EXHIBIT C HENRY MAYO NEWHALL MEMORIAL HOSPITAL, HENRY MAYO NEWHALL MEMORIAL HEALTH FOUNDATION, INC., SANTA CLARITA HEALTH CARE ASSOCIATION, INC.

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "EXHIBIT C HENRY MAYO NEWHALL MEMORIAL HOSPITAL, HENRY MAYO NEWHALL MEMORIAL HEALTH FOUNDATION, INC., SANTA CLARITA HEALTH CARE ASSOCIATION, INC."

Transcription

1 EXHIBIT C HENRY MAYO NEWHALL MEMORIAL HOSPITAL, HENRY MAYO NEWHALL MEMORIAL HEALTH FOUNDATION, INC., SANTA CLARITA HEALTH CARE ASSOCIATION, INC. CONTINUING DISCLOSURE ANNUAL REPORT As of September 30, 2009 Operating Data Non-Financial Please answer each of the following questions: a) Has there been a change in the name and titles of officers since the last annual report?(check one) Yes -X No Senior Management Cindy Peterson, Vice President, Chief Information Officer, and Mark Puleo, Vice President, Chief Human Resources Officer The Hospital s senior management team includes a number of personnel who, in turn, supervise various department heads, administrators and managers who have direct responsibility for various clinical, ancillary and support departments. Summary information concerning the principal members of the Hospital s management team is presented below. Roger E. Seaver, President and Chief Executive Officer (61) Mr. Seaver was hired as President and Chief Executive Officer of the Hospital in From 1997 to 2000, he served as President and Chief Executive Officer at Northridge Hospital Medical Center, a 370-bed hospital located in Northridge, California. Mr. Seaver has also held executive positions at Glendale Memorial Hospital for 19 years, including Chief Financial Officer, Chief Operating Officer and Chief Executive Officer from 1992 to Mr. Seaver holds a bachelor s degree from the University of South Dakota and a master s degree in business administration from Pepperdine University in Malibu, California. John Schleif, Chief Operating Officer (63) Mr. Schleif joined the Hospital in 2004 as Chief Operating Officer. Prior to 2004, he served as Administrator of Scripps Memorial Hospital Encinitas, a 140-bed hospital in Encinitas, California. Mr. Schleif has also held executive positions with other hospitals and health systems in California and Hawaii including Good Samaritan Hospital in Los Angeles, California, and The Queen s Medical Center and The Queen s Health

2 System in Honolulu, Hawaii. He holds a bachelor s degree from St. Olaf College, Northfield, Minnesota, and a master s degree in hospital and health administration from the University of Iowa, Iowa City, Iowa. He is a Fellow of the American College of Healthcare Executives. C.R. Hudson, Chief Financial Officer (60) Mr. Hudson joined the Hospital in 2001 as Chief Financial Officer. Prior to coming to the Hospital, he held a Director s position at KPMG LLP s health care consulting practice, where he provided Medicare and Medi-Cal reimbursement strategy and operational and organizational services to health care providers. He has also held executive positions at MedPartners and Charter Medical Centers. Mr. Hudson holds a bachelor s degree in accounting from San Diego State University in San Diego, California, and is a certified public accountant (non-practicing). Larry Kidd, Director of Nursing (53) Mr. Kidd Joined the Hospital in 2007 as Interim Chief Nursing Officer. Over the past 14 years, he has held positions at the Chief Nurse Executive and Chief Operating Officer levels. His accomplishments include the development of new clinical product lines, patient satisfaction improvement strategies, aggressive and successful nursing recruitment and retention plans, system redesign, cost containment strategies, and the development of long range strategic plans. Larry received his bachelor s degree in nursing from the University of Alabama and a Master of Public Administration from the University of San Francisco. In 1999, he completed a fellowship in Nursing Administration at the Wharton School of business, University of Pennsylvania. He is currently enrolled at the Medical University of South Carolina in the doctoral program for Health Administration and Leadership. Cindy Peterson, Vice President/Chief Information Officer (58) Ms. Peterson joined the Hospital in 2001 as Director of Technology and Communications, she moved into a CIO role shortly after. Prior to that, she was a Regional CIO for Adventist Health supporting five Hospitals in So. CA. She has over 25 years of Healthcare IT experience and her accomplishments have been in the implementation of centralized data centers, major system implementations, and infrastructure re-designs. She currently holds a Sr. membership role in HIMSS (Health Info Mgmt Sys Society), and is a member of CHIME (College of Hosp Info Mgmt Exec). She also serves as a Council Member for AT&T and Medicity. Mark Puleo, Vice President/Chief Human Resources Officer (45) Mr. Puleo was hired as the head of Human Resources in As a member of the senior leadership team he is responsible for the coordination of the Human Resource Management function. He is responsible for labor relations, recruitment/retention, leadership development, benefit program selection and negotiation, compensation plan development, workplace injury reduction, and safety/security/disaster preparedness. Mark has over 20 years of Human Resource Management experience mostly in acute healthcare, having worked for USC University Hospital/Kenneth Norris Cancer Hospital, Northridge Hospital Medical Center, Harbor UCLA Medical Center, and Shriners Hospital. He holds a Master s Degree in Business Administration with emphasis on Healthcare Management.

