Lower Cape Fear Hospice Audit Report 2015

LOWER CAPE FEAR HOSPICE,

INCORPORATED

Financial Statements For the Year Ended September 30, 2015

(with Comparative Totals for 2014 And Independent Auditor’s Report)

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Lower Cape Fear Hospice, Incorporated Management’s Discussion and Analysis

For the Fiscal Year Ended September 30, 2015

Unaudited

The discussion and analysis of Lower Cape Fear Hospice’s financial performance provides an overall review of Hospice’s financial activities for the fiscal year ended September 30, 2015. The intent of this discussion and analysis is to look at Hospice's financial performance as a whole; readers should also review the notes to the basic financial statements so as to enhance their understanding of Hospice’s financial performance. Financial Highlights The reporting unit includes Lower Cape Fear Hospice, Incorporated and Lower Cape Fear Hospice Foundation which are combined for the entity total. Key financial highlights for fiscal 2015 are as follows:

o The combined net position decreased $113,079 as compared to an increase of $4,566,678 in 2014. $2,091,162 of the increase in 2014 is the net position recorded as a result of a merger with Mercy Care Hospice, effective April 1, 2014.

o Of this total, Hospice’s operating activities resulted in a gain of $1,557,638 during 2015 as compared to loss of $383,707 in 2014.

o Total entity revenues and support was $36,806,356 in fiscal 2015 versus $34,890,377 in 2014. Patient revenues accounted for $33,430,012 or 91% percent of total revenues and support. Grants, contributions, and fundraisers accounted for $3,376,344 or 9% percent of total revenues and support.

o Hospice’s non-operating loss from investments was $1,320,518 in 2015 as compared to a gain of $2,091,049 in 2014. Interest expense was $376,843 in 2015 and $272,930 in 2014.

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Hospice as a Whole The following provides a summary of Hospice’s entity total net assets for 2015 compared to 2014:

2015 2014AssetsCurrent assets 17,956,732$ 15,922,562$ Net property 23,977,624 23,961,493 Other non-current assets 19,509,258 21,735,648

Total Assets 61,443,614$ 61,619,703$

LiabilitiesCurrent liabilities 5,075,523$ 5,489,883$ Long-term liabilities 12,169,854 11,818,504

Total Liabilities 17,245,377 17,308,387

Net PositionUnrestricted

Property, net of debt 11,223,774 11,623,236 Operations 31,523,569 28,845,170

Restricted Expendable 37,154 2,338,975 Non-expendable 1,413,740 1,503,935

Total Net Position 44,198,237 44,311,316

Total Liabilities & Net Position 61,443,614$ 61,619,703$ Total entity assets decreased $176,089. Operations cash and short-term investments increased $3,141,950. Assets limited as to use decreased $2,269,929 reflecting board policy reserves of 180 days of operating reserves and other requirements. Contributions and negative financial market conditions caused the Foundation Fund Assets to decrease $90,195, after making a gift of $42,436 to Hospice’s operations. In the year ended September 30, 2015, the net position of the entity decreased by $113,079. The unrestricted net position increased by $2,278,937. Patient revenues increased $1,376,873 and support increased $539,106, for total revenue increases of $1,915,979. Expenses decreased $25,366.

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Operating Fund Budgeting Highlights Hospice's operating budget is prepared by management and approved by the Board of Directors. Operating revenues in excess of expenses were $2,278,938, which was $2,746,464 (54.65%) under the budget of $5,025,402. Total revenues were $34,656,854, which was $4,288,357 (11.01%) under the budget of $38,945,211. Revenue variances were as follows: net patient service revenue was under budget by $2,940,832 (8.09%), public support was under budget by $66,909 (4.36%), special events were over budget by $80,317 (40.17%), grants were under budget by $9,717 (7.87%), and other operating revenue was under budget by $57,567 (8.08%). Non-operating revenues were under budget by $21,880 (455.82%). Non-budgeted unrealized loss on investments was $1,271,770. Total expenses were $34,704,175, which was $2,283,287 (6.17%) under the budget of $36,987,462. Expense variances were as follows: personnel expenses were under budget by $1,127,812 (4.44%), patient ancillary expenses were under budget by $713,155 (11.16%), and all other expenses were under budget by $442,321 (8.48%). Revenues for the last three months of the Wilmington Hospice Care Center Expansion capital campaign were $33,290, which was $366,710 (91.68%) under the budget of $400,000. A transfer of $21,966 was made from the operating fund to cover the expenses related to the campaign. In December 2014, the campaign ended and made a transfer to the Agency of $2,348,225 for the capitalization of the Expansion Project. Endowment fund expenses in excess of revenues were $90,195. Total revenues were $10,433, which was $19,567 (65.22%) under the budget of $30,000. Non-budgeted unrealized loss on investments was $48,748. Total expenses were $9,444, which was $3,056 (24.45%) under the budget of $12,500. A transfer of $42,436, $7,436 (21.25%) over the budget of $35,000, was made to operations for palliative care program funding. Volunteer donated services were valued at $881,775 for the year and are recorded under both revenue and expense. Capital Assets At the end of fiscal 2015 capital assets of Hospice consist of land, buildings, and equipment of $30,190,499. The accumulated depreciation on these assets at September 30, 2015 was $6,212,875, resulting in Hospice net property of $23,977,624. Activity during fiscal 2015 is summarized as follows:

Beginning ofYear Additions

Retirement &Reclassification End of Year

Land 5,610,362$ -$ -$ 5,610,362$ Buildings 16,132,641 3,931,296 4,024 20,067,961 Furniture & equipment 4,765,445 359,425 (621,394) 4,503,476 Construction in progress 3,187,920 - (3,179,220) 8,700

Total 29,696,368 4,290,721 (3,796,590) 30,190,499 Less: Accumulated depreciation (5,734,875) (1,021,669) 543,669 (6,212,875)

Net Property 23,961,493$ 3,269,052$ (3,252,921)$ 23,977,624$

2015

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Debt In July 2013, Hospice obtained a construction loan from First Citizens Bank with a maximum draw of $4,000,000 for expansion and renovation of the Wilmington inpatient facility and for site parking and service road additions on the Wilmington campus. The construction began in 2013, resulting in a draw down balance of $3,855,964. The facility opened and began serving patients in November 2014. The interest rate is fixed at 3.45% over the 15 year term, maturing in August 2018. The balance as of September 30, 2015 is $3,700,998. Monthly payments of $23,200 began in September 2014. The building expansion was constructed on the same site as the existing inpatient unit, but the agency purchased an additional parcel of land to accommodate additional parking and roadways. The land was purchased with the proceeds of a $1,230,000 loan from First Citizens Bank in May 2012. The interest rate is fixed at 3.35% over 15 years, with monthly payments of $8,761. In fiscal 2009, the USDA Rural Development loan proceeds of $2,071,350 were used to construct an inpatient facility in Whiteville, North Carolina. The $2,000,000 balance of the loan was refinanced with First Citizens Bank in July 2013. The interest rate was fixed at 3.45% and payments of $11,615 are due monthly until the loan matures in August 2028. The facility houses a six-bed hospice inpatient facility, a counseling center, and offices for the clinical staff who care for the patients in Columbus County. Hospice has two series of Variable Rate Health Care Facility Revenue Bonds issued through the North Carolina Medical Care Commission with Branch Banking & Trust as the Trustee. The Series 2007 bonds have an outstanding balance of $3,100,000 as of September 30, 2015. The bond proceeds were used to finance the LifeCare and Counseling Center Building in Wilmington, North Carolina. Repayment of principal is due annually through November 2027. The LifeCare and Counseling Center Building houses administrative staff, clinical staff who care for the patients in New Hanover County, and staff who provide counseling services, education, and information to the community. The Series 2011 bonds have an outstanding balance of $2,112,000 as of September 30, 2015. The bond proceeds were used to finance a facility in Bolivia, North Carolina, which houses a seven-bed inpatient facility, a counseling center, and administrative offices for the clinical staff who care for the patients throughout Brunswick County. Repayment of principal began in May 2013 and continues through November 2028. In April 2014, LCFH merged with Mercy Care Hospice and as a result of the merger, acquired their facility in Myrtle Beach, South Carolina and assumed their facility loan. The loan is with Wells Fargo with monthly principal and interest payments of $5,381 at a fixed rate of 3.90% through April 2018. A balloon payment of $615,277 is due in May 2018. This facility houses administrative staff, clinical staff who care for patients throughout Horry County, and staff who provide counseling services, education, and information to the community.

