Children's Care Hospital and School and Children's Care Foundation · 2012. 11. 1. · 200E.lOthSt..Sto.500 I P.O.Box5125 I S;ouxFaii•,SD57117-5125 I T605.339.1999 I F605.339.1306

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June 30, 2012 and 2011

Children's Care Hospital and School and Children's Care Foundation

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Children's Care Hospital and School and Children's Care Foundation Table of Contents

June 30, 2012 and 2(}1 1

Independent Auditor's Report .................................................................................................................................... 1

Consolidated Financial Statements

Consolidated Balance Sheets .................................................................................................................................. 2 Consolidated Statements of Operations ................................................................................................................. .3 Consolidated Statements of Changes in Net Assets ............................................................................................... 5 Consolidated Statements of Cash Flows ................................................................................................................ 6 Notes to Consolidated Financial Statements .......................................................................................................... 8

Independent Auditor's Report on Supplementary Information ................................................................................ 23

Consolidating Supplementary Information

Consolidating Balance Sheet ................................................................................................................................ 24 Consolidating Statement of Operations ................................................................................................................ 25 Consolidating Statement of Changes in Net Assets ............................................................................................. 27 Consolidating Statement of Cash Flows ............................................................................................................... 28

The Board of Directors Children's Care Hospital and School Sioux Falls, South Dakota

The Board of Directors Children's Care Foundation Sioux Falls, South Dakota

~....-.....-.....-~

EideBailly. ~

CPA. & BUSINESS ADVISORS

Independent Auditor's Report

We have audited the accompanying consolidated balance sheets of Children's Care Hospital and School and Children's Care Foundation (Organization) as of June 30, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Organization's management. 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 consolidated financial statements are free of material misstatement. An audit includes

. consideration of internal control over fmancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control over financial reporting. Accordingly, we do not express such an opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Children's Care Hospital and School and Children's Care Foundation as ofJune 30,2012 and 2011, and the consolidated results of their operations, changes in net assets, and cash flows for the years then ended in confonnity with accounting principles generally accepted in the United States of America.

As disclosed in Note 17, in accordance with updates to the relevant accounting standards pertaining to the presentation and disclosure of patient service revenue, provision for bad debt, and the allowance for doubtful accounts for certain health care entities, Children's Care Hospital and School has changed its presentation and disclosure of those fmancial statement elements.

Sioux Falls, South Dakota October 19, 2012

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200E.lOthSt..Sto.500 I P.O.Box5125 I S;ouxFaii•,SD57117-5125 I T605.339.1999 I F605.339.1306 I EOE

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2012 2011 Assets

Current Assets Cash and cash equivalents $ 2,251,138 $ 2,218,479 Assets limited as to use 343,061 452,665 Receivables

Patient and resident, net of estimated contractnal adjustments and nncollectibles of $2,621,000 in 2012 and $2,134,000 in 2011 4,229,864 4,205,808

Estimated third-party payor settlements 266,040 685,445 Due from afftliates 11,053 14,333 Pledges 6,000 17,500 Other receivables 5,709 58,180 Interest 6,045 3,362

Supplies 263,730 242,742 Prepaids 41,097 43,178

Total current assets 7,423,737 7,941,692

Assets Limited as to Use Under indenture agreements 555,655 520,370 By Board for capital improvements and debt redemption 1,568,026 1,464,840 Donor restricted investments 5,601,843 5,486,443 Beneficial interest in remainder trusts 1,559,565 1,408,557 Beneficial interest in perpetual trusts 362,412 344,510

Assets limited as to nse 9,647,501 9,224,720

Property and Equipment, Net 10,171,313 10,346,851

Other Assets Deferred lmancing costs, net of accumulated amortization

of$29,709 in 2012 and $97,369 in 2011 f 98,087 106,992 Investments 29,544,083 29,296,796

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Total other assets 29,642,170 . 29,403,788

Total assets $ 56,884,721 $ 56,917,051

See Notes to Consolidated Financial Statements

Children's Care Hospital and School and Children's Care Foundation Consolidated Balance Sheets

June 30, 2012 and 2011

Liabilities and Net Assets

Current Liabilities Current maturities of long-term debt Accounts payable Accrued expenses

Salaries and wages Vacation Interest Payroll taxes and other

Annuities payable

Total current liabilities

Long Term Debt, Less Current Maturities

Total liabilities

Net Assets Unrestricted Temporarily restricted Permanently restricted

Total net assets

Total liabilities and net assets

$

2012

338,099 509,256

295,855 381,113

61,863 139,012 143,470

1,868,668

7,678,562

9,547,230

39,387,377 1,969,088 5,981,026

47,337,491

$ 56,884,721

$

2011

442,004 436,999

231,470 456,062

65,122 67,336

146,589

1,845,582

8,020,214

9,865,796

39,279,048 1,924,483 5,847,724

47,051,255

$ 56,917,051

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Children's Care Hospital and School and Children's Care Foundation Consolidated Statements of Operations

Years Ended June 30,2012 and2011

Unrestricted Revenues, Gains, and Other Support Net patient and resident service revenue Provision for bad debts

Net patient and resident service revenue less provision for bad debts

Other revenue Net assets released from restrictions used for operations

Total revenue from patients, residents and other support

Fundraising Revenues Contributions Bequests Change in split -interest agreements Income distributions from outside trusts Events income Other