3 Diane Vose, Foundation President (61) Ms. Vose began her career at the Hospital in late 1981 in development and community relations. She became part of the Foundation when it was first organized in Working under the expertise of two Foundation presidents as Director of Development and Executive Director, Ms. Vose took over as President of the Foundation in She is responsible for all fundraising programs of the Foundation, including planning, organizing, managing and marketing the fund development program, as well as the development, recruitment and management of a 30-member Board of Directors and related committees, volunteers and support groups. She is active in several community organizations including the Santa Clarita (SCV) Valley Chamber of Commerce Board of Directors, SCV Health PAC, KHTS Radio Advisory Board, SCV Child and Family Foundation Advisory Board, and Soroptimist International of SCV. Ms. Vose is also a member of the Association for Healthcare Philanthropy and the Southern California Association for Hospital Development. b) Please describe any new material litigation, or a material adverse result in litigation since the date of the last report. None c) Please describe any significant sale, destruction or loss of real property or other material assets since the date of the last report. None d) Please describe any changes in licensing. Please update the information that appeared under the following headings in Appendix A to the Official Statement for the Series 2007B Bonds for the most recent Fiscal Year, as appropriate:

4 [LICENSES AND ACCREDITATION (Bed Capacity Table); MEDICAL STAFF; EMPLOYEES; UTILIZATION; FINANCIAL INFORMATION.] BED CAPACITY Category Bed Capacity Medical Surgical 150 Intensive Care 12 Perinatal 17 Psychiatry 23 Rehabilitation 19 Total 221

5 Medical Staff by Specialty* Specialty Number Average Age Board Certified % Board Certified Allergy % Anatomic Pathology % Anesthesiology % Cardiovascular Medicine % Critical Care % Dermatology % Diagnostic Radiology % Emergency % Endocrinology % Family Practice % Gastroenterology % General Surgery % Hematology % Infectious Disease % Internal Medicine % Interventional Cardiology % Nephrology % Neurology % Neurosurgery % OB/GYN % Oncology % Ophthalmology % Orthopedic Surgery % Otolaryngology % Pain Management % Pediatric Cardiology % Pediatrics % Psychiatry % Physical Med/Rehab % Plastic Surgery % Pulmonary Disease % Radiation Oncology % Rheumatology % Thoracic Surgery % Urology % Vascular Surgery % % Source: The Hospital *Includes Active, Associate, General Dentist and Provisional

6 The following table lists the top twenty admitting physicians by specialty as of September 30, The top twenty admitting physicians, with an average age of approximately 47, accounted for approximately 64% of the Hospital s admissions (excluding newborns). Top Twenty Admitting Physicians (October 1, 2008 to September 30, 2009) Specialty Age Years on Admissions Medical Staff Number Percent Psychiatry % Internal Medicine % Family Practice % Internal Medicine % Internal Medicine % Internal Medicine % Family Practice % Internal Medicine % Internal Medicine % Internal Medicine % Gynecology % Family Practice % Internal Medicine % General Surgery % Obstetrics/Gynecology % Obstetrics/Gynecology % General Surgery % Obstetrics/Gynecology % Obstetrics/Gynecology % Obstetrics/Gynecology % % Source: Hospital records EMPLOYEES As of September 30, 2009 the Hospital employed 975 full-time equivalent employees ( FTEs ). Two labor unions represent approximately 75% of the Hospital s employees. California Nurses Association (CNA) represents approximately 340 registered nurses and United Electrical, Radio & Machine Workers of America (UE) represents approximately 500 nonprofessional employees. Initial collective bargaining agreements with both unions were ratified by the respective memberships of the bargaining units on December 18, 2000 and were executed on December 24, The current CNA contract expires January 21, 2012 and the current UE contract expires on January 31, Management considers its relations with employees to be good. The CNA contracts provides for annual focal step increases and the UE contract provides for a performance based pay increase conducted annually on their anniversary date. The

7 Hospital s employee benefit package was modified to include a matching contribution (subject to certain limits) by the Hospital to employee retirement programs. The Hospital contracts with a private company for services in the following support areas: inpatient and outpatient rehab services, dietary, housekeeping, security and maintenance. Under this agreement, the contractor provides management services for these functions and employs the staff assigned to these areas approximately 135 FTEs. Utilization Data UTILIZATION The following table sets forth the Hospital s utilization data for the fiscal years ended September 30, 2006, 2007, 2008 and Fiscal Year Ended September 30, Beds Acute Women s Transitional Care Acute Rehabilitation Behavioral Health Total Patient Days Acute 38,846 39,700 44,331 46,189 Women s 4,100 3,953 3,916 3,413 Transitional Care 6,642 6,145 3,597 0 Acute Rehabilitation 2,904 3,290 2,284 2,735 Behavioral Health 6,234 6,372 5,808 6,115 Total 58,726 59,460 59,936 58,452 Occupancy Acute 81.20% 83.00% 74.95% 78.42% Women s 66.10% 63.70% 62.94% 55.00% Transitional Care 67.40% 62.40% 36.40% 0.00% Acute Rehabilitation 41.90% 47.40% 58.41% 42.84% Behavioral Health 74.30% 75.10% 69.00% 72.84% Total 74.10% 75.10% 74.30% 72.46% Outpatient Visits Emergency 41,486 41,730 43,637 46,915 Department All Other 30,761 49,952 40,008 37,964 Totals 72,247 91,682 83, Source: Hospital Records