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For the Future Over the last year, Lower Cape Fear Hospice served 2,737 patients in the outpatient hospice program and provided 192,794 days of care with an average daily census of 528 patients. The hospice staff made 129,769 visits to patients in homes, nursing homes, adult care homes, and hospitals throughout the service areas. In addition, the agency served 1,490 patients in one of the agency’s three hospice inpatient centers located in Wilmington, Whiteville, and Bolivia and provided 9,342 days of care with an average daily census of 26 patients. Also, the palliative care program served 2,144 patients, with staff making 8,275 consultative visits. Population growth projections for persons over the age of 65 within the agency’s service areas are increasing at a much higher rate than the general population. Approximately 82% of the patients who receive hospice services are 65 years of age or older. This growing demographic, along with the potential to serve a higher percentage of the patients dying in the service area, supports agency program growth. The majority of hospice care does occur in the patient’s home, but care is also provided in nursing homes, adult care homes, and hospitals. Inpatient services are available if symptoms cannot be adequately managed at home. Since 1997, Lower Cape Fear Hospice has owned and operated a 12-bed hospice inpatient care center in Wilmington. In October 2008, the agency opened a six-bed hospice inpatient care center in Whiteville and in August 2012, a seven-bed hospice inpatient care center was opened in Bolivia. With the Wilmington hospice inpatient center operating at capacity and patients being put regularly on a waiting list for admission, the agency filed for and received a Certificate of Need in December 2011 to add a six-bed addition to the facility. The construction for the expansion began in late 2013 and was completed in October 2014. Patients were admitted to the new wing in November 2014. In addition to the patient room expansion, the existing Wilmington Care Center Building was renovated in November 2014. Additional parking and a service road were constructed in 2013 to accommodate the expansion. Driven by patient need, the opening of these additional six rooms allowed the agency to serve 293 more patients who needed inpatient hospice care in 2015. A hospice inpatient care center offers an appropriate level of special care not found in a hospital acute care setting. A hospice care center close to a patient’s home ensures that patients get the best quality care in a home-like setting and allows families more valuable time to spend with their loved ones without enduring long trips to visit. Reimbursement is inadequate to cover the costs of our Hospice Care Centers and community support is vital to keeping them operational. In addition to providing hospice services and in order to support the end-of-life health care needs of the community, Lower Cape Fear Hospice successfully operates palliative care consultative programs throughout the service area. Palliative care is a medical specialty that focuses on comfort and quality of life. The program is for people with serious illnesses and the goal is to provide relief of symptoms, pain, and stress, and focus on the best quality of life for both patients and their family members. While receiving palliative care, the patient may continue to receive curative and/or life-prolonging treatments, as well as home health services.

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A hospital based palliative care consultation program was implemented in New Hanover Regional Medical Center (NHRMC) in 2004. NHRMC partially funds this program. In 2007, palliative care programs were expanded in several counties to provide consultative services in nursing homes, adult care homes, and patient’s homes. The agency’s merger with Mercy Care Hospice in 2014 expanded the agencies inpatient and outpatient palliative care programs to Horry County. A hospital based palliative care consultation program is successfully operating at Conway Medical Center (CMC) and CMC partially funds this program. Outpatient palliative services will continue throughout Horry County. Also in 2015, a hospital based palliative care consultation program began in Onslow Memorial Hospital and outpatient palliative care programs were expanded to include Onslow County. Expansion of all of these programs is expected to continue in 2016. The palliative care program expands Hospice’s high level of expertise in end-of-life care to patients who are not appropriate for hospice care or who do not choose to receive hospice services. Reimbursement for palliative care services is limited to per visit charges billed for physicians, nurse practitioners, and physician assistants and does not fully cover the personnel costs or any of the indirect expenses. Palliative care helps patients and families understand their illness, treatment options, and goals, in order to help them prepare for the future. Thirty percent of the patients who are served in palliative care are subsequently transferred to hospice. Lower Cape Fear Hospice also offers a Kid’s Path Program, as an alternative to hospice care for children. The Kid’s Path Program is a model of pediatric palliative care services designed to increase access to uniformly recognizable, seamless, high quality pediatric palliative and hospice care for children and their families. The model incorporates expansion and enhancement of the medical component of care for children to supplement our well-established Sunrise Kids Program for grief education and support. The Sunrise Kids Program provides grief education and support for young people who have experienced the death of a person who has been important in their life. The program aims to help children accept the reality of the death, experience the pain of the loss, adjust to the loss, and begin to reinvest their energies in their own futures. Sunrise Kids groups are conducted in public schools throughout the agency’s service area. Individual counseling sessions and group sessions outside of the school setting are also provided as alternatives. The program conducts multiple summer grief camps throughout the service area. The Sunrise Kids Program is a non-reimbursed program offering services to the community at large. Sunrise Kids is supported by donations and grants. Program expansion plans are underway for 2016, to offer more services to more children. Adult bereavement services are offered to the families of all hospice patients and to the community at large. The bereavement staff counselors provide services to the hospice family members for a year or more after the patient’s death. These services are not reimbursed by Medicare or any other payer, even though the service is mandated by Medicare as a condition of participation in the Medicare program.

