for Economic Development University of Nevada, Reno Department of Resource Economics Mail Stop 204 Reno, Nevada 89557-0204 UCED University of Nevada, Reno Nevada Cooperative Extension Department of Resource Economics

Financial Feasibility Of New Frontier Treatment Center Fallon, Nevada March 2008 Prepared for New Frontier Board of Directors Prepared by Robert R. Fletcher Professor Emeritus, University of Wyoming and Shannon Price University of Nevada, Reno Collaborating with University Center for Economic Development University of Nevada, Reno

Table of Contents PREFACE...II INTRODUCTION... 1 PROCEDURE... 2 ANNUAL CASH EXPENSES... 4 TABLE 1. PERSONNEL REQUIRED FOR FUTURE NFTC OPERATIONS.... 4 TABLE 2. ESTIMATED ANNUAL OPERATING EXPENSES DEBT RETIREMENT, CASH FLOW.... 6 NEED FOR SERVICE... 8 TABLE 3. NFTC 2006 ADMISSIONS OR "MET NEED" BY CATEGORY.... 10 FINANCIAL ANALYSIS... 12 TABLE 4. MAXIMUM FEE SCHEDULE, SLIDING SCALE, AND ACTUAL FEES COLLECTED, FY-2006... 12 TABLE 5. SENSITIVITY ANALYSIS FOR INCREASED CLIENTS AND PERCENT OF COLLECTIONS**... 14 TABLE 6. PROJECTED 5-YEAR CASH FLOW WITH PROFIT AND LOSS... 16 TABLE 7. MORTGAGE PAYMENT EXAMPLES... 17 TABLE 8. PROJECTED 5-YEAR BALANCE SHEET, NFTC... 18 TABLE 9. ASSUMPTIONS USED TO ESTIMATE BALANCE SHEETS, FY 2008-2012... 19 SUMMARY AND OTHER CONSIDERATIONS... 20 LIST OF REFERENCES... 22 ACRONYMS USED IN NEW FRONTIER TREATMENT CENTER (NFTC) REPORT... 24

Preface This report analyzes the financial feasibility of the Churchill Council on Alcohol and Other Drugs, dba New Frontier Treatment Center (NFTC), acquiring a building to replace their facility that burned in March 2007. This report is intended to compliment two other analyses that have been conducted for NFTC regarding the acquisition of a new facility. An Architectural Feasibility Report on the Silver Rose Assisted Living Facility in Fallon, Nevada was submitted by HMC Architects to fulfill a requirement of the USDA, RD for funding purposes. A market value appraisal on this property was conducted by Carter-Ott Appraisal Inc. in January 2008. The scope of this report assumes the Silver Rose Assisted Living Facility will be purchased for the NFTC residential program. No other alternatives have been given serious consideration. However, the cash flow needed for the assumed purchase price and debt repayment would apply to any facility. The report is formatted to address two specific but different objectives. The first objective is to estimate revenue and expenses, using specific stated assumptions, to determine the long-run financial viability of NFTC. The second objective is to explicitly address each item included in (Guide 5) RD Instruction 1942-A, FINANCIAL FEASIBILITY REPORT, (1-15-79), Rural Development, USDA. Two components, historical background of the existing NFTC facility and alternative analysis for replacing the facility are addressed in detail in the Architectural Feasibility report. Economic, demographic and government characteristics are presented in the appraisal report. This information will be supplemented as needed but not duplicated in this financial feasibility analysis.

Introduction In 1971 a group of Churchill County residents incorporated the Churchill Council on Alcohol and Other Drugs (CCAOD) as a not-for-profit corporation, registered with the Secretary of State. The New Frontier Treatment Center (NFTC) has been doing business under this corporation on a continuous basis since 1974. There has been a working arrangement between Churchill County and NFTC since the beginning. In 1974 the County agreed to provide facilities that allowed NFTC to offer 14 beds that could house 7 men and 7 women at any given time. After nearly a quarter-century a loan was acquired through the USDA in 1997 to construct a larger facility. A new building that doubled the NFTC capacity to 28 beds was constructed on County land. This Churchill County Government and not-forprofit alliance had a synergistic effect that served the community well for another 10 years. On March 26, 2007, a fire destroyed the 28 bed residential facility. The CCAOD Board of Directors and the NFTC staff feel it is important to replace the residential facility as soon as possible to minimize the disruption of service and maintain staff to continue the residential program. The purpose of this financial feasibility analysis is to estimate the operating costs and income from all sources to evaluate the financial capacity of NFTC to meet their operating expenses and service the debt on a building to house their entire operation. Two alternatives were originally considered; (1) to acquire land or a long term lease and construct a new building, or (2) to purchase an existing facility. The Silver Rose Manor, currently utilized as an assisted living facility, was one option. The architectural feasibility report [15] explains the alternative analysis the NFTC Board of Directors and staff followed to conclude purchasing the Silver Rose was their best alternative. 1