8 BOARD Name Professional Affiliation Term Expires Vinod Assomull, M.D. Dale Donohoe Judy Fish, PhD. Secretary Graciela Freixes Cecelia Hann, M.D. James D. Hicken Chair Elizabeth Hopp Don Kimball Treasurer Marlee Lauffer Foundation Representative Mark Liker, M.D. Craig Peters Vice Chair Member of Medical Staff, Hospital Owner, Intertex Companies, Inc. Superintendent, Saugus Unified School District Judge, Los Angeles Superior Court Member of Medical Staff, Hospital President and CEO, Bank of Santa Clarita Senior Vice President, Bank of Santa Clarita Senior Vice President and CFO, Newhall Land Vice President, Marketing & Communications, Newhall Land Member of Medical Staff, Hospital Industrial Real Estate, CB Richard Ellis Ex Officio Roger E. Seaver President and CEO, Ex Officio Hospital Douglas R. Sink CFO, REMO, Inc Mark Sender, M.D. Deputy Chief of Medical Staff, Hospital Ex Officio Frank Yusuf, M.D. Chief of Medical Staff, Hospital Ex Officio

9 Financial a) Please attach a copy of your most recent financial statements. Please review Section 5 of the Continuing Disclosure Agreement and confirm that no material Listed Event has occurred. No material events

10

11 Henry Mayo Newhall Memorial Hospital Financial Statements Years Ended September 30, 2009 and 2008

12 Contents Independent Auditors Report 3 Financial Statements Statements of Financial Position 4 Statements of Operations 5 Statements of Changes in Net Assets 6 Statements of Cash Flows 7 8 Notes to Financial Statements 9 39 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Schedule of Findings and Responses

13

14 September 30, Assets Current assets Cash and cash equivalents $ 36,922,449 $ 23,218,630 Short term investments 4,856,243 - Assets limited as to use 11,870,657 9,540,694 Patient accounts receivable, less bad debt allowances of $4,751,691 and $7,196,617, respectively 33,415,364 32,333,018 Receivable from affiliate 833,647 4,376,419 Other receivables 263, ,626 Inventories 3,554,330 3,691,156 Prepaid expenses and other current assets 2,674,606 2,614,088 Total current assets 94,391,195 75,897,631 Receivable from affiliate, less current portion 2,433 7,153 Assets limited as to use, less current portion 6,460,268 24,249,838 Property, plant and equipment, net 113,979, ,977,600 Pledged lease 2,705,427 2,742,543 Deferred financing costs, net 9,012,198 9,709,989 Other assets 1,291,296 1,440,598 $ 227,842,754 $ 215,025,352

15 Statements of Financial Position September 30, Liabilities and Net Assets Current liabilities Current portion of long-term debt $ 1,270,000 $ 1,220,000 Current portion of obligations under capitalized leases 894, ,550 Accounts payable 11,413,181 10,776,090 Accrued payroll and benefits 8,855,939 8,024,462 Accrued expenses 1,222,456 1,163,323 Accrued interest 3,061,366 2,791,121 Total current liabilities 26,717,472 24,818,546 Long-term debt, less current portion 122,379, ,672,389 Obligations under capitalized leases, less current portion 12,538,147 12,888,609 Deferred contribution revenue 2,705,427 2,742,543 Other long-term liabilities 12,235 48,235 Accrued malpractice liability 3,191,000 2,469,000 Total Liabilities 167,543, ,639,322 Commitments and contingencies Net assets Temporarily restricted 1,948,828 5,099,183 Unrestricted 58,350,592 43,286,847 Total net assets 60,299,420 48,386,030 $ 227,842,754 $ 215,025,352 See accompanying notes to financial statements. 4

16 Statements of Operations Years Ended September 30, Unrestricted Revenues Net patient service revenue $ 192,239,381 $ 177,828,151 Nonpatient revenue 1,263,552 1,406,152 Total unrestricted revenues 193,502, ,234,303 Expenses Salaries and wages 64,176,443 58,307,798 Employee benefits 17,764,886 15,703,835 Registry 6,849,044 11,121,849 Supplies 30,037,598 28,868,262 Purchased services 18,848,410 16,606,328 Repairs and maintenance 3,243,458 2,265,525 Provision for bad debts 11,590,559 15,568,085 Interest 7,996,719 7,623,384 Depreciation and amortization 10,067,652 7,880,716 Insurance, net 2,540,001 2,433,238 Facility costs 5,139,834 5,395,121 Other operating costs 6,620,720 6,983,530 Total expenses 184,875, ,757,671 Operating income 8,627, ,632 Other income Contributions 37,242 36,044 Interest income 1,006,262 1,948,130 Other nonoperating income, net 62, ,010 Equity in income of Joint Venture 570, ,426 Excess of revenues over expenses 10,303,443 3,157,242 Net assets released from restrictions 4,760,302 2,742,400 Net increase in unrestricted net assets $ 15,063,745 $ 5,899,642 See accompanying notes to financial statements. 5

