C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION ( UNAUDITED) Health First, Inc. and Subsidiaries

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION ( UNAUDITED) March 31, 2015

2 Consolidated Financial Statements and Supplementary Information (Unaudited) Consolidated Financial Statements Contents Consolidated Balance Sheets at March 31, 2015 and September 30, 2014 (Unaudited)...1 Consolidated Statements of Operations and Changes in Net Assets for the Three and Six Months Ended March 31, 2015 and 2014 (Unaudited)...2 Consolidated Statements of Cash Flows for the Three and Six Months Ended March 31, 2015 and 2014 (Unaudited)...4 Notes to Consolidated Financial Statements (Unaudited)...5 Supplementary Information Key Debt Ratios...34 System Hospitals Performance Dashboard...35

3 Consolidated Balance Sheets (Unaudited) Assets Current assets: Cash and cash equivalents 139,672 March 31, 2015 September 30, 2014 (In Thousands) $ $ 132,422 Investments 456, ,611 Current portion of assets limited as to use 11,849 14,599 Accounts receivable, less allowances for uncollectible accounts of $73,555 and $68, , ,751 Inventories 24,363 23,894 Prepaid expenses and other current assets 44,406 39,196 Total current assets 789, ,473 Assets limited as to use, less current portion 25,493 34,078 Property and equipment, net 699, ,941 Goodwill 18,812 17,162 Other assets 28,282 26,640 Total assets $ 1,561,767 $ 1,525,294 Liabilities and net assets Current liabilities: Accounts payable and accrued liabilities $ 151,231 $ 138,726 Current portion of long-term debt and capital lease obligation 15,991 17,792 Total current liabilities 167, ,518 Long-term debt and capital lease obligation, less current portion 622, ,577 Other noncurrent liabilities 37,554 37,929 Total liabilities 827, ,024 Net assets: Unrestricted: Controlling interest 726, ,855 Noncontrolling interests in subsidiary 1,296 1, , ,124 Temporarily restricted - controlling interest 6,557 7,146 Total net assets 734, ,270 Total liabilities and net assets $ 1,561,767 $ 1,525,294 See accompanying notes. 1

4 Consolidated Statements of Operations and Changes in Net Assets (Unaudited) Three Months Ended March 31 Six Months Ended March (In Thousands) (In Thousands) Unrestricted revenues and other support: Patient service revenue $ 199,089 $ 192,032 $ 395,298 $ 371,886 Provision for bad debts (6,007) (9,381) (15,531) (19,164) Net patient service revenue 193, , , ,722 Premium revenue 108,120 95, , ,511 Income from joint ventures Other revenue 10,343 7,503 16,867 15,060 Net assets released from restrictions for operations , Total unrestricted revenues and other support 312, , , ,386 Expenses: Salaries and benefits 130, , , ,241 Supplies and other expenses 97,468 85, , ,122 Medical service expenses 49,416 41,101 90,354 74,817 Depreciation and amortization 15,690 15,722 31,275 31,482 Interest 5,833 6,673 11,766 13,397 Total operating expenses before restructuring charges 299, , , ,059 Income from operations before restructuring charges 13,532 18,747 27,370 30,327 Restructuring charges (806) (1,374) (1,878) (1,541) Income from operations 12,726 17,373 25,492 28,786 Nonoperating gains (losses): Investment income 3,920 2,067 8,450 4,205 Change in value of interest rate swaps (1,164) (921) (2,559) (482) Other (21) (31) (21) (132) Total nonoperating gains (losses) 2,735 1,115 5,870 3,591 Excess of revenues, other support, and gains over expenses and losses before debt extinguishment 15,461 18,488 31,362 32,377 Debt extinguishment (Note 8) (33,826) Excess (deficiency) of revenues, other support, and gains over expenses and losses 15,461 18,488 (2,464) 32,377 Less: Excess of revenues, other support, and gains over expenses and losses attributable to noncontrolling interests Excess (deficiency) of revenues, other support, and gains over expenses and losses attributable to controlling interest 15,454 18,441 (2,490) 32,302 2

5 Consolidated Statements of Operations and Changes in Net Assets (Unaudited) (continued) Three Months Ended March 31 Six Months Ended March (In Thousands) (In Thousands) Unrestricted net assets: Excess (deficiency) of revenues, other support, and gains over expenses and losses attributable to controlling interest $ 15,454 $ 18,441 $ (2,490) $ 32,302 Excess of revenues, other support, and gains over expenses and losses attributable to noncontrolling interests Net unrealized gains on other-than-trading securities 4,379 3,645 11,254 19,402 Other changes in unrestricted net assets (267) (73) (443) (122) Increase in unrestricted net assets 19,573 22,060 8,347 51,657 Temporarily restricted net assets: Contributions Investment income Net assets released from restrictions for operations (691) (128) (1,404) (336) (Decrease) increase in temporarily restricted net assets (338) 7 (589) 119 Increase in net assets 19,235 22,067 7,758 51,776 Net assets, beginning of period 714, , , ,023 Net assets, end of period $ 734,028 $ 687,799 $ 734,028 $ 687,799 See accompanying notes. 3