Total fundraising revenues

Total uorestricted revenues, gains, and other support

Expenses Salaries Employee benefits and payroll taxes Contract labor Medical supplies -billable Supplies Insurance Utilities Repairs and maintenance Fundraising, promotion and publication Other · Provider tax Rent Education and training Depreciation and amortization Interest

Total expenses

Operating Loss

Other Income Investment income Gain on disposal of equipment

Other income

See Notes to Consolidated Financial Statements

2012

$ 23,629,610 (99,996)

23,529,614 842,633 275,174

24,647,421

364,576 855,895 (19,606) 45,007 76,291

1,322,163

25,969,584

15,389,166 3,106,477

905,229 1,172,968 1,075,444

538,637 550,442 437,086 152,476 777,433 506,532 349,330 135,820

1,199,834 383,864

26,680,738

(711,154)

1,040,059 5,134

1,045,193

2011

$ 24,261,036 (146,328)

24,114,708 567,271

82,614

24,764,593

433,977 575,353

(2,895) 49,547 97,956 18,108

1,172,046

25,936,639

15,450,031 3,451,043

929,462 1,104,189 1,018,009

616,830 537,722 450,533 210,883 622,727

91,871 378,642 114,216

1,615,765 408,563

27,000,486

(1,063,847)

3,385,264 16,465

3,401,729

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Children's Care Hospital and School and Children's Care Foundation Consolidated Statements of Operations

Years Ended June 30, 2012 and 2011

2012 2011

Revenues in Excess of Expenses $ 334,039 $ 2,337,882

Change in Unrealized (Losses) Gains on Investments (309,541) 3,191,083

Net Assets Released from Restrictions for Purchase of Property and Equipment 83,831 127,894

Increase in Unrestricted Net Assets $ 108,329 $ 5,656,859

See Notes to Consolidated Financial Statements 4

Children's Care Hospital and School and Children's Care Foundation Consolidated Statements of Changes in Net Assets

Years Ended June 30,2012 and 2011

2012 2011 Unrestricted Net Assets

Revenues in excess of expenses $ 334,039 $ 2,337,882 Change in unrealized (losses} gains on investments (309,541) 3,191,083 Net assets released from restriction for purchase of property

and equipment 83,831 127,894

Increase in unrestricted net assets 108,329 5,656,859

Temporarily Restricted Net Assets Contributions received 252,602 441,878 Net assets released from restrictions (359,005) (210,508) Change in split-interest agreements 151,008 165,747

·} Increase in temporarily restricted net assets 44,605 397,117

Permanently Restricted Net Assets Contributions and bequests received 115,400 687,451 Change in split -interest agreements 17,902 51,844

Increase in permanently restricted net assets 133,302 739,295

Increase in Net Assets 286,236 6,793,271

Net Assets, Beginning of Year 47,051,255 40,257,984

Net Assets, End of Year $ 47,337,491 $ 47,051,255


Children's Care Hospital and School and Children's Care Foundation Consolidated Statements of Cash Flows


2012 2011 Operating Activities

Change in net assets $ 286,236 $ 6,793,271 Adjustments to reconcile changes in net assets to net

cash from operating activities Depreciation and amortization 1,199,834 1,615,765 Unrealized losses (gains) on investments 309,541 (3,191,083) Gain on sale of investments (130,167) (2,511 '706) Gain on disposal of equipment (5,134) (16,465) Contributions restricted by donors (368,002) (1,129,329) Change in beneficial interest in remainder trusts (151,008) (165,746) Change in beneficial interest in perpetual trusts (17,902) (51,844)

Changes in assets and liabilities Receivables 441,637 1,313,023

'r: Pledges 11,500 (48,500)

i Supplies (20,988) 3,368 Prepaid expenses 2,081 5,773 Accounts payable (54,382) 113,898 Accrued expenses 57,853 (735,708) Annuities payable (3,119) (19,830)

Net Cash from Operating Activities 1,557,980 1,974,887

Investing Activities Purchases of property and equipment (893,043) (887,678) Proceeds from sales of property and equipment 9,425 32,223 Proceeds from sales and maturities of investments 3,627,958 11,748,784 Purchase of investments (4,192,106) (12,919,609)

Net Cash used for Investing Activities (I ,447 ,766) (2,026,280)

Financing Activities Principal payments on long-term debt (445,557) (565,711) Contributions restricted by donors 368,002 1,129,329

Net Cash (used for) from Financing Activities (77,555) 563,618

Increase in Cash and Cash Equivalents 32,659 512,225

Cash and Cash Equivalents, Beginning of Year 2,218,479 1,706,254

Cash and Cash Equivalents, End of Year $ 2,25!,138 $ 2,218,479


Children's Care Hospital and School and Children's Care Foundation Consolidated Statements of Cash Flows


2012 2011

Supplemental Disclosure of Cash Flow Information Cash paid for interest during the year $ 387,123 $ 413,839

Supplemental Schedule of Non-cash Investing Activities Capital expenditures for property included in

accounts payable at year end $ 219,604 $ 92,965


Children's Care Hospital and School and Children's Care Foundation Notes to Consolidated Financial Statements

June 30, 2012 and 2011

Note 1 - Summary of Significant Accounting Policies

Organization

Children's Care Hospital and School (Hospital and School) is organized as a non-profit corporation with facilities in Sioux Falls and Rapid City, South Dakota. The Hospital and School offers therapeutic, nursing, and medically complex services, as well as rehabilitation and educational services to children and their families, with special health and education needs. The Hospital and School is exempt from federal income taxes under Section 50l(c)(3) of the Internal Revenue Code.