Procedure The specific objective of this report is to estimate the dollar amount of earned revenue, government grants and other contributions NFTC needs to generate to pay their operating expenses and have adequate funds for debt service to replace the building needed to resume their residential treatment program. There are several reasons to conduct a feasibility study; (1) new start-up business, (2) purchase of an existing business, (3) add new enterprise to an existing business, and (4) expansion of an existing business. Purchase of the Silver Rose will provide more beds which allows for expansion of the residential program. NFTC was planning a remodeling project at the time of the fire, which would add four beds to the residential program, increase their intensive outpatient program and add additional storage space. A market analysis, or market feasibility, is usually the first step in considering financial feasibility for economic competitive industries. NFTC provides treatment for alcohol and drug addiction, a social service that relies less on client payment and more on third party sources for the majority of their revenue which includes; government programs, insurance companies, charities, friends and family. Their charges for service are based on a sliding scale fee tied to the client s household income. NFTC does not deny service to those unable to pay. These two financial characteristics of the NFTC business model, reduced collections based on household income and inability to pay, provide a real challenge in estimating earned revenue. Historical cost data, for operating their 28 bed treatment center prior to the fire was used as a guideline to estimate future costs of operating the new facility. These costs are documented, indexed for inflation and adjusted to reflect operations in a replacement building. After total costs of operating and long term debt services have been 2

estimated, the need for substance abuse treatment is assessed. Estimates are then made for competition in the area served by NFTC. A sensitivity analysis estimates the potential impact of an increase in number of admissions and/or the percent increase in collection of fees that will be required to cover the costs. Managing annual cash expenses is the most critical but also the most controllable factor in maintaining NFTC as a financially feasible operation. The current level of management was considered in each step of the analysis and was assumed to continue into the future. Historical data was used to the greatest extent possible. The staff not only provided in-depth financial information and client characteristic data, but also reviewed report drafts to ensure all information had been properly interpreted. This interactive process with management is always helpful, but it becomes critical with a not-for-profit organization such as NFTC, for which there are few if any comparables. 3

Annual Cash Expenses Historical operating costs of the NFTC have been well documented by the staff and are available in annual financial statements and tax returns. Fire destroyed the building in March of 2007. Fiscal year 2006 (October 1, 2005 through September 30, 2006) is the last full year cost data is available that includes a full year for the residential program. The first step was to estimate personnel requirements for the expanded facility with 42 beds, a 50% increase in residential capacity. Table 1 describes the assumed distribution of the 36 fulltime equivalent (FTE) employees with $1,027,800 in annual salary requirements. The estimated salary compares to an actual payroll of $788,345 in FY 2006. The 36 FTE represent the staff needed to open the new facility and maintain the professional competence of current employees by reducing turn over. Table 1. Personnel Required for Future NFTC Operations. Personnel Categories FTE's $/FTE Total Payroll Administrative 11 $28,193 $310,120 Clinical 10 $35,578 $355,780 Residential 15 $24,128 $361,900 Total 36 $87,899 $1,027,800 Table 2 shows the estimated annual cash required for operations and debt retirement assuming a $1,500,000 real estate mortgage. The projected annual operating costs are based on actual costs reported for FY-2006. These reported expenses were modified and assumed to represent FY-2007 expenditures assuming operations had not been interrupted by the March 2007 fire. The major adjustments were in personnel costs. The actual wages and salaries for 2006 was $788,345. The higher estimate of $1,027,800 wages and salaries for FY-2007 assumes increased capacity of four beds that were in the planning stage at the time of the fire. This higher number also reflects the salary adjustment that helped NFTC 4

maintain qualified employees. One new position is assumed to be added each year beginning in FY-2008 because of increased work load as residential occupancy increases. A 4.2% annual increase in wage and salaries was used to maintain cost of living in the area and reward job performance. This number is justified based on annual wage and salary trend data published by the Bureau of Economic (BEA) analysis for Churchill County since 1969. Another adjustment in personnel costs is an assumed two percent contribution to a 403(b) defined contribution retirement plan. This will allow employees to tax defer a portion of their current income to fund their retirement. It is assumed this will actually save money in the long-run by reducing employee turn over and consequently the cost of training. The estimated gas and electric utility expenses are based on actual charges for the Silver Rose Manner [9]. The other utility category is assumed costs for water, sewer and solid waste, as actual costs were not available. Annual increases were assumed to reflect inflation plus economic conditions that could impact future energy costs. The real property taxes represent the Silver Manor actual costs, $11,717 and indexed up at eight percent annually to reflect the maximum increase under current law. Most other costs were assumed to have a two to three percent annual increase. The exceptions are food at 15%, natural gas and electricity at 4% and travel at 10%. The food and energy increases are assumed to reflect market forces, and the number of patients in the residential program will increase by approximately 10 percent annually until occupancy is back to a minimum of 65 percent capacity. The increase in travel assumes both an increase in costs and a small increase in actual travel. A meeting with appropriate NFTC staff on December 27-28, 2007, provided in-depth review to assure the data reflected NFTC operations as accurately as possible. 5

