Charleston Area Medical Center Health System, Inc. and Subsidiaries Years ended December 31, 2001 and 2000

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS AND O THER F INANCIAL I NFORMATION Charleston Area Medical Center Health System, Inc. and Subsidiaries Years ended December 31, 2001 and

2 Consolidated Financial Statements and Other Financial Information Years ended December 31, 2001 and 2000 Contents Report of Independent Auditors... 1 Audited Consolidated Financial Statements Consolidated Balance Sheets... 2 Consolidated Statements of Operations... 4 Consolidated Statements of Changes in Net Assets... 5 Consolidated Statements of Cash Flows... 6 Notes to Consolidated Financial Statements... 7 Other Financial Information Report of Independent Auditors on Other Financial Information Consolidating Balance Sheet: December 31, December 31, Consolidating Statement of Operations: December 31, December 31,

3 Report of Independent Auditors Board of Directors Charleston Area Medical Center Health System, Inc. We have audited the accompanying consolidated balance sheets of Charleston Area Medical Center Health System, Inc. and Subsidiaries (the System) as of December 31, 2001, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the System s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the System for the year ended December 31, 2000, were audited by other auditors whose report dated March 16, 2001, to the 2000 consolidated financial statements, except for Note 8 as to which the date is April 4, 2001, expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the System as of December 31, 2001, and the results of their operations, changes in net assets and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. As described in Note 2 to the consolidated financial statements, in 2001 the System changed its method of accounting for derivatives and hedging activities by adopting the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. April 12,

4 Consolidated Balance Sheets December Assets Current assets: Cash and cash equivalents $ 32,445 $ 22,103 Short-term investments 20,163 14,408 Current portion of assets limited as to use 8,300 6,700 Patient receivables, net of allowances for uncollectible accounts of $11,800 in 2001 and $10,200 in ,236 92,772 Other receivables 6,277 4,957 Estimated amounts due from third-party payors 858 4,997 Inventories 8,888 8,130 Prepaid expenses and other 1,810 1,917 Total current assets 169, ,984 Assets limited as to use 157, ,961 Property, plant, and equipment: Land 12,869 12,148 Buildings and improvements 224, ,119 Equipment 330, ,532 Construction in progress 5,825 3, , ,528 Less accumulated depreciation (394,477) (362,192) Total property, plant and equipment, net 179, ,336 Other assets 7,708 8,989 Total assets $ 514,636 $ 552,270 See accompanying notes

5 December Liabilities and unrestricted net assets Current liabilities: Accounts payable and accrued expenses $ 48,619 $ 62,087 Accrued payroll and payroll related expenses 19,803 19,158 Lines of credit and other short-term borrowings Current maturities of capital lease obligations and long-term debt 5,684 5,998 Total current liabilities 74,106 87,743 Long-term liabilities: Postretirement benefits other than pensions 16,928 16,539 Self-insurance reserves 28,764 28,714 Capital lease obligations and long-term debt 175, ,070 Other 2,883 3,106 Total long-term liabilities 223, ,429 Minority interest (1,376) (1,598) Net assets: Unrestricted 196, ,108 Temporarily restricted 8,290 9,911 Permanently restricted 13,036 12,677 Total net assets 218, ,696 Total liabilities and net assets $ 514,636 $ 552,270 See accompanying notes

6 Consolidated Statements of Operations Years ended December Unrestricted revenue and other support: Net patient service revenue $ 509,098 $ 478,943 Other operating revenue 29,398 26,066 Investment income, net 4,567 9,657 Net assets released from restrictions 1,421 1,671 Total unrestricted revenue and other support 544, ,337 Expenses: Salaries and wages 199, ,020 Employee benefits 53,625 49,935 Professional compensation and fees 8,098 11,983 Supplies and other 185, ,002 Depreciation and amortization 33,158 35,076 Provision for uncollectible accounts 37,940 34,029 Medicaid provider tax 10,226 11,388 Interest and debt expense 10,430 11,997 Impairment loss 664 8,098 Total expenses 539, ,528 Excess of revenues over expenses 4, Other changes in net assets: Net unrealized losses on investments (2,745) (2,311) Merger of Oak Hill with Plateau - 3,980 Loss on debt refinancing - (257) Net assets released for capital expenditure restrictions Contributions for capital expenditures Increase in unrestricted net assets $ 2,664 $ 2,654 See accompanying notes