6 Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31 Six Months Ended March (In Thousands) (In Thousands) Operating activities Increase in net assets $ 19,235 $ 22,067 $ 7,758 $ 51,776 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net unrealized gains on trading and other-than-trading securities (5,190) (4,208) (12,498) (19,559) Realized (gains) losses on sales of securities (408) 113 (363) 185 Loss on disposal of property and equipment Change in value of interest rate swaps 1, , Restricted contributions and investment income (353) (134) (815) (454) Loss on extinguishment of debt 33,826 Income from joint ventures (474) (496) (883) (757) Distributions from joint ventures ,068 1,120 Depreciation and amortization 14,829 15,722 30,268 31,482 Provision for bad debts 6,007 9,381 15,531 19,164 Changes in operating assets and liabilities: Accounts receivable (11,735) (15,758) (22,554) (21,228) Inventories (217) (709) (469) (1,275) Other operating assets (1,685) (5,889) (8,396) (8,101) Accounts payable and accrued liabilities 28,911 26,937 12,470 9,285 Other noncurrent liabilities (93) (89) (5,120) (6,997) Net cash provided by operating activities 50,430 48,473 52,397 55,271 Investing activities Proceeds from the sale or maturity of investments 26,375 21,051 88,215 39,280 Purchases of investments (27,576) (34,918) (109,293) (70,724) (Decrease) increase in assets limited as to use (5,841) (9,219) 3,104 3,032 Purchases of property and equipment (8,219) (6,150) (19,539) (10,178) Other investing activities (500) (1,000) Net cash used in investing activities (15,761) (29,236) (38,513) (38,590) Financing activities Proceeds from issuance of long-term debt 256,561 Repayments of long-term debt and capital lease obligation (6,243) (3,262) (264,010) (6,389) Restricted contributions and investment income Net cash used in financing activities (5,890) (3,128) (6,634) (5,935) Increase in cash and cash equivalents 28,779 16,109 7,250 10,746 Cash and cash equivalents, beginning of period 110, , , ,876 Cash and cash equivalents, end of period $ 139,672 $ 150,622 $ 139,672 $ 150,622 See accompanying notes. 4

7 Notes to Consolidated Financial Statements (Unaudited) March 31, 2015 (Dollars in Thousands) 1. Reporting Entity Health First, Inc. (the Parent) is a not-for-profit parent holding company located in Brevard County, Florida, whose primary purpose is to direct the affairs of a multi-entity health care system, which includes the following affiliates: Holmes Regional Medical Center, Inc. (HRMC) a tax-exempt, 514-bed acute care hospital. Palm Bay Hospital (PBH) a tax-exempt, 152-bed acute care hospital that is a division of HRMC. Pro Health Fitness Center (PH) a tax-exempt division of HRMC with four state-of-theart health and fitness centers. Cape Canaveral Hospital, Inc. (CCH) a tax-exempt, 150-bed acute care hospital and home health agency. Viera Hospital (VH) a tax-exempt, 84-bed acute care hospital. Health First Health Plans, Inc. (HFHP) a taxable entity providing various health care insurance services to employees of the Parent, other employers, and Medicare Advantage Plans. Health First Medical Group, LLC (HFMG), Health First Physicians, Inc. (HFPI) and Health First Medical Management, Inc. (HFMM) taxable entities providing a system of primary care centers, specialty and ancillary services, as well as physician practice management services. Hospice of Health First, Inc. (HHF) a tax-exempt entity that provides care for terminally ill individuals. Health First Foundation, Inc. (HFF) a tax-exempt entity that performs philanthropic activities. 5

8 1. Reporting Entity (continued) Other affiliated organizations include Cape Health Properties, Inc. (CHP), a subsidiary of CCH; Health First Holding Corp. (HFHC); Holmes Regional Enterprises, Inc. (HRE); Viera Medical Plaza at Viera Health Park (VMOB); Health First Insurance, Inc. (HFII); Health First Family Pharmacy (HFFP), a division of HRMC; Doctor s GI Partnership, LTD. (DGP), a majority-owned partnership of HRMC; and taxable entities that manage health care-related and/or other businesses and professional services. The Parent is the sole member or owner of each of the above entities except CHP and DGP, and controls the multi-entity structure through appointment by the Board of Trustees (Board) and approval of all major transactions. 2. Significant Accounting Policies The accompanying consolidated financial statements include the accounts of the Parent and its controlled affiliates (referred to herein collectively as the Corporation). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Financial Statement Presentation The Corporation conforms to the requirements of the Presentation of the Financial Statements Not-for-Profit Entities Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), which establishes standards for external financial reporting by not-for-profit organizations and requires that resources be classified for accounting and reporting purposes into three net asset categories (unrestricted, temporarily restricted, and permanently restricted) according to externally (donor) imposed restrictions. Cash and Cash Equivalents The Corporation classifies all highly liquid investments with an original maturity of 90 days or less when purchased as cash and cash equivalents, excluding amounts limited as to use by Board designation or other arrangements under trust agreements. Cash deposits are federally insured in limited amounts. 6

