THE EAST ALABAMA HEALTH CARE AUTHORITY AUDITED FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION SEPTEMBER 30, 2012

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1 AUDITED FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION

2 Tentative report, subject to review by the Chief Examiner of The Department of Examiners of Public Accounts, State of Alabama. This report will become final upon review and acceptance by the Chief Examiner.

3 CONTENTS Page INDEPENDENT AUDITORS REPORT 3 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) 6 FINANCIAL STATEMENTS Balance Sheets 15 Statements of Revenues and Expenses 17 Statements of Changes in Net Assets 18 Statements of Cash Flows 19 Notes to Financial Statements 21 ADDITIONAL INFORMATION Schedules of Operating Expenses 49 Members of the Authority Board (Unaudited) 50 Schedule of Insurance Coverage (Unaudited) 51 Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 52 2

4 INDEPENDENT AUDITORS REPORT January 22, 2013 Board of Directors The East Alabama Health Care Authority Opelika, Alabama We have audited the accompanying balance sheets of The East Alabama Health Care Authority (the Authority) as of September 30, 2012 and 2011, and the related statements of revenues and expenses, changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Authority s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The East Alabama Health Care Authority as of September 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2013, on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

5 Board of Directors The East Alabama Health Care Authority January 22, 2013 Page 2 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 6 through 13 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audits were conducted for the purpose of forming opinions on the financial statements that collectively comprise the Authority s financial statements as a whole. The accompanying schedules of operating expenses are presented for purposes of additional analysis and are not a required part of the financial statements. This information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Birmingham, Alabama

6 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED)

7 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) This section of The East Alabama Health Care Authority s (the Authority) financial statements presents management s analysis of the Authority s financial performance during the fiscal years that ended on September 30, 2012 and Please read it in conjunction with the financial statements, which follow this section: Financial Highlights 2012 Strong operating results continue to be consistently generated. Recorded operating revenue grew by 4.3 percent for the year 2012, and operating expenses grew by 4.5 percent. These increases caused recorded income from operations to slightly decrease from $9.3 million in 2011 to $9.1 million in Net assets increased in 2012 by $12.3 million. Cash and temporary investment balances increased from $56.6 million in 2011 to $65.0 million in Recorded operating revenue grew by 2.5 percent for the year 2011, and operating expenses grew by 3 percent. These increases cause recorded income from operations to decrease from $10.2 million in 2010 to $9.3 million in However, based on the explanation following Exhibit A-4, income from operations could have been $10.3 million depending on how certain expenses are recorded. Net assets increased in 2011 by $7.0 million. Cash and temporary investment balances increased from $39.1 million in 2010 to $56.6 million in Overview of the Financial Statements The financial statements consist of two parts: management s discussion and analysis and the financial statements. The financial statements also include notes and additional information that explain in more detail some of the information in the financial statements. 6

8 Required Financial Statements The financial statements of the Authority offer short-term and long-term financial information about its activities. The balance sheets include all of the Authority s assets and liabilities and provide information about the nature and amounts of investments in resources (assets) and the obligations to Authority creditors (liabilities). The assets and liabilities are presented in a classified format, which distinguishes between current and long-term assets and liabilities. The balance sheets also provide the basis for computing rate of return, evaluating the capital structure of the Authority and assessing the liquidity and financial flexibility of the Authority. All of the current year s revenues and expenses are accounted for in the statements of revenues and expenses and statements of changes in net assets. These statements measure the success of the Authority s operations over the past year and can be used to determine whether the Authority has successfully recovered all its costs through its services provided, as well as its profitability and creditworthiness. The final required financial statements are the statements of cash flows. The primary purpose of these statements is to provide information about the Authority s cash receipts and cash payments during the reporting period. The statements report cash receipts, cash payments and net changes in cash resulting from operating, investing, noncapital financing and financing activities, and provide answers to such questions as where did cash come from, what was cash used for and what was the change in the cash balance during the reporting period. Financial Analysis Our analysis of the financial statements of the Authority begins below. One of the most important questions asked about the Authority s finances is, Is the Authority as a whole better off or worse off as a result of the year s activities? The balance sheets, the statements of revenues and expenses and the statements of changes in net assets report information about the Authority s activities in a way that will help answer this question. These statements report the net assets of the Authority and changes in them. You can think of the Authority s net assets - the difference between assets and liabilities - as one way to measure financial health or financial position. Over time, increases or decreases in the Authority s net assets are one indicator of whether its financial health is improving or deteriorating. However, you will need to consider other nonfinancial factors, such as changes in economic conditions, regulations and new or changed government legislation. 7

9 Net Assets To begin our analysis, a summary of the Authority s balance sheets is presented in Tables A-1 and A-2. Table A-1 Condensed Balance Sheet (in millions of dollars) FY 2012 FY 2011 Dollar Change Percentage Change Receivables, net $ 26.5 $ 20.0 $ % Other current assets % Current assets % Other assets % Property, plant and equipment, net (5.0) (3.5%) Total assets $ $ $ % Current liabilities $ 66.8 $ 34.4 $ % Long-term liabilities (32.1) (23.6%) Total liabilities $ $ $ 0.3.2% Minority interest $ 0.5 $ 0.2 $ % Net assets: Invested in capital assets, net of related debt $ 32.4 $ 32.9 $ (0.5) Unrestricted Restricted Total net assets $ $ $ % As shown in Table A-1, net assets increased $12.3 million from This change in net asset position was attributable to income generated in See discussion following Table A-3 for more details. Current assets are up $16.0 million, due to an increase in cash and temporary investments, which is up $8.4 million from 2011, and an increase in net accounts receivable, which is up $6.5 million from The increase in cash is due to positive cash flow from operations in Net receivables increase of $6.5 million over the prior year is primarily due to a $2.8 million receivable recorded in 2012 related to the electronic health records award associated with the American Recovery and Reinvestment Act. The award paid to the Authority related to 2011 was paid prior to the end of fiscal Other increases in receivables were spread out over the Authority s several business units. 8

10 Table A-2 Condensed Balance Sheet (in millions of dollars) FY 2011 FY 2010 Dollar Change Percentage Change Receivables, net $ 20.0 $ 18.0 $ % Other current assets % Current assets % Other assets (7.0) (6.2%) Property, plant and equipment, net (2.6) (1.8%) Total assets $ $ $ % Current liabilities $ 34.4 $ 31.7 $ % Long-term liabilities % Total liabilities $ $ $ % Minority interest $ 0.2 $ 0.2 $ - - Net assets: Invested in capital assets, net of related debt $ 32.9 $ 32.4 $ 0.5 Unrestricted Restricted Total net assets $ $ $ % As shown in Table A-2, net assets increased $7.0 million from This change in net asset position was attributable to income generated in See discussion following Table A-4 for more details. Current assets are up $19.9 million, due primarily to an increase in cash and temporary investments, which is up $17.5 million from The increase in cash is due to positive cash flow from operations in 2011 and a reduction in long-term investments. Management decided to invest less in long-term investments due to the lower rates currently available in the market. Net receivables are up $2.0 million. Net property, plant and equipment decreased slightly during 2011 due to management s strategic decision to limit capital expenditures and raise cash. Depreciation expense was greater than investment into new property, plant and equipment. 9

11 Table A-3 Condensed Statements of Revenues, Expenses and Changes in Net Assets (in millions of dollars) FY 2012 FY 2011 Dollar Change Percentage Change Operating revenues $ $ $ % Service departments % Earnings departments % Depreciation and amortization (0.1) (0.6%) Total operating expenses % Income from operations (0.2) (2.2%) Nonoperating revenues (expenses), net 3.2 (2.3) 5.5 Excess of revenues over expenses Beginning net assets Ending net assets $ $ $ % As shown in Table A-3 above, operating revenues grew by 4.3 percent in Volumes were slightly positive, and rate increases were minimal. In this environment, expense management is crucial. Expenses increased 4.5 percent (consistent with revenue growth). Income from operations decreased slightly from $9.3 million in 2011 to $9.1 million in Operating results continue to be strong and consistent. Nonoperating income was much more in 2012 than 2011 increasing from negative $2.3 million to positive $3.2 million. The primary change from 2011 relates to the increase in unrealized gains in the investment portfolio. The summary of unrealized gains in 2012 is as follows: Gain in value of stocks $ 893,929 Gain in value of bonds 1,716,276 Loss in value of swaps (2,398,124) 2012 unrealized gains $ 212,081 10