Children's Care Foundation (Foundation) was incorporated for the purpose of encouraging and assisting the Hospital and School and other institutions in providing medical or educational services to children with disabilities. The Foundation is a non-profit corporation exempt from federal income taxes. Members of the Foundation's Board ofDirectors are subject to ratification by the Board of Directors of the Hospital and School. In addition, the Foundation is under common management with the Hospital and School. Children's Care Hospital and School has been the principal beneficiary of the Foundation since the Foundation's inception on July 1, 1979. The Foundation is not controlled by any disqualified persons and meets the test of section 509(a)(3) of the Internal Revenue Code as a Type 1 supporting organization for the Hospital and School.

Principles of Consolidation

The financial statements include the consolidated accounts of Children's Care Hospital and School and Children's Care Foundation, (collectively, the Organization). All material intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of consolidated fmancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less, excluding assets liruited as to use.

Patient and Resident Receivables

Patient and resident receivables are uncollateralized patient, resident and third-party payor obligations. Payments of patient receivables are allocated to the specific claims identified on the remittance advice or, if unspecified, are applied to the earliest unpaid claim.

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June 30, 2012 and 2011

Patient and resident receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, the Hospital and School analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third party coverage, the Hospital and School analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deduchbles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Hospital and School records a provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.

The Hospital and School's process for calculating the allowance for doubtful accounts for self-pay patients has not significantly changed from June 30, 2011 to June 30, 2012. The Hospital and School does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant write offs from third-party payors.

Supplies

Supplies are stated at lower of cost (first-in, first-out) or market.

Investments and Investment Income

Investments in equity securities with readily detenninable fair values and all investments in debt securities are measured at fair value in the balance sheets. Investments in certificates of deposits that are not publically traded are recorded at cost plus accrued interest. Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in revenues in excess of expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from revenues in excess of expenses unless the investments are trading securities.

Endowment earnings appropriated for spending in the same year as they are earned are recorded in unrestricted net assets on the accompanying consolidated statements of operations.

Fair Value Measurements

The Organization has determined the fair value of certain assets and liabilities in accordance with generally accepted accounting principles, which defines a framework for measuring fair value.

Fair value is defmed as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation teclmiques should maximize the use of observable inputs and minimize the use of unobservable inputs.

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June 30,2012 and 2011

A fair value hierarchy has been established which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level3 inputs are unobservable inputs related to the asset or liability.

Assets Limited as to Use

Assets limited as to use include assets set aside by the Hospital and School Board of Directors for future capital improvements and debt redemption, over which the Board retains control and may at its discretion subsequently use for other purposes; assets held by trustees under indenture agreements; and identifiable donor restricted assets. Assets limited as to use that are available for obligations classified as current liabilities are reported in current assets.

Additionally, assets limited as to use consist of the following: investments restricted by the donor; the present value of the estimated future distributions expected to be received from trust agreements for which the Organization is not the trustee, after obligations to the beneficiaries are satisfied; and the Organization's interest in perpetual and remainder trusts maintained by independent trustees.

Beneficial interests in perpetual trusts consist of trusts administered by others, which the Organization is an income beneficiary in perpetuity. The Organization records these gifts as permanently restricted net assets using the fair market values of the trust assets. Beneficial interests in remainder trusts consist of several trusts administered by others, which the Organization is a remainder and income beneficiary. The Organization records these gifts as temporarily or permanently restricted net assets at the present value of the assets based on the donor's wishes.

Property and Equipment

Property and equipment acquisitions in excess of$1,500 ($750 for 2011) are capitalized and recorded at cost. Depreciation is provided over the estimated useful life of each depreciable asset and is computed using the straight-line method. The estimated useful lives of property and equipment are as follows:

Land improvements Buildings and leasehold improvements Equipment

5-20 years 5-69 years 3-25 years

Gifts of long-lived assets such as land, buildings, or equipment are recorded at fair value at the date of the gift as determined by subsequent cash realization or by appraisal. Additions increase unrestricted net assets and are excluded from revenues in excess of expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-Jived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted net assets. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when donated or when acquired long-lived assets are placed in service.

Deferred Financing Costs

Deferred fmancing costs are amortized over the period the related obligation is outstanding using both the effective interest and straight line methods.

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June 30, 2012 and 2011

Income Taxes

The Hospital and School and the Foundation are separate nonprofit corporations and have been recognized by the Internal Revenue Service (lRS) as exempt from federal income taxes under Internal Revenue Code Section 501( c)(3). The Organizations are annually required to file a Return of Organizational Exempt from Income Tax (Form 990) with the IRS. The Organizations have determined they are not subject to unrelated business income tax and have not filed an Exempt Organization Business Income Tax Return (Form 990T) with the IRS.

The Organizations believe that they have appropriate support for any tax positions affecting their annual filing requirements, and as such, do not have any uncertain tax positions that are material to the financial statements. The Organizations would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred.

Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are those whose use by the Hospital and School has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Hospital and School in perpetuity.

Donor-Restricted Gifts

Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When donor stipulated time restrictions or purpose restrictions are met or accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statement of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the consolidated statement of operations.