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The bereavement department provides one-on-one bereavement counseling and facilitates support and education groups for adults in the community who are grieving. These adult group sessions are designed to provide helpful tips for coping more effectively with grief. These programs are funded through donations and grants. In 2016, expansion of grief services are planned to serve more individuals experiencing grief. Begin the Conversation is a public initiative and education program launched and supported by LCFH and designed to encourage everyone to identify and communicate their healthcare choices. Begin the Conversation conferences, workshops, and community initiatives have been on-going throughout the service area since the program began in 2009 and will continue in 2016. The program has drawn local, statewide, and national support and recognition. The program is funded partially through grants and in 2015 began selling toolkits and promotional materials to other healthcare providers. The agency also collaborates with the Department of Veteran Affairs as a member of the We Honor Veterans Program. The program assists our organization in recognizing and honoring veterans and their families. The agency recognizes that veteran patients have unique needs and has enlisted a series of programs and initiatives to best serve them. The agency has a veteran specific resource guide, a Vet-to-Vet volunteer program, veteran grief groups, and we host, sponsor, and participate in veteran-specific events and committees. Veteran outreach includes the annual Veteran Stand Down, “Honor Flight” documentary screenings, participation at Veteran Council meetings, sitting on the planning committee for the Purple Heart Dinner, hosting veteran teleconferences, and much more. Further implementation of these programs is expected to continue in 2016. The vision of Lower Cape Fear Hospice is to serve everyone touched by a life-limiting illness. Our mission is to provide the highest level of care and comfort to patients with life-limiting illnesses, support and counseling to families, and education to the community. Funding our mission is heavily reliant on generating excess revenues from reimbursed programs, public support, and grant funding. Four significant regulatory changes for hospices became effective in 2014 and two more become effective in 2015. The most significant in 2015 is the conversion of diagnosis coding from ICD-9 to ICD-10. These regulatory changes have and will continue to significantly increase administrative and patient care costs for the agency. Hospice regulatory changes, along with all the other changes mandated with healthcare reform, have created much confusion in the healthcare market. The timeliness of referrals and the conversion of referrals to admissions have all been negatively impacted by the regulatory landscape. This has resulted in a lower than expected patient census and patients with a much shorter length of stay. A short length of stay in hospice is not optimal for the patient or the agency. Since inception, the hospice benefit was structured for patients with a life expectancy of six months or less. Over a six month period, the patient and family can truly benefit from the full complement of hospice services and not just receive crisis care type services. In turn, a hospice should be able to balance out the flat rate per-diem reimbursement over a six month period to cover the high front-end loaded costs associated with patient admissions and the high back-end costs associated with the increased acuity of the patient’s condition, as long as there are adequate lower costs days in between.

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This has not been the case in 2015, where 35% of LCFH patients had a length of stay of less than seven days and 16% had a length of stay between eight and 14 days. The median length of stay for all patients was 14 days. With 51% of our patients with a length of stay of two weeks or less, reimbursement to cover the agency’s outpatient services and to support the operational losses on our three hospice care centers and our palliative care programs has produced minimal excess revenues. On January 1, 2016, the reimbursement structure for hospice Medicare patients will change to a two-tiered payment methodology for routine homecare patients. The first 60 days of care will be paid at a higher rate and days above 60 will be paid at a lower rate. A service intensity add-on will be paid for nursing and social work visits in the patient’s last seven days of life. In 2016, the agency will continue marketing initiatives to target growth in hospice patient census by increasing length of stay and improving hospice penetration within our service area. The agency currently has dominant market share in all but one of our core counties, but there is still market share to be gained throughout the service area and room for the market to expand by providing hospice services to a greater number of those needing care. In addition, the agency must continue to evaluate hospice expansion opportunities beyond our current borders. Growth in hospice census will allow the agency to spread indirect expenses over a larger census base and improve incremental revenues. As hospice reimbursement changes, it will be important for the agency to evaluate other complimentary programs with alternate revenue streams and to evaluate opportunities to partner with other healthcare providers in the community to deliver care to those with a life-limiting illness. Because of the shortfalls in current reimbursement, reimbursement changes from Medicare, the fragmentation of the revenue stream for palliative care, and the cost of running non-reimbursed programs, the organization will continue to depend heavily upon donations, fundraising, and grants to maintain the financial viability and growth of these much-needed services, to expand programs, and to fund capital projects. This community support is crucial, as it allows the organization to make quality services and programs available to all persons in need. In 2016, marketing initiatives will continue with medical providers and with the community at large. The Begin the Conversation initiative will continue, along with veterans focused programs. Palliative care and bereavement programs will continue to expand across the service area, for the benefit of our communities and will further differentiate the agency from competitors. With the changes that continue to transform the healthcare industry at large, the need for continual strategic planning remains vital to Hospice’s viability and success. Lower Cape Fear Hospice will continue to embrace these changes and embark on programs to impact the needs of the community served. Contacting Hospice’s Financial Management This financial report is designed to provide a general overview of Hospice’s finances and to show Hospice’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact Deborah Pressley, Vice President of Finance and Operations, at Lower Cape Fear Hospice, 1414 Physicians Drive, Wilmington, NC 28401.

Earney & Company, L.L.P., 710 Military Cutoff Road, Suite 250 Wilmington, NC 28405 T: (910) 256 9995, F: (910) 256 2829, www.earneynet.com

INDEPENDENT AUDITOR'S REPORT

To the Board of Trustees of Lower Cape Fear Hospice, Incorporated Report on the Financial Statements We have audited the accompanying basic financial statements of Lower Cape Fear Hospice, Incorporated (“Hospice” a nonprofit organization and discretely presented component unit of New Hanover Regional Medical Center of Wilmington, North Carolina) including Lower Cape Fear Hospice Foundation (which is a discretely presented component unit of Hospice), which comprise the statement of net position as of September 30, 2015, and the related statements of revenues, expenses, and changes in net position and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lower Cape Fear Hospice, Incorporated as of September 30, 2015, and the changes in its net position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis on pages 1 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Report on Summarized Comparative Information We have previously audited Lower Cape Fear Hospice, Incorporated’s 2014 basic financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated November 10, 2014. In our opinion, the summarized comparative entity total information presented herein as of and for the year ended September 30, 2014, is consistent, in all material respects, with the audited financial statements from which it has been derived.

Wilmington, North Carolina November 9, 2015

Lower Cape Fear Hospice, Incorporated Statement of Net Position As of September 30, 2015

The Accompanying Notes are an Integral Part of these Financial Statements - 11 -

2014

Lower Cape Hospice Entity Comparative Fear Hospice Foundation Total Entity Total

AssetsCurrent Assets

Cash & cash equivalents 5,775,829$ -$ 5,775,829$ 4,370,016$ Short-term investments 8,258,182 - 8,258,182 6,522,045 Patient receivables, (net of allowance of

$886,515 for 2015; $725,773 for 2014) 3,159,867 - 3,159,867 3,994,680 Pledges & other receivables 348,245 500 348,745 562,188 Due from NHRMC 24,372 - 24,372 32,529 Prepaid expenses 389,737 - 389,737 441,104

Total Current Assets 17,956,232 500 17,956,732 15,922,562 Assets limited as to use (Note 2) 17,225,597 1,413,240 18,638,837 20,908,766 Property & equipment, net (Note 2) 23,977,624 - 23,977,624 23,961,493 Other long-term assets (Note 7) 870,421 - 870,421 826,882

Total Assets 60,029,874$ 1,413,740$ 61,443,614$ 61,619,703$

Liabilities & Net PositionCurrent Liabilities

Accounts payable 1,642,389$ -$ 1,642,389$ 2,203,851$ Accounts payable - NHRMC 204,926 - 204,926 307,505 Accrued salary & other payables 2,488,080 - 2,488,080 2,260,567 Deferred revenue 46,516 - 46,516 48,732 Current lease obligations 38,886 - 38,886 30,705 Current maturities 654,726 - 654,726 638,523

Total Current Liabilities 5,075,523 - 5,075,523 5,489,883 Non-Current Liabilities

Non-current lease obligation (Note 9) 70,730 - 70,730 118,770 Long-term debt (Note 8) 12,099,124 - 12,099,124 11,699,734

Total Non-Current Liabilities 12,169,854 - 12,169,854 11,818,504 Total Liabilities 17,245,377 - 17,245,377 17,308,387

Net PositionInvested property, net of related debt 11,223,774 - 11,223,774 11,623,236 Unrestricted (Note 2) 31,523,569 - 31,523,569 28,845,170