12 Table A-4 Condensed Statements of Revenues, Expenses and Changes in Net Assets (in millions of dollars) FY 2011 FY 2010 Dollar Change Percentage Change Operating revenues $ $ $ % Service departments % Earnings departments % Depreciation and amortization (0.8) (4.4%) Total operating expenses % Income from operations (0.9) (8.8%) Nonoperating revenues (expenses), net (2.3) (.5) (1.8) Excess of revenues over expenses (2.7) Beginning net assets Ending net assets $ $ $ % As shown in Table A-4 above, operating revenues grew by 2.5 percent in Volumes were slightly positive, and rate increases were minimal. In this environment, expense management is crucial. Expenses increased 3.0 percent, which caused income from operations to decrease from $10.2 million in 2010 to $9.3 million in The increase in operating expenses of $7.4 million was partially due to the $3.1 million increase in the hospital s gainsharing program over the prior year. The program rewards all employees if certain financial, quality and patient satisfaction metrics are met. The Authority paid out $4.3 million in 2011 and only $1.2 million in Gainsharing expense is calculated based on the sum of income from operations plus nonoperating revenue (excluding unrealized portfolio gains or losses). Gainsharing expense, however, is all recorded in operating expense. If a portion of the gainsharing expense was recorded in the nonoperating revenue section, so as to be consistent with how the actual calculation is determined, the income from operations would be $10.3 million in 2011 and $10.2 million in Operating expenses would have been $1 million less than recorded, and nonoperating expenses would have been $1 million more than recorded. 11

13 Nonoperating income was less in 2011 than 2010 decreasing from negative $.5 million to negative $2.3 million. The primary changes from 2010 relate to 1) the receipt of $4.0 million from the American Reinvestment and Recovery Act (ARRA) due to the Authority s achievement of reaching meaningful use of its electronic health record and 2) the increase in unrealized losses in its investment portfolio. The summary of unrealized losses in 2011 is as follows: Loss in value of stocks $ 784,750 Loss in value of bonds 1,594,210 Loss in value of swaps 3,885, unrealized losses $ 6,264,527 Capital Assets and Debt Financing Property, Plant and Equipment As of September 30, 2012, the Authority had $138.0 million invested in net property, plant and equipment as shown in Table A-5 below. This amount is down $5.0 million, or 3.5 percent, as compared to The Authority has decided to limit capital expenditures in an effort to increase its cash to debt ratio. This policy will continue unless the Authority s average age of plant begins to rise versus other A rated hospitals. The Authority did spend $12.0 million on capital equipment and construction in See Note A on page 29 for more details. As of September 30, 2011, the Authority had $143.0 million invested in net property, plant and equipment as shown in Table A-5 below. This amount is down $2.6 million, or 1.8 percent, as compared to The Authority did spend $14.7 million on capital equipment and construction in See Note A on page 30 for more details. Table A-5 Capital Assets (in millions of dollars) FY 2012 FY 2011 FY 2010 Land and land improvements $ 19.1 $ 19.1 $ 18.2 Buildings and fixed equipment Major moveable equipment Total capital assets Accumulated depreciation (180.6) (168.5) (155.2) Construction-in-process $ $ $

14 Long-Term Debt The Authority issued two new bonds in 2012, the 2012-A bonds and the 2012-B bonds. The net result of these transactions, along with the normal principal payments, lowered total debt (long-term debt plus bonds payable due within one year) by $6.6 million. The recording of the variable rate debt (2012-B) of $30 million as a current liability compared to being recorded as long-term is also a significant change in the Authority s debt structure. (See Note D in the notes to financial statements for details of all the Authority s debt.) In 2011, the Authority paid debt repayments as scheduled in the amount of $4.1 million. Along with other changes in long-term debt (as noted in Note D on pages 39 through 44), these scheduled payments reduced the Authority s long-term debt to $122.1 million at September 30, Other Long-Term Liabilities Other long-term liabilities relate solely to the negative value of its swap agreement, which the Authority held at September 30, 2012 and The swap agreement has a termination date greater than one year; therefore, it is classified as long term. For more detailed information regarding the Authority s capital assets and debt financing, please refer to the notes to financial statements. 13

15 FINANCIAL STATEMENTS

16 BALANCE SHEETS AND 2011 ASSETS Current Assets Cash and cash equivalents $ 57,582,993 $ 50,654,539 Temporary investments 7,421,762 5,941,931 Accounts receivable, net 26,455,855 19,958,965 Inventories 5,942,265 6,087,844 Prepaid expenses 3,600,374 3,245,280 Current portion of assets whose use is limited 1,982,875 1,156,381 Total Current Assets 102,986,124 87,044,940 Assets Whose Use Is Limited Board-designated funds 58,470,969 57,419,809 Trustee held funds 14,236,507 14,897,911 By East Alabama Medical Center Foundation 11,820,679 10,057,591 84,528,155 82,375,311 Less assets required for current liabilities 1,982,875 1,156,381 82,545,280 81,218,930 Investments Long-term investments 17,730,479 16,249,084 Property, Plant and Equipment Land and land improvements 19,099,279 19,099,279 Buildings and fixed equipment 186,311, ,806,704 Major moveable equipment 110,595, ,641, ,005, ,547,868 Less accumulated depreciation 180,632, ,564, ,373, ,983,685 Construction-in-process 2,610,720 1,029, ,984, ,013,450 Other Assets Unamortized bond issue costs, net of accumulated amortization of $176,568 in 2012 and $807,103 in ,535,731 2,158,727 Other assets 5,811,818 5,995,286 See notes to financial statements. $ 348,593,866 $ 335,680,417 15

17 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable $ 7,352,118 $ 5,192,141 Bonds and notes payable due within one year 31,701,133 3,890,838 Payroll taxes and employee withholdings 1,577,672 2,229,630 Employee health insurance claims payable 1,265,900 1,476,800 Accrued salaries and wages 3,647,129 2,434,291 Accrued vacation pay 5,056,063 4,575,212 Other accrued liabilities 15,641,583 14,012,643 Accrued interest payable 564, ,846 Total Current Liabilities 66,806,488 34,379,401 Long-Term Debt Bonds and notes payable, less current portion, unamortized discount and deferred loss from early retirement of debt plus unamortized premium 87,691, ,143,258 Other Long-Term Liabilities 16,530,094 14,131,970 Minority Interest 535, ,497 Net Assets Invested in capital assets, net of related debt 32,380,959 32,879,611 Restricted: For debt service 1,982,875 1,156,381 Expendable for other purposes 2,958,630 2,689,268 Unrestricted 139,708, ,042, ,030, ,767,291 $ 348,593,866 $ 335,680,417 16

18 STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED AND Operating Revenue Net patient service revenue (net of provision for bad debts of $35,614,009 in 2012 and $34,099,890 in 2011) $ 263,491,503 $ 251,677,898 Other revenues, net 12,160,502 12,665, ,652, ,343,864 Expenses Service departments 45,231,280 42,052,044 Earnings departments 203,971, ,485,998 Depreciation and amortization 17,386,424 17,514, ,588, ,052,865 Income from Operations 9,063,258 9,290,999 Nonoperating Revenues (Expenses) Interest income from trustee held funds 260, ,957 Donations 653, ,281 Loss on disposal of assets (121,105) (495,070) Other interest income 3,644,248 2,782,741 Interest expense (7,863,943) (7,455,970) Ad valorem taxes 3,920,140 3,913,666 Electronic Health Records awards 2,794,349 4,005,812 Impairment losses (300,000) (151,993) Unrealized gains (losses) 212,081 (6,264,527) 3,199,926 (2,297,103) Excess of Revenues over Expenses $ 12,263,184 $ 6,993,896 See notes to financial statements. 17