7 Consolidated Statements of Changes in Net Assets Years ended December Unrestricted net assets: Excess of revenue over expenses $ 4,998 $ 809 Net unrealized losses on investments (2,745) (2,311) Merger of Oak Hill with Plateau - 3,980 Loss on debt refinancing - (257) Net restricted assets released for capital expenditure Contributions for capital expenditures Increase in unrestricted net assets 2,664 2,654 Temporarily restricted net assets: Contributions, net 764 1,973 Investment income 1,966 1,332 Net unrealized losses on investments (2,724) (205) Net assets released from restrictions: Satisfaction of program restrictions (1,421) (3,103) Satisfaction of capital expenditure restrictions (206) (265) Decrease in temporarily restricted net assets (1,621) (268) Permanently restricted net assets: Contributions 359 1,964 Increase in permanently restricted net assets 359 1,964 Increase in net assets 1,402 4,350 Net assets, beginning of year 216, ,346 Net assets, end of year $ 218,098 $ 216,696 See accompanying notes

8 Consolidated Statements of Cash Flows Years ended December Cash flows from operating activities Increase in net assets $ 1,402 $ 4,350 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Loss on debt refinancing Impairment loss 664 8,098 Depreciation and amortization 33,158 35,076 Provision for uncollectible accounts 37,940 34,029 Net realized/unrealized losses (gains) on investments 3,750 (2,496) Net restricted contributions and investment income (3,089) (5,269) Change in assets and liabilities: Patient receivables (36,404) (31,402) Other receivables (1,320) (1,811) Inventories, prepaid expenses and other (651) (615) Estimated amounts due from/to third-party payors 4,139 (5,102) Accounts payable and accrued expenses (13,468) (89) Accrued payroll and payroll related expenses 645 7,548 Other liabilities (226) (267) Net cash provided by operating activities 26,540 42,307 Cash flows from investing activities Capital expenditures, net (19,149) (20,567) Change in assets limited as to use, net 30,987 (44,620) Increase in short-term investments (5,755) (14,408) Change in other assets 1,281 (6,161) Net cash provided by (used in) investing activities 7,364 (85,756) Cash flows from financing activities Proceeds from issuance of long term debt 1, ,415 Principal payments on debt and other liabilities (27,651) (83,644) Net restricted contributions and investment income 3,089 5,269 Debt issuance costs - (1,113) Payments on line of credit (500) Borrowings under lines of credit and other short-term borrowings Net cash (used in) provided by financing activities (23,562) 36,227 Net increase (decrease) in cash and cash equivalents 10,342 (7,222) Cash and cash equivalents, beginning of year 22,103 29,325 Cash and cash equivalents, end of year $ 32,445 $ 22,103 Supplemental disclosure of cash flow information Cash paid during the year for interest $ 9,547 $ 11,009 See accompanying notes

9 Charleston Area Medical Center Health System and Subsidiaries Notes to Consolidated Financial Statements December 31, 2001 and Organization Charleston Area Medical Center Health System, Inc. (the Parent), formerly Camcare, Inc., is a West Virginia nonprofit corporation exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (Code). As the parent holding company, the Parent provides general guidance and strategic direction for the following subsidiaries (collectively, the System): Charleston Area Medical Center, Inc. (CAMC) a West Virginia nonprofit corporation that owns and operates the General, Memorial and Women and Children s Hospitals. Charleston Area Medical Center Foundation, Inc. (the Foundation) a West Virginia nonprofit corporation established for the purpose of raising funds for CAMC, other System subsidiaries and other area healthcare organizations. Heritage Health System, Inc. (Heritage) a West Virginia nonprofit corporation that owns and operates Plateau Medical Center, Inc. (Plateau), Heritage Management Services, Inc. and Heritage Medical Associates, Inc. Heritage was formed in 2000 when the System s joint venture with an unaffiliated third party dissolved. Included in other operating revenue in the accompanying 2000 consolidated statement of operations is a gain of $1,597 as a result of the dissolution. The assets of Plateau were previously owned by Oak Hill Hospital, Inc. (Oak Hill), a wholly owned subsidiary of the System, and leased to Plateau. In 2000, Oak Hill was merged with Plateau, with Plateau being the surviving corporation. In connection with the merger, Oak Hill forgave approximately $3,980 of unpaid lease payments due from Plateau for the period from 1997 to This is reflected as an increase to unrestricted net assets in the accompanying 2000 consolidated financial statements. Also in 2000, management evaluated the future cash flows expected to be generated by Plateau s operations and concluded that these cash flows were not sufficient to fully recover the carrying value of its goodwill. Based upon this evaluation, management recorded an impairment loss of $8,098 as goodwill was deemed to have no fair market value. This is reflected as an impairment loss in the accompanying 2000 consolidated statement of operations. CAMC Health Education and Research Institute, Inc. (the Institute) a West Virginia nonprofit corporation established for the purpose of managing, promoting and conducting medical education and research programs