9 2. Significant Accounting Policies (continued) Investments and Investment Income The Corporation conforms to the requirements of the Investments Not-for-Profit Entities Topic of the FASB ASC. In accordance with those requirements, investments in equity securities with readily determinable fair values and all investments in debt securities are stated at fair value in the consolidated balance sheets. Investment income or loss, including realized gains and losses on investments and interest and dividends, is included in the excess of revenues, other support and gains over expenses and losses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from the excess of revenues, other support, and gains over expenses and losses, unless the investments are trading securities. Other-than-temporary impairment of investments represents losses on debt and equity securities for which the decline in the fair value below the cost basis was determined to be other than temporary. Assets Limited as to Use Assets limited as to use primarily include assets held by trustees under bond indenture agreements and designated assets set aside by the Board for malpractice and other obligations, over which the Board retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities of the Corporation are reported as current assets (see Note 4). Inventories Inventories, consisting primarily of medical supplies and pharmaceuticals, are stated at the lower of cost (first-in, first-out) or market value. Property and Equipment Property and equipment are stated at cost or, if donated, at fair value at the date of the gift. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized, as are interest costs during the period of construction for such expenditures. Depreciation is computed utilizing the straight-line method at rates estimated by management to amortize the cost of the various assets within the periods of expected use. Amortization of assets recorded under capital leases is included in depreciation and amortization expense and accumulated depreciation and amortization. 7

10 2. Significant Accounting Policies (continued) Impairment of Long-Lived Assets The Corporation reviews long-lived assets to be held and used for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluation relies on a number of factors, including operating results, future anticipated cash flows, business plans, and certain economic projections. In addition, the Corporation s evaluation considers nonfinancial data, such as changes in operating environment and business relationships. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, the Corporation recognizes an impairment loss. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Corporation estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. Goodwill Goodwill represents the excess of the purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of the businesses acquired. These amounts are evaluated annually for impairment or when there is an indicator of impairment. In accordance with ASC Topic 350, in performing the annual assessment, the Corporation chose to complete a qualitative assessment to determine whether it is more likely than not that the fair value of its reporting unit is less than the carrying amount. The Corporation performed its last annual goodwill evaluation during the third quarter of fiscal year ending September 30, Management determined that it was not more likely than not that the fair value of the Corporation s reporting unit was less than the carrying amount. Therefore, the two-step impairment test under ASC Topic 350 was not required. 8

11 2. Significant Accounting Policies (continued) Contributions The Corporation records contributions in accordance with the Revenue Recognition Not-for- Profit Entities Topic of the FASB ASC, which establishes accounting standards for contributions for donees (and donors) and generally requires unconditional promises to give cash and other assets (including multiyear promises) to be recognized at fair value as revenue and expenses in the period made. Noncash contributions are valued at fair value on the date of the gift. Contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets are released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as the contributions received are reflected as unrestricted contributions in the accompanying consolidated financial statements. Temporarily restricted net assets are primarily available for property and equipment purchases and support of specific programs administered by HRMC, CCH, PBH, VH, and HHF. Excess of Revenues, Other Support, and Gains Over Expenses and Losses The consolidated statements of operations and changes in net assets include excess of revenues, other support, and gains over expenses and losses. Changes in unrestricted net assets that are excluded from excess of revenues, other support, and gains over expenses and losses include changes in unrealized gains and losses on other-than-trading securities, distributions to noncontrolling interests and contributions of long-lived assets, including assets acquired using contributions that, by donor restriction, were to be used for the purpose of acquiring such assets. Net Patient Service Revenue, Accounts Receivable, and Allowance for Uncollectible Accounts Patient service revenue and accounts receivable are reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered. The Corporation recognizes patient service revenue associated with patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, revenue is recognized on the basis of discounted rates in accordance with the Corporation s policy. 9