Revennes in Excess of Expenses

Revenues in excess of expenses excludes unrealized gains and losses on investments other than trading securities and contributions of long-lived assets, including assets acquired using contributions which were restricted by donors.

Net Patient and Resident Service Revenue

The Hospital and School has agreements with third-party payors that provide for payments to the Hospital and School at amounts different from its established rates. Payment arrangements primarily include reimbursed costs, prospectively determined rates, discounted charges, and per diem payments. Net patient and resident service revenue is reported at the estimated net realizable amounts from patients, residents, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as fmal settlements are determined.

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June 30, 2012 and 2011

The Hospital and School recognizes patient and resident service revenue associated with services provided to patients and residents who have third-party payor coverage on the basis of contractual rates for the services rendered, as noted above. The Hospital and School recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a portion of the Hospital and School's uninsured patients and residents will be unable or unwilling to pay for the services provided. Thus, the Hospital and School records a provision for bad debts related to uninsured patients and residents in the period the services are provided. Net patient and resident service revenue, but before the provision for bad debts, recognized for the years ended June 30, 2012 and 2011 from these major payor sources, is as follows:

Net patient and resident service revenue Medicaid Other third party payors

Advertising

The Organization expenses advertising costs as incurred.

Reclassifications

2012

$ 14,246,124 9,383,486

$ 23,629,610

2011

$ 14,560,494 9,700,542

$ 24,261,036

Certain amounts in the 2011 consolidated financial statements have been reclassified for comparative purposes to conform with the presentation in the current year consolidated financial statements. These reclassifications did not affect the consolidated financial position or the change in net assets as previously reported.

Subsequent Events

The Organization have evaluated subsequent events through October 19, 2012, the date which the consolidated financial statements were available to be issued.

Note 2- Net Patient and Resident Service Revenue

The Hospital and School has agreements with third-party payors that provide for payments to the Hospital and School at amounts different from established rates. A sunnnary of the payment arrangements with major third-party payors follows:

The Hospital and School participates in the Medicaid programs for the states of South Dakota, Iowa, Minnesota, Nebraska, Wyoming, and Alaska. The Hospital and School's Medicaid reimbursement is determined at prospectively determined rates with no retroactive settlements. Revenue from Medicaid programs accounted for approximately 60% for the years ended June 30, 2012 and 2011. Laws and regulations governing Medicaid and other programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates could change by a material amount in the near term.

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June 30, 2012 and 2011

The Hospital and School has also entered into payment agreements with certain commercial insurance carriers and other organizations. The basis for payment to the Hospital and School under these agreements includes discounts from established charges and prospectively determined daily rates.

A summary of patient and resident service revenue, contractual adjustments, and the provision for bad debts for the years ended June 30, 2012 and 2011 is as follows:

Patient and resident service revenue Behavioral and Extended Care School tuition - school districts Medically complex and rehab Outreach Outpatient Medical equipment, orthotics and prosthetics School therapy- school districts

Total patient and resident service revenue

Total contractual adjustments

Net patient and resident service revenue Provision for bad debts

Net patient and resident service revenue less provision for bad debts

Note 3 - Investments and Investment Income

2012

$ 17,116,038 4,008,466 3,823,120 3,682,067 3,464,644 2,449,121

800,977

35,344,433

(11,714,823)

23,629,610 (99,996)

$ 23,529,614

2011

$ 17,434,200 3,493,294 3,107,937 4,142,354 3,046,602 2,195,023

665,101

34,084,511

(9,823,475)

24,261,036 (146,328)

$ 24,114,708

The composition of assets limited as to use -under indenture agreements and assets limited as to use -by Board for capital improvements and debt redemption at June 30, 2012 and 2011, is shown in the following table.

Under bond indenture agreement -held by trnstee Cash and cash equivalents Certificates of deposit

Less amount shown as current

By Board for capital improvements and debt redemption Cash and cash equivalents Certificates of deposit Fixed income mutual funds

$

$

$

2012

253,732 644,984

898,716 (343,061)

555,655

27,222 788,035 752,769

$ 1,568,026

$

$

2011

287,413 685,622

973,035 (452,665)

520,370

$ 1,464,840

$ 1,464,840

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June 30,2012 and 2011

The composition of assets limited as to use - donor restricted investments and other assets - investments at June 30, 2012 and 2011, is shown in the following table.

2012 20ll Donor restricted investments and investments

Fixed income mutual funds $ ll,630,424 $ 12,353,757 Equity mutual funds 23,488,889 22,405,015 Membership investment 26,613 24,467

$ 35,145,926 $ 34,783,239

Investment Income

Investment income and gains and losses on cash and cash equivalents, assets limited as to use, investments, and other investments consist of the following for the years ended June 30, 2012 and 20ll:

Other revenue Interest income

Other income Interest and dividend income Realized gains on investments

Other changes in unrestricted net assets Change in unrealized (loss) gain on investments

Note 4- Fair Value Measurements

$

$

$

$

2012 20ll

$ 2,143

909,892 $ 873,558 130,167 2,5ll,706

1,040,059 $ 3,385,264

(309,541) $ 3,191,083

Assets and liabilities measured at fair value on a recurring basis at June 30, 2012 and 2011 are as follows:

2012 2011

Cash and cash equivalents $ 1,069,349 $ 1,752,615 Fixed income mutual funds 12,383,193 12,353,757 ,Equity mutual funds 23,488,889 22,405,015 Beneficial interest in remainder trusts 1,559,565 1,408,557 Beneficial interest in perpetual trusts 362,412 344,510

Total assets $ 38,863,408 $ 38,264,454

Annuities payable $ 143,470 $ 146,589

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June 30, 2012 and 2011

The fair value for cash and cash equivalents and fixed income and equity mutual fimds are determined by reference to quoted market prices. The beneficial interest in trusts is valued by discounting the market values of the assets and cash flows using the terms of the trust agreements. Annuities payable are estimated at the present value of the expected future cash payments.