10 Integrated Health Care Providers, Inc. (Integrated) a West Virginia corporation established for the purpose of providing physician services. Braxton County Memorial Hospital, Inc. (Braxton) a West Virginia nonprofit corporation that operates a community hospital in rural West Virginia. 2. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Parent and the aforementioned subsidiaries. All significant intercompany transactions and balances have been eliminated. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents represent cash and temporary investments with original maturities of three months or less. Short-term investments represent certain debt securities with original maturities extending beyond three months that management has identified as available to meet current operating needs. The System completes an evaluation at year-end to designate debt securities that are available for current operating needs and reclassifies such amounts from boarddesignated funds to short-term investments. Patient Receivables and Net Patient Service Revenue Patient receivables and net patient service revenues are derived primarily in the System s local geographic regions. Patient receivables consist of amounts due from third-party payors, including federal and state indemnity and managed care programs, managed care health plans, and commercial insurance companies, and individual patients for healthcare services rendered. The System does not require collateral or other security on its patient receivables. In 2001 and 2000, approximately 62% and 57%, respectively, of consolidated net patient service revenue is derived from third-party payment programs (Medicare, Medicaid, Public Employees Insurance Agency ( PEIA ), workers compensation and various other arrangements), which reimburse the System at amounts that are less than established charges. Net patient service revenue reflects the estimated net realizable amounts due from third-party payors for services rendered, including estimated retroactive adjustments under reimbursement agreements

11 Revenues from the Medicare and Medicaid programs account for approximately 42% and 9%, respectively, of the System s net patient service revenue for the year ended December 31, 2001, and 44% and 7%, respectively, for the year ended December 31, Reported costs and services provided under the reimbursement arrangements with Medicare and Medicaid are subject to retroactive audit and adjustment. Provision has been made in the consolidated financial statements for estimated contractual adjustments, representing the difference between the standard charges for services and estimated total payments to be received from third-party payors. Estimated settlements are accrued in the period the related services are rendered and adjusted in future periods as final settlements are determined. Settlement of prior year cost reports and revisions to prior year settlement estimates had the effect of decreasing net patient service revenue by approximately $2,006 in 2001 and increasing net patient service revenue by an immaterial amount in Laws and regulations governing these programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility recorded estimated settlements will change by a material amount in the near term. Management believes that adequate provisions have been made for reasonable adjustments that may result from such final settlements. The System believes it is in compliance with all applicable laws and regulations and is not aware of any 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. The approximate percentage of patient receivables by type of payor as of December 31, 2001 and 2000, is as follows: Medicare 27% 27% Commercial insurance Other third-party payment programs Medicaid Self-pay 9 7 PEIA 7 6 Total 100% 100%

12 Charity Care The System provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than its established rates. Because the System does not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as revenue (Note 3). The System maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone for services and supplies furnished under the System s charity care policies. Supplies Inventory All inventories are valued at the lower of cost on a first-in, first-out basis or market. Assets Limited as to Use Investments in equity securities with readily determinable fair values and all investments in debt securities are classified as nontrading and are measured at fair value using quoted market prices. Gains and losses determined by the average cost method, including other than temporary losses on unrestricted nontrading investments, are included in excess of revenues over expenses. Net unrealized gains and losses are recorded as changes in net assets in the accompanying consolidated statements of changes in net assets. The System reviews nontrading investments for impairment conditions that indicate that an other than temporary decline in market value has occurred. In conducting this review, various factors are considered which, individually or in combination, indicate that a decline is other than temporary and that a reduction of the carrying value is required. These factors include specific information pertaining to an individual company or a particular industry and general market conditions that reflect prospects for the economy as a whole. Based on this review, other than temporary losses of $1,096 were recorded in 2001, which are included in investment income in the consolidated statement of operations. Investments in limited partnerships in which the Foundation has less than 5% ownership are accounted for utilizing the cost method. Investments in limited partnerships in which the Foundation has greater than 5% ownership are accounted for utilizing the equity method. The carrying value of life insurance contracts represents the cash surrender value of such contracts. The Foundation s investments are commingled among unrestricted, temporarily and permanently restricted funds to obtain maximum use of funds and higher interest rates on short-term investments. The Foundation s investment income from unrestricted, temporarily restricted and