12 2. Significant Accounting Policies (continued) Patient service revenue is reduced by the provision for bad debts and accounts receivable are reduced by an allowance for uncollectible accounts. The provision for bad debts and allowance for uncollectible accounts are based upon management s assessment of historical and expected net collections and historical write-off experience by payor and aging category, trends in health care coverage, and other collection indicators. Management regularly reviews collections data by major payor sources in evaluating the sufficiency of the allowance for uncollectible accounts. On the basis of historical experience, a significant portion of the amounts owed by the Corporation s self-pay patients for services rendered will not be paid. As such, the Corporation records a significant provision for bad debts in the period services are rendered related to self-pay patients. The Corporation s allowance for uncollectible accounts for self-pay patients was 89% and 93% of self-pay accounts receivable as of March 31, 2015 and September 30, 2014, respectively. For receivables associated with patients who have third-party coverage, the Corporation analyzes contractually due amounts and provides an allowance for uncollectible accounts and a provision for bad debts, if deemed necessary. Accounts receivable are written off after collection efforts have been followed in accordance with the Corporation s policies. Accounts written off as uncollectible are deducted from the allowance and subsequent recoveries are added. The Corporation has determined, based on an assessment at the reporting entity level, that patient service revenue is primarily recorded prior to assessing the patient s ability to pay and as such, the entire provision for bad debts is recorded as a deduction from patient service revenue in the accompanying consolidated statements of operations and changes in net assets. The Corporation has not experienced significant changes in write-off trends and has not materially changed its charity care policy. Patient service revenue is not recognized for those patients that qualify for charity under the Corporation s policies. For all other patients, patient service revenue, net of contractual allowances and self-pay discounts and before the provision for bad debts, recognized from major payor sources is as follows: Three Months Ended March 31 Six Months Ended March Third-party payors, net of contractual allowances $ 181,878 $ 166,811 $ 359,096 $ 325,210 Self-pay patients, net of discounts 17,211 25,221 36,202 46,676 $ 199,089 $ 192,032 $ 395,298 $ 371,886 10

13 2. Significant Accounting Policies (continued) The Corporation grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor arrangements. Significant concentrations of patient accounts receivable due from third-party payors at March 31, 2015 and September 30, 2014, respectively, include 15% and 13% from the Medicare program and 57% and 59% from contracts with other third parties. Revenue from the Medicare program represented approximately 26% and 25% of net patient service revenue for the three months ended March 31, 2015 and 2014, respectively and 25% of net patient service revenue for the six months ended March 31, 2015 and The Corporation is subject to retroactive revenue adjustments due to audits, reviews, and investigations. Included in prepaid expenses and other current assets is $8,059 and $12,017 in estimated third-party settlements at March 31, 2015 and September 30, 2014, respectively. Included in other assets is $996 in estimated third-party settlements at March 31, 2015 and September 30, Included in accounts payable and accrued liabilities is $20,994 and $14,526 in estimated third-party settlements as of March 31, 2015 and September 30, 2014, respectively. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. There were no adjustments to revenue related to prior periods as a result of settled cost reports and changes in estimates for the three and six months ended March 31, 2015 and Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. However, management is not aware of any matters that could have a material effect on recorded estimates. Charity Care The Corporation provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, these amounts are not included in patient service revenue. The Corporation estimates the direct and indirect costs of providing charity care by applying a cost to gross charges ratio to the gross uncompensated charges associated with providing charity care to patients. Funding received to offset or subsidize charity services provided was de minimis for the three and six months ending March 31, 2015 and The cost of providing charity care was $5,853 and $8,594 for the three months ended 11

14 2. Significant Accounting Policies (continued) March 31, 2015 and 2014, respectively. The cost of providing charity care was $14,808 and $17,763 for the six months ended March 31, 2015 and 2014, respectively. EHR Incentive Payments The American Recovery and Reinvestment Act of 2009 included provisions for implementing health information technology under the Health Information Technology for Economic and Clinical Health Act (HITECH). The provisions were designed to increase the use of electronic health record (EHR) technology and establish the requirements for a Medicare and Medicaid incentive payment program beginning in 2011 for eligible providers that adopt and meaningfully use certified EHR technology. Eligibility for annual Medicare incentive payments is dependent on providers demonstrating meaningful use of EHR technology in each period over a four-year period. Initial Medicaid incentive payments are available to providers that adopt, implement, or upgrade certified EHR technology. Providers must demonstrate meaningful use of such technology in subsequent years to qualify for additional Medicaid incentive payments. The Corporation accounts for HITECH incentive payments as a gain contingency. Income from Medicare incentive payments is recognized as revenue after the Corporation has demonstrated that it complied with the meaningful use criteria over the entire applicable compliance period and the cost report period beginning during the payment year has been completed. The Corporation recognized revenue from Medicaid incentive payments after it adopted certified EHR technology. Incentive payments in the amount of $709 and $1,211 for the three months ending March 31, 2015 and 2014, respectively, are included in other revenue in the accompanying consolidated statements of operations and changes in net assets. Incentive payments in the amount of $1,451 and $2,421 for the six months ending March 31, 2015 and 2014, respectively, are included in other revenue in the accompanying consolidated statements of operations and changes in net assets. Included in prepaid expenses and other current assets in the accompanying consolidated balance sheets is $1,541 and $5,494 in incentive payments earned but not received at March 31, 2015 and September 30, 2014, respectively. Income from incentive payments is subject to retrospective adjustments as the incentive payments are calculated using Medicare s cost report that is subject to audit. Additionally, the Corporation s compliance with the meaningful use criteria is subject to audit by the federal government. 12