17 Statements of Changes in Net Assets Years Ended September 30, Unrestricted net assets Excess of revenues over expenses $ 10,303,443 $ 3,157,242 Net assets released from restrictions 4,760,302 2,742,400 Net increase in unrestricted net assets 15,063,745 5,899,642 Temporarily restricted net assets Contributions 1,609,947 1,965,138 Net assets released from restrictions (4,760,302) (2,742,400) Net decrease in temporarily restricted net assets (3,150,355 ) (777,262) Increase in net assets 11,913,390 5,122,380 Net assets, September 30, 2008 and ,386,030 43,263,650 Net assets, September 30, 2009 and 2008 $ 60,299,420 $ 48,386,030 See accompanying notes to financial statements. 6

18 Statements of Cash Flows Years Ended September 30, Cash flows provided by operating activities Increase in net assets $ 11,913,390 $ 5,122,380 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 10,067,652 7,880,716 Provision for bad debts 11,590,559 15,568,085 Amortization of deferred financing costs, net 674, ,171 Equity in income of Joint Venture (570,209) (501,426) Capitalization of interest (124,498) (537,320) (Gain) loss on disposal of fixed assets (1,950) 179,317 Changes in assets and liabilities: Patient accounts receivable (12,672,905) (18,229,256) Receivable from affiliate 3,547, ,878 Other receivables (140,273) 527,728 Inventories 136,826 (616,630) Prepaid expenses and other current assets (60,518) 355,473 Other assets 63,517 99,087 Accounts payable 637,091 (702,146) Accrued payroll and benefits 831, ,497 Accrued expenses 107,368 (358,689) Accrued interest 270,245 1,090,343 Other liability (84,235) 35,458 Accrued malpractice liability 722, ,000 Liabilities compromised by confirmed plan, and related interest - (31,133) Net cash provided by operating activities 26,907,484 11,836,533 7

19 Statements of Cash Flows Years Ended September 30, Cash flows used for investing activities Acquisition of property and equipment (22,316,201) (23,652,845) Proceeds from sale of short-term investments - 500,000 Purchase of short-term investments (4,856,243) - Distribution from Joint Venture 500, ,000 Advances to Joint Venture (87,323) (127,193) Repayment on notes receivable from Joint Venture 243, ,198 Decrease in assets limited as to use 45,777,695 71,572,226 Increase in assets limited as to use (30,318,088) (51,583,012) Net cash used for investing activities (11,056,843 ) (2,653,626) Cash flows used for financing activities Cost of Issuance - (345,918) Payments on long-term debt (1,220,000) (5,141,667) Payments on capital lease obligations (926,822) (1,143,649) Net cash used for financing activities (2,146,822 ) (6,631,234) Net increase in cash and cash equivalents 13,703,819 2,551,673 Cash and cash equivalents, beginning of year 23,218,630 20,666,957 Cash and cash equivalents, end of year $ 36,922,449 $ 23,218,630 Supplemental disclosure of cash flow information Cash paid for interest during the year $ 7,199,994 $ 6,507,785 Supplemental disclosure of non-cash transactions Pledged lease (See Note 12) (37,116) 2,742,543 Amendment to capital lease (See Note 12) - 1,847,260 Capital lease 627,340 - Bond premium (23,336) (24,463) See accompanying notes to financial statements. 8

20 Notes to Financial Statements 1. Organization Henry Mayo Newhall Memorial Hospital (the Company or Hospital ) is a California not-for-profit public service benefit acute care hospital providing patient services to individuals in Santa Clarita, California. The Hospital is affiliated with Santa Clarita Health Care Association, Inc. and its affiliates through common management. Santa Clarita Health Care Association and one of its subsidiaries, Santa Clarita Health Care Management Group, Inc., had no activity during the years ending September 30, 2009 and In addition, the Hospital is also affiliated with Henry Mayo Newhall Memorial Health Foundation (the Foundation ). The Foundation shares some members of management with the Hospital. 2. Summary of Significant Accounting Policies Basis of Presentation The Company prepares its financial statements in accordance with the Accounting Standards Codification ( ASC ) 954, Health Care Entities. The Company s accounting policies used in the preparation of the accompanying financial statements are in conformity with accounting principles generally accepted in the United States of America, and have been consistently applied. Reclassifications Certain amounts in the prior year s financial statements have been reclassified to conform to the 2009 presentation. Subsequent Events Management has evaluated events that have occurred subsequent to September 30, 2009 through February 11, 2010, the date on which the financial statements were available to be issued and has determined that there were no material events requiring recognition or disclosure. 9