13 permanently restricted funds is allocated to unrestricted and temporarily restricted funds based on a fund s percentage of total net assets. Property, Plant and Equipment Amounts capitalized as part of land, buildings and equipment, including additions and improvements to existing facilities, are recorded at acquisition cost, including applicable internal labor costs capitalized during construction. During 2001 and 2000, approximately $917 and $857, respectively, of internal labor costs were capitalized related to construction projects. Depreciation, including amortization of assets recorded under capital leases, is recorded on the straight-line method over the estimated useful lives of the buildings and improvements (generally 10 to 40 years) and equipment (generally 3 to 20 years). Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted, and any gain or loss is recorded in the consolidated statement of operations. Maintenance costs and repairs are expensed as incurred. The System continually reviews the recoverability of the carrying value of long-lived assets as prescribed in Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The System also reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any write-downs due to impairment are charged to operations at the time impairment is identified. An amount of $664 was recorded in 2001 to reduce the carrying value of Plateau s property and equipment to estimated fair market value in connection with the planned sale of these operations during Contributions All contributions are recognized in the period received or the period in which an unconditional promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. 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, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of operations. For the Institute, donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. For the Foundation, donor-restricted contributions whose restrictions are met within

14 the same year as received are reported as net assets released from restrictions in the accompanying consolidated financial statements. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are available primarily for cancer related initiatives, research, education and scholarship programs, and the care of indigent patients. Permanently restricted net assets are restricted in perpetuity, and the income is to be used primarily for clinical and education programs. Self-Insurance Health Plan The System has a self-insurance program for employee health insurance. Payments for claims by employees are remitted to a third-party administrator to provide for the payment of actual claims and administrative fees. Estimated unpaid claims, including amounts for incurred but not reported claims, are included in accounts payable and other accrued expenses. Excess of Revenues over Expenses The consolidated 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 were to be used for the purposes of acquiring such assets). Income Taxes Integrated follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. At December 31, 2001 and 2000, Integrated had recorded a deferred tax asset of approximately $5,529 and $5,931, respectively, representing NOL carryforwards. This deferred tax asset has been fully reserved by a valuation allowance in the accompanying consolidated balance sheets due to the uncertainty of Integrated s ability to generate future taxable income. CAMC, the Foundation, Heritage, the Institute and Braxton are exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and applicable state statutes. Accordingly, no provision for income taxes is made in the accompanying consolidated financial statements

15 Change in Accounting Principle In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (Statement No. 133), Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under Statement No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. As of December 31, 2000, CAMC entered into a fixed-to-floating and a floating-tofloating interest rate swap arrangement with Merrill Lynch Capital Services, Inc. ( MLCS ) for the notional principal amount of $117,700. In conjunction with the interest rate swap agreements, CAMC also entered into an interest rate cap agreement with MLCS on $60,000 of the aggregate principal amount of $117,700. On January 1, 2001, the System adopted Statement No In connection with the adoption of Statement No. 133, the interest rate swap and cap agreements were recorded at their fair value ($622) with a corresponding adjustment to increase the carrying value of the related debt. As a result, there was no cumulative effect from the adoption of SFAS No The $622 adjustment to the carrying value of the fixed-rate revenue bonds will be amortized over the remaining term of the related debt using the effective-interest method. In June 1999, the Financial Accounting Standards Board issued Statement No. 136, Transfers of Assets Involving a Not-For-Profit Organization that Raises or Holds Contributions for Others (Statement No. 136). This statement clarifies accounting for contributions collected and assets held by foundations and others on behalf of the System or its affiliates. Statement No. 136 was adopted on January 1, 2000, with no overall impact to the consolidated financial statements of the System. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Adjustments to estimates are recorded, as appropriate, in periods in which they are determined

16 Reclassifications Certain reclassifications have been made to the 2000 consolidated financial statements to conform to the 2001 presentation. Such reclassifications did not affect previously reported excess of revenues over expenses or increase in net assets. 3. Net Patient Service Revenue Net patient service revenue for the years ended December 31, 2001 and 2000, consists of the following: 2001 CAMC Heritage Integrated Braxton Total 2000 Gross patient service billings $ 753,842 $ 32,317 $ 28,171 $ 15,471 $ 829,801 $ 764,270 Charity care allowances (10,547) (973) (180) (19) (11,719) (11,914) Contractual allowances (288,996) (14,523) (9,803) (4,794) (318,116) (283,353) Medicaid disproportionate share enhancement program revenue 8, ,132 9,940 Net patient service revenue $ 462,474 $ 17,237 $ 18,188 $ 11,199 $ 509,098 $ 478,943 The System has agreements with third-party payors that provide for payments at amounts that differ from its established rates. A summary of the payment arrangements with major third-party payors is as follows: Medicare Inpatient acute care services rendered to Medicare program beneficiaries and defined medical education, disproportionate share reimbursement and capital costs are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Effective August 2000, outpatient services are reimbursed at prospectively determined rates per visit based primarily on ambulatory payment classification. To ensure that providers do not experience a significant decrease in payments due to the change in reimbursement, additional transitional payments have been established through Some inpatient nonacute services, certain outpatient services and a percentage of bad debt costs related to Medicare beneficiaries are paid based primarily on a cost reimbursement methodology. The System is primarily reimbursed for cost-reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. Classification of patients under the Medicare program and the