Total Unrestricted 42,747,343 - 42,747,343 40,468,406 Temporarily restricted 37,154 - 37,154 2,338,975 Permanently restricted - 1,413,740 1,413,740 1,503,935

Total Net Position 42,784,497 1,413,740 44,198,237 44,311,316

Total Liabilities & Net Position 60,029,874$ 1,413,740$ 61,443,614$ 61,619,703$

2015

Lower Cape Fear Hospice, Incorporated Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended September 30, 2015


2014

Lower Cape Hospice Entity ComparativeFear Hospice Foundation Total Entity Total

Net Patient Services RevenueInpatient Hospice 8,989,323$ -$ 8,989,323$ 8,052,813$ Outpatient Hospice, Palliative Care,

& Bridge 36,397,402 - 36,397,402 35,082,723 Less: Contractual adjustments (11,956,713) - (11,956,713) (11,082,397)

Total Net Patient Services Revenue 33,430,012 - 33,430,012 32,053,139

SupportContributions 1,488,513 - 1,488,513 1,189,271 Volunteer services (Note 2) 881,775 - 881,775 826,596 Special events, net 273,012 - 273,012 94,199 Grants for operations 733,044 - 733,044 727,172

Total Support 3,376,344 - 3,376,344 2,837,238 Total Revenue & Support 36,806,356 - 36,806,356 34,890,377

ExpensesSalaries 19,970,176 - 19,970,176 18,591,576 Contract services 383,279 - 383,279 344,271 Employee benefits 4,282,851 - 4,282,851 5,032,933

Total Salary & Benefits 24,636,306 - 24,636,306 23,968,780 Medical supplies 5,675,748 - 5,675,748 6,145,242 Professional fees 206,981 - 206,981 237,443 Volunteer services (Note 2) 881,775 - 881,775 826,596 Purchased services & other 2,816,794 9,444 2,826,238 3,216,724 Depreciation & retirements 1,021,670 - 1,021,670 879,299

Total Expenses 35,239,274 9,444 35,248,718 35,274,084

Operating Income (Loss) 1,567,082 (9,444) 1,557,638 (383,707)

Non-Operating Revenues (Expenses)Interest expense (376,843) - (376,843) (272,930) Investment (loss) income - (48,748) (48,748) 111,795 Unrealized (loss) gain on investments (1,271,770) - (1,271,770) 1,979,254 Non-operating (loss) (17,079) - (17,079) (57,358) Foundation transfers 42,436 (42,436) - -

Total Non-Operating Revenues (Expenses) (1,623,256) (91,184) (1,714,440) 1,760,761

Excess (Deficit) of Revenues overExpenses Before Capital Contributions (56,174) (100,628) (156,802) 1,377,054

Capital & permanent endowmentcontributions 33,290 10,433 43,723 1,098,462

Merger of Mercy Care (Note 13) - - - 2,091,162

(Decrease) Increase in Net Position (22,884) (90,195) (113,079) 4,566,678

Total Net Position, Beginning 42,807,381 1,503,935 44,311,316 39,744,638 Total Net Position, Ending 42,784,497$ 1,413,740$ 44,198,237$ 44,311,316$

2015

Lower Cape Fear Hospice, Incorporated Statement of Cash Flows For the Year Ended September 30, 2015


2014

Lower Cape Hospice Entity Comparative Fear Hospice Foundation Total Entity Total

Cash Flows From Operating ActivitiesCash received from patients 38,257,777$ -$ 38,257,777$ 36,784,775$ Contributions & other cash receipts 2,344,914 - 2,344,914 1,918,797 Cash paid to employees (24,407,822) - (24,407,822) (23,907,227) Cash paid to suppliers (13,591,409) (9,444) (13,600,853) (16,663,453)

Net Cash Provided by (Used in)Operating Activities 2,603,460 (9,444) 2,594,016 (1,867,108)

Cash Flows From Noncapital Financing Activities

Mercy Care merger cash contribution - - - 931,963 Operating transfer to (from) Foundation 42,436 (42,436) - -

Net Cash Provided by (Used in)Noncapital Financing Activities 42,436 (42,436) - 931,963

Cash Flows From Capital &Related Financing Activities

Capital contributions 540,022 10,433 550,455 655,634 Proceeds from sale of property 51,937 - 51,937 26,642 Acquisition of property & equipment (494,130) - (494,130) (605,878) Cash paid for construction in progress - - - (2,591,791) Proceeds from bonds, notes, & other sources 1,025,836 - 1,025,836 2,263,021 Interest paid on capital financing (376,843) - (376,843) (272,930) Repayment of principal (652,965) - (652,965) (510,952)

Net Cash Provided by (Used in)Financing Activities 136,293 (32,003) 104,290 (104,291)

Cash Flows From Investing ActivitiesNet sales (purchases) of investments &

assets limited as to use (1,349,980) 57,704 (1,292,276) (948,555) Investment income (loss) - (48,748) (48,748) 111,795

Net Cash Provided by (Used in)Investing Activities (1,349,980) 8,956 (1,341,024) (836,760)

Net Increase (Decrease) in Cash & Cash Equivalents 1,389,773 (32,491) 1,357,282 (2,808,159)

Cash & Cash EquivalentsBeginning of year 4,436,999 45,117 4,482,116 7,290,275 End of year 5,826,772$ 12,626$ 5,839,398$ 4,482,116$

Reconciliation of Cash & Cash Equivalentsto the Statement of Net Position

Unrestricted 5,775,829$ -$ 5,775,829$ 4,370,016$ Assets limited as to use 50,943 12,626 63,569 112,100

Cash & Cash Equivalents, IncludingLimited Use Assets 5,826,772$ 12,626$ 5,839,398$ 4,482,116$

Interest paid 376,843$ 272,930$

2015

Lower Cape Fear Hospice, Incorporated Statement of Cash Flows (continued) For the Year Ended September 30, 2015


2014

Lower Cape Hospice Entity ComparativeFear Hospice Foundation Total Entity Total

Reconciliation of Operating Income (Loss) to Net Cash Provided by (Used in)Operating Activities:

Operating income (loss) 1,567,082$ (9,444)$ 1,557,638$ (383,707)$ Adjustments to Reconcile to Net Cash

Provided by Operating Activities:Depreciation & retirements 1,021,670 - 1,021,670 879,299 Provision for bad debts 466,238 - 466,238 546,148 Changes in:

Patient receivables 834,813 - 834,813 462,621 Other current assets (847,599) - (847,599) (3,614,363) Accounts payable (666,257) - (666,257) 74,899 Salaries & other payables 227,513 - 227,513 167,995

Net Cash Provided by (Used in)Operating Activities 2,603,460$ (9,444)$ 2,594,016$ (1,867,108)$

Noncash Investing, Capital, & Financing Activities:Hospice held investments at September 30, 2015, with a fair value of $26,647,737. During fiscal year 2015, the netdecrease in the fair value on these investments was $1,271,770. During fiscal 2014, the increase was $1,979,254.

Hospice has a Swap liability of $258,536 related to its 2007 Series Bonds. During fiscal year 2015, the liabilityincreased by $42,722. In fiscal 2014, the decrease was $5,350.