Following is a reconciliation of activity for 2012 for liabilities measured at fair value based upon significant unobservable (non-market) information.

Beneficial Interest Annuities Trusts Payable

Balance, beginning of year $ 1,753,067 $ 146,589 Adjustments to fair market value 168,910 19,606 Settled annuity liabilities (22,725)

Balance, end of year $ 1,921,977 $ 143,470

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June 30, 2012 and 2011

The Organization considers the carrying amount of significant classes of financial instruments on the balance sheets, including cash and cash equivalents, receivables, other assets, accounts payable, a=ued expenses, and the Series 2005 bonds (matured during 2012) to be reasonable estimates of fair value due to their length of maturity at June 30,2012 and 2011.

The Organization's fixed rate Series 2007 bonds have a carrying amount that differs from its estimated fair value. The fair value of the Organization's Series 2007 bonds is determined by references to trading activity of the underlying bonds. The carrying value of the Series 2007 bonds is $7,641,584 and $7,915,137 as ofJune 30, 2012 and2011. The fair value of the Series 2007 bonds is $7,967,653 and $7,603,989 as of June 30,2012 and 2011.

Note 5- Beneficial Interest in Assets Held by Community Foundations

The Foundation has a beneficial interest in several trust funds established directly by donors with the South Dakota Community Foundation and the Sioux Falls Area Community Foundation (Community Foundations).ln donating these funds to the Community Foundations, the Donor has granted the Governing Boards of the Community Foundations variance power. Variance power gives the Community Foundations the right to modify the terms of the agreement if, in the judgment of the Community Foundations' Boards of Trustees, the restrictions and conditions of the agreement become uunecessary, incapable of fulfilhnent, or inconsistent with the charitable needs of the community. All contributions are irrevocable gifts to the Community Foundations. Earnings are to be distributed armually. As ofJune 30, 2012 and 2011, the Foundation had a beneficial interest of $531 ,546 and $501,597, respectively, made up of gifts made directly to the Community Foundations and related accumulated investment earnings. This beneficial interest, in accordance with generally accepted accounting principles, is not reported as an asset in the accompanying consolidated balance sheets.

Note 6- Property and Equipment

A suunnary of property and equipment at June 30,2012 and 2011 follows:

Land and land improvements Buildings and fixed equipment Major movable equipment

Net property and equipment

$

$

2012

Cost

614,622 19,109,000 6,849,373

26,572,995

Accumulated Depreciation

$ 134,584 11,135,462 5,131,636

$ 16,401,682

$ 10,171,313

2011 Accumulated

Cost Depreciation

$ 614,621 $ 128,084 18,510,160 10,451,845

6,636,689 4,834,690

$ 25,761,470 $ 15,414,619

$ 10,346,851

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June 30, 2012 and 2011

Note 7- Endowments

The Foundation's endowment consists of funds established for the benefit of Children's Care Hospital and School. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.

Interpretation of Relevant Law

The Foundation's Board of Directors has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIF A) as requiring the preservation of the fair value of the original donor restricted endowment fund gift as of the date received absent explicit donor stipulations to the contrary. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) changes in the fair value of the beneficial interest in perpetual trusts. The undistributed earnings of the donor-restricted endowment fund is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIF A.

In accordance with UPMIF A, the Organization considers the following factors in making a determination to appropriate or accumulate donor -restricted endowment funds:

1. The duration and preservation of the fund 2. The purpose of the Foundation and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the Foundation 7. The investment policies of the Foundation.

Changes in endowment net assets for the years ended June 30, 2012 and 2011 are as follows:

2012 Temporarily Permanently

Unrestricted Restricted Restricted Total Endowment net assets

at beginning of year $ $ $ 5,486,443 $ 5,486,443

Contributions 115,400 115,400

Net investment income 114,514 114,514

Appropriated for distributions (114,514) (114,514)

Endowment net assets at end of year $ $ $ 5,601,843 $ 5,601,843

17


June 30,2012 and 2011

2011 Endowment net assets

at beginning of year $ $ $ 4,798,992 $ 4,798,992

Contributions 687,451 687,451

Net investment income 1,117,204 1,117,204

Appropriated for distributions (1 ,117 ,204) (1,117,204)

Endowment net assets at end of year $ $ $ 5,486,443 $ 5,486,443

Return Objectives and Risk Parameters

The Foundation has adopted investment and spending policies that attempt to provide a predictable stream of income for the funding of programs supported by its endowment. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that seeks both preservation of capital and growth of capital on a real return basis. Asset allocation guidelines have been established for the endowment based on liquidity needs and time horizons. The Foundation undergoes a quarterly assessment for possible rebalancing of the asset allocation. If the asset allocation of the major asset class (equity or fixed income) varies by more than 5% relative to its long-term target, the Foundation will advise and request the Investment Committee Chair to review and approve rebalancing to the approved targets. During the course of a complete market cycle, the total fund return objective shall be to achieve a return equal to capital market returns with a similarly weighted asset allocation with low administrative expenses. Actual returns in any given year may vary from this amount.