15 2. Significant Accounting Policies (continued) Premium Revenue Commercial membership contracts are written to groups on a yearly basis subject to cancellation by the employer group or HFHP according to the termination provision of the contract. Medicare membership contracts are written to individuals and may be terminated by the member at any time. Premiums are due monthly and are recognized as revenue during the period in which the Corporation is obligated to provide services to members. Approximately 69% of total premium revenue was received under the Medicare program for the three months ended March 31, 2015 and 2014, and 31% was received from contracts with other employer groups. Approximately 70% and 72% of total premium revenue was received under the Medicare program for the six months ended March 31, 2015 and 2014, respectively, and 30% and 28% was received from contracts with other employer groups, respectively. Functional Expenses The Corporation does not present expense information by functional classification because its resources and activities are primarily related to providing health care services. Further, since the Corporation receives substantially all of its resources from providing health care services in a manner similar to a business enterprise, other indicators contained in the consolidated financial statements are considered important in evaluating how well management has discharged its stewardship responsibilities. Claims Payable Claims payable are recorded in accounts payable and accrued liabilities in the consolidated balance sheets and represent the amount of payments to be made on individual claims that have been reported to HFHP, as well as estimates of claims incurred that have not yet been reported as of the consolidated balance sheet date. Claims payable are estimated using various statistical methods that use both historical financial and operating data. Although considerable variability is inherent in such estimates, management believes that the reserves for unpaid claims are reasonable. Adjustments to claims payable to reflect actual experience, if any, are reflected in the consolidated statements of operations and changes in net assets in the period in which such adjustments become known to management. Due to uncertainties inherent in the claims estimation process, it is at least reasonably possible that the claims paid in the near term could differ materially from the accrued amounts. Management believes that the recorded reserves are adequate. 13

16 2. Significant Accounting Policies (continued) The following table provides a reconciliation of the beginning and ending balances of unpaid claims liabilities included in accounts payable and accrued liabilities, net of reinsurance recoverables: Six Months Ended March 31, 2015 Year Ended September 30, 2014 Unpaid claim liabilities, at beginning of period $ 18,599 $ 23,062 Incurred losses: Current period 79, ,594 Prior periods (1,640) (2,743) Payments for claims, net of reinsurance: Current period (58,575) (131,742) Prior periods (16,824) (15,572) Unpaid claim liabilities, at end of period $ 21,048 $ 18,599 Medical Services Expense HFHP contracts with various health care providers for the provision of certain medical care services to its members. Medical services consist partially of inpatient and outpatient hospital services and pharmacy. Hospital services are paid on a fee-for-service, capitation, and fixed-rate basis. The provision for medical services includes estimates of payments to be made on health care services reported as of the consolidated balance sheet date and estimates of health care services rendered but not reported to HFHP as of the consolidated balance sheet date. Medical services reserves are reviewed and adjusted periodically. As adjustments are made, differences are included in current operations. Estimated Malpractice Costs The provision for estimated medical malpractice claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. 14

17 2. Significant Accounting Policies (continued) Income Taxes The Parent and its tax-exempt affiliates are generally exempt from federal and state income taxes applicable under Section 501(a), as organizations described in Section 501(c)(3), of the Internal Revenue Code and Section of the Florida Statutes, respectively. The taxable affiliates, except CHP, file a consolidated income tax return for both federal and state income tax purposes. The provision for income taxes and income taxes paid included in these consolidated financial statements is not significant. The consolidated income tax returns for the tax years ended September 30, 2012 through 2014 are still subject to federal and state income tax examination. ASC Topic 740, Income Taxes, prescribes the accounting for uncertainty in income tax positions recognized in financial statements. ASC Topic 740 provides guidance for recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Reclassifications Certain reclassifications were made to the three and six months ended March 31, 2014 consolidated financial statements to conform to the respective 2015 presentation. These reclassifications had no effect on the consolidated change in net assets previously reported. Recent Accounting Pronouncements In April 2015, the FASB issued Accounting Standards Update (ASU) , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in ASU are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Management is currently evaluating the effects of ASU on the Corporation s consolidated financial statements. 15

18 2. Significant Accounting Policies (continued) In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The amendments in ASU require management to assess an entity s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management s plan, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management s plan, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in ASU are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter, with early application permitted. Management is currently evaluating the effects of ASU on the Corporation s consolidated financial statements. In May 2014, the FASB issued ASU , Revenue from Contracts with Customers. The amendments in ASU require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. An entity should disclose sufficient information to enable the financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments of ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Management is currently evaluating the effects of ASU on the Corporation s consolidated financial statements. 16