2015

Lower Cape Fear Hospice, Incorporated Notes to Financial Statements September 30, 2015

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1. ORGANIZATION

Lower Cape Fear Hospice, Incorporated ("Hospice") is a North Carolina non-profit corporation which provides professional health care to patients with life-limiting illnesses, as well as providing support and education to their families and community in six counties in Southeastern North Carolina and (as a result of the merger of Mercy Care on April 1, 2014, discussed in Note 13) three counties in South Carolina. Hospice is certified to provide services under Medicare, Medicaid, and other insurance reimbursement arrangements. Although most services have been provided on an outpatient basis, Hospice has been operating inpatient facilities in Wilmington, North Carolina since 1997, in Whiteville, North Carolina since October 2008, and in Brunswick County, North Carolina since August 2012. As a result of a 1998 reorganization agreement, Hospice became a controlled corporate affiliate of New Hanover Regional Medical Center, a public non-profit corporation providing health care to residents of Southeastern North Carolina. The Board of Trustees of New Hanover Regional Medical Center appoints 16 of the 20 members of the Board of Directors of Hospice. Hospice is a component unit of the Medical Center for financial reporting purposes. Its activities are reported with other component units as a separate column in the Medical Center’s proprietary fund financial statements. Hospice has adopted accounting and reporting standards appropriate for governmental health care organizations. During fiscal 2015, NHRMC granted and paid Hospice $563,576 for Hospice’s Palliative Care Program, which is recognized as grant revenue in the accompanying statement of revenues, expenses, and changes in net position. Under governmental reporting standards, Lower Cape Fear Hospice Foundation, although a separate legal entity, is required to be included in Hospice’s basic financial statements as a discretely presented component unit of Hospice. The Foundation’s Board of Directors is nominated by Hospice’s Board and all resources of the Foundation are committed to Hospice. Hospice is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code. Accordingly, it is exempt from income taxes on related income pursuant to Section 501(a) of the Code and contributions may be deductible to donors. In addition, Hospice receives refunds of North Carolina sales tax and is exempt from property taxes on its buildings and equipment. Hospice files Form 990 with the IRS annually; those forms are generally subject to examination by the IRS for a period of up to three years after they are filed.


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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Hospice prepares its financial statements in accordance with generally accepted accounting principles promulgated in the United States of America (U.S. GAAP) for health care entities. Hospice follows the accounting standards prescribed by the Health Care Entities Audit Guide and statements of the Governmental Accounting Standard Board (GASB) and Financial Accounting Standards Board (FASB) where applicable. Revenues and expenses are recognized on the accrual basis of accounting. Revenues are recorded as earned and expenses as incurred. The significant accounting policies are described below to enhance the usefulness and understandability of the financial statements to the reader. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. Hospice’s management believes that the estimates and assumptions are reasonable in the circumstances; however, the actual results could differ from those estimates. Net Assets The financial statements report net position amounts separately as follows:

a) Unrestricted amounts are those resources currently available at the discretion of the Board for use in Hospice’s operations. Such resources include the following:

2015 2014Invested property, net of related debt 11,223,774$ 11,623,236$

Board designated to sustain hospice care 11,007,269 11,007,269 Board designated for capital improvements & replacement 6,821,781 6,821,781 Unrestricted 13,694,519 11,016,120

Total Unrestricted 31,523,569$ 28,845,170$ The Board of Directors designates reserves for future operations. Specifically, it generally designates net assets equivalent to approximately 180 days of future year’s budgeted operating expenses to sustain hospice care and for capital improvements and replacement. The reserves are funded and reported as assets whose use is limited in the accompanying financial statement.


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b) Temporarily restricted amounts are those which are stipulated by grantors and

donors for specific purposes. Interest, dividends, and gains and losses, whether realized or unrealized on the Foundation’s endowment funds invested, are classified as restricted until the Foundation’s Board of Directors approves distribution to Hospice.

c) Permanently restricted endowment funds are subject to the restrictions of gift instruments, which require that the principal be invested in perpetuity and that only the dividend or interest income from the endowment fund be used.

Net Patient Service Revenue Hospice has agreements with third-party payers that provide for payments at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered. Retroactive adjustments under reimbursement agreements with third parties have not been significant and are recorded as incurred. Net patient service revenues consisted of the following at September 30:

Medicare 30,929,315$ 92% 29,050,020$ 91%Medicaid 1,187,513 4% 1,412,499 4%Commercial 1,047,788 3% 1,141,270 4%Self pay 265,396 1% 449,350 1%

Total 33,430,012$ 100% 32,053,139$ 100%

2015 2014

Charity Care Hospice provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Hospice does not pursue collection of amounts determined to qualify as charity care. Approximately 1% of patient days/visits provided were charity care at an estimated cost summarized as follows at September 30:

Inpatient Outpatient Palliative Care Days of Care Days of Care Center Total

Fully allocated cost per patient day/visit 772.62$ 123.40$ 250.60$ Total days/visits of indigent care 129 2,037 351

99,668$ 251,366$ 87,961$ 438,995$

Inpatient Outpatient Palliative Care Days of Care Days of Care Center Total

Fully allocated cost per patient day/visit 782.32$ 133.13$ 282.00$ Total days/visits of indigent care 155 1,475 242

121,260$ 196,367$ 68,244$ 385,871$

September 30, 2015

September 30, 2014


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Donor Restricted Gifts Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying financial statements. Donor-restricted contributions for property are released when expended for the completed item. Volunteer Services Hospice benefits from personal services provided by a substantial number of volunteers. Those volunteers have donated significant amounts of time and services in Hospice’s program operations and in its fundraising campaigns. However, the majority of the contributed services do not meet the criteria for recognition in financial statements. GAAP allows recognition of contributed services only if (a) the services create or enhance nonfinancial assets or (b) the services would have been purchased if not provided by contribution, require specialized skills, and are provided by individuals possessing those skills. Donated services with an estimated fair value of $881,775 met those criteria and are included in volunteer services support. Deferred Revenue Hospice receives funds under various grant arrangements which are earned as services are provided to qualified patients. In addition, special event revenue for activities like the Festival of Trees may be collected in the fiscal year before the event is held. Accordingly, amounts collected for patient services provided after fiscal year end or special events to be held the following fiscal year are shown in the statement of net position as a current liability called deferred revenue.


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Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. From time to time during the periods presented, Hospice has had cash balances in a financial institution that have exceeded federal depository insurance limits. Cash and cash equivalents are as follows at September 30:

2015 2014Unrestricted Cash

Cash on hand 4,200$ 4,200$ Checking account 5,771,629 4,365,816

5,775,829 4,370,016 Assets Limited as to Use

Hospice 50,943 66,983 Endowment 12,626 45,117

63,569 112,100 5,839,398$ 4,482,116$

Assets Limited as to Use Assets limited as to use primarily include assets held by Trustees under indenture agreements and designated assets set aside by the Board of Trustees for future capital improvements and to sustain hospice care, over which the Board retains control and may at its discretion subsequently use for other purposes. A summary of activity in these accounts for the fiscal year ended September 30, 2015 is as follows:

2014 Additions Reductions 2015By Board for capital improvements & replacements 6,688,313$ -$ (664,973)$ 6,023,340$ By donors for endowment & other 1,503,206 - (89,966) 1,413,240 By Board to sustain hospice care 11,525,532 - (508,988) 11,016,544 By agreement, Mercy Care reserve 799,030 - (799,030) - By donor, long-term pledges 392,685 - (206,972) 185,713

Total 20,908,766$ -$ (2,269,929)$ 18,638,837$ The above amounts are invested in the following:

2015 2014Cash & cash equivalents 63,569$ 112,100$ Investments 18,389,555 20,403,981 Pledges receivable 185,713 392,685