21 2. Summary of Significant Accounting Policies Management s Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the Company s financial statements relate to the assessment of the carrying value of accounts receivable, accruals for general and professional liability risks, and amounts payable under health insurance plans. While management believes that these estimates are reasonable, actual results could be materially different from those estimates. Cash and Cash Equivalents Cash and cash equivalents include certain highly liquid investments with maturities of three months or less when purchased, that are not held as collateral. Short-Term Investments Short-term investments are comprised of certificates of deposits (CDs) with maturities of three months to one year and short-term bonds. Short-term bonds at September 30, 2009 and 2008 in the amounts of $3,853,200 and $0 respectively are recorded at fair value. Patient Accounts Receivable Patient accounts receivable are stated at the amounts billed to patients or third-party payors and others less contractual allowances. The carrying amount of patient accounts receivable is reduced by bad debt allowances that reflect management s best estimate of the amounts that will not be collected. Bad debt allowances are based on management s review of the historical collection experience of all balances. 10

22 2. Summary of Significant Accounting Policies The Company provides for an allowance against patient accounts receivable for an amount that could become uncollectible, whereby such receivables are reduced to their estimated net realizable value. The Company estimates this allowance based on the aging of their accounts receivable, historical collection experience from the payers, and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of co-payments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the Company s estimation process. These impacts may be material. The Company s policy is to attempt to collect amounts due from patients, including co-payments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ( EMTALA ). Certain classes of patient accounts receivable are charged off against allowances after designated period of collection efforts. Subsequent cash recoveries are recognized as income in the period when they occur. The Company provides outpatient and emergency trauma cases ( AB99 ) for Medi-Cal beneficiaries. As such, the Hospital has been designated as a Private Trauma Hospital, as defined by the Centers for Medicare & Medicaid services, in the County of Los Angeles, and receives supplemental reimbursements for such trauma cases that it provides during its fiscal year. Based on agreements entered into and related reimbursements received to date, the Company determined that no reserves were necessary for its receivables relating to the California AB99 payor category as of September 30, 2009 and There are various factors that can impact the supplemental reimbursements and the changes in these factors can have a material impact on future collection of these amounts. 11

23 2. Summary of Significant Accounting Policies Inventories Inventories consist primarily of pharmaceuticals and medical supplies and are stated at cost, which is determined using the weighted-average method. Assets Limited as to Use Assets limited as to use include assets set aside by trustees under indenture agreements. These investments, consisting primarily of money market funds and U.S. agency securities, are stated at fair value. Assets limited as to use that are required for obligations classified as current liabilities are reported as current assets. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in the excess of revenues over expenses. Unrealized gains and losses on investments are excluded from the excess of revenues over expenses unless the investments are trading securities. At September 30, 2009 and 2008, unrealized gains were approximately $62,000 and $117,000, respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the financial statements. The estimated useful lives of the related assets are as follows: Building and improvements Equipment and furniture 10 to 40 years 2 to 15 years Maintenance, repairs and investments in minor equipment are charged to operations. Expenditures which materially increase the value of properties or extend the useful lives are capitalized. 12

24 2. Summary of Significant Accounting Policies Deferred Financing Costs Deferred financing costs are amortized using the effective interest method, over the terms of the related bonds or loans. Deferred financing costs, net totaled $9,012,198 and $9,709,989 as of September 30, 2009 and 2008, respectively. Of these amounts, $3,609,435 and $3,999,015 relate to the issuance of the 2001 Bonds (see Note 6), which is amortized over the life of the bonds. $5,402,763 and $5,710,974 relate to the 2007 Bond Series A & B, as of September 30, 2009 and 2008, respectively, which are also amortized over the life of the bonds. Amortization expense of approximately $698,000 and $521,000 was recorded for the years ended September 30, 2009 and 2008, respectively. Amortization expenses is expected to be approximately $573,000, $563,000 $550,000, $538,000, $524,000 and $6,264,198 for the years ended September 30, 2010, 2011, 2012, 2013, 2014 and thereafter, respectively. Fair Value Measurements The Company adopted ASC 820, Fair Value Measurements and Disclosures, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements, on October 1, ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows: Level 1 quoted prices in active markets for identical assets or liabilities; Level 2 quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or Level 3 unobservable inputs 13

25 2. Summary of Significant Accounting Policies for the asset or liability, such as discounted cash flow models or valuations. The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In February 2008, the Financial Accounting Standards Board ( FASB ) delayed the effective date of ASC 820 for non-financial assets and liabilities, as defined, to fiscal years beginning after November 15, The Company will apply ASC 820 to nonfinancial assets and liabilities on October 1, The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy: Level 1: These assets and liabilities include the part of the Company s cash and cash equivalents, short-term investments and assets limited as to use which consist of treasury and money market mutual funds and fixed income securities. The following table presents the financial instruments carried at fair value as of September 30, 2009 (as described above): Quoted market price in active markets (Level 1) Significant observable market inputs (Level 2) Significant unobservable market inputs (Level 3) Total Cash and cash equivalents $ 33,318,743 $ - $ - $ 33,318,743 Short term investments 3,853, ,853,200 Assets limited as to use 18,313, ,313,564 Total assets at fair value $ 55,485,507 $ - $ - $ 55,485,507 14