17 appropriateness of their admission are subject to an independent review by a peer review organization under contract with the Medicare program. The Medicare cost reports for CAMC, Plateau and Braxton have been audited by the Medicare fiscal intermediary through December 31, Medicaid Beginning in 1996, inpatient services rendered to Medicaid program beneficiaries are reimbursed on a prospective payment system. Previously, Medicaid reimbursement was at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicaid program. Outpatient services rendered to Medicaid program beneficiaries are reimbursed based on a fee schedule, with no retroactive adjustment. CAMC, Plateau and Braxton s Medicaid cost reports have been audited by the Medicaid program through December 31, PEIA Inpatient services rendered to PEIA subscribers are reimbursed on a prospective payment system. Outpatient services rendered to PEIA subscribers are reimbursed based on a fee schedule, with no retroactive adjustment. The System has also entered into payment agreements with certain commercial insurance carriers, preferred provider organizations ( PPO ) and HMOs. The primary basis for payment under the commercial, HMO and PPO arrangements is negotiated rates. Medicaid Disproportionate Share Enhancement Program Under the West Virginia Medicaid disproportionate share enhancement program, funds designated by the West Virginia Legislature for disproportionate share hospitals are distributed based on, among other things, each particular hospital s Medicaid inpatient activity and total operating expenses compared to other hospitals in the State. During 2001 and 2000, the System recorded approximately $9,132 and $9,940, respectively, in reimbursement from the disproportionate share program. This reimbursement has been included in net patient service revenue in the accompanying consolidated statements of operations. Funds received from this program are subject to retroactive adjustment. The State of West Virginia renewed the program through June 30,

18 Health Care Provider Medicaid Enhancement Tax The West Virginia Health Care Provider Medicaid Enhancement Tax Act of 1993 assesses a tax on net patient service revenue at rates varying from 1.75% to 5.5% depending on the type of services provided. This tax totaled $10,226 and $11,388 during 2001 and 2000, respectively, and is reflected as an operating expense in the accompanying consolidated statements of operations. 4. Assets Limited as to Use Assets limited as to use consist of the following as of December 31, 2001 and 2000: Board-designated funds: Cash and cash equivalents $ 907 $ 18,840 Corporate stocks 50,268 54,956 Limited partnerships 10,255 10,126 Mutual funds 41,635 44, , ,201 Self-insurance: Cash and cash equivalents 5,773 5,548 Government obligations 11,215 10,659 Corporate bonds 313 2,993 Corporate stocks 9,211 8,300 Mutual funds and other 2, ,386 27,710 Trustee-held acquisition fund cash and cash equivalents 6,047 14,401 Other trustee-held funds: Mutual funds 15,542 15,100 Money market 2,483 2,506 18,025 17,606 Other assets: Cash and cash equivalents 5,536 3,043 Life insurance contracts 3,165 4,610 Mutual funds - 4,650 Other ,401 12,743 Total $ 165,924 $ 200,

19 Board-designated funds consist of the Foundation and CAMC s investments for capital and operating expenditures. Self-insurance and postretirement benefit assets are maintained in bank trust departments. Trustee-held investments represent funds set aside for certain Obligated Group debt service requirements (Note 5). The acquisition fund was set aside from the proceeds of the 1999 Series A and C Bonds and the 2000 Series A Bonds for future capital improvements. Investment income and gains on assets limited as to use are comprised of the following for the years ended December 31, 2001 and 2000: Unrestricted: Interest and dividend income $ 3,944 $ 4,645 Realized gains on investments, net 1,719 5,012 Other than temporary losses on investments (1,096) Net unrealized gains and losses (2,745) (2,311) 1,822 7,346 Temporarily restricted: Interest and dividend income 1, Realized gains on investments, net Net unrealized gains and losses (2,724) (205) (758) 1,127 Net investment income and gains and losses $ 1,064 $ 8, Capital and Operating Lease Obligations and Long-Term Debt Obligations under capitalized leases and long-term debt are as follows as of December 31: Series A and B Bonds $ 115,955 $ 116, Series C Bonds - 23, Series A Bonds 54,630 58,350 Other 12,651 11, , ,499 Less unamortized discount (2,319) (2,431) 180, ,068 Less current maturities (5,684) (5,998) Total capital lease obligations and long-term debt $ 175,233 $ 201,