Total 18,638,837$ 20,908,766$


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Property Land, buildings, and equipment are reported in the statement of net position at cost if purchased and at fair value at the date of donation if donated. All land and buildings are capitalized. Equipment is capitalized if it has a cost of $1,000 or more and a useful life when acquired of more than one year. Repairs and maintenance that do not significantly increase the useful life of the asset are expensed as incurred. Depreciation is computed using the straight-line method for buildings and accelerated for furniture and equipment over the estimated useful lives as indicated below. Land, buildings, and equipment are reviewed for impairment when a significant change in the asset’s use or another indicator of possible impairment is present. No impairment losses were recognized by Hospice in the financial statements in the current period. The following is a summary of activity in property accounts:

2014 AdditionsRetirement &

Reclassification 2015 Service LifeLand 5,610,362$ -$ -$ 5,610,362$

Buildings 16,132,641 3,931,296 4,024 20,067,961 20-45 years

Furniture & EquipmentOffice equipment & furniture 1,557,302 200,922 (16,574) 1,741,650 5-8 yearsComputer equipment 2,924,349 158,503 (484,029) 2,598,823 3-7 yearsMedical equipment & furniture 19,663 - (5,256) 14,407 5 yearsFundraising equipment 4,195 - - 4,195 3-10 yearsVehicles & other 259,936 - (115,535) 144,401 5 years

4,765,445 359,425 (621,394) 4,503,476

Construction in progress 3,187,920 - (3,179,220) 8,700

Total Property 29,696,368 4,290,721 (3,796,590) 30,190,499

Less: Accumulated depreciation (5,734,875) (1,021,669) 543,669 (6,212,875)

Net Property 23,961,493$ 23,977,624$

For the Year Ended September 30, 2015


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Investments Investments are recorded at fair market value using quoted market prices. Hospice’s investment policy divides investment strategies into two investment categories, short-term and long-term. Allocation to each category is based on the liquidity needs of Hospice. The intent of the short-term fund investment strategy, generally Hospice’s operations, is to provide short-term liquidity and working capital for operations and other strategic purposes, with the primary strategy to be preservation of principal, and income a secondary consideration. The intent of the long-term fund investment strategy, generally Hospice Foundation, is to generate current income and maintain stability of principal. As of September 30, 2015, Hospice had the following investments, concentrations, and maturities:

Less thanInvestment Type Fair Value 1 Year 1-5 Years 6-10 Years

Bond funds 5,422,416$ N/A N/A N/AInvestments other 1,608,628 N/A N/A N/AEquity mutual funds 19,616,693 N/A N/A N/A

Total 26,647,737$ -$ -$ -$ Investments were reported as follows as of September 30:

2015 2014Unrestricted investments 8,258,182$ 6,522,045$ Assets Limited as to Use:

By Board for capital improvements & replacements 6,023,340 6,688,313

By Board to sustain hospice care 10,965,601 11,458,549 By agreement, Mercy Care reserve - 799,030

16,988,941 18,945,892

Lower Cape Fear Hospice Endowment 1,400,614 1,458,089 Total 26,647,737$ 26,926,026$

Compensated Absences Hospice’s benefit eligible employees earn paid days off at varying rates depending on years of service. Paid days off accumulate up to a specified maximum after which employees are paid out for hours in excess of the maximum. The estimated amount of paid days off of $1,322,239 in 2015 and $1,262,245 in 2014 is included as accrued salary and other payables in the accompanying statement of net position.


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Interest Rate Swap Agreement Hospice has entered into an interest rate swap agreement to modify interest rates on certain outstanding debt. Net interest expenditures resulting from these agreements and the resulting accrued receivable or payable under the Swap liability agreement are reflected in the financial statements. As disclosed in Note 8, the estimated fair values of interest rate swaps are recorded as a liability on the statement of net position. The fair value of interest rate swaps is recorded at the values reported by the counterparties, which approximates a value determined by the discounted cash flow model. For all swap instruments determined to be ineffective, the change in fair value is recorded in the statement of revenues, expenses, and changes in net position as a component of the net increase (decrease) in fair value of investments. For all swap instruments determined to be effective, any change in fair value is deferred and recorded on the statement of net position as a deferred outflow of resources, other asset. (See Note 7) Subsequent Events Management considered the inclusion of subsequent events in the disclosures of the footnotes through November 9, 2015, if such disclosures were required. Events occurring after that date have not been evaluated to determine whether a change in their financial statements would be required. Comparative Information and Reclassification The basic financial statements also include comparative entity total data for the prior year, which are presented in the financial statements in order to provide an understanding of Hospice’s financial position and operations, but not at the level of detail required for a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with Hospice’s prior year financial statements, from which the information was derived. Certain amounts presented in prior year’s data have been reclassified, as necessary, to be consistent with the current year presentation.


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3. PATIENT RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK

Hospice grants credit without collateral to its patients, most of which are local residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers was as follows at September 30:

2015 2014Medicare 82% 85%Medicaid 13% 11%Other third party payers 5% 4%Self pay 0% 0%

100% 100% The balance in patient receivables consisted of the following at September 30:

2015 2014Medicare 3,324,499$ 3,986,309$ Medicaid 535,764 524,787 Other third party payers 186,119 209,357

Less: Allowance for uncollectibles (886,515) (725,773)

Total 3,159,867$ 3,994,680$

4. DONOR PLEDGES Hospice raises funds for operating, endowment, and capital campaigns. Outstanding pledges as of September 30, 2015 are expected to be collected as follows:

Operations Endowment Total2016 282,783$ 500$ 283,283$ 2017 105,071 - 105,071 2018 77,071 - 77,071 2019 3,571 - 3,571 2020 - - - Total 468,496 500 468,996

Current (282,783) (500) (283,283) Long-Term 185,713$ -$ 185,713$


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5. LEASES

Rent expense totals $49,525 in fiscal 2015. Hospice leases office spaces in Bladen, Pender, and Onslow Counties and includes $4,125 of HOA expense for the Horry County office. Rent expense was $46,470 for fiscal 2014.

6. RETIREMENT PLAN As of January 1, 2009, Hospice adopted a defined contribution plan qualified under section 403(b) of the Internal Revenue Code and an elective deferral plan. The plans cover qualified employees of Hospice, which are generally all employees. Hospice can match contributions to the 403(b) plan, but is not required to do so. For employees, it takes three complete years of services to vest employer contributions. In 2015, management elected to discontinue the employer retirement contribution for the fiscal year of 2015. In fiscal year 2014, the contribution expense for the plans was $783,099.

7. OTHER LONG-TERM ASSETS Hospice is the specified beneficiary of a charitable remainder unitrust held by a third party. After payment of certain income amounts during the life of the grantors, Hospice will receive the remainder value of the trust after the death of the grantors. The fair value of the trust is calculated by an independent third party who has custody of the funds. The fair value was $37,885 at September 30, 2015. Hospice holds a deferred outflow asset in other assets which reflects the fair market value of the Swap liability of $258,536, discussed in Note 8. The balance of other assets, $574,000, is land donations made to Hospice that are not currently being used in operations.