Strategies Employed for Achieving Objectives

To satisfy its long-term rate-of-return objectives, the Organization relies on a passive management strategy in which investment returns are achieved primarily through low-cost, diversified index mutual funds. The Foundation targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

Spending Policy and How the Investment Objectives Relate to Spending Policy

The Organization's policy of appropriating for distribution each year is approved by the Board of Directors. The Foundation's investment portfolio is maintained primarily to provide for current and future distributions. The annual spending rate is currently 4.0% of the most recent 16 quarter rolling average investment value through the calendar year-end preceding the fiscal year in which the appropriate is made and the distribution is planned.

18


June 30,2012 and 2011

Note 8- Annuities Payable

The Foundation has entered into gift annuity agreements, which provide that the Foundation shall pay periodic amounts to designated beneficiaries until their death. The payments continue even if the assets gifted or acquired as a result of the gift have been exhausted. The Foundation recorded these gifts at market value with a corresponding liability recorded for the present value of payments to be made to the designated beneficiaries. Upon the death of the beneficiaries, the remaining assets are held or disposed of in accordance with the annuity agreements. The estimated present value of future payments to be made under these agreements totaled $143,470 and $146,589 at June 30,2012 and 2011, respectively.

Note 9 - Line of Credit

The Hospital and School has a $675,000 revolving line of credit, which was unused at June 30, 2012. The line carries a variable rate of interest, matures on March 1, 2013 and requires monthly interest payments on any outstanding balance.

NotelO- Long-TermDebt

Long-term debt consists of:

Series 2005, revenue bonds, 4.09% due in varying installments through October 2011

Series 2007, revenue bonds, 4.25%-4.75% due in varying installments through November 2029 Unamortized bond premium

Note payable, 6.50% due in annual installments of $77,479 through May 2018

Less current maturities

Long-term debt, less current maturities

Long-term debt maturities are as follows:

Years Ending June 30,

2013 2014 2015 2016 2017 Thereafter Bond Premium

2012

$

7,580,000 61,584

375,077 8,016,661 (338,099)

$ 7,678,562

2011

$ 122,146

7,850,000 65,137

424,935 8,462,218 (442,004)

$ 8,020,214

$ 338,099 351,550 370,226 38!,141 403,310

6,110,751 61,584

$ 8,016,661

19


June 30, 2012 and 2011

The bonds are secured by a first mortgage lien on the Hospital and School's facilities subject to certain permitted encumbrances, a security interest in its gross receipts, and a pledge of the Foundation's investments in an amount equal to the principal amount of the bonds outstanding.

Under the terms of the bond agreements, the Hospital and School is required to maintain certain deposits with a trustee. Such deposits are included with assets limited as to use in the consolidated financial statements. Assets that are required for obligations classified as current liabilities are reported in current assets. The Joan agreements also places limits on the incurrence of additional borrowings and requires that the Hospital and School satisfy certain measures of financial performance.

Note 11- Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at June 30, 2012 and 2011:

Restricted for various children's projects and programs Beneficial interest in remainder trusts

2012

$ 409,523 1,559,565

$ 1,969,088

Permanently restricted net assets at June 30, 2012 and 2011 are restricted as follows:

Investments to be held in perpetuity, the income from which is expendable for the use in the Hospital and School's operations or otherwise as directed by the donor

Note 12- Retirement Plans

2012

$ 5,981,026

2011

$ 515,926 1,408,557

$ 1,924,483

2011

$ 5,847,724

The Hospital and School participates in a state sponsored multi-employer defined benefit plan for all employees who hold a teaching certificate and meet plan enrolhnent qualifications. The Hospital and School also provides a group tax deferred annuity program for all non-teacher employees who meet plan enrolhnent qualifications. The Hospital and School contributes 1% (5% for 2011) of each elig~ble employee's contribution. The Hospital and School made contributions of$115,084 and $406,201 for the years ended June 30,2012 and 2011, respectively.

20


June 30, 2012 and 2011

Note 13 - Leases

The Organization leases certain equipment and office space under noncancelable long-term lease agreements. Total lease expense for the years ended June 30,2012 and 2011 for all operating leases was $349,330 and $378,428, respectively. Minimum future lease payments for the operating leases are as follows:

Years Ending June 30,

2013 2014 2015 2016

Total minimum lease payments

Note 14- Commitments and Contingencies

Malpractice Insurance

$

$

263,294 259,790 237,532 201,876

962,492

The Hospital and School has malpractice insurance coverage to provide protection for professional liability losses on a claims-made basis subject to a limit of $6 million per claim and an annual aggregate limit of $6 million. Should the claims-made policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term, but reported subsequently, would be uninsured uuless tail insurance was purchased for the estimated liability.

IT Maintenance and Support

The Hospital and School has entered into an agreement to receive certain information technology support services through April20 19. Payments for services increase annually by a percentage equal to the annual increase in the Consumer Price Index. The minimum future payments for services, based on January 2012 pricing, are as follows:

Years Ending June 30.