20 2000 Series A and B Bonds In June 2000, CAMC and Oak Hill entered into a loan agreement with the West Virginia Hospital Finance Authority (the Authority), pursuant to which CAMC borrowed the proceeds of the Authority s $93,225 Hospital Revenue Bonds, 2000 Series A (2000 Series A Bonds) and Oak Hill borrowed the proceeds of the Authority s $24,475 Hospital Revenue Bonds, 2000 Series B (2000 Series B Bonds) for an aggregate principal amount of $117,700. The proceeds of the 2000 Series A Bonds were used to legally defease the 1993 Series A Bonds and 1999 Series A Bonds and to fund future capital expenditures. The proceeds of the 2000 Series B Bonds were used to legally defease the 1999 Series B Bonds. In 2000, Oak Hill merged with Plateau, making Plateau the principal obligor under the 2000 Series B Bonds. CAMC and Plateau recognized an extraordinary loss of $206 and $51, respectively, as a result of the debt refinancings. Interest on the 2000 Series A Bonds and 2000 Series B Bonds accrues at rates from 5.3% to 6.75% and 6.75%, respectively. The 2000 Series A Bonds require payments of principal and interest through September 1, The 2000 Series B Bonds require interest payments of approximately $1,652 annually through September 1, Annual principal payments are scheduled to begin on September 1, 2014, through September 1, In conjunction with the 2000 Series A and B Bonds issuance, CAMC entered into a fixed-tofloating and a floating-to-floating interest rate swap arrangement with Merrill Lynch Capital Services, Inc. (MLCS) for the notional principal amount of $117,700. CAMC will pay a floating interest rate on the 2000 Bonds based on the Bond Market Association Swap Index (which is reset every Wednesday), and will receive a fixed rate of 5.3% to 6.75% on the 2000 Series A Bonds and a fixed rate of 6.75% on the Series 2000 B Bonds. In conjunction with the interest rate swap agreements, CAMC also entered into an interest rate cap agreement with MLCS on $60,000 of the aggregate principal amount of $117,700. The agreement caps the floating interest rate at 7.5% for $60,000 of the debt. Following the adoption of SFAS No. 133, the System s derivative instruments no longer qualify for hedge treatment. Accordingly, changes in the fair value of the derivative instruments and the related debt are included in the statement of operations. In June 2001, CAMC terminated the fixed-to-floating interest rate swap contract and recognized a gain of approximately $1.1 million, which represents the change in fair value of the contract from January 1, 2001 through the date of sale. The gain is included in other operating revenue in the accompanying consolidated statement of operations. The increase in the fair value of the floating-to-floating swap and interest rate cap agreements during 2001 approximated $300 and is included in other operating revenue. At December 31, 2001, the fair value of the floating-to-floating interest rate swap contract and interest rate cap agreement was a liability of $2.8 million and is included in accrued expenses in

21 the accompanying consolidated balance sheet. Under the terms of the related contracts with MLCS, CAMC will maintain collateral posted with MLCS to secure the estimated value of the derivative instruments, as periodically determined by MLCS. The minimum amount required in the collateral account regardless of the estimated value of the hedge is $2,400. At December 31, 2001, CAMC deposited approximately $2,500 in collateral with MLCS, which is reflected in other assets limited as to use in the accompanying consolidated balance sheets. The floating-to-floating swap agreement terminates September 1, 2030, and the interest rate cap agreement terminates September 1, Series C Bonds In December 1999, CAMC entered into a loan agreement with the Authority pursuant to which it borrowed the proceeds of the Authority s $23,000 Taxable Hospital Revenue Bonds, 1999 Series C (the 1999 Series C Bonds ). The interest rate on the 1999 Series C Bonds is equal to the most recently announced 30-day LIBOR rate (which is reset as of two business days prior to the first day of each calendar month) plus 1%, effectively 7.56% at December 31, During 2001, CAMC repaid the $23,000 outstanding balance of the 1999 Series C Bonds Series A Bonds In 1995, CAMC entered into a refinancing agreement with the Authority relating to the refunding of the 1986 Series A, 1989 Series A and 1989 Series B Hospital Revenue Refunding Bonds. In connection with this agreement, the Authority issued the 1995 Series A Hospital Revenue Refunding Bonds in the aggregate principal amount of $73,420. Interest on the Bonds accrues at rates ranging from 4.5% to 5.75%. The Bonds mature on various dates through 2006, and on September 1, The Bonds maturing on September 1, 2013, are subject to mandatory redemption prior to maturity commencing September 1, The Bonds are secured by a promissory note, 1995 Series A Note, given to the Authority as specified under CAMC s 1993 Restated Master Trust Indenture (the Master Trust Indenture ). The 1995 Series A Note is an unsecured obligation of CAMC