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8. LONG-TERM DEBT AND INTEREST RATE SWAP

A schedule of changes in Hospice’s long-term debt for the year ended September 30, 2015 is as follows:

9/30/2014New Loans

PrincipalPayments

SwapChange 9/30/2015

Whiteville FacilityFirst Citizens refinance loan 1,926,352$ -$ (73,170)$ -$ 1,853,182$

Wilmington FacilityLand loan 1,086,165 - (69,180) - 1,016,985 Facility expansion Loan 2,830,128 1,025,836 (154,966) - 3,700,998

Horry County Facility 747,798 - (35,649) - 712,149 Series 2007 Bonds Payable 3,300,000 - (200,000) - 3,100,000 Series 2011 Bonds Payable 2,232,000 - (120,000) - 2,112,000 Swap liability 215,814 - - 42,722 258,536

12,338,257$ 1,025,836$ (652,965)$ 42,722$ 12,753,850$ A summary of future debt payments are as follows:

Fiscal Year Principal Interest Swap Total2016 200,000$ 1,792$ 130,828$ 332,620$ 2017 200,000 1,668 121,527 323,195 2018 200,000 1,545 112,258 313,803 2019 200,000 1,421 103,208 304,629 2020 200,000 1,298 94,235 295,533

2021-2025 1,200,000 4,448 335,912 1,540,360 2026-2030 900,000 556 85,069 985,625

3,100,000$ 12,728$ 983,037$ 4,095,765$

Series 2007 Variable Rate Bonds

Whiteville Facility In fiscal 2009, the USDA Rural Development loan proceeds of $2,071,350 were used to construct an inpatient facility in Whiteville, North Carolina. The $2,000,000 balance of the loan was refinanced with First Citizens Bank in July 2013. The interest rate was fixed at 3.45% and payments of $11,615 are due monthly until the loan matures in August 2028. The loan balance was $1,853,182 at September 30, 2015. Wilmington Facility In July 2013, Hospice obtained a construction loan from First Citizens Bank for the expansion and renovation of the Wilmington inpatient facility and for site parking and service road additions on the Wilmington campus. The construction began in 2013, resulting in a draw down balance of $3,855,964. The facility was opened and began serving patients in November 2014. This loan has monthly payments of $23,200 which began in September 2014. The loan has a fixed interest rate of 3.45% and a maturity date of August 2028. The loan balance was $3,700,998 at September 30, 2015. The site parking and service road is being constructed on land purchased in May 2012, with the proceeds of a $1,230,000 loan from First Citizens Bank. The loan has a term of 15 years and a fixed interest rate of 3.35% resulting in monthly payments of $8,761. The loan balance was $1,016,985 at September 30, 2015.


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Horry County Facility In 2014, Hospice acquired Mercy Care of Horry County, which included their facility at Devon Court, Myrtle Beach, South Carolina. Hospice assumed the related mortgage loan with Wells Fargo of $764,979 on April 1, 2014. The note is due in monthly payments of $5,381 including an interest rate at 3.90% through May 19, 2018. The loan balance was $712,149 at September 30, 2015. Series 2007 Bonds Payable (Wilmington Administrative Building) In fiscal 2008, Hospice issued $4,000,000 of Variable Rate Health Care Facility Revenue Bonds, Series 2007, through the North Carolina Medical Care Commission with Branch Banking & Trust Company as Trustee. The bond funds were used to finance construction of the Life Care and Counseling Center Administration Building in Wilmington, North Carolina. BB&T also issued a letter of credit at an annual fee to provide additional security for the payment of the bonds. Principal and interest maturities of the bonds are payable annually on November 1. The loan balance was $3,100,000 at September 30, 2015. Interest is payable monthly and is based on weekly weighted average per the Bond Market Association Index (BMA) which was 0.05000% at September 30, 2015. The related Swap liability agreement is discussed below. Series 2011 Bonds Payable (Brunswick Care Center) In fiscal 2011, Hospice issued $3,400,000 of Variable Rate Health Care Facility Revenue Bonds, Series 2011, through the North Carolina Medical Care Commission with Branch Banking & Trust Company as Trustee. The bond funds were used to finance construction of an inpatient facility in Brunswick County, North Carolina. During fiscal 2012, $1,000,000 of principal was paid. The loan balance was $2,112,000 at September 30, 2015. Interest only payments were due through April 2013, with the first principal payment due May 2013. The interest rate is based on LIBOR and was 1.46091% at September 30, 2015. Management has entered into an interest rate protection transaction with Sumitomo Mitsui Banking Corporation. The agreement is not a swap transaction, but insures that Hospice’s effective interest rate on this bond issue will not exceed 3.70% through April 13, 2018. Financial covenants related to the bond issues have been met during fiscal 2015 and include the following:

Hospice is to maintain a long-term debt service coverage ratio of 1.20 or higher at all times.

Hospice is to maintain a maximum debt to net assets ratio of 0.75:1.00 at all times. Hospice is to maintain a cash flow coverage ratio of 1.25:1.00 at all times. Hospice’s total net assets must be more than $9,000,000 at all times.


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Swap Liability Hospice hedged originally $2,000,000 of its interest rate exposure associated with its Series 2007 Bonds through an interest rate swap agreement with a bank. As of September 30, 2015, the $1,550,000 remaining balance is hedged at an interest rate of 3.885%. Based on market tax exempt interest rates of about 0.0200%, the present value of cash payment under the swap agreement is a negative position of approximately $258,536 as of September 30, 2015, which is recognized as a liability. The objective of the swap agreement was to effectively change one half of Hospice’s 2007 Bonds’ variable rate to a fixed rate of 3.885%, to provide Hospice with a reduced possibility of a negative budget outcome. This swap has been effective from inception through September 30, 2015. The term of the Series 2007 Bonds and the Swap liability are essentially the same, 20 years. Credit Risk: The counter party carries a guarantee by an entity rated A1 by Moody’s Investors Service (Moody’s), A by Standard & Poor’s (S & P), and A+ by Fitch Ratings. Basis Risk: All interest rates in the Swap liability are based on BMA and no basis risk exists. Termination Risk: If at the time of termination the Swap liability has a negative fair value, Hospice would be liable to the counter party for a payment equal to the Swap liability’s fair value. A summary of the projected total payments on the debt is as follows at September 30, 2015:

Interest Rate TotalPrincipal Interest Swap, Net Interest

2016 654,726$ 311,639$ 130,828$ 442,467$ 2017 679,627 295,229 121,527 416,756 2018 1,290,467 278,669 112,258 390,927 2019 670,145 261,563 103,208 364,771 2020 687,450 244,068 94,235 338,303

2021-2025 3,944,797 927,760 335,912 1,263,672 2026-2030 4,453,643 294,255 85,069 379,324 2031-2035 372,995 18,773 - 18,773

Total 12,753,850$ 2,631,956$ 983,037$ 3,614,993$

Long-Term Debt


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9. CAPITAL LEASE OBLIGATIONS

Hospice acquired, as a result of the merger of Mercy Care, capital leases for various pieces of equipment and vehicles. These leases meet the criteria of a capital lease since they transfer benefits and risks of ownership to the lessee at the end of the lease term. On the capital lease program, Hospice has ten vehicles with a total monthly payment of $3,228. The lease length is from 42 to 60 months. There is a total residual value of $30,550. At September 30, 2015, the current portion of the lease agreements is $38,886 and the non-current lease obligation is $70,730.

Fiscal Year Principal Interest Total2016 38,886$ 6,644$ 45,530$ 2017 33,190 4,475 37,665 2018 31,952 1,837 33,789 2019 5,588 307 5,895 Total 109,616$ 13,263$ 122,879$

10. FAIR VALUE MEASUREMENTS Hospice reports its fair value measures using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy, established by GAAP, requires that entities maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:

- Level 1 - Quoted prices for identical assets or liabilities in active markets to which Hospice has access at the measurement date.