19 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED AND Changes in Net Assets Excess of revenues over expenses $ 12,263,184 $ 6,993,896 Net Assets - beginning of year 164,767, ,773,395 Net Assets - end of year $ 177,030,475 $ 164,767,291 See notes to financial statements. 18

20 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AND Operating Activities Receipts from patient service $ 256,994,613 $ 249,685,729 Other receipts 12,160,502 12,665,966 Payments to suppliers and others (114,328,639) (99,897,835) Payments to employees (130,392,906) (135,347,470) Net Cash Provided by Operating Activities 24,433,570 27,106,390 Noncapital Financing Activities Ad valorem taxes 3,920,140 3,913,666 Donations 653, ,281 Electronic Health Records awards 2,794,349 4,005,812 Distributions to minority interest (264,967) (320,256) Net Cash Provided by Noncapital Financing Activities 7,103,377 8,523,503 Investing Activities Interest and dividends on investments 3,904,549 3,226,698 Changes in temporary investments and assets whose use is limited by the Board of Directors (740,777) 2,421,223 Net changes in assets whose use is limited by The East Alabama Medical Center Foundation (1,763,088) 61,687 Net Cash Provided by Investing Activities 1,400,684 5,709,608 Capital and Related Financing Activities Payment of bonds and notes payable (6,385,991) (4,134,166) Interest paid on long-term debt (7,866,899) (7,467,686) Acquisitions of property, plant and equipment, net (11,947,774) (14,741,796) Proceeds from notes and bond issue - 34,191 Proceeds from sale of equipment 191,487 10,532 Net Cash Used in Capital and Related Financing Activities (26,009,177) (26,298,925) Increase in Cash and Cash Equivalents 6,928,454 15,040,576 Cash and Cash Equivalents - beginning of year 50,654,539 35,613,963 Cash and Cash Equivalents - end of year $ 57,582,993 $ 50,654,539 19

21 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AND 2011 (Continued) Reconciliation of Income from Operations to Net Cash Provided by Operating Activities Income from operations $ 9,063,258 $ 9,290,999 Adjustments to reconcile income from operations to net cash provided by operating activities: Provision for depreciation and amortization 17,386,424 17,514,823 Provision for bad debts 35,614,009 34,099,890 Changes in operating assets and liabilities: Accounts receivable (42,110,899) (36,092,059) Inventories 145,579 (293,601) Prepaid expenses (355,094) 85,395 Other assets (471,028) (756,330) Accounts payable 2,159,977 1,057,057 Other accrued liabilities 2,459,771 1,833,009 Minority interest 541, ,207 Net Cash Provided by Operating Activities $ 24,433,570 $ 27,106,390 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING, CAPITAL AND FINANCING ACTIVITIES Net increase in deferred loss on refunding $ 914,069 $ - See notes to financial statements. 20

22 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES Reporting Entity The East Alabama Health Care Authority (the Authority) is a public corporation organized under the laws of the State of Alabama. The Authority was originally incorporated June 13, 1950, as Lee County Hospital Board (the Hospital) under the laws of Alabama Act No. 46 adopted in The Hospital reincorporated as The East Alabama Health Care Authority under the provisions of Act No at the 1982 Regular Session of the Legislature of Alabama. As of October 1, 1988, the Authority, under the provisions of the Code of Alabama, was designated to operate as a hospital corporation. The Authority is governed by its Board of Directors (the Board) composed of nine members. The Board members serve six-year terms and are approved by the Lee County Commission. The Authority has received exemption from income tax under Internal Revenue Code Section 115 as a governmental entity, as well as under Section 501(a) as an organization described in Section 501(c)(3). The Authority includes the accounts of East Alabama Medical Center (EAMC or the Medical Center) - a 314-bed, acute care general hospital, which also includes a 26-bed skilled nursing facility. The Authority owns and operates the following entities: The East Alabama Medical Center Foundation (the Foundation) is a fund-raising entity established to serve as an instrument to assist, advance and strengthen the Authority in its service as a health care center for eastern Alabama. The Foundation is a tax-exempt entity under Section 501(a) as an organization described in Section 501(c)(3) of the Internal Revenue Code. The Foundation has filed its tax returns through September 30, The tax returns for periods ended September 30, 2009, and thereafter are subject to audit by the taxing authorities. East Alabama Medical Development Associates, Inc. (EAMD) was incorporated in 1996 to establish or affiliate with organizations to fulfill various health care needs in eastern Alabama. EAMD is a taxable entity under the Internal Revenue Code. EAMD has filed its tax returns through September 30, The tax returns for periods ended September 30, 2009, and thereafter are subject to audit by the taxing authorities. East Alabama Leasing, LLC (EAL) was created in January It is a joint venture between the Authority and various members of its medical staff. The purpose of this entity is to purchase appropriate clinical equipment and lease it to the Authority. This allows the Authority to have additional access to capital besides traditional borrowing. EAL is a taxable pass-through entity under the Internal Revenue Code. 21

23 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued East Alabama Cardiovascular Leasing, LLC (EACL) was created in October It is a joint venture between the Authority and various members of its medical staff. The purpose of this entity is to purchase appropriate clinical equipment and lease it to the Authority. This allows the Authority to have additional access to capital besides traditional borrowing. EACL is a taxable pass-through entity under the Internal Revenue Code. Foley Sleep Professionals, LLC (Foley) - The Authority purchased a 100-percent interest in Foley in January The purpose of this entity is to provide sleep disorder services to its community. Foley is a taxable pass-through entity under the Internal Revenue Code. Foley was closed in October Sleep Solutions, LLC (Sleep) - The Authority purchased a 90-percent interest in Sleep in March The purpose of this entity is to provide sleep disorder services to the communities it serves. Sleep is a taxable pass-through entity under the Internal Revenue Code. As of October 1, 2011, the Authority maintained a 100-percent interest. CPAP Solutions, LLC (CPAP) - The Authority purchased a 100-percent interest in CPAP in March The purpose of this entity is to provide CPAP devices for the communities it serves. CPAP is a taxable pass-through entity under the Internal Revenue Code. East Alabama Orthopedics and Sports Medicine, LLC (Ortho) - The Authority created Ortho in April 2007 to employ orthopedic physicians and their staff to provide orthopedic physician services to the local community. Ortho is a taxable pass-through entity under the Internal Revenue Code. East Alabama Homemed, LLC (EAH) - The Authority created EAH in The purpose of this entity is to provide durable medical equipment to the communities it serves. EAH is a taxable pass-through entity under the Internal Revenue Code. East Alabama EMS, LLC (EMS) - The Authority created EMS in The purpose of this entity is to provide ambulance services to the local community. EMS is a taxable pass-through entity under the Internal Revenue Code. East Alabama Health Services, LLC (EHS) - The Authority created EHS in The purpose of this entity is to provide assisted living and health facilities to the local community. EHS is a taxable pass-through entity under the Internal Revenue Code. East Alabama Campus Health, LLC (EACH) - The Authority created EACH in The purpose of this entity is to operate the student health facility at Auburn University. EACH is a taxable pass-through entity under the Internal Revenue Code. 22