26 2. Summary of Significant Accounting Policies Excess of Revenues over Expenses The statements of operations include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers of assets to and from affiliates for other than goods and services, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction are to be used for the purposes of acquiring such assets). Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time period or purpose. Permanently restricted net assets are those that must be maintained by the Hospital in perpetuity. At September 30, 2009 and 2008, the Hospital had $1,948,828 and $5,099,183 of temporarily restricted net assets, respectively. The Hospital did not have any permanently restricted net assets at September 30, 2009 and Net Patient Service Revenue The Hospital recognizes net patient service revenue in the period in which services are performed. The Hospital has agreements with third-party payors that provide for payments to the Hospital 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 payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors (including the Medicare and Medi-Cal programs). Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. These retroactive adjustments may be material. 15

27 2. Summary of Significant Accounting Policies Charity Care The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Net patient service revenue is reflected net of charity care. The amount of charges foregone for services and supplies furnished under the Hospital s charity care policy aggregated approximately $8,748,000 and $7,218,000 for the years ended September 30, 2009 and 2008, respectively. Advertising Advertising costs are expensed as incurred. Advertising expense during the years ended September 30, 2009 and 2008 was approximately $976,000 and $1,384,000, respectively. Donated Services Volunteers perform various services. The services donated are not reflected in the accompanying financial statements as expense and income from donations, as these services do not meet the criteria for recognition. Interest Expense Interest expense during the years ended September 30, 2009 and 2008 was approximately $7,997,000 and $7,623,000, respectively. Total interest costs capitalized during the years ended September 30, 2009 and 2008 was approximately $125,000 and $537,000, respectively. Income Taxes The Hospital is a not-for-profit corporation and has been recognized as tax-exempt pursuant to Section 501 (c)(3) of the Internal Revenue Code. 16

28 2. Summary of Significant Accounting Policies Impairment of Long-Lived Assets The Company periodically reviews the carrying values of its longlived assets for possible impairment. Whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, the Company records an adjustment to reduce the related assets to their net realizable value. The Company believes that no material impairment of its long-lived assets exists at September 30, 2009 and 2008, respectively. Accrual for General and Professional Liability Risks The Company records reserves for claims when they are probable and reasonably estimable. The Company maintains reserves, which are based on actuarial estimates by an independent third party, for the portion of their professional liability risks, including incurred but not reported claims. The Company estimates reserves for losses and related expenses using expected loss-reporting patterns. Reserves are not discounted. There can be no assurance that the ultimate liability will not exceed the Company s estimates. Adjustments to the estimated reserves are recorded in the Company s results of operations in the periods when such amounts are determined. These adjustments may be material. 3. Net Patient Service Revenue Gross patient service revenue is recorded on the basis of the Company s usual and customary charges. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The difference between charges generated from agreements with thirdparty payors and the related payment amounts are reflected as contractual discounts as shown below: Years ended September 30, Gross patient service revenue $ 955,229,819 $ 890,621,951 Contractual discounts (762,990,438 ) (712,793,800) Net patient service revenue $ 192,239,381 $ 177,828,151 17

29 3. Net Patient Service Revenue A summary of the payment arrangements with major third party payors is as follows: Medicare Inpatient acute services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge (DRGs). These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Outpatient services related to Medicare beneficiaries are paid at prospectively determined rates according to Ambulatory Payment Classifications (APCs). Other payments, including disproportionate share and Medicare bad debt expense reimbursement, are based on the Hospital s cost reports, and are estimated using historical trends and current factors. The Hospital is reimbursed at a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. Annual cost reports are generally due five months after the financial year end. Laws and regulations governing the Medicare program are 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. The Hospital s Medicare cost reports have been final settled by the Medicare fiscal intermediary through September 30, Cost reports for September 30, 2008 have been filed as of September 30, Filing, tentative settlements, and settlement of appeals of cost reports during the 2008 fiscal year resulted in an increase of net patient service revenue in the amount of approximately $820,000. For the year ended September 30, 2009, filing final settlements, tentative settlements and settlement of appeals resulted in a decrease of net patient service revenue of approximately $13,

30 3. Net Patient Service Revenue HMO/PPO The Company also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations ( HMOs ), and preferred provider organizations ( PPOs ). The basis for payment to the Company under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Self-Pay and Other The Hospital offers managed care-style discounts to most uninsured patients, which enables the Hospital to offer lower rates to those patients who historically have been charged standard gross charges. Under this method, the discount offered to uninsured patients is recognized as a contractual allowance instead of provision for bad debts, which reduces net patient revenues at the time the uninsured patient accounts are recorded and reduces provision for bad debts. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value through provision for bad debts based on historical collection trends and other factors that affect the estimation process. For the years ended September 30, 2009 and 2008, provision for bad debts were approximately $11,591,000 and $15,568,000, respectively. The other payor category is comprised primarily of indemnity, Workers Compensation, and other commercial payors. Payment usually occurs on a negotiated settlement basis at some discount to the Hospital s gross charges. Medi-Cal Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed at a negotiated per diem rate. Outpatient services are reimbursed based upon fee schedules. For the years ended September 30, 2009 and 2008, the State of California s Enhanced Medi-Cal Trauma program (AB 99) provided approximately $1,875,000 and $1,843,000, respectively, in additional receipts for this class of net patient service revenues. 19