Table 2. Estimated Annual Operating Expenses Debt Retirement, Cash Flow. Operating Expenses FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Personnel Wages and Salaries 1,027,800 1,105,968 1,187,418 1,272,290 1,360,726 1,452,876 FICA (7.65%) 78,627 84,607 90,837 97,330 104,096 111,145 Workers Comp (1.5%) 15,417 16,590 17,811 19,084 20,411 21,793 FUI & SUI (3.0% unemploy ins) 30,834 33,179 35,623 38,169 40,822 43,586 Health Insurance (11.5%) 118,197 127,186 136,553 146,313 156,483 167,081 Retirement 403(b) (2%) 20,556 22,119 23,748 25,446 27,215 29,058 Payroll Processing (300/MO) 3,600 3,708 3,819 3,934 4,052 4,173 Total Personnel $1,295,031 $1,393,356 $1,495,810 $1,602,566 $1,713,804 $1,829,713 Supplies Supplies/General and Office 52,626 53,679 54,752 55,847 56,964 58,103 Food Supplies 31,452 36,170 41,595 47,835 55,010 63,261 Household supplies 4,359 4,446 4,535 4,626 4,718 4,813 Postage 3,031 3,092 3,153 3,217 3,281 3,346 Equipment Purchase/Rental 15,000 15,300 15,606 15,918 16,236 16,561 Total Supply $106,468 $112,686 $119,642 $127,442 $136,209 $146,085 Services Professional Services 118,000 120,360 122,767 125,223 127,727 130,282 Lab Test/UA 5,000 5,100 5,202 5,306 5,412 5,520 Temporary Employees 3,866 3,943 4,022 4,103 4,185 4,268 Marketing Expense 15,000 16,500 18,150 19,965 21,962 24,158 Employment Advertisement 3,323 3,655 4,021 4,423 4,865 5,352 Recreation Expense 2,400 2,448 2,497 2,547 2,598 2,650 Dues and Subscriptions 2,000 2,040 2,081 2,122 2,165 2,208 Licenses and Fees 8,000 8,160 8,323 8,490 8,659 8,833 Seminars 19,046 19,427 19,815 20,212 20,616 21,028 Travel 38,190 42,009 46,210 50,831 55,914 61,505 Repairs and Maintenance 11,376 11,604 11,836 12,072 12,314 12,560 Vehicle Expense 6,000 7,500 9,375 11,719 14,648 18,311 Total Services $232,201 $242,746 $254,299 $267,012 $281,065 $296,675 Utilities and Telephone Electricity 33,108 34,432 35,810 37,242 38,732 40,281 Gas 11,434 11,891 12,367 12,862 13,376 13,911 Other 3,000 3,120 3,245 3,375 3,510 3,650 Telephone 15,000 15,300 15,606 15,918 16,236 16,561 Total Utilities and Telephone $62,542 $64,744 $67,027 $69,396 $71,854 $74,403 Taxes, Insurance and Misc. Real Property Tax 11,717 12,654 13,667 14,760 15,941 17,216 Business Liability Ins 22,347 22,794 23,250 23,715 24,189 24,673 Fire and Casualty Insurance 24,000 24,480 24,970 25,469 25,978 26,498 Miscellaneous Operating 6,000 6,120 6,242 6,367 6,495 6,624 Total Taxes, Ins. and Misc. $64,064 $66,048 $68,129 $70,311 $72,603 $75,011 Reserve for Capital Repairs 0 60,000 61,800 63,654 65,564 67,531 Total Cash Operating $1,760,306 $1,939,580 $2,066,707 $2,200,381 $2,341,099 $2,489,417 Debt Repayment $1.5M Mortgage Mortgage Payment annualized 81,000 81,000 81,000 81,000 81,000 81,000 Debt Service Reserve 8,100 8,100 8,100 8,100 8,100 8,100 Annualized Building Costs $89,100 $ 89,100 $89,100 $ 89,100 $ 89,100 $ 89,100 Total Annual Cash Required $1,849,406 $2,028,680 $2,155,807 $2,289,481 $2,430,199 $2,578,517 6

The annualized mortgage payment and debt service reserve are based on the RD, USDA example [13, payment example]. Each $500,000 of principal requires a monthly payment of $2,250 which is $27,000 (2,250 x 12) on an annual basis. There is also a debt service reserve requirement of $225 per month, $2,700 annually or 10 percent of the payment for principal and interest. The total debt service and reserve requirement is $29,700 per $500,000 per year. The assumed mortgage, $1.5 million will require three $500,000 units or $89,100 annual cash flow. It is further assumed the contribution to the reserve will continue beyond the level required by USDA and used for future capital replacement needs. This reserve account should also smooth out the cash flow problems experienced in the past and allow monthly mortgage payments to be made in a prompt and timely manner. These cost estimates are assumed to allow NFTC to continue their current level of outpatient care and provide a replacement for their Residential Inpatient programs. The next step is to identify the need for the services they are prepared to provide. 7

Need for Service A market analysis is usually conducted to determine the revenue that could be derived by selling an economic good or service where the price and quantity determine the demand for that good or service. A market analysis is not the appropriate methodology for this report. The need for treatment of individuals for substance abuse is an estimate made by a government agency in Nevada. Economic forces or local economic conditions are not directly related to the need for service. NFTC provides treatment for alcohol and drug addiction, a social service that relies on payment from third party sources including; government programs, insurance companies, charities, friends and family. Substance Abuse Prevention and Treatment Agency (SAPTA) reports the number of people treated for substance abuse in Nevada in 2004 [1]. This fact sheet also reported 2,226 people had to wait an average of 24 days for admission to treatment services in 2006. Utilizing the number treated in the state or the met need and the total need from the Substance Abuse Mental Health Services Administration (SAMHSA) National Survey on Drug Use and Health (NSDUH 2004), they were able to estimate the unmet need. The total number of people estimated in need of service was 180,000 approximately 8.6 percent of the population. The met need from all sources was estimated at 33,983 leaving an unmet need of 146,017 or 81 percent. SAPTA recognizes these estimates contain a degree of error and even if the met need is double the estimate, or 67,966, there is still an unmet need of 112,034. Using their population estimate of 2,094,627 the unmet need is equal to 5.35 percent of the population. The 5.35 percentage is assumed to apply to all geographic areas of the state and include both adolescents and adults in the population. 8