19 2. Significant Accounting Policies (continued) In April 2014, the FASB issued ASU , Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments of ASU improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity s operations and financial results. Under current GAAP, many disposals, some of which may be routine in nature and not a change in an entity s strategy, are reported in discontinued operations. ASU requires expanded disclosures for discontinued operations to provide financial statement users more information about the assets, liabilities, revenues, and expenses of discontinued operations. ASU also requires an entity to disclose profit or loss (or change in net assets for a not-for-profit entity) of an individually significant component of an entity that does not qualify for discontinued operations reporting to provide users with information about the financial effects of significant disposals that do not qualify for discontinued operations reporting. The amendments in ASU are effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Corporation adopted the provisions of ASU , effective January 1, The adoption of this guidance did not have an impact on the Corporation s consolidated financial statements. 3. Investments The composition of investments and assets limited as to use is presented below: March 31, 2015 September 30, 2014 Cash and cash equivalents $ 13,250 $ 16,568 Equity securities 316, ,152 U.S. Treasury and agency obligations 66,617 79,814 U.S. corporate bonds 67,144 61,086 Asset-backed securities 10,426 10,237 Municipal bonds 2,275 2,242 Government asset-backed securities 2,599 2,177 Other 15, $ 493,533 $ 471,288 17

20 3. Investments (continued) Unrestricted investment income is comprised of the following: Three Months Ended March 31 Six Months Ended March Interest income $ 2,701 $ 1,617 $ 6,843 $ 4,233 Realized gain (loss) on sales of securities 408 (113) 363 (185) Unrealized gain on trading securities , $ 3,920 $ 2,067 $ 8,450 $ 4, Assets Limited as to Use Assets limited as to use are composed of the following: March 31, 2015 September 30, 2014 Board designated for malpractice and other obligations $ 24,406 $ 23,869 Cash and investments held by trustee under bond indenture agreements debt service and project funds 6,179 17,462 Board designated for the Foundation 6,557 7,146 Other ,342 48,677 Less amounts required to meet current obligations 11,849 14,599 $ 25,493 $ 34, Other Assets The composition of other assets is as follows: March 31, 2015 September 30, 2014 Investment in joint ventures $ 16,272 $ 15,998 Deferred financing cost 4,891 4,299 Other 7,119 6,343 $ 28,282 $ 26,640 18

21 5. Other Assets (continued) The Corporation accounts for its investments in joint ventures in accordance with the Investments Equity Method and Joint Ventures Topic of the FASB ASC. Accordingly, the Corporation records an investment in the net assets of the joint venture at cost and adjusts the carrying amount of the investment to recognize the Corporation s share of the income or losses of the joint venture after the date of acquisition. The Corporation s share of income from joint ventures for the three months ended March 31, 2015 and 2014 was $474 and $496, respectively. The Corporation s share of income from joint ventures for the six months ended March 31, 2015 and 2014 was $883 and $757, respectively. HealthSouth of Sea Pines Limited Partnership (HSSP), in which the Corporation has a 25% interest, is the Corporation s significant unconsolidated subsidiary that is accounted for using the equity method of accounting. Summarized financial information for the Corporation s investment in HSSP, assuming 100% ownership interest, is as follows: March 31, 2015 September 30, 2014 Balance sheets Current assets $ 7,231 $ 6,696 Noncurrent assets 13,308 12,028 Total assets $ 20,539 $ 18,724 Current liabilities $ 2,460 $ 2,868 Partners capital 18,079 15,856 Total liabilities and partners capital $ 20,539 $ 18,724 Three Months Ended March 31 Six Months Ended March Statements of operations Net operating revenues $ 7,230 $ 6,638 $ 13,886 $ 13,171 Operating expenses 6,190 5,493 12,219 11,000 Income from continuing operations 1,040 1,145 1,667 2,171 Other 1 (3) 2 (3) Net income $ 1,041 $ 1,142 $ 1,669 $ 2,168 19

22 6. Property and Equipment A summary of property and equipment is as follows: March 31, 2015 September 30, 2014 Land and improvements $ 88,308 $ 88,185 Buildings and improvements 789, ,794 Fixed equipment and major movable equipment 646, ,009 1,524,056 1,506,988 Less allowances for depreciation and amortization 835, , , ,332 Construction-in-progress 10,981 10,609 $ 699,840 $ 708,941 Construction-in-progress at March 31, 2015, represents costs incurred to date related to construction and renovation projects expected to be completed over the next five years. At March 31, 2015, the estimated cost to complete construction and renovation projects in progress is approximately $30,510, which will be funded principally from operations. The Cape Canaveral Hospital District (District) was created under the laws of the state of Florida on August 18, 1959, and includes a special tax district in Brevard County, Florida. The District was re-created by Chapter , Laws of Florida, which codified all special acts related to the District. The District leases the hospital facility and operating assets to CCH. CCH makes payments to the District sufficient to pay the principal and interest on the District s outstanding obligations. The assets and liabilities of CCH revert to the District upon completion of the lease term in The District may levy taxes upon all real and personal taxable property in the District, not to exceed 2.25 mills annually. The District did not levy taxes for either of the three or six months ended March 31, 2015 or The future minimum lease payments at March 31, 2015, under the capital lease obligation with the District are de minimis. 20