24 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Aperian Laboratory Solutions, LLC (ALS) - The Authority created ALS in The purpose of this entity is to provide toxicology and reference lab services to physicians and laboratories across the country. ALS is a taxable pass-through entity under the Internal Revenue Code. Auburn Primary Care, LLC (APC) - The Authority created APC in The purpose of this entity is to provide a primary care physician office in Auburn, Alabama. APC is a taxable pass-through entity under the Internal Revenue Code. Primary Medicine Associates, LLC (PMA) - The Authority created PMA in The purpose of this entity is to provide a primary care physician office in Auburn, Alabama. PMA is a taxable pass-through entity under the Internal Revenue Code. Maternity Services of District 11, LLC (MS11) was created in The purpose of this entity is to operate the Medicaid Waiver program for District 11 in Alabama. MS11 is a taxable pass-through entity under the Internal Revenue Code. East Alabama Surgical Associates, LLC (EASA) - The purpose of this entity is to provide a general surgeon office in Opelika, Alabama. EASA is a taxable passthrough entity under the Internal Revenue Code. East Alabama Medical Center Voluntary Employee Benefit Association Trust (VEBA) - The Authority created VEBA in The purpose of this entity is to offer self-insured health insurance to the Authority and associated physician practices. VEBA is a tax-exempt entity under Section 501(a) as an organization described in Section 501(c)(9) of the Internal Revenue Code. VEBA has filed its initial tax return for September 30, 2011, which is subject to audit by the taxing authorities. Bessemer HomeMed, LLC (BHM) - The Authority created BHM in The purpose of this entity is to provide durable medical equipment to the communities it serves. BHM is a taxable pass-through entity under the Internal Revenue Code. East Alabama Heart and Vascular Consultations, LLC (EAHV) - The Authority created EAHV in The purpose of this entity is to provide cardiologist offices in Opelika and Auburn, Alabama. EAHV is a taxable pass-through entity under the Internal Revenue Code. Transformational Improvement Partners, LLC (TIP) - The Authority created TIP in The purpose of this entity is to provide educational and consulting services to other organizations. TIP is a taxable pass-through entity under the Internal Revenue Code. EAMC Eye Clinic, LLC (EAEC) - The Authority created EAEC in 2012 to employ ophthalmologists and their staff to provide ophthalmic physician services to the local community. EAEC is a taxable pass-through entity under the Internal Revenue Code. 23

25 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued The Authority is the sole member or controlling member and either operates, appoints or approves at least a voting majority of the Board of Directors of each of the entities. Further, each entity operates for the benefit of the Authority. Accordingly, the affiliated entities are reported as blended component units of the Authority. Principles of Consolidation The financial statements of the Authority include the accounts of the Medical Center, the Foundation, EAMD, VEBA and each of the previously mentioned limited liability companies, collectively referred to herein as the Authority. All significant intercompany transactions have been eliminated. Accounting Standards and Methods Pursuant to Governmental Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the Authority has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), unless those pronouncements conflict with or contradict a GASB pronouncement, including those issued after November 30, The Authority utilizes the proprietary fund method of accounting whereby revenues and expenses are recognized on the accrual basis. Substantially all revenues and expenses are subject to accrual. Mission Statement The Authority strives to provide high quality, compassionate health care. Operating Versus Nonoperating Revenues and Expenses The Authority distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with the Authority's principal ongoing operations. The principal operating revenues of the Authority are for patient service. Operating expenses include general and administrative expenses, supplies and other expenses and depreciation and amortization expenses. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 24

26 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Charity Care The Authority provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. The Authority does not pursue collection of amounts determined to qualify as charity care, and those amounts are not reported as revenues in the accompanying financial statements. The Authority maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges forgone for services and supplies furnished under its charity care policy, the estimated cost of these services and supplies and equivalent service statistics. The following information measures the level of charity care provided during the years ended September 30, 2012 and 2011: Charges forgone, based on established rates $ 9,691,598 $ 12,269,225 Estimated costs and expense incurred to provide charity care 4,610,293 5,946,893 Net Patient Service Revenues Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payors, primarily Medicare, Medicaid and Blue Cross of Alabama, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. In the opinion of management, adequate provision has been made for any adjustments that may result from review and audit. 25

27 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Revenues from the Medicare and Medicaid programs accounted for approximately 44.0 percent and 9.3 percent, respectively, of the Authority's gross patient service revenues for the year ended September 30, 2012, and 42.7 percent and 9.2 percent, respectively, of the Authority s gross patient service revenues for the year ended September 30, Laws and regulations governing the Medicare and Medicaid programs are 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. The Authority believes that 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, resulting in significant fines and penalties, 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. A summary of the payment arrangements with major third-party payors follows: Medicare. Inpatient acute care services rendered to Medicare program beneficiaries 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. The Authority is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Authority and audits thereof by the Medicare fiscal intermediary. Services rendered for outpatient services provided to Medicare beneficiaries are paid at prospectively determined rates. The Authority's classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review by a peer review organization under contract with the Authority. The Authority's Medicare cost reports have been audited and settled by the Medicare fiscal intermediary through September 30, Net patient service revenues increased by approximately $2,500,000 during fiscal year 2012 and 2011 due to changes in estimates related to prior year cost report settlements. 26

28 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) established the Recovery Audit Contractor (RAC) three-year demonstration program to conduct postpayment reviews to detect and correct improper payments in the fee-for-service Medicare program. Each RAC had discretion over the types of reviews and record requests it would conduct within the states for which it was responsible as long as it followed the Centers for Medicare and Medicaid Services (CMS)-defined Statement of Work. The Tax Relief and Health Care Act of 2006 made the RAC program permanent and mandated its nationwide expansion by CMS has awarded contracts to four RACs that will implement the permanent RAC program on a nationwide basis. All hospitals in the State of Alabama will be subject to reviews under the RAC program. The first reviews began in August The Authority has evaluated the potential impact of reviews under the RAC program in the accompanying financial statements. Medicaid. Inpatient services rendered to Medicaid program beneficiaries are reimbursed at an all-inclusive per diem rate. The prospectively determined per diem rates are not subject to retroactive settlement. During 2011, outpatient services were reimbursed based on encounter rates. During 2012, outpatient services were reimbursed based on a fee schedule, plus cost adjustment payments. The Authority also receives disproportionate share payments based on the level of Certified Public Expenditures (CPEs) the Authority has spent. CPEs are defined as funds paid for Medicaid and certain indigent patients. Blue Cross. Inpatient services rendered to Blue Cross subscribers are reimbursed based on a per diem rate per day of hospitalization, and outpatient services are reimbursed based on a percentage of charges. The Authority has also entered into payment agreements with certain commercial insurance carriers and preferred provider organizations. The basis for payment to the Authority under these agreements includes discounts from established charges and daily rates. 27

29 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Cash and Cash Equivalents For purposes of the statements of cash flows, the Authority considers all temporary cash investments with a maturity of less than three months at the time of purchase, primarily money market funds not included in Board-designated funds and trustee-held funds, to be cash equivalents. Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less. At September 30, 2012 and 2011, the carrying amount of the Authority's deposits was $57,582,993 and $50,654,539, respectively, which approximated market. The Authority's deposits were held by financial institutions that participate in the State of Alabama's Security of Alabama Funds Enhancement (SAFE) Program. The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41-14A-1 through 41-14A-14. Under the SAFE Program, all public funds are protected through a collateral pool administered by the Alabama State Treasurer's Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Deposit Insurance Corporation (FDIC). If the securities pledged failed to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. Certain balances consolidated by the Authority for nongovernmental entities (the Foundation, the limited liability companies, etc.) are not eligible to participate in the SAFE Program. These funds would be covered up to FDIC limits and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd- Frank Act, effective November 2010, provides for unlimited insurance for noninterestbearing transaction accounts through December 31, At year end, the Authority had approximately $1.5 million of cash and equivalents in excess of FDIC limits SAFE coverage amounts. Temporary Investments Temporary investments include short-term investments with original maturities of more than three months. Inventories Inventories are stated at the lower of cost or market, determined on the first-in, first-out (FIFO) basis. 28