The NFTC has historically served most of northern and eastern Nevada on a limited basis. Their residential program, based in Fallon, emphasizes Churchill County, but draws clients from the Reno and Carson City area. The Nevada State Demographer estimated the 2006 Churchill County population to be 27,371 [Table A-2]. Using the 5.35% estimate for unmet need indicates there are approximately 1,464 potential clients in Churchill County. However, the unmet need or potential clients who reside in the County do not translate directly into demand for the NFTC services. There are an additional 15,000 potential clients within a one hour drive of Fallon in the Reno-Carson City area. Churchill County has supported the NFTC residential program for over 10 years and should be able to continue in the future. NFTC employs a multi-disciplinary staff which includes licensed and certified addiction counselors, marriage and family therapists and social workers. Five NFTC staff members have received certification for Creating Lasting Family Connections (CLFC) and six employees have received extensive training in the Parent Child Assistance Program (PCAP) and in Project CHOICES. NFTC strives to ensure its staff is culturally and linguistically representative of the populations served. Presently, the organization employs and/or contracts with four persons of Native American decent, five persons of Hispanic descent, two persons with disabilities, one African American and five current employees are former consumers of the social services continuum in rural Nevada. NFTC employs two Spanish-speaking staff which, other than English, is the primary language spoken in this area. The organization is strongly rooted in the community and has well-established relationships with other community-based organizations, the medical and military communities, social services, the local Native American Tribes and the business community. 9

The organization invests significant resources into its sustainability by engaging in annual strategic planning and on-going resource development. NFTC has a diverse funding stream and is experienced in managing multiple projects. NFTC has provided critical service to Churchill County and surrounding communities on a continual basis for over 30 years. Their mission is to promote the health and welfare of the individual, family, and community through a comprehensive continuum of substance abuse and other related wellness services [2, p11]. The best measure of future need for NFTC services can be gleaned from past performance. Table 3. NFTC 2006 Admissions or "Met Need" by Category. County Admissions Outpatient Inpatient Male Female Carson 15 2 13 10 5 Churchill 194 131 63 122 72 Clark 6 1 5 3 3 Douglas 12 0 12 7 5 Elko 51 39 12 34 17 Humboldt 37 26 11 29 8 Lander 1 0 1 0 1 Lincoln 7 7 0 0 7 Lyon 39 11 28 19 20 Mineral 14 8 6 7 7 Nye 8 4 4 6 2 Pershing 63 54 9 33 30 Washoe 80 7 73 38 42 White Pine 26 17 9 13 13 All Counties 553 307 246 321 232 Statewide 1 0 1 1 0 Nevada 554 307 247 322 232 Out-of-State 9 0 9 4 5 Total 563 307 256 326 237 Table 3 shows the number and type of their 2006 admissions. Every Nevada County had residents served by NFTC in 2006 with the exception of Esmeralda. In analyzing the number of admissions it is not surprising to find that Churchill County represented the largest number 10

of admissions, 194 total with 131 outpatient and 63 residential or inpatient. What is interesting, and an indication of the NFTC competitiveness, is Washoe County admitted 73 inpatients or 10 more than Churchill. Total admissions shown in Table 3 include both fee paying clients and those covered by contract such as drug courts. A review of available information on Nevada drug and alcohol treatment centers [3] and the appropriate economic census data indicates NFTC has minimal competition in the area they serve. The next step is to define the relationship between the met need and client fees generated for revenue. Those fees will then be combined with anticipated government grants, charitable gifts and contributions and government contracts to estimate total funding from all sources for a break-even analysis. 11

Financial Analysis NFTC has a maximum fee schedule for different categories of service which are shown in the first data column of Table 4. NFTC does not deny service to anyone because of inability to pay and have adopted a sliding fee schedule. A patients charge depends on the level of their household income adjusted for the number of persons in the household. The sliding fee is then applied to the maximum chargeable amount. Table 4. Maximum Fee Schedule, Sliding Scale, and Actual Fees Collected, FY-2006 Maximum Fees Sliding Scale Actual Receipts Actual % Maximum Actual % Slid Scale Outpatient Group $40 $15.70 $8.20 20.5% 52.2% Outpatient Individual $75 $29.44 $15.38 20.5% 52.2% Intensive Outpatient $125 $49.06 $25.63 20.5% 52.2% Detox $450 $176.63 $92.25 20.5% 52.2% Residential III.1 $225 $88.31 $46.13 20.5% 52.2% Residential III.5 $225 $88.31 $46.13 20.5% 52.2% People in the lowest household income category pay 15% and represent 60% of patients. The next level of household income pay 40% of the maximum charge and represents 10% of households. At the upper level of income 15% of the households pay 75% of the charges and 15% pay 100% or the total maximum allowable charges for the services received [9]. On average this works out to 39.25% of the maximum charges billed to patients that are not covered by a government contract or other arrangement. Column 2, Table 4 shows the average billing for service using the sliding scale. However, NFTC only collects a little over 52% of the sliding scale charges billed which is only 20.5% of the maximum charges. The non-collected fees are turned over to a collections agency from which they receive approximately $800 per month from delinquent accounts. In 12