31 4. Assets Limited as to Use The composition of assets limited as to use at September 30, 2009 and 2008, is set forth in the following table. Investments are stated at fair value (see Note 2) Under indenture agreement, held by trustees: U.S. Treasury money market funds $ 11,991,925 $ 33,716,572 Fixed income securities 6,339,000 73,960 Total assets limited as to use 18,330,925 33,790,532 Less current portion 11,870,657 9,540,694 Noncurrent portion $ 6,460,268 $ 24,249, Property, Plant and Equipment A summary of property, plant and equipment at September 30, 2009 and 2008, is as follows: Building and improvements $ 111,375,794 $ 95,507,328 Equipment and furniture 60,101,448 53,833,761 Building, improvements and equipment under capital leases 16,123,889 15,496, ,601, ,837,638 Less accumulated depreciation and amortization 94,228,418 84,762,394 93,372,713 80,075,244 Construction-in-progress 18,493,791 18,788,923 Land 2,113,433 2,113,433 Property, plant and equipment, net $ 113,979,937 $ 100,977,600 20

32 5. Property, Plant and Equipment Depreciation expense for the years ended September 30, 2009 and 2008 amounted to approximately $10,068,000 and $7,881,000, respectively. At September 30, 2009 and 2008, assets held under capital lease obligations, including those in construction-inprogress, amounted to $17,314,832 and $16,687,492, respectively, and related accumulated depreciation amounted to $8,547,452 and $8,063,228, respectively. 6. Long-Term Debt 2001 Series A Hospital Refunding Revenue Bonds On February 1, 2001, California Statewide Communities Development Authority issued $54,895,000 of 2001 Series A Hospital Refunding Revenue Bonds (the 2001 Bonds ). The 2001 Bonds are insured by the State of California and secured by a deed of trust on substantially all of the Hospital's property. The Hospital is allowed to secure up to $7,000,000 of operating financing with a senior lien. Accordingly, the Hospital obtained the loan financing which was subsequently paid off. The proceeds of the 2001 Bonds were used to pay off the 1988 bonds, construction liens from the costs of repairing the facility from the January 1994 Northridge earthquake, and to provide working capital. The bond regulation agreement, as amended, also requires the Hospital and its related affiliate, the Foundation, to maintain certain debt covenants including a maximum annual debt service coverage ratio of 1.25 times, a current ratio of at least 2.0 times, and days cash on hand of 60 days. The bond agreement also contains certain restrictions on other borrowings and spending of the Hospital and its related affiliates. As of the date of these financial statements, the Hospital was in compliance or had received waivers for these covenants. The 2001 Bonds bear interest at annual rates ranging from 4.0% to 5.125%, payable semi-annually. Principal payments are due annually in amounts ranging from $1,270,000 in fiscal year 2010 to $1,320,000 in fiscal year Beginning 2012, the Hospital must establish a sinking fund that requires annual payments ranging from $1,375,000 in that year to $3,345,000 in The sinking fund will provide for two principal installments of $13,125,000 on October 1, 2018, and $32,525,000 on October 1,

33 6. Long-Term Debt At September 30, 2009 and 2008, the carrying values of the 2001 Bonds were as follows: September 30, Current $ 1,270,000 $ 1,220,000 Noncurrent 46,970,000 48,240,000 Maturities of the 2001 Bonds subsequent to September 30, 2009, are as follows: Years ending September 30, Principal 2010 $ 1,270, ,320, ,375, ,440, ,515, and thereafter 41,320,000 Insured Revenue Bonds Series 2007A & 2007B $ 48,240,000 $ 49,460,000 $ 48,240,000 On August 1, 2007, California Statewide Communities Development Authority issued $45,000,000 of Insured Revenue Bonds Series 2007A (the 2007 Bonds Series A ), and $30,000,000 of Insured Revenue Bonds Series 2007B (the 2007 Bonds Series B ), collectively the 2007 Bonds. The proceeds of the 2007 Bonds are to be used to finance and refinance acquisition, construction, improvement and equipping of healthcare facilities owned and operated by the Hospital, fund a bond reserve account and finance the costs of issuance of the bonds. The 2007 Bonds are insured by the Office of Statewide Health Planning and Development ( OSHPD ) of the State of California pursuant to the California Health Facility Construction Loan Insurance Law. 22