30 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Assets Whose Use Is Limited Assets whose use is limited include investments restricted by the Board to provide for future capital purchases over which the Board retains control and may, at its discretion, subsequently use for other purposes; assets held in a self-insurance reserve fund (see Note H); assets held by trustees under indenture agreements; and assets restricted by the Foundation for purposes designated by donors. Derivative Activities GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, provides definition of a derivative investment instrument and addresses measurement and reporting. It discusses that changes in the fair value of hedging derivative instruments will be reported as deferrals, while changes in fair value of investment derivative instruments (i.e., ineffective hedging instruments) will be reported as part of investment revenue (expense). Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation expense is provided on the straight-line method based upon estimated useful lives, which are as follows: Item Land improvements Building Fixed equipment Major moveable equipment Estimated Useful Life years years years 3-10 years The detail of property and equipment as of September 30, 2012 and 2011, is as follows: 2011 Additions Deletions 2012 Land and land improvements $ 19,099,279 $ - $ - $ 19,099,279 Buildings and fixed equipment 183,806,704 2,513,644 (8,850) 186,311,498 Major moveable equipment 107,641,885 7,853,175 (4,899,852) 110,595,208 Property and equipment, at cost 310,547,868 10,366,819 (4,908,702) 316,005,985 Less accumulated depreciation 168,564,183 16,664,198 (4,596,110) 180,632, ,983,685 (6,297,379) (312,592) 135,373,714 Construction in process 1,029,765 1,580,955-2,610,720 $ 143,013,450 $ (4,716,424) $ (312,592) $ 137,984,434 29

31 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued 2010 Additions Deletions 2011 Land and land improvements $ 18,238,426 $ 860,853 $ - $ 19,099,279 Buildings and fixed equipment 181,808,105 2,565,321 (566,722) 183,806,704 Major moveable equipment 100,706,993 10,351,958 (3,417,066) 107,641,885 Property and equipment, at cost 300,753,524 13,778,132 (3,983,788) 310,547,868 Less accumulated depreciation 155,203,401 16,850,505 (3,489,723) 168,564, ,550,123 (3,072,373) (494,065) 141,983,685 Construction in process 66, ,664-1,029,765 $ 145,616,224 $ (2,108,709) $ (494,065) $ 143,013,450 Estimated costs to complete projects under construction at September 30, 2012, were approximately $1,300,000. Bond Issue Costs, Premiums and Discounts Bond issue costs, premiums and discounts are amortized over the life of the bonds using the straight-line method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date and revenues and expenses during the reporting period. Actual results could differ from those estimates. Use of Restricted Resources When both restricted and unrestricted resources are available for use, it is the Authority's policy to use restricted resources first for their intended donor purpose and then unrestricted resources as they are needed. 30

32 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Net Assets Net assets of the Authority are classified in four components. Net assets invested in capital assets, net of related debt consist of capital assets net of accumulated depreciation and reduced by the current balances of any outstanding borrowings used to finance the purchase or construction of those assets. Restricted expendable net assets are noncapital net assets that must be used for a particular purpose, as specified by creditors, grantors or contributors external to the Authority, including amounts deposited with trustees as required by bond indentures, discussed in Note C. Restricted nonexpendable net assets equal the principal portion of permanent endowments. The Authority does not have any restricted nonexpendable net assets. Unrestricted net assets are remaining net assets that do not meet the definition of invested in capital assets, net of related debt or restricted. New Accounting Pronouncements GASB Statement No. 61, The Financial Reporting Entity: Omnibus, was issued by the GASB in December This statement is designed to improve financial reporting for governmental entities by amending the requirements of Statements No. 14, The Financial Reporting Entity, and No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments, to better meet user needs and address reporting entity issues that have come to light since those statements were issued in 1991 and 1999, respectively. The statement is effective for financial statements for periods beginning after June 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The adoption of this statement is not expected to have a material impact on the Authority s financial statements. GASB Statement No. 62, Codification and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, was issued by the GASB in December This statement incorporates into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in FASB and AICPA pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements. This statement supersedes Statement No. 20 but allows entities to continue to apply post-november 30, 1989, FASB pronouncements that do not conflict with or contradict GASB pronouncements. The statement is effective for financial statements for periods beginning after December 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The adoption of this statement is not expected to have a material impact on the Authority s financial statements. 31

33 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, was issued in June This statement establishes guidance for reporting deferred outflows of resources, deferred inflows of resources and net position in a statement of financial position. The statement is effective for financial statements for periods beginning after December 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The adoption of this statement is not expected to have a material impact on the Authority s financial statements. GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, was issued in March This statement clarifies the appropriate reporting of deferred outflows of resources and deferred inflows of resources to ensure consistency in financial reporting. The statement is effective for financial statements for periods beginning after December 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The Authority is currently assessing the impact of the future adoption of this statement on the Authority s financial statements. GASB Statement No. 66, Technical Corrections an amendment of GASB Statements No. 10 and No. 62, was issued in March This statement enhances the usefulness of financial reports by resolving conflicting accounting and financial reporting guidance that could diminish the consistency of financial reporting. The statement is effective for financial statements for periods beginning after December 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The adoption of this statement is not expected to have a material impact on the Authority s financial statements. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, was issued in June This statement requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time and to more comprehensively and comparably measure the annual costs of pension benefits. This statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information. The statement is effective for fiscal years beginning after June 15, As such, the Authority has not implemented the provisions in the 2012 financial statements. The adoption of this statement is not expected to have a material impact on the Authority s financial statements. 32

34 NOTES TO FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - Continued Subsequent Events Management has evaluated the impact of subsequent events through January 22, 2013, representing the date the financial statements were issued. NOTE B - ACCOUNTS RECEIVABLE Accounts receivable at September 30 consisted of the following: Accounts receivable for patient care services, net of allowance for contractual adjustments $ 48,273,674 $ 45,144,614 Less allowance for doubtful accounts 20,385,638 19,995,709 27,888,036 25,148,905 Estimated amounts due to Medicare on year-end settlements (9,131,334) (9,772,628) Other 7,699,153 4,582,688 Accounts receivable, net $ 26,455,855 $ 19,958,965 The estimated amount due to Medicare represents the cumulative difference between total estimable reimbursable amounts and interim reimbursements received. The Authority grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The Authority ages its accounts based on discharge date or date of service. Once accounts reach a certain age, they are turned over to a collection agency to pursue for a set amount of time and written off by the Authority. The Authority provides an allowance for doubtful accounts based on review of historical collection information, agings of accounts and specific account review. 33

35 NOTES TO FINANCIAL STATEMENTS NOTE B - ACCOUNTS RECEIVABLE - Continued In 2012, the Authority received approximately $2,500,000 in additional net patient revenues as a result of a class action settlement against the Centers for Medicare and Medicaid Services related to the rural floor budget neutral assessments between ($-0- in 2011). The mix of receivables from patients and third-party payors at September 30 was as follows: Medicare 27% 26% Medicaid 8% 7% Blue Cross 17% 17% Other third-party payors 12% 12% Self-pay 36% 38% NOTE C - INVESTMENTS 100% 100% The Authority maintains a pool of investments, the assets of which are further classified as temporary investments and assets whose use is limited by the Board and trustee and long term investments. Segregation of these funds as either temporary investments or assets whose use is limited is based on management's direction of principal placed in the pool. All cash and investments of the Foundation are classified by the Authority as assets whose use is limited. 34