FY-2006 approximately $603,400 was billed on sliding fees. These billings resulted in $340,400 collections of which $315,200 represented inpatient charges. Sensitivity analysis can be used to determine the degree to which revenue can be increased by holding the occupancy rate constant and increasing the percent of the sliding scale fees collected or increase occupancy and hold collections constant. These are two variables over which management has some control. The economic viability of the NFTC will depend to a large extent on how these two factors are managed. The increase in number of beds is assumed to increase number of admissions, if not the occupancy rate. There are also indications that the collection rate has been increasing with the current management [9]. Table 5, column 1 shows an additional $24,620 would be collected from 20 additional admissions per year assuming current client fees. This is an increase of approximately eight percent based on an assumed 256 admissions in the base year. Reading on down column 1 shows the increased revenue anticipated from an additional 20 admissions per year, with no change in collections. The first row in Table 5 shows the amount of additional revenue provided from a 2% incremental increase in collections from the $603,400 of sliding schedule fees actually billed and holding the number of admissions constant. It is assumed that occupancy can be increased by 20 each year and that an additional 2% of fees billed using the sliding scale can be collected each year for the next five years. Reading down and across the Table shows the dollar amount of additional revenue realized for the increased number of admissions and the increase in the percentage of fees collected. For example, 80 more admissions and a 10 percent increase in client fee collections would generate an additional $158,820 in annual revenue. 13

Table 5. Sensitivity Analysis for Increased Clients and Percent of Collections** 0% 2% 4% 6% 8% 10% 0 0 12,068 24,136 36,204 48,272 60,340 20 24,620 36,688 48,756 60,824 72,892 84,960 40 49,240 61,308 73,376 85,444 97,512 109,580 60 73,860 85,928 97,996 110,064 122,132 134,200 80 98,480 110,548 122,616 134,684 146,752 158,820 100 123,100 135,168 147,236 159,304 171,372 183,440 120 147,720 159,788 171,856 183,924 195,992 208,060 140 172,340 184,408 196,476 208,544 220,612 232,680 160 196,960 209,028 221,096 233,164 245,232 257,300 ** Rows represent increments of 20 additional clients = $1,231 per client while Columns represent 2% incremental increase in client fee collections. Table 5 provides estimates of increased cash from operations that will be available under varying assumptions for the number of admissions and rate of collections. This estimated revenue over the next five years is combined with other funding sources including grants, contracts, contributions and client fees to estimate total cash available for annual operations and long-term debt repayment. Table 6 shows all sources of estimated revenue over a five year period. Money is available from two broad categories. State and Federal grants and contributions are a major source of support for NFTC, but are not directly tied to the quantity of services provided. Earned income comes from client fees and service contracts. Column 1, FY-2007 represents the base year and is used to estimate the amount of support and earned income over the next five years. There was not a residential program for the last six months of the base year because of the fire. However, the staff was able to maintain most of the support funding and pursue new grants and contracts on anticipation of acquiring a new building. In the base year, grants and contribution support, account for $1.05 M, 54% of total available cash. It is estimated grants and contributions will increase to $1.285 M by FY-2012 but represent only 49.6% of total cash available. Earned income is projected to account for 50.4% of available 14

cash in FY-2012 because of increased admissions and the percentage increase in client fee collections. Projected operating expenses are also listed in Table 6. These expenses represent the aggregated categories of expenses shown in Table 2. The reserve for capital repairs is intended to cover capital repairs on the building as needed and other capital equipment such as automobiles. Debt repayment assumes a $1.5 M USDA Rural Development loan with monthly payments based on $2,250 per $500,000 principal [13] plus 10% set aside as a debt service reserve. Table 7 shows the monthly and annual mortgage payments for a conventional loan based on 3.5%, 4.0% and 4.5 % interest rates and terms of 30, 35, and 40 years. These annual cash flow estimates assume a level of management provided by the current staff. There is a projected net profit of $92,182 or 4.2% of available cash in FY-2008 and $12,426 or 0.48% in FY-2012. 15