22 Other In May 2001, Braxton entered into a loan agreement with the West Virginia Hospital Association pursuant to which Braxton borrowed $1,970,000 West Virginia Hospital Finance Authority Variable Rate Demand Revenue Bonds, Series 2001B-2. The proceeds of the 2001 Series B-2 Bonds were used to fund capital expenditures. Interest on the 2001 Series B-2 Bonds accrues at variable rates, presently 1.6% at December 31, The 2001 Series B-2 Bonds require principal and interest payments of approximately $37,000 annually through May The Women and Children s Medical Office Building Partnership, which is included in CAMC s accounts, has a promissory note payable to a financial institution for $4,883 which matures on December 31, The average interest rate on the note was 5.7% and 7.8% in 2001 and 2000, respectively. The loan is secured by the building and guaranteed by CAMC. The West Virginia Hospital Finance Authority Hospital Refunding Revenue Bonds 1992 Series A, dated October 1, 1993, were issued for $4,770 on behalf of the General Division Medical Office Building Partnership, which is consolidated in the accompanying balance sheets. The bonds bear interest at a rate that fluctuates so as to remain equal to the prime rate, as defined, effectively 4.75% at December 31, The bonds are secured by the office building and guaranteed by CAMC. Obligated Group Effective June 29, 1999, the Foundation joined CAMC as a member of the Obligated Group, in accordance with the provisions of the Master Trust Indenture. The Foundation and CAMC are jointly and severally liable for the performance of all covenants and obligations contained in the Master Trust Indenture and in the related notes and guarantees. The 1995 Series A Bonds and 2000 Series A Bonds are obligations under the Master Trust Indenture at December 31, Foundation assets in the amount of approximately $90,098 and $94,806 are available at December 31, 2001 and 2000, respectively, to satisfy obligations of the Obligated Group. CAMC has guaranteed the obligations under the 2000 Series B Bonds, which are secured by a note issued under the Master Trust Indenture, thereby making the Foundation and CAMC jointly and severally liable for the payment of the 2000 Series B Bonds. The Obligated Group has also guaranteed CAMC s line and letters of credit described in Note

23 Debt Service and Capital Lease Requirements The System is required, to make the following payments under capital lease and long-term debt obligations as of December 31, 2001: Bond Series 2000A and 1995A 2000B Other Total 2002 $ 6,782 $ 8,660 $ 1,661 $ 17, ,781 8,660 1,025 16, ,766 8,661 5,916 21, ,763 8, , ,759 8, ,105 Thereafter 41, ,782 4, ,866 Total payments 74, ,075 14, ,980 Amounts representing interest and unamortized discount (19,949) (158,858) (3,256) (182,063) Present value of future minimum payments $ 55,035 $114,217 $ 11,665 $ 180,917 Approximate market value at December 31, 2001 $ 56,923 $123,525 Operating Lease Agreements The System leases various land, computer, office and movable equipment under operating lease agreements expiring at various dates through The following payments are required under operating lease agreements as of December 31, 2001: 2002 $ 3, , , , ,424 Thereafter 1,590 $ 17,

24 Total expense recognized for operating leases, which is included in supplies and other in the accompanying consolidated statements of operations, was $3,894 and $5,106 for the years ended December 31, 2001 and 2000, respectively. 6. Lines of Credit and Short-Term Borrowings In January 2001, CAMC obtained a revolving line of credit in the amount of $10 million and letter of credit with a bank. $8,000 of the revolving line of credit is available for short-term working capital needs. The remaining $2 million has been reserved as credit enhancement for the Series 2001 B-2 Bonds borrowed by Braxton. The irrevocable stand-by letter of credit in the amount of $2,000 is for Braxton. The line of credit and letter of credit expire on October 1, The letter of credit is automatically renewable for periods of one year until October 1, There are no amounts outstanding under the line of credit at December 31, As of December 31, 2001, there was $2,804 committed to undrawn workers compensation letters of credit. At December 31, 2000, the System had various lines of credit with banks with aggregate borrowing limits totaling $500. The outstanding balance on these lines of credit at December 31, 2000, was $500. Borrowings under the line of credit had an interest rate of prime plus 0.5% (effectively 10%) at December 31, Liabilities for Self-Insurance Reserves Certain System subsidiaries are self-insured for professional malpractice and general liability claims through the Camcare and Affiliates Malpractice Self-Insurance Trust (the Trust ). Participating affiliates have proportionate rights to the trust account balances held under the custodial management of a bank trust department and can withdraw from the trust subject to certain actuarially determined withholds. Contributions to the Trust are made as determined by an actuarial valuation of occurrence-based risks, which includes consideration of incurred but not reported claims exposure. As of December 31, 2001 and 2000, the System has recorded approximately $34,082 and $33,369, respectively, as the liability for self-insured asserted and unasserted professional malpractice claims. The estimated current portion of approximately $8,300 in 2001 and $6,700 in 2000 is included in accounts payable and accrued expenses in the accompanying balance sheets. The estimated liability for such malpractice claims has been discounted using a discount rate of 5% and 7.5%, respectively, at December 31, 2001 and The trust accounts are used for payment