34 6. Long-Term Debt The 2007 Bonds Series B are further insured by Ambac Assurance Corporation. If moneys are not available to pay the principal or interest on the 2007 Bonds Series B and the insurance from the OSHPD is not in full force and effect, or the OSHPD is in default of the payment, the Trustee will take such steps as are necessary to collect upon the payments. The obligations of the 2007 Bonds are on parity with the obligations with respect to the 2001 Bonds. The bond regulation agreement also requires the Hospital and its related affiliate, the Foundation, to maintain certain debt covenants including a maximum annual debt service coverage ratio of 1.25 times, a current ratio of at least 2.0 times, and to maintain at the end of each year at least 30 days cash on hand. The bond agreement also contains certain restrictions on other borrowings and spending of the Hospital and its related affiliates. The Hospital was in compliance with these covenants as of September 30, The 2007 Bond Series B were originally issued as variable rate bonds subject to change at each auction period. These bonds however have a built in conversion feature, whereby they could be converted to fixed rate bonds at the option of the Company, which the Company converted during fiscal year The 2007 Bonds Series A bear interest, at annual rates ranging from 4.25% to 5.00%, payable semi-annually. Principal payments are due annually in amounts ranging from $775,000 starting in fiscal year 2011 to $1,070,000 in Beginning 2019, the Company must establish a sinking fund that requires annual payments ranging from $1,125,000 in that year to $1,245,000 in Beginning in 2022, the Company must establish a sinking fund that requires annual payments ranging from $1,305,000 in that year to $1,765,000 in Finally, beginning in 2029, the Company must establish a sinking fund that requires annual payments ranging from $1,855,000 in that year to $2,910,000 in 2038, the final year of maturity. The 2007 Series A Bonds are secured by present and future gross revenues of the Hospital, as defined. 23

35 6. Long-Term Debt At September 30, 2009 and 2008, the carrying values of the 2007 Bonds Series A were as follows: September 30, Current $ - $ - Noncurrent 45,000,000 45,000,000 Original Issue Premium 409, ,389 Net $ 45,409,053 $ 45,432,389 Maturities of the 2007 Bonds Series A subsequent to September 30, 2009, are as follows: Years ending September 30, Principal 2010 $ , , , , and thereafter 41,690,000 $ 45,000,000 The 2007 Bonds Series B bear interest, at annual rates ranging from 4.00% to 5.20%, payable semi-annually. Beginning in fiscal year 2011, the Company must establish a sinking fund that requires annual payments ranging from $675,000 in that year to $775,000 in fiscal year Beginning in 2016, the Company must establish a sinking fund that requires annual payments ranging from $800,000 in that year to $875,000 in Beginning in 2020, the Company must establish a sinking fund that requires annual payments ranging from $900,000 in that year to $1,200,000 in Finally, beginning in 2030, the Company must establish a sinking fund that requires annual payments ranging from $1,225,000 in that year to $1,575,000 in 2038, the final year of maturity. The 2007 Series A Bonds are secured by present and future gross revenues of the Hospital, as defined. 24

36 6. Long-Term Debt At September 30, 2009 and 2008, the carrying values of the 2007 Bonds Series B were as follows: September 30, Current $ - $ - Noncurrent 30,000,000 30,000,000 $ 30,000,000 $ 30,000,000 Maturities of the 2007 Bonds Series B subsequent to September 30, 2009, are as follows: Years ending September 30, Principal 2010 $ , , , , and thereafter 27,150,000 $ 30,000, Pension Plan The Hospital maintains a deferred compensation annuity plan (defined as an IRC Section 403 (b) plan), which covers employees who elect to participate. The Hospital provides matching contributions equal to 5% of participants eligible annual compensation up to the amount allowed by the Internal Revenue Service for the calendar year. Employer matching contributions are funded annually based on the calendar year. For the years ended September 30, 2009 and 2008, the Company s matching contributions were approximately $1,340,000 and $1,260,000, respectively. 25

37 8. Receivable from Affiliate Under ASC Transfers of Assets to a Not-For-Profit Organization or Charitable Remainder Trust That Raises or Holds Contributions for Others, requires organizations similar to the Hospital and the Foundation to record on the designated organization as a temporarily restricted asset, those funds raised by the Foundation for the benefit of the Hospital. The amounts raised on behalf of the Hospital by the Foundation are recorded as a receivable from affiliate with detail as follows: September 30, Current $ 833,647 $ 4,376,419 Noncurrent 2,433 7,153 $ 836,080 $ 4,383, Related Party Transactions During the years ended September 30, 2009 and 2008, the Hospital had the following related party transactions: The Foundation received contributions of approximately $1,181,000 and $1,484,000 for the benefit of Hospital programs such as the Emergency Room and Breast Imaging Center for the years ended September 30, 2009 and 2008, respectively (see Note 10). At September 30, 2009 and 2008, the Hospital had a receivable from the Foundation in the amount of $836,080 and $4,383,572, respectively (see Note 8). During 2009 and 2008, funds in the amount of approximately $4,363,000 and $1,780,000, respectively, were spent on these programs. For the years ended September 30, 2009 and 2008, the Hospital received funds of approximately $4,363,000 and $1,780,000, respectively, from the Foundation. 10. Temporarily Restricted Net Assets Funds received from the Foundation for the benefit of Hospital programs such as the Emergency Room and Breast Imaging Center are recorded as temporarily restricted contributions. Other funds are comprised primarily of a grant received from the County of Los Angeles as part of the national Bioterrorism Hospital Preparedness program that designates the Hospital as a Disaster Resource Center. 26