Table 6. Projected 5-Year Cash Flow with Profit and Loss Estimated Available Cash FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Support (Grants/Contrib) SAPTA 695,000 715,850 737,326 759,445 782,229 805,695 Gambling (DHHS) 108,000 111,240 114,577 118,015 121,555 125,202 PATH 42,500 43,775 45,088 46,441 47,834 49,269 FASD 108,000 180,000 180,000 180,000 180,000 180,000 RnCoC 50,000 50,000 50,000 50,000 50,000 50,000 MISC Support 46,500 51,150 56,265 61,892 68,081 74,889 Total Support 1,050,000 1,152,015 1,183,256 1,215,792 1,249,698 1,285,055 Earned Income Client Fees (net, net) 388,900 388,900 388,900 388,900 388,900 388,900 Increase Collections 36,688 61,308 97,996 134,684 171,372 208,060 Contracts/Drug Court 362,000 376,480 391,539 407,201 423,489 440,428 "IHS" 21,000 27,300 33,600 39,900 46,200 52,500 TANF 15,000 24,000 33,000 42,000 51,000 60,000 Fed P&P 19,000 34,600 50,200 65,800 81,400 97,000 Evaluations 45,000 47,000 49,000 51,000 53,000 55,000 Other Revenue 4,000 4,000 4,000 4,000 4,000 4,000 Total Revenue 891,588 963,588 1,048,235 1,133,485 1,219,361 1,305,888 Total Available Cash 1,941,588 2,115,603 2,231,491 2,349,277 2,469,059 2,590,943 Operating Expenses FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Personnel 1,295,031 1,393,356 1,495,810 1,602,566 1,713,804 1,829,713 Supply 106,468 112,686 119,642 127,442 136,209 146,085 Services 232,201 242,746 254,299 267,012 281,065 296,675 Utilities & Telephone 62,542 64,744 67,027 69,396 71,854 74,403 Taxes, Ins. & Misc. 64,064 66,048 68,129 70,311 72,603 75,011 Reserve for Capital Repairs 0 60,000 61,800 63,654 65,564 67,531 Total Cash Operating 1,760,306 1,939,580 2,066,707 2,200,381 2,341,099 2,489,417 Debt Repayment $1.5M Mortgage Mortgage Payment annualized 81,000 81,000 81,000 81,000 81,000 81,000 Debt Service Reserve 8,100 8,100 8,100 8,100 8,100 8,100 Annualized Building Costs 89,100 89,100 89,100 89,100 89,100 89,100 Total Annual Cash Requirement 1,849,406 2,028,680 2,155,807 2,289,481 2,430,199 2,578,517 Net Profit/(loss) $92,182 $86,923 $75,684 $59,796 $38,860 $12,426 16

Table 7. Mortgage Payment Examples Principal Amount Annual Interest Number of Years Number of Months Monthly Payment Annual Payment 500,000 4.5% 30 360 2,533 30,401 1,500,000 4.5% 30 360 7,600 91,203 1,500,000 4.0% 30 360 7,161 85,935 1,500,000 3.5% 30 360 6,736 80,828 1,500,000 4.5% 35 420 7,099 85,186 1,500,000 4.0% 35 420 6,642 79,699 1,500,000 3.5% 35 420 6,199 74,392 1,500,000 4.5% 40 480 6,743 80,921 1,500,000 4.0% 40 480 6,269 75,229 1,500,000 3.5% 40 480 5,811 69,730 Although these are the best estimates of future annual cash flow the actual profit or loss could easily fluctuate to the positive or negative by 3 to 5 percent in any given year. Government grants and contributions are responsible for approximately one-half of the annual budget. There is uncertainty as to the level of funding that will be available from year to year and when the funds may be made available within the operating year. To assure adequate cash is available to pay bills in a timely manner throughout the year requires maintaining a cash reserve and practicing sound budget and cash management. Table 8 shows an estimated balance sheet for FY-2007 assuming residential operations had not been interrupted by the fire. This provides the basis for projecting a balance sheet over five operating years. The numbers in these hypothetical balance sheets are consistent with the cash flow estimates in Table 6. These estimates are based on explicit and implicit assumptions. These assumptions were developed in conjunction with the NFTC staff. To assist the reader in following the analysis or to develop their own estimates of financial feasibility, assumption, definitions and related applications are shown in Table 9. 17

Table 8. Projected 5-Year Balance Sheet, NFTC FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Assets Current Assets Cash and cash equivalents 600,000 115,000 176,800 240,454 306,018 373,548 Accounts receivable grants 105,000 105,000 105,000 105,000 105,000 105,000 Accounts receivable clients 100,000 100,000 100,000 100,000 100,000 100,000 Prepaid expenses 25,000 25,000 25,000 25,000 25,000 25,000 Total Current Assets 830,000 345,000 406,800 470,454 536,018 603,548 Property and Equipment Property and equipment 60,000 1,970,000 1,970,000 1,970,000 1,970,000 1,970,000 Accumulated depreciation (60,000) (66,425) (132,850) (199,275) (265,700) (332,125) Total Property and Equipment - 1,903,575 1,837,150 1,770,725 1,704,300 1,637,875 Total Assets $830,000 $2,248,575 $2,243,950 $2,241,179 $2,240,318 $2,241,423 Liabilities and Equity Current Liabilities Accounts payable 55,000 55,000 55,000 55,000 55,000 55,000 Accrued expenses 48,000 48,000 48,000 48,000 48,000 48,000 Capital lease 2,000 2,000 2,000 2,000 2,000 2,000 Current portion of long-term debt - 80,921 80,921 80,921 80,921 80,921 Total Current Liabilities 105,000 185,921 185,921 185,921 185,921 185,921 Long-Term Liabilities Notes payable, net of current - 1,486,298 1,471,967 1,456,978 1,441,300 1,424,902 Total Liabilities $105,000 $1,672,219 $1,657,888 $1,642,899 $1,627,221 $1,610,823 Equity Equity in property and equip - 336,356 284,262 232,826 182,079 132,052 Capital reserves 600,000 115,000 176,800 240,454 306,018 373,548 Unrestricted assets 125,000 125,000 125,000 125,000 125,000 125,000 Owner equity (net assets) 725,000 576,356 586,062 598,280 613,097 630,600 Total Liabilities and Equity $830,000 $2,248,575 $2,243,950 $2,241,179 $2,240,318 $2,241,423 18