25 of any professional malpractice and general liability losses, expenses relating thereto, costs of administering the trust and insurance premiums for coverage in excess of the self-insured limits. The limits (in aggregate for all participants) are a maximum $3,000 per occurrence and a maximum aggregate limit of $12,454 for January 1, 1998, through April 30, 1999, and $3,000 per occurrence and a maximum annual aggregate limit of $9,000 after May 1, Certain System subsidiaries are also self-insured for workers compensation, unemployment compensation and disability. The workers compensation plan s trust fund is under the custodial management of a bank trust department. The obligation recorded for these programs is $4,849 and $2,684 at December 31, 2001 and 2000, respectively, and is estimated using statistical analyses by consulting actuaries. While the ultimate amount of costs incurred under the System s self-insured programs is dependent on future developments, in management s opinion, recorded reserves are adequate to cover the future settlement of claims. However, it is reasonably possible that recorded reserves may not be adequate to cover the future settlement of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments are known. 8. Benefit Plans Deferred Profit Sharing Plan CAMC s deferred profit sharing plan, frozen effective January 1, 1990, was replaced with the Retirement Savings Plan. Effective January 1, 1999, the plan was amended and restated to allow all employees of participating employers (CAMC, Camcare, the Institute and the Foundation) to participate in the plan. Employees may contribute from 1%-19% of their salary, subject to certain limitations, to the plan and the employers will match from 1%-6% based on the employees years of service. Total employer contributions to the deferred profit sharing plan were $5,711 and $5,358 during 2001 and 2000, respectively, which is included in employee benefits in the accompanying consolidated statements of operations. Postretirement Benefits Other Than Pensions Effective May 1, 1998, employees were notified of the discontinuation of postretirement health benefits. In accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, as of the effective date, the System ceased recognizing service costs

26 related to the healthcare component of the benefit. However, life insurance and sick day buyout benefits remain. The 2001 and 2000 postretirement benefit expenses were as follows: Service cost of benefits earned $ 37 $ 39 Interest cost on accumulated postretirement benefit obligation 1,387 1,359 Amortization of transition obligation and losses Net periodic postretirement benefit expense, included in employee benefits $ 1,528 $ 1,471 Benefits paid $ 1,321 $ 1,596 The postretirement benefit plan is not funded at December 31, 2001 and Information related to the plan as of December 31, 2001 and 2000, is as follows: Accumulated postretirement benefit obligation: Current retirees $ 17,751 $ 19,830 Fully eligible active plan participants Other active participants Total 19,396 21,587 Unrecognized transition obligation at adoption, net of amortization (4) (5) Unrecognized net gain (1,117) (3,515) Liability for postretirement benefit obligations $ 18,275 $ 18,067 The estimated current portion of the obligation of approximately $1,344 in 2001 and $1,528 in 2000 is included in accounts payable and accrued expenses in the accompanying balance sheets. For measurement purposes, a 5% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2001 and thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for 2001 by approximately $1,243. A discount rate of 6.75%

27 was used to determine the accumulated postretirement benefit obligation as of December 31, 2001 and Related Party Transactions West Virginia University (WVU) employs the physicians who provide medical education and supervision to the resident physicians employed by CAMC. In 2001 and 2000, the Institute provided approximately $2,724 and $2,314, respectively, to help support WVU for the physicians who teach and supervise the resident physicians. The fee paid to WVU is included in supplies and other expense in the accompanying consolidated statements of operations. The Institute has committed $3,134 to further support WVU for the use of the teaching and supervising physicians. 10. Functional Expenses The functional expenses related to the System s operations are as follows: Provision of healthcare and related services $ 422,149 $ 414,919 General and administrative 117, ,609 $ 539,415 $ 515, Commitments and Contingencies Litigation The System is party to several routine lawsuits incidental to its operations. It is not possible at the present time to estimate the ultimate legal and financial liability, if any, of the System with respect to certain lawsuits. In the opinion of management after consultation with counsel, adequate insurance exists to cover the System in the event of any significant financial exposure. Accordingly, in the opinion of management, resolution of those matters is not expected to have a material adverse effect on the System s consolidated financial position. However, depending on the amount and timing of such resolution, an unfavorable resolution of some or all of these matters could materially affect the future results of operations or cash flows in a particular period