23 6. Property and Equipment (continued) A summary of assets under the capital lease with the District included in property and equipment is as follows: March 31, 2015 September 30, 2014 Land and improvements $ 2,591 $ 2,591 Buildings and improvements 93,126 92,693 Fixed equipment and major movable equipment 79,221 78, , ,768 Less allowance for amortization 127, ,775 47,465 48,993 Construction-in-progress $ 47,979 $ 49, Goodwill The changes in the carrying amount of goodwill were as follows: Six Months Ended March 31, 2015 Year Ended September 30, 2014 Goodwill, at beginning of period $ 17,162 $ 17,162 Acquisitions 1,650 Impairments Goodwill, at end of period $ 18,812 $ 17,162 21

24 8. Long-Term Debt Long-term debt is as follows: March 31, 2015 September 30, 2014 Term loan with two lenders, secured by certain assets of the Corporation, interest payable monthly at a fixed rate of 4.49%, due March 2038 $ 138,132 $ 139,839 Term loan with a financial institution, collateralized by revenues of the borrowers, interest payable monthly at a variable rate (1.43% at March 31, 2015), due February ,934 35,427 Term loan with a financial institution, collateralized by revenues of the borrowers, interest payable monthly at a variable rate (1.78% at March 31, 2015), due September ,240 10,459 Term loan with a financial institution, collateralized by the revenues of the borrowers, interest payable monthly at a variable rate (1.43% at March 31, 2015), due November ,305 7,949 Term loan with a financial institution, collateralized by revenues of the borrowers, interest payable monthly at a variable rate (1.43% at March 31, 2015), due November ,371 11,286 Health Facilities Revenue Refunding Bonds, Series 2014, including a premium of $22, ,429 Health Facilities Revenue Bonds, Series 2013A, including a premium of $7,186 and $7,479, respectively 71,086 71,379 Health Facilities Revenue Bonds, Series 2012A 19,144 19,551 Health Facilities Revenue Bonds, Series 2009A 55,125 56,875 Health Facilities Revenue Bonds, Series 2009B, extinguished in ,010 Health Facilities Revenue Bonds, Series 2005, recorded net of a discount of $0 and $1,466, respectively 6, ,534 Other 8,753 11,060 Total long-term debt 638, ,369 Less current maturities (15,991) (17,792) $ 622,963 $ 604,577 22

25 8. Long-Term Debt (continued) Maturities of long-term debt, excluding capital leases, consist of the following at March 31, 2015: Due within one year $ 14,936 Due between one and two years 22,901 Due between two and three years 25,704 Due between three and four years 20,013 Due between four and five years 20,652 Due beyond five years 503,441 Future minimum lease payments under the capital leases, together with the present value of net minimum lease payments, consist of the following at March 31, 2015: Due within one year $ 1,138 Due between one and two years 601 Due between two and three years 428 Due between three and four years 37 2,204 Less amount representing interest 127 Present value of net minimum lease payments 2,077 Less current portion 1,055 Long-term capital lease obligation $ 1,022 A Master Trust Indenture, dated May 15, 2001, and modified in February 2013, covers all bonds issued and outstanding by the Parent, HRMC, CCH, and VH (collectively, the Obligated Group) at March 31, Under the Master Trust Indenture, all members of the Obligated Group are jointly and severally liable for the obligation covered by the Master Trust Indenture. HRMC has executed a mortgage on a portion of HRMC s property in favor of the Master Trustee to secure the Obligated Group s repayment obligation under the Master Trust Indenture. The mortgaged property has a carrying value of $229,089 at March 31, In addition, all revenues of HRMC, PBH, CCH, and VH are pledged as security for the payment of the obligations outstanding under the Master Trust Indenture. At March 31, 2015, total debt outstanding related to the Master Trust Indenture is approximately $452,

26 8. Long-Term Debt (continued) The Master Trust Indenture provides for specific restrictive covenants, including a debt service coverage requirement. The Corporation was in compliance with all such restrictive covenants at March 31, In December 2014, the Corporation completed the refunding of its Series 2009B Health Facilities Revenue Bonds and part of the Series 2005 Health Facilities Revenue Bonds to reduce its total debt service payments. The interest rates on the Series 2009B and Series 2005 Health Facilities Revenue Bonds ranged from 5.0% to 7.0%. The Series 2014 Health Facilities Revenue Refunding Bonds were issued in the amounts of $255,385, with corresponding interest rates ranging from 3.0% to 5.0%. In accordance with FASB ASC Modifications and Extinguishments, the Corporation recorded a non-operating loss on the defeased debt of $33,826; which is excluded under the Master Trust Indenture for required debt service coverage calculation purposes. The economic gain (the difference between the present value of the old and new debt service payments) of the refunding was $25,669. The Series 2014 Health Facilities Revenue Refunding Bonds were issued at a premium of $22,759 and the premium will be amortized through maturity using the effective interest method, reducing periodic interest expense. Interest expense approximates interest paid. 9. Employee Benefit Plans Retirement Plan The Corporation, excluding HFMG, has a defined contribution plan covering substantially all employees. Under the plan, the Corporation contributes 1% of the eligible employees gross wages. Eligible employees are allowed to contribute up to 100% of the eligible employees gross wages not to exceed the maximum permissible standard deferral amount. This is in addition to any catch-up deferral amount for qualifying individuals. In addition to the Corporation s contribution previously noted, the Corporation will match up to 8% of the employees contribution at a 30% rate. As a result, a maximum 3.4% contribution may be made by the Corporation. Retirement plan expense was $1,455 and $1,168 for the three months ended March 31, 2015 and 2014, respectively. Retirement plan expense was $2,815 and $2,336 for the six months ended March 31, 2015 and 2014, respectively. 24