The balance sheet or projected statement of financial position for the next five years indicates owner equity or total assets will decrease by about $95,000 during that time. However, cash on hand is adequate to assure funds are available to pay all expenses and mortgage payments as they come due. Table 9. Assumptions Used to Estimate Balance Sheets, FY 2008-2012 1. Time Frame FY-2008 represents first year new building is available for occupancy. 2. Purchase Price NFTC will purchase Silver Rose facility for $1,750,000, the appraised value. 3. Personal Property $220,000 in personal property will be needed over the next five years to operate new facility. 4. Cash Available NFTC currently has approximately $600,000 available. 5. Real Estate Loan A 30 year loan at 4.5% interest will be used to purchase the building. 6. Relocation Costs $75,000 cash allotted for relocation 7. Cash Balance $545,000 used for down payment on building, personal property and relocation expenses, leaving $55,000 carryover for FY-2009. 8. Other Costs 9. Cash Equivalents and Capital Reserves 10. Depreciation 11. Capital Replacement 12. Reoccurring Entries 13. Property and Equipment 14. Management and Staff It is anticipated there may be additional costs required to bring the building up to code and other improvements as needed. These costs will be covered by funding through a Community Development Block Grant. The $55,000 cash balance, after costs associated with the new building are paid, is increased by these capital reserve requirement in the cash flow table 6. The building has an estimated value of $1,400,000 and depreciated at 2.5%. Personal property was depreciated straight line over 7 years. For comparative purposes, there were assumed to be no new capital purchased during the first 5 years of operations. Entries usually included in the balance sheet that do not directly impact the feasibility of purchasing the new facility were held constant. The $60,000 property and equipment shown for FY-2007 was taken off the books and the $1,970,000 starting in FY-2008 reflects the value of the building and the personal property. There is an explicit assumption that runs throughout this analysis that NFTC will maintain the current quality of management and staff. 19

Summary and Other Considerations In 1971 a group of Churchill County residents incorporated the Churchill Council on Alcohol and Other Drugs (CCAOD) as a not-for-profit corporation which has been doing business as NFTC on a continuous basis since 1974. Churchill County provided a 14 bed facility in 1974 that allowed NFTC to treat 7 men and 7 women at any given time. A new building that doubled the capacity to 28 beds was constructed by NFTC in 1997 with a USDA loan on County land. This Churchill County Government and not-for-profit alliance had a synergistic effect that served the community well for another 10 years. On March 26, 2007, a fire destroyed the facility. The CCAOD Board of Directors and the NFTC staff feel it is important to replace the facility as soon as possible to minimize the disruption of service and maintain a competent and well-trained staff to continue the residential program. The purpose of this financial feasibility analysis is to estimate the operating costs and income from all sources to evaluate the financial capacity of NFTC to meet their operating expenses and service the debt on a building to house their entire operation. This analysis assumes the NFTC will no longer receive any direct financial benefit from Churchill County. The financial feasibility analysis considered historical operating costs, debt service on a replacement building and estimated available cash from earned income, grants and contributions. The estimated cash flow over the next five years is adequate to cover annual operating costs and debt service on a $1.5 M mortgage. This conclusion is based on maintaining the quality of the current administrative staff. This is considered a unique situation for a not-for-profit organization that provides a non-market based service to be able 10/10/2008 20

to purchase their facility. This is only possible because of the money they have available from insurance proceeds after the fire. NFTC generates both fiscal impacts and economic impacts on Churchill County and the local economy. To quantify these impacts is beyond the scope of this report but a descriptive analysis is beneficial. The fiscal impacts would include government taxes and fees paid either directly or indirectly though the course of doing business. The other potential fiscal impact is the service they provide the local community. Would the costs of acquiring services they provide be at a higher cost if NFTC were to cease operations? Fiscal impacts relate to governments where as economic impacts measure the economic interactions with local businesses. A study conducted by UNR in 2006, [10] The Impact of the Local Health Care System on the Churchill County Economy, provides an estimate of the economic impacts generated by health care workers. NFTC will employee between 36 and 40 total staff. According to the UNR study an additional 10 to 12 indirect jobs will be created within the local economy. These employees live in the community and spend part of their income locally. Their local purchases generate $250,000 in indirect household income. 10/10/2008 21