36 NOTES TO FINANCIAL STATEMENTS NOTE C - INVESTMENTS - Continued The Authority's investments, other than certificates of deposit, are generally carried at fair value. Investments in certificates of deposit are carried at cost which approximates fair value. At September 30, 2012 and 2011, the Authority had the following investments and maturities, all of which were held in the Authority's name by eight custodial banks that are agents of the Authority. The summary below includes the temporary investments, long-term investments and Board-designated funds included on the balance sheet for 2012 in the amounts of $7,421,762, $17,730,479 and $58,470,969, respectively, for a total of $83,623,210. The summary below includes the temporary investments, long-term investments and Board-designated funds included on the balance sheet for 2011 in the amounts of $5,941,931, $16,249,084 and $57,419,809, respectively, for a total of $79,610,824. These funds are combined for this presentation because they are administered by the Authority's Board investment policy. September 30, 2012: Investment Maturities (in Years) Carrying Amount Less Than More Than 10 Investment type: Money market accounts $ 3,407,831 $ 3,407,831 $ - $ - $ - CDs 1,829, ,536 1,523, Government agencies 11,312,124 25,339-3,564,503 7,722,282 Corporate 67,074,086 9,467,690 46,489,502 10,624, ,048 $ 83,623,210 $ 13,206,396 $ 48,013,135 $ 14,189,349 $ 8,214,330 September 30, 2011: Investment Maturities (in Years) Carrying Amount Less Than More Than 10 Investment type: Money market accounts $ 1,648,326 $ 1,648,326 $ - $ - $ - CDs 1,979,544 1,811, , Government agencies 19,004,542 91,570 4,319,250 6,006,170 8,587,552 Corporate 56,978,412 3,807,290 45,979,470 6,724, ,027 $ 79,610,824 $ 7,359,096 $ 50,466,354 $ 12,730,795 $ 9,054,579 35

37 NOTES TO FINANCIAL STATEMENTS NOTE C - INVESTMENTS - Continued Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Authority s investment policy limits the maturity of any corporate bond investments to 15 years or less and any U.S. Treasury securities or governmental agency securities to maturities of 30 years or less. At September 30, 2012, the Authority's portfolio (including temporary investments, long-term investments and Board-designated funds) has an average maturity of approximately 5.23 years to final maturity and 4.84 years to call. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. The Authority's investment policy for temporary investments and Boarddesignated funds limits investments to fixed income securities issued by the U.S. Treasury, governmental agency securities and corporate bonds that are investment grade. U.S. Treasury securities have no credit risk, government agency securities owned by the Authority are all AAA rated by Standard & Poor's and all corporate bonds held at September 30, 2012, and to the date of this report are classified as investment grade issue. Custodial Credit Risk For an investment, this is the risk that, in the event of the failure of the counterparty, the Authority will not be able to cover the value of its investments or collateral securities that are in the possession of an outside party. The Authority's policy states that these securities must be held by an acceptable custodian but has no policy regarding a dollar limit as to the amount of securities a custodian may hold for the Authority. The Authority currently has two custodians for the temporary investments, long-term investments and Board-designated funds. The trustee-held funds and the Foundation funds are held by two separate custodians. 36

38 NOTES TO FINANCIAL STATEMENTS NOTE C - INVESTMENTS - Continued Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of the Authority's investment in a single issuer. The Authority's investment policy limits the amount of securities in one corporate name to no more than five percent of the total portfolio. At September 30, 2012, no one corporate name, except noted below, had more than $3,764,586, which is 4.5 percent of the total $83,623,210 portfolio. The Authority held securities of the following issuers, which are greater than 5.0 percent of the portfolio: Amount % of Total Federal National Mortgage Association $ 5,520, % Federal Home Loan Mortgage 4,507, % General Electric 4,306, % The Trust Indenture of the Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2002-A, Series 2008-A, Series 2008-B, Series 2012-A and Series 2012-B (2002-A, 2008-A, 2008-B, 2012-A and 2012-B Revenue and Tax Bonds) establishes certain funds to be controlled by a trustee. Balances in the trusteed funds at September 30, 2012 and 2011, consisting primarily of U.S. Government obligations and certificates of deposit, were as follows: Bond Fund $ - $ 302,624 Bond Reserve Fund - 3,804,234 Accrued interest - 13,160 Trustee-held funds for Series 2002-A Revenue and Tax Anticipation Bonds - 4,120,018 37

39 NOTES TO FINANCIAL STATEMENTS NOTE C - INVESTMENTS - Continued Bond Fund 120, ,886 Bond Reserve Fund 2,714,701 2,710,795 Accrued interest 10,946 41,133 Trustee-held funds for Series 2008-A Revenue and Tax Anticipation Bonds 2,845,826 2,871,814 Bond Fund 1,732, ,462 Bond Reserve Fund 4,305,000 7,226,501 Accrued interest - 73,116 Trustee-held funds for Series 2008-B Revenue and Tax Anticipation Bonds 6,037,171 7,906,079 Bond Fund 115,012 - Bond Reserve Fund 5,233,932 - Trustee-held funds for Series 2012-A Revenue and Tax Anticipation Bonds 5,348,944 - Bond Fund 4,566 - Trustee-held funds for Series 2012-B Revenue and Tax Anticipation Bonds 4,566 - Total trustee-held funds 14,236,507 14,897,911 Less current portion 1,982,875 1,156,381 $ 12,253,632 $ 13,741,530 Trustee-Held Funds The Bond Reserve Funds are required to be maintained at a balance equal to the maximum annual debt service requirement in any one year. Deposits are made into the Bond Reserve Funds sufficient to fund interest and principal due on the next payment date.

40 NOTES TO FINANCIAL STATEMENTS NOTE C - INVESTMENTS - Continued The Foundation The East Alabama Medical Center Foundation had assets of $11,820,679 at September 30, 2012, and $10,057,591 at September 30, The following table shows the investment amounts per asset class at fair market value: Cash $ 647,421 $ 1,222,673 Bond mutual funds 776, ,515 Equity mutual funds 8,660,459 6,292,238 Individual equities 1,718,571 1,573,171 Other 17,878 17,994 $ 11,820,679 $ 10,057,591 Most of the funds in the Foundation are managed with the assistance of an investment advisor. The advisor assists the Authority with appropriate asset allocation between asset classes, selection of money managers and monitoring of results. Because the accounts of the Authority cannot directly invest in equity securities, the Foundation, with its ability to do so, helps the organization as a whole diversify its investment portfolio. NOTE D - LONG-TERM DEBT Long-term debt consisted of the following at September 30: Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2008-A, with interest payable March 1 and September 1 at fixed rates ranging from 4.0% to 5.25% $ 26,735,000 $ 26,770,000 Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2008-B, with interest payable March 1 and September 1 at fixed rates ranging from 4.0% to 5.50% 41,550,000 70,695,000 39

41 NOTES TO FINANCIAL STATEMENTS NOTE D - LONG-TERM DEBT - Continued Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2002-A, with interest payable March 1 and September 1 at fixed rates ranging from 3% to 5.27% - 35,070,000 Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2012-A, with interest payable March 1 and September 1 at fixed rates ranging from 4.0% to 5.0% 28,380,000 - Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2012-B, with interest payable weekly at variable rates ranging from.21% to.50% 30,000,000 - Note payable to bank with principal and interest payable monthly through November 2012, with an adjustable rate of LIBOR plus 2.25% 7,340 51,380 Note payable to bank with principal and interest payable monthly through February 2012, with an adjustable rate of LIBOR plus 2.25% - 44,373 Note payable to bank with principal and interest payable monthly through February 2012, with an adjustable rate of LIBOR plus 2.25% - 95,820 Note payable to bank with principal and interest payable monthly through April 2012, with an adjustable rate of LIBOR plus 2.25% - 123,347 Note payable to bank with principal and interest payable monthly through April 2014, with an adjustable rate of LIBOR plus 2.25% 59,481 94,061 40

42 NOTES TO FINANCIAL STATEMENTS NOTE D - LONG-TERM DEBT Continued Note payable to bank with principal and interest payable monthly through December 2012, with an adjustable rate of LIBOR plus 2.25% 52, ,665 Note payable to bank with principal and interest payable monthly through June 2012, with an adjustable rate of LIBOR plus 2.25% - 3,031 Various equipment leases 22,878 31, ,807, ,193,354 Amounts due within one year (31,701,133) (3,890,838) Unamortized premium (discount) 2,066,603 (329,014) Deferred loss from early retirement of debt (9,481,128) (6,830,244) $ 87,691,706 $122,143,258 The fair value of the bonds is estimated using discounted cash flows based on the Authority s current incremental borrowing rate on comparable bonds at September 30, 2012, for a similar type of debt instrument. The fair value of the Authority s bonds was approximately $137 million at September 30, The fair value of notes payable approximates book value due to variable rates associated with those obligations. During the 2012 fiscal year, the Authority issued $28,380,000 of Health Care Facilities Bonds, Series 2012-A, dated April 11, 2012 (the 2012-A Bonds), and $30,000,000 of Health Care Facilities Bonds, Series 2012-B, dated April 24, 2012 (the 2012-B Bonds). The net proceeds of these issues of approximately $60 million were used to retire the 2002-A Bonds and a portion of the 2008-B Bonds, resulting in a loss on defeasance of approximately $3.3 million, which is grouped with long-term debt in the accompanying balance sheets. The 2012-A bonds are fixed rate bonds with maturities ranging from $1,705,000 to $4,355,000 spread between 2019 and 2028 with rates ranging between 4.0 percent and 5.0 percent. These bonds were issued in conjunction with a Net Original Issue Premium of $2,350,489, which lowered the yield to between 2.83 percent and 4.33 percent.