27 9. Employee Benefit Plans (continued) Employee Health Plan The Corporation is self-funded for health benefits for substantially all employees. The selffunded benefits are administered by HFHP. Employee health benefits expense was $3,725 and $3,503 for the three months ended March 31, 2015 and 2014, respectively. Employee health benefits expense was $7,901 and $7,551 for the six months ended March 31, 2015 and 2014, respectively. 10. Malpractice Insurance Plan The Corporation maintained insurance for malpractice coverage under claims-made policies at March 31, 2015 and A claims-made policy covers only malpractice claims reported to the insurance carrier during the policy term. Management has recorded a liability for estimated losses from reported and unreported claims of $22,189 and $21,934 at March 31, 2015 and September 30, 2014, respectively, of which $5,725 and $5,470 and $16,464 and $16,464 are included in accounts payable and accrued liabilities and other noncurrent liabilities as of March 31, 2015 and September 30, 2014, respectively, in the accompanying consolidated balance sheets. Management, with the assistance of consulting actuaries, estimates claims liabilities at the present value of future claims payments using a discount rate of 3.5% at March 31, 2015 and September 30, Medical malpractice expense of $2,399 and $2,383 for the three months ended March 31, 2015 and 2014, respectively, is included in supplies and other expenses in the accompanying consolidated statements of operations and changes in net assets. Medical malpractice expense of $4,689 and $4,657 for the six months ended March 31, 2015 and 2014, respectively, is included in supplies and other expenses in the accompanying consolidated statements of operations and changes in net assets. 11. Commitments and Contingencies Litigation The Corporation is involved in litigation arising in the ordinary course of business. After consultation with legal counsel, management believes that these matters will be resolved without material adverse effect on the Corporation s future consolidated financial position or results of operations. 25

28 11. Commitments and Contingencies (continued) On February 1, 2007, a local physician and Brevard Orthopedic, Spine & Pain Clinic, Inc. filed a lawsuit (the Contract Complaint) in the Circuit Court for the Eighteenth Judicial Circuit in and for Brevard County, Florida (the Court), alleging a breach of contract by HFMM. This case arises out of a contract dated February 1, 2002 between the local physician and HFMM. The contract provided that HFMM was to serve as attorney-in-fact for billing, collecting, and endorsing checks received for medical services; contesting denials by governmental agencies of claims for medical services; and initiating legal actions for the local physician on claims for furnishing medical services. HFMM presented a new contract to the local physician in 2005 to replace the 2002 contract. The 2005 contract substituted Brevard Orthopedic, Spine & Pain Clinic, Inc. for the local physician and reduced the amount of fees due to HFMM. This lawsuit is based on claims that HFMM breached the contract by failing to properly bill its accounts; did not inform the local physician of the status of its collections; and failed to turn over the required patient, insurance, and billing information to the local physician on the termination of the contract. HFMM has filed an Answer and Counterclaim and will continue to vigorously contest the allegations contained in the Contract Complaint. Although it is premature to assess the likely course or outcome of the litigation, if the outcome of the litigation is adverse to HFMM, then HFMM could incur material liabilities for damages or other adverse financial consequences. On May 15, 2007, a local physician and Brevard Orthopedic, Spine & Pain Clinic, Inc. filed a lawsuit (the Brevard Complaint) in the Court, alleging 12 counts of various antitrust and other violations by Health First Group. The complaint alleges, among other things, that the Health First Group has impermissibly obtained market power in the general acute care in-patient hospital market, and managed care markets in the central and south portion of Brevard County as a result of the merger between HRMC and CCH in 1995 in violation of Section 7 of the Clayton Antitrust Act. On February 21, 2008, the Health First Group filed its Answer and Affirmative Defenses with the Court and will continue to vigorously contest the allegations contained in the Brevard Complaint. While the case has been set for trial twice in the last year, the Court has continued the case on the motion of Plaintiffs and has recently re-opened and expanded the time period for discovery. Although it is premature to assess the likely course or outcome of the Brevard Complaint, if the outcome of the litigation is adverse to the Health First Group, the Health First Group could incur material liabilities for damages or other adverse financial consequences. 26