List of References 1. Nevada Division of Mental Health and Development Services, Substance Abuse Prevention and Treatment Agency (SAPTA) 2006 Estimated Unmet Need for Treatment Nevada. Web Site: http://health2k.state.nv.us/bada/2007factoids/aodestimateofunmetneed.pdf 2. Substance Abuse Treatment Services RFA Application Checklist, New Frontier Treatment Center, January 18, 2006. 3. Nevada drug and alcohol treatment centers and substance abuse services. Web Site: http://alcoholism.about.com/od/tx_nv/nevada_treatment_centers.htm 4. Harris, Thomas R., et al. Economic Lindages in the Economy of Churchill County, Technical Report UCED 92-02, University of Nevada, Reno, 1992. 5. McArthur, Karl A., et al. Feasibility of the Proposed New Frontier Treatment Center Expansion in Fallon, Nevada. Technical Report UCED 95-10, University of Nevada, Reno, 1996. 6. Health Care and Social Assistance Nevada, 2002 Economic Census, US Census Bureau, USDC. Web Site: http://www.census.gov/econ/census02/data/nv/nv000_62.htm 7. Price, Shannon and T.R. Harris, Economic Feasibility of Rebuilding New Frontier Treatment Center in Fallon, Nevada, Technical Report UCED 2007/08-02, University of Nevada, Reno, 2007. 8. Hofstrand, Don and M. Holz-Clause, Feasibility Study Outline, Ag Marketing Resource Center, Iowa State University. Ames Iowa. Web Site: http://www.extension.iastate.edu/agdm/wholefarm/html/c5-66.html 9. Conversation with Lana K. Henderson, Executive Director, NFTC and other Staff. 10. Packham, John, S. Price and T.R. Harris, The Impact of the Local Health Care System on the Churchill County Economy, Technical Report UCED 2005/06-30, University of Nevada, Reno, 2006. 11. Sanford & Company, Audited Financial Statements, Churchill Council on Alcohol and Other Drugs, D.B.A. New Frontier, September 30, 2006. 12. Sanford & Company, Return of Organization Exempt from Income Tax, form 990, beginning Oct 1, 2005 and ending Sep 30, 2006. 13. Rural Development, USDA, Community Facility loan and grant program, a collection of requirements and guidelines, Carson City, Nevada Office. 10/10/2008 22

14. Ott, Julie C., MAI, Silver Rose Manor Residential Care Facility, 1490 Grimes Street, Fallon, Nevada., Appraisal Report, Carter-Ott Appraisal Inc., Reno, Nevada, January 2008. 15. HMC Architects, Architectural Feasibility Report for the Silver Rose Assisted Living Facility. Fallon, Nevada, December 2007 10/10/2008 23

Acronyms Used in New Frontier Treatment Center (NFTC) Report No. Acronym Definition of this acronym used by NFTC 1 AA Alcoholics Anonymous 2 ACCS American Comprehensive Counseling Service 3 ASI Addiction Severity Index 4 BADA Bureau of Alcohol and Drug Abuse (State of Nevada) 5 BLC Bureau of Licensure and Certification - NFTC licensing Board 6 BOE Board of Examiners - Alcohol, Drug and Gambling Counselors 7 CADC Certified Alcohol and Drug Counselor 8 CADC-I Certified Alcohol and Drug Counselor Intern 9 CBT Cognitive Behavioral Therapy 10 CDBG Community Development Block Grant 11 CFDA Catalog for Federal Domestic Assistance 12 CLFC Creating Lasting Family Connections 13 CSBG Community Service Block Grant 14 DHHS Division of Health and Human Services 15 DV Domestic Violence 16 DVI Domestic Violence Intervention 17 EAP Employee Assistance Programs 18 FAS Fetal Alcohol Syndrome 19 FASD Fetal Alcohol Spectrum Disorder 20 FDE Fetal Drug Effects 21 Fed P&P Federal Parole and Probation 22 GA Gamblers Anonymous 23 GMU Grants Management Unit 24 HIPAA Health Insurance Portability and Accountability Act 25 HMIS Homeless Management Information System 26 IHS Indian Health Services 27 IOP Intensive Outpatient treatment - adults or adolescents 28 JCAHO Joint Commission on Accreditation of Healthcare Organizations 29 JPO Juvenile Probation Office 30 LADC Licensed Alcohol and Drug Counselor 31 LCSW Licensed Clinical Social Worker 32 Level I Regular outpatient drug and alcohol treatment - adults or adolescents 33 Level III.1 Less Intensive Residential Treatment - Adults (more like a work release program) 34 Level III.2d Social Model Detoxification 35 Level III.5 Intensive Residential Treatment Adults 36 LMI Low to Moderate Income 37 LSW Licensed Social Worker 38 MFT Marriage and Family Therapist 10/10/2008 24

No. Acronym Definition of this acronym used by NFTC 39 MHDS Mental Health and Departmental Services 40 MI Motivational Interviewing 41 MOU Memorandum of Understanding 42 NA Narcotics Anonymous 43 NACO National Association of Counties 44 NFTC New Frontier Treatment Center 45 NHIPPS Nevada Health Information Provider Performance System 46 OVW Office for Violence Against Women 47 P&P Parole and Probation 48 PATH Projects for Assistance in Transition from Homelessness 49 P-CAP Parent Child Assistance Program 50 RnCoC Rural Nevada Continuum of Care 51 SA Substance Abuse 52 SAMHSA Substance Abuse Mental Health Services Administration 53 SAPT Substance Abuse Prevention Treatment Block Grant 54 SAPTA Substance Abuse Prevention and Treatment Agency 55 SMI Seriously Mentally Ill 56 TANF Temporary Assistance to Needy Families 57 WIC Women, Infant and Children Program 10/10/2008 25