43 NOTES TO FINANCIAL STATEMENTS NOTE D - LONG-TERM DEBT - Continued The $30,000, B bonds were issued with variable rates in the Weekly Rate Mode. The rates are determined each week based on a determination by the Remarketing Agent. The rates paid during fiscal 2012 ranged from 21 basis points to 50 basis points. The Authority uses its own balance sheet for liquidity for these bonds. These bonds can be redeemed anytime prior to its maturity date of September 1, These bonds are recorded as a current liability. An economic gain or loss analysis was not performed related to the refunding, as a portion of the new debt issued was in the form of variable rate demand bonds which would require making assumptions regarding variable interest rates and the terms in the future. During the 2008 fiscal year, the Authority issued $27,015,000 of Health Care Facilities Bonds, Series 2008-A, dated March 6, 2008 (the 2008-A Bonds), and $74,540,000 of Health Care Facilities Bonds, Series 2008-B, dated March 19, 2008 (the 2008-B Bonds). The net proceeds of these issues of approximately $98 million were used to retire the 2006-A Bonds and the 2003-A Bonds, resulting in a loss on defeasance of approximately $5.5 million, which is grouped with long-term debt in the accompanying balance sheets. The 2008-A bonds are fixed rate bonds with maturities of $585,000 spread between 2008 and 2018 and $26,430,000 that is subject to a mandatory tender on September 1, Rates range from 4.0 percent to 5.0 percent for the series bonds and 5.25 percent for the bonds subject to mandatory tender. The 2008-B bonds are fixed rate bonds with maturities of $6,895,000 spread between 2009 and 2013 with rates ranging between 4.0 percent and 4.75 percent, as well as $27,645,000 subject to mandatory tender at September 1, 2013, with a rate of 5.0 percent and $40,000,000 subject to mandatory tender at September 1, 2018, with a rate of 5.50 percent. The $27,645,000 (noted above) was advance refunded with the proceeds of the 2012-A Bonds. The Authority issued $49,340,000 of Health Care Facilities Revenue and Tax Anticipation Bonds, Series 2002-A, dated June 1, The proceeds were used to redeem the Series 1993 bonds, to finance the acquisition of assisted living facilities and to acquire and construct certain capital improvements to the Authority's health care facilities. These bonds were refunded by the 2012-B bonds noted above. 42

44 NOTES TO FINANCIAL STATEMENTS NOTE D - LONG-TERM DEBT - Continued All of the outstanding bonds of the Authority (2008-A, 2008-B, 2012-A and 2012-B) are secured by a pledge of the gross receipts of the Authority, the accounts receivable of the Authority, pledged tax proceeds of the Authority and the funds and accounts established under the bond indentures. In addition, under the terms of the bond indentures, the Authority is required to maintain certain deposits with a trustee and must satisfy certain measures of financial performance as long as the bonds are outstanding. Activity related to long-term debt is summarized as follows: Balance October 1 Borrowings Repayments Balance September 30 Fiscal year 2011 $ 137,293,329 $ 34,191 $ (4,134,166) $ 133,193,354 Fiscal year 2012 $ 133,193,354 $ 58,380,000 $ (64,765,990) $ 126,807,364 Scheduled principal and interest repayments on long-term debt are as follows: Principal Interest 2013 $ 31,701,133 $ 5,118, ,231 4,980, ,000 4,977, ,000 4,975, ,000 4,972, ,725,000 10,017, ,230,000 3,607, ,910, ,675 $126,807,364 $ 38,773,188 During fiscal years 2012 and 2011, total interest paid was $7,866,899 and $7,467,686, respectively. There was no interest capitalized in 2012 or

45 NOTES TO FINANCIAL STATEMENTS NOTE D - LONG-TERM DEBT - Continued Other long-term liabilities include the value of the following swap agreements the Authority has with Bank of America/Merrill Lynch, its counterparty. Interest Rate Swaps The Authority has entered into interest rate swap agreements and basis rate swap agreements as part of its interest rate risk management strategy. These derivatives are recorded at fair value with changes in the derivative's fair value recognized currently in earnings as nonoperating revenues (expenses). The Authority terminated the basis swap on May 12, 2011, realizing a positive termination value of $1,300,000, which is recorded within interest expense on the statements of revenues and expenses. At September 30, 2012 and 2011, the fixed payer swap was the only interest rate swap still in effect. See the summary below for swap descriptions and values. The fixed payer swap had its terms amended in January Prior to the amendment, the Authority was required to make fixed rate interest payments at a rate of 4.40 percent in return for receiving a floating rate based on the USD-SIFMA Municipal Swap Index. The amended terms changed to making fixed payments at a rate of percent and receiving a floating rate based on 67 percent of USD-LIBOR-BBA. The Authority paid $1,622,918 and $1,931,018 related to this swap in 2012 and 2011, respectively. Swap Type Value at September 30 Notional Amount Original Termination Date Fixed payer swap $ 46,025,000 September 1, 2033 $ (16,530,094) $ (14,131,970) The only activity in the other long-term liabilities account is recording the change in fair value of the swaps from period to period and the termination of the basis swap as described above. NOTE E - EMPLOYEE RETIREMENT PLAN In 1995, the GASB issued Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, which establishes standards for disclosure of pension information of employers for both defined contribution and defined benefit plans. The Authority adopted the provisions of this standard and has disclosed information as required. 44

46 NOTES TO FINANCIAL STATEMENTS NOTE E - EMPLOYEE RETIREMENT PLAN - Continued The Financial Security Plan (the Plan) is a defined contribution plan administered by ING, which covers substantially all of the Authority's employees. Contributions are determined at the discretion of the Board of Directors on a yearly basis. No contribution expense related to the Plan was incurred in fiscal years 2012 or The Plan was amended to freeze participation in, and contributions made to, the Plan effective September 22, During 1993, the Authority implemented a tax sheltered annuity program (the Program) for all eligible employees. The Program consists of a Tax Sheltered Annuity (TSA) and Thrift Plan, which are both defined contribution plans administered by ING. Each year, participants may contribute to the TSA plan a percentage of pretax annual compensation, not to exceed total allowed tax-deferred contributions to all benefit plans based upon current statutory limits for employees younger than 50 years of age and for employees 50 years of age and older. The Authority contributes to the Thrift Plan a percentage of the participant's contribution to the TSA plan as established by the Board of Directors. Effective January 1, 2001, the Authority contributes 75 percent of the first six percent of compensation that a participant contributes to the TSA plan. During fiscal years 2012 and 2011, the Authority contributed $2,356,552 and $2,219,386, respectively, and participants contributed $4,697,724 and $4,456,354, respectively, to the Program. The provisions and contribution requirements were established by, and may be amended by, the Authority. NOTE F - OTHER ACCRUED LIABILITIES Other accrued liabilities at September 30 consisted of the following: Accrued gainsharing $ 4,000,000 $ 4,275,000 Accrued retirement plan 5,264,150 5,134,654 Accrued medical malpractice insurance 2,951,068 2,951,068 Other accrued liabilities 3,426,365 1,651,921 $ 15,641,583 $ 14,012,643 45