2013 $ 261,879 2014 261,879 2015 261,879 2016 261,879 2017 261,879 Thereafter 480,111

$ 1,789,506

21

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June 30, 2012 and 2011

Note 15- Concentrations of Credit Risk

The Hospital and School grants credit without collateral to its patients and residents, most of who are insured under third-party payor agreements. The mix of receivables from third-party payors and patients and residents at June 30, 2012 and 2011 was as follows:

2012 2011

Medicaid 52% 53% Private pay 32% 39% Commercial insurance 8% 4% Blue Cross 7% 3% Medicare 1% 1%

100% 100%

The Organization's cash balances are maintained in various bank deposit accounts. At times during the years ended June 30, 2012 and 2011, the balances of these deposits were in excess of the federally insured limits.

Note 16- Functional Expenses

The Organization provides health care and educational services to children within its geographic location. Expenses related to providing these services are as follows:

2012 2011

Health care and educational services $ 23,090,372 $ 23,521,574 General and administrative 3,515,367 3,397,407 Fundraising 74,999 81,505

$ 26,680,738 $ 27,000,486

Note 17 - Change in Accounting Principle

During the year ended June 30,2012, the Organization adopted the provisions of Financial Accounting Standards Board (F ASB) Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, as allowable. In accordance with the implementation guidance, the Organization retroactively applied the presentation requirements to 2011. The impact on 2011 was a decrease to total revenues, gains, and other support and total expenses of $146,328 in the consolidated statements of operations. There was no impact on consolidated operating income or net assets.

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Supplementary Information June 30, 2012

Children's Care Hospital and School and Children's Care Foundation

www.e i debai lly.com

CPAs & BUSINESS ADVISORS

Independent Auditor's Report on Supplementary Information

The Board of Directors Children's Care Hospital and School Sioux Falls, South Dakota

The Board of Directors Children's Care Foundation Sioux Falls, South Dakota

We have audited the consolidated financial statements of Children's Care Hospital and School and subsidiaries as of and for the years ended June 30, 2012 and 2011, and our report thereon dated October 19, 2012, which expressed an unqualified opinion on those consolidated financial statements appears on page 1. Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information on pages 24-28 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual organizations, and it 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 audits of the consolidated fmancial 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 fmancial 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 taken as a whole.

Sioux Falls, South Dakota October 19,2012

www .eidebai lly.com

200 E. lOth St., Ste. 500 I P.O. Box 5125 I Sioox Foil,, SD 57117-5125 I T 605.339.1999 I F 605.339.1306 I EOE

23

r

Children's Care Children's Consolidating

Hospital Care Elimination Consolidated and School Foundation Entries Totals

Assets

Current Assets Cash and cash equivalents $ 1,997,367 $ 253,771 $ $ 2,251,138 Assets limited as to use 343,061. 343,061 Receivables

Patient and resident, net of estimated contractual adjustments and nncollectibles of$2,621,000 4,229,864 4,229,864

Estimated third-party payor settlements 266,040 266,040 Due from affiliates 72,640 (61,587) 11,053 Unconditional promises to give 6,000 6,000 Other receivables 1,400 4,309 5,709 Interest 6,045 6,045

Supplies 263,730 263,730 Prepaid expenses 39,628 1,469 41,097

Total current assets 7 219,775 265,549 (61,587) 7,423,737

Assets Limited as to Use Under indenture agreements 555,655 555,655 By Board for capital improvements

and debt redemption 1,568,026 1,568,026 Donor restricted investments 5,601,843 5,601,843 Beneficial interest in remainder trusts 1,559,565 1,559,565 ·Beneficial interest in perpetual trusts 362,412 362,412

Total assets limited as to use 2,123,681 7,523,820 9,647,501

Property and Equipment, Net 10,136,800 34,513 10,171,313

Other Assets Deferred fmancing costs, net of accumulated

amortization of$29,709 98,087 98,087 Investments 26,613 29,517,470 29,544,083

Total other assets 124,700 29,517,470 29,642,170

$ 19,604,956 $ 37,341.,352 $ (61,587) $ 56,884,721

--1 l I

Children's Care Hospital and School and Children's Care Foundation Consolidating Balance Sheet

June 30, 2012



Liabilities and Net Assets

Current Liabilities Current maturities of long-term debt $ 338,099 $ $ $ 338,099 Acconnts payable 509,256 61,587 (61,587) 509,256 Accrued expenses

Salaries and wages 295,855 295,855 Vacation 381,113 381,113 Interest 61,863 61,863 Payroll taxes and other 125,370 13,642 139,012

Annuities payable 143,470 143,470

Total current liabilities 1,711,556 218,699 (61,587) 1,868,668

Long Term Debt, Less Current Maturities 7,678,562 7,678,562

T otalliabilities 9,390,118 218,699 (61,587) 9,547,230

Net Assets Umestricted 9,788,544 29,598,833 39,387,377 Temporarily restricted 409,523 1,559,565 1,969,088 Permanently restricted 16,771 5,964,255 5,981,026

Total net assets 10,214,838 37,122,653 47,337,491

$ 19,604,956 $ 37,341,352 $ (61,587) $ 56,884,721

24

Children's Care Hospital and School and Children's Care Foundation Consolidating Statement of Operations