- Level 2 - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets;

quoted prices for identical or similar assets in markets that are not active;

observable inputs other than quoted prices for the asset or liability (for

example, interest rates and yield curves); and

inputs derived principally from, or corroborated by, observable market data by correlation or by other means.

- Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs should be used to measure the fair value to the extent that observable inputs are not available.


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When available, Hospice measures fair value using level 1 inputs because they generally provide the most reliable evidence of fair value. However, level 1 inputs are not available for many of the assets and liabilities that Hospice is required to measure at fair value (for example, unconditional promises to give and in-kind contributions). The primary uses of fair value measures in Hospice’s financial statements are:

- initial measurement of noncash gifts, including gifts of investment assets and unconditional promises to give.

- recurring measurement of investments (Note 2).

- recurring measurement of endowment investments (Note 2).

- recurring measurement of the Swap liability (Note 8).

- recurring measurement of split interest gift (Note 7). Management considers the fair valuation measurements of the split interest gift and the Swap liability to be level 2. The fair market value of the split interest gift, held in other assets, was determined by an independent trustee. Their valuation used quoted market prices, estimated life expectancy, and estimates of future market returns. The liability valuation for the Swap liability related to the Series 2007 Bonds Payable was provided by the Investment Bank. The valuation takes into consideration the current variable market rates for bonds, the fixed rate of the Swap liability, and the remaining principle balance. Fair values of assets measured on a recurring basis at September 30, 2015 are as follows:

Fair Value

Quoted Pricesin Active Markets

for Identical Assets

(Level 1) (Level 2) (Level 3)Investment bond funds 5,422,416$ 5,422,416$ -$ -$ Investment other 1,608,628 1,608,628 - - Investment equity mutual funds 19,616,693 19,616,693 - - Other assets - split interest gift 37,885 - 37,885 - Swap liability (258,536) - (258,536) -

Total 26,427,086$ 26,647,737$ (220,651)$ -$


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11. CONTINGENCIES AND CONCENTRATION OF RISK

From time to time, Hospice may be aware of various asserted and unasserted claims. Management feels that these claims can be successfully defended and intends to resist the allegations of these matters in every way and does not plan to seek out-of-court settlements. In the event that judgments adverse to their interests should be rendered, management feels any liability will be fully covered by existing insurance or not be material to the financial statements. Hospice strives to be paid appropriately for services it provides, but third-party payers continue to provide lower rates of payments. In recent years, there have been numerous federal legislative and administrative actions, including the Health Care Reform Act, that have reduced the rate of increase in Medicare payments to health care providers. The federal government has also reduced the share of federal matching payments made to the states to subsidize the cost of Medicaid. Accordingly, Hospice funding from Medicare and Medicaid is likely to be reduced. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Hospice believes that they are in compliance with all applicable laws and regulations and are not aware of any significant pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. Amounts held in financial institutions occasionally are in excess of the Federal Deposit Insurance Corporation and Securities Investor Protection Corporation limits. Hospice deposits its cash with high quality financial institutions, and management believes Hospice is not exposed to significant credit risk on those amounts. The majority of Hospice’s contributions and grants are received from corporations, foundations, and individuals located in the Southeastern North Carolina area and three adjacent counties of South Carolina. As such, Hospice’s ability to generate resources via contributions and grants is dependent upon the economic health of that area and of the state of North Carolina and South Carolina. An economic downturn could cause a decrease in contributions and grants that coincides with an increase in demand for Hospice’s services. Hospice’s investments are subject to various risks such as interest rate, credit, and overall market volatility risks. Further, because of the significance of the investments to Hospice’s financial position and the level of risk inherent in most investments, it is reasonably possible that changes in the values of these investments could occur in the near term and such changes could materially affect the amounts reported in the financial statements. Management is of the opinion that the diversification of its invested assets among the various asset classes should mitigate the impact of changes in any one class.


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Hospice’s investment policy mitigates interest rate risk by providing adequate liquidity for short-term cash needs and by making longer-term investments only with funds that are not needed for current cash flow purposes. The policy does not formally limit maturities as a means of managing exposure to fair value losses arising from changes in interest rates. Hospice’s investment portfolio holds bond funds and equity mutual funds. Hospice’s policy is to diversify the investment portfolio so that the impact of potential losses from any one type of security will be minimized.

12. RISK MANAGEMENT Hospice is exposed to various risks of loss in the ordinary course of business as a result of torts, theft of, damage to, or destruction of assets, business interruption, allegations of medical malpractice (professional liability), natural disasters, employee and officer errors and omissions, and employee workers’ compensation and medical claims. Hospice purchases commercial insurance coverage against risk of loss due to errors and omissions, fiduciary liability, property damage and theft, pollution liability, and various other insurable risks. Hospice carries property insurance in the amount of $23,375,000 for 2015 and $20,765,000 for 2014, with a deductible of $5,000 for all perils except named windstorm. For 2015 and 2014, the minimum deductible for named storm is $25,000 per policy, with a maximum deductible of 1% per building. For 2015 and 2014, Hospice was insured for workers’ compensation and employer’s liability in excess of $500 per claim. In both 2015 and 2014, professional liability and general liability stop loss coverage is on a claims made basis; general liability is written on an occurrence basis. Excess commercial insurance is purchased to provide coverage above the self-insured retention levels for professional liability and general liability. No claim payment has exceeded insurance coverage in the past three fiscal years where insurance coverage applies, subject to the deductibles and retentions noted above. Hospice has an umbrella policy with limits of $5,000,000 per occurrence, and a $5,000,000 aggregate limit. The Directors and Officer’s policy has a $3,000,000 per occurrence limit, with a $3,000,000 aggregate limit.


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13. MERGER OF MERCY CARE INTO LOWER CAPE FEAR HOSPICE, INCORPORATED

To affect continuity in operations and derive efficiencies, Mercy Care, a Hospice operating in the Myrtle Beach area of South Carolina adjacent to Lower Cape Fear Hospice’s Southeast North Carolina service area, was merged with Lower Cape Fear Hospice, Incorporated effective April 1, 2014. Mercy Care’s operations were absorbed into and continued by Lower Cape Fear Hospice, Incorporated. Accordingly, the net assets at a carrying value of $2,091,162 were transferred to Lower Cape Fear Hospice, Incorporated, which recorded it as a non-operating capital addition. The transaction is treated as a merger under GASB State 69, which is the overriding accounting standard. Accordingly, the following net assets of Mercy Care were recorded in the accompanying financial statements at April 1, 2014:

Cash & cash equivalents 931,963$ Patient receivables 488,485 Other current assets 37,838 Property & equipment, net 1,989,102

3,447,388

Less:Current liabilities (416,994) Current maturities of promissory note (87,063) Long-term promissory note (852,169)

Net Assets 2,091,162$ As consideration for agreeing to the merger, Lower Cape Fear Hospice, Incorporated agreed to make, over time, capital and operating expenditures for the benefit of Mercy Care’s previous South Carolina operations of $3,500,000. At closing, Lower Cape Fear Hospice’s Board of Directors designated a reserve funded with cash, cash equivalents, and marketable securities for this purpose. At September 30, 2015, all the reserve had been expended in accordance with the agreement.

Documents

Lower Cape Fear Hospice Audit Report 2015