47 NOTES TO FINANCIAL STATEMENTS NOTE G - COMMITMENTS The Authority has lease agreements for office space and medical and office equipment, which are being accounted for as operating leases. Lease expense for the years ended September 30, 2012 and 2011, was $3,486,651 and $3,525,243, respectively. Future noncancelable commitments under these leases are as follows: NOTE H - SELF-INSURANCE 2013 $ 2,600, ,117, ,760, ,460, ,212 $ 8,867,354 Beginning January 1, 2003, the Authority became self-insured for professional and general liability coverage. For claims reported prior to January 1, 2003, the Authority maintained a claims made policy with Medical Assurance, Inc. The Authority has established a self-insurance reserve fund based on actuarial funding recommendations determined by an independent actuary. The balance of the self-insurance reserve fund at September 30, 2012, is approximately $3,448,630 and is included in Board-designated funds in the accompanying balance sheet. At September 30, 2012 and 2011, the Authority has accrued approximately $2,951,000 related to reported and incurred but not reported (IBNR) claims covered under the self-insurance policy. In addition to being self-insured for professional and general liability, the Authority is self-insured for employee health insurance and workers compensation. Amounts accrued are based on actuarial determined calculations. Amounts accrued are included in other accrued liabilities. 46

48 NOTES TO FINANCIAL STATEMENTS NOTE I - ELECTRONIC HEALTH RECORDS AWARDS During the years ended September 30, 2012 and 2011, the Authority successfully attested to meeting the requirements for the Medicare/Medicaid Electronic Health Records (EHR) Incentive Program, a federally funded program which provides financial awards to health care facilities meeting new federally mandated EHR requirements for federal fiscal year 2012 and These amounts are recorded as nonoperating revenues in the 2012 and 2011 statements of revenues and expenses. Future incentive awards are contingent on the Authority being able to successfully meet the additional EHR requirements for subsequent years. 47

49 ADDITIONAL INFORMATION

50 SCHEDULES OF OPERATING EXPENSES FOR THE YEARS ENDED AND Service and Earnings Departments' Expenses Salaries $ 113,122,402 $ 107,138,093 Benefits 26,664,920 27,234,191 Nonmedical supplies 3,604,752 3,165,064 Food and dietary supplies 2,225,310 2,221,978 Equipment rental 3,486,651 3,525,243 Medical specialists' fees 8,582,040 8,626,719 Repairs and maintenance 10,455,207 10,156,280 Medical supplies/drugs/film 50,480,467 47,240,688 Purchased services 18,098,681 16,304,389 Utilities and telephone 4,868,183 4,763,641 Insurance 879, ,005 Audit, consulting and legal fees 2,381,143 1,739,307 Education, travel, dues and other 4,353,083 4,461, ,202, ,538,042 Capital Expenses Depreciation 16,664,198 16,838,967 Amortization 722, ,856 17,386,424 17,514,823 $ 266,588,747 $ 255,052,865 See independent auditors' report. 49

51 MEMBERS OF THE AUTHORITY BOARD (UNAUDITED) Name and Address Title Expiration of Term Joel Pittard, M.D. 441 Pinedale Drive Auburn, AL Chairman 2012 Ken McKemie 1655 Lee Road 372 Valley, AL Vice Chairman 2014 Bob Dumas 1635 Bradford Lane Auburn, AL Secretary-Treasurer 2014 William Garrett, M.D Arrowhead Avenue Opelika, AL Member 2016 Lucinda Cannon 302 North 9 th Street Opelika, AL Member 2016 Paul Waddy, M.D Rocky Brook Road Opelika, AL Member 2014 William O. Baker, Jr U.S. Highway 80 Opelika, AL Member 2012 David Smalley, M.D Lauren Lane Auburn, AL Member 2012 C. Wayne Alderman 1842 Creekwood Trail Auburn, AL Member

52 SCHEDULE OF INSURANCE COVERAGE (UNAUDITED) JANUARY 2013 Coverage Amount Insurer Expiration Date Blanket #1 coverage - buildings, business personal property, EDP on premises, business income $552,436,790 Blanket #2 coverage - accounts receivable $20,000,000 Blanket #3 coverage - valuable papers $20,000,000 Included in business Blanket #4 coverage - electronic data personal property American Guarantee & Liability Ins. Co. 10/1/2013 American Guarantee & Liability Ins. Co. 10/1/2013 American Guarantee & Liability Ins. Co. 10/1/2013 American Guarantee & Liability Ins. Co. 10/1/2013 Liability: Professional for hospital As required by law Self-Insured N/A General: Bodily injury As required by law Self-Insured N/A Property damage As required by law Self-Insured N/A Automobile: Hospital $1,000,000 State Farm Insurance 5/22/2013 Dandyland $1,000,000 Argonaut Midwest 8/7/2013 HealthPlus $1,000,000 Argonaut Midwest 10/26/2013 Ambulance - liability $1,000,000 National Interstate Ins. Co. 7/22/2013 Ambulance - physical damage $580,000 National Interstate Ins. Co. 7/22/2013 Workers compensation As required by law Self-Insured N/A Directors and officers $10,000,000 Federal Insurance 10/1/2013 Bonds: Pension and benefit plans fidelity bond $1,000,000 Hartford Insurance Group 5/22/2013 Pension and benefit plans fidelity bond - Sleep Solutions, LLC $50,000 Hartford Insurance Group 5/22/2013 Broad form money and securities: Theft, disappearance, destruction $25,000 Hartford Insurance Group 5/22/2013 Public employee dishonesty $100,000 Hartford Insurance Group 5/22/2013 Environmental site liability $1,000,000 Illinois Union Ins. Co. 10/1/2013 Underground storage tank liability $1,000,000 ACE American Insurance 10/1/2013 Cyber liability $1,000,000 Illinois Union Ins. Co. 10/1/2013 Other general and professional liability: East AL Health Services, LLC - Unity Wellness $1,000,000 Beazley Insurance 11/7/2013 East AL Health Services, LLC - Healthplus Fitness $1,000,000 Philadelphia Insurance 11/7/2013 East AL EMS, LLC $1,000,000 Colony Ins. Co. 11/7/2013 East AL Health Services, LLC - Assisted Living $1,000,000 Ironshore Specialty 11/7/2013 Aperian Laboratory Solutions, LLC $1,000,000 Homeland Ins. Co. of NY 4/1/2013 East AL Campus Health, LLC $1,000,000 Mag Mutual 8/1/2013 Primary Medicine Associates, LLC $1,000,000 Mag Mutual 8/1/2013 East AL Orthopedics & Sports Medicine, LLC $1,000,000 Mag Mutual 8/1/2013 CPAP Solutions, LLC $1,000,000 Benchmark Insurance 4/4/2013 Auburn Primary Care, LLC $1,000,000 State Farm Insurance 12/2/2013 East AL HomeMed, LLC - Bessemer $1,000,000 Benchmark Insurance 8/1/2013 East AL HomeMed, LLC - Opelika $1,000,000 Benchmark Insurance 12/1/2013 East AL Leasing, LLC $1,000,000 Cincinnati Insurance 2/7/2013 East AL Cardiovascular Leasing, LLC $1,000,000 Cincinnati Insurance 1/30/2013 This statement is intended only as a descriptive summary. No expression of opinion as to the adequacy of the coverage or fulfillment of statutory requirements is intended. 51

53 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS January 22, 2013 Board of Directors The East Alabama Health Care Authority Opelika, Alabama We have audited the financial statements of The East Alabama Health Care Authority (the Authority) as of and for the year ended September 30, 2012, and have issued our report thereon dated January 22, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting Management of the Authority is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Authority s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected on a timely basis.