Year Ended June 30, 2012


Hospital Care Eliminaiion Consolidated and School Foundation Entries Totals

Umestricted Revenues, Gains, and Other Support Net patient and resident service revenue $ 23,629,610 $ $ $ 23,629,610 Provision for bad debts (99,996) (99,996)

Netpatientandreffidentsenncerevenue less provision for bad debts 23,529,614 23,729,606

Other revenue 842,633 842,633 Net assets released from restrictions for

operations 275,174 275,174

Total revenue from patients, residents and other support 24,647,421 24,847,413

Fundraising Revenues Contributions 1,381,750 134,072 (1,151,246) 364,576 Bequests 855,895 855,895 Change in split-interest agreements (19,606) (19,606) Income distributions from outside trusts 45,007 45,007 Events income 76,291 76,291

Total fundraising revenues 1,381,750 1,091,659 (1,151,246) 1,322,163

Total unrestricted revenues, gains, and other support 26,029,171 1,091,659 (1,151,246) 26,169,576

Expenses Contributions to Children's Care Hospital

and School 1,151,246 (1,151,246) Salaries 15,108,485 280,681 15,389,166 Employee benefits and payroll taxes 3,060,966 45,511 3,106,477 Contract labor 905,229 905,229 Medical supplies- billable 1,172,968 1,172,968 Supplies 1,066,984 8,460 1,075,444 Insurance 538,637 538,637 Utilities 543,183 7,259 550,442 Repairs and maintenance 425,159 11,927 437,086 Fundraising, promotion and publication 152,476 152,476 Other 708,779 68,654 777,433 Provider tax 506,532 506,532 Rent 315,058 34,272 349,330 Education and training 126,951 8,869 135,820 Depreciation and amortization 1,186,677 13,157 1,199,834 Interest 383,864 383,864

Total expenses 26,049,472 1,782,512 (1,151,246) 26,680,738

Operating Loss $ (20,301) $ (690,853) $ $ (511,162)

25

Children's Care Hospital and School and Children's Care Foundation Consolidating Statement of Operations


26

Children's Care Hospital and School and Children's Care Foundation Consolidating Statement of Changes in Net Assets


Children's Care Children's

Hospital Care Consolidated and School Foundation Totals

Unrestricted Net Assets Revenues in excess of expenses $ 3,155 $ 330,884 $ 334,039 Change in unrealized gain (loss) on investments 1,651 (311,192) (309,541) Net assets released from restriction

for purchase of property and equipment 83,831 83,831

Increase in unrestricted net assets 88,637 19,692 108,329

Temporarily Restricted Net Assets Contnl>utions received 252,602 252,602 Net assets released from restrictions (359,005) (359,005) Change in split-interest agreements 151,008 151,008

(Decrease) Increase in temporarily restricted net assets (106,403) 151,008 44,605

Permanently Restricted Net Assets Contributions and bequests received 115,400 115,400 Change in split-interest agreements 17,902 17,902

Increase in permanently restricted net assets 133,302 133,302

(Decrease) Increase in Net Assets (17,766) 304,002 286,236

Net Assets, Beginning of Year 10,232,604 36,818,651 47,051,255

Net Assets, End of Year $ 10,214,838 $ 37,122,653 $ 47,337,491

27

Children's Care Hospital and School and Children's Care Foundation Consolidating Statement of Cash Flows




Operating Activities Change in net assets $ (17,766) $ 304,002 $ $ 286,236 Adjustments to reconcile changes in net assets

to net cash from operating activities Depreciation and amortization 1,186,677 13,157 1,199,834 Unrealized (gains) losses on investments (1,651) 311,192 309,541 Net realized gain on investments (130,167) (130,167) Gain on disposal of equipment (5,134) (5,134) Beneficial interest in remainder trusts (151,008) (151,008) Beneficial interest in perpetual trusts (17,902) (17,902) Contributions restricted by donors (252,602) (115,400) (368,002)

Changes in assets and liabilities Receivables 393,974 45,691 1,972 441,637 Pledges 11,500 11,500 Supplies (20,988) (20,988) Prepaid expenses (1,855) 3,936 2,081 Accounts payable (54,382) (54,382) Accmed expenses 59,919 (94) (1,972) 57,853 Annuities payable !3,119) !3,119)

Net Cash from Operating Activities 1d86,192 271 788 I 557 980

Investing Activities Purchases of property and equipment (857,454) (35,589) (893,043) Proceeds from sales of property and equipment 9,425 9,425 Proceeds from sales and maturities of investments 1,825,189 1,802,769 3,627,958 Purchase of investments (1,847,771) (2,344,335) (4,192,106)

) Net Cash used for Investing Activities (870,611) (577,155) (1,447, 766)

Financing Activities Principal payments on long-tenn debt (445,557) (445,557) Contributions restricted by donors 252,602 115 400 368,002

Net Cash (used for) from Financing Activities (192,955) 115 400 (77,555)

lncrease (Decrease) in Cash and Cash Equivalents 222,626 (189,967) 32,659

Cash and Cash Equivalents, Beginning of Year I 774,741 443,738 2,218,479

Cash and Cash Equivalents, End of Year $ 1,997,367 $ 253,771 $ $ 2,251,138

28

Documents

Children's Care Hospital and School and Children's Care Foundation · 2012. 11. 1. · 200E.lOthSt..Sto.500 I P.O.Box5125 I S;ouxFaii•,SD57117-5125 I T605.339.1999 I F605.339.1306