Frederick Regional Health System Financial Report and Management Discussion For the Six Months ended December 31, 2011 This report is presented in accordance with the continuing disclosure requirements of the First and Second Supplemental Loan Agreements between Maryland Health and Higher Educational Facilities and Frederick Memorial Hospital, Inc. (Article II section 2.03) dated August 6, 2002 and May 1, 2006 respectively and the continuing disclosure requirements of the Third Supplemental Loan Agreement between Maryland Health and Higher Educational Facilities and Frederick Memorial Hospital Inc. dated July 1, 2008. This report is prepared with a focus on the financial results for the six months ended December 31, 2011. A comprehensive overview of fiscal year ended June 30, 2011 and comparisons of fiscal year ended June 30, 2011 to Budget FY 2011 can be found in the June 30, 2011 Annual Report that is posted on the DAC website (www.dacbond.com). The following presentation may include forward-looking information including budget information and discussions about future expectations and events. Actual results could differ materially from what is presented or said. ALL OF THE CURRENT FINANCIAL AND STATISTICAL INFORMATION CONTAINED HEREIN IS UNAUDITED. Management Overview The results of operations for Frederick Regional Health System (FRHS) for the six months ended December 31, 2011 (the period) resulted in consolidated operating income of $3.1 million versus a budgeted gain of $1.9 million. Consolidated operating EBIDA for the period was $15.4 million (8.8%), $172 thousand higher than the budget of $15.2 million (8.6%). Net inpatient revenues were below budget by $6.5 million (6.6%). Regulated campus-based outpatient net revenue was above budget by $2.3 million (4.2%). Outpatient unregulated net revenues were below budget by $1.6 million (4.9%). Maryland s Health Service Cost Review Commission (HSCRC) assessments were above budget by $779 thousand (8.9%). Total net patient services revenue was below budget by $6.4 million (3.7%) and above last year by 0.5%. Other operating revenues were $4.2 million above budget and include $2.8 million received as the result of electronic health records initiatives under the Health Information Technology for Economic and Clinical Health Act (HITECH). In addition, Hospice of Frederick County received a $1.0 million unrestricted donation. FRHS inpatient admissions (adult & pediatric) were below budget for the period by 1,298 (12.1%). Nursery discharges were below budget by 35 (3.3%). Hospital EIPA s for the period were 19,336 or 9.9% below budget and 6.2% below last year. The average length of stay for the period was 4.24, 2.3% longer than budget. Days Cash On Hand on December 31, 2011 was 133 days, 18 days lower than June 30, 2011. (See the Statement of Cash Flows overview to follow). Days Net Revenue in Accounts Receivable increased 7.1 days to 56.2 for the period. MADS coverage excluding unrealized losses on investments decreased from 3.6 to 2.8 and debt-to-capitalization decreased from 46.3% to 46.2%.
Further discussion of the operating results for the period is provided in conjunction with the financial and statistical tables presented below. The following table illustrates the consolidated results for fiscal years ended June 30, 2010 and 2011 and the consolidated operating budget for fiscal year ending June 30, 2012: FMH and Subsidiaries Statement of Operations (000 s) Audit Audit Budget FY 2010 FY 2011 2012 Revenues: Net patient service revenues $ 304,786 $ 341,584 $ 345,212 Other operating revenues 11,052 12,493 9,481 Total Revenue 315,838 354,077 354,693 Non-Capital Expenses: 286,007 315,641 322,946 Operating EBIDA 29,831 38,436 31,747 Capital Expenses: Depreciation/Amortization 18,301 19,304 21,586 Interest Expense 4,357 4,665 4,557 Operating Income (Loss) 7,173 14,467 5,604 Other income(expense) 1,081 11,282 2,001 Excess of Revenues over Expenses $ 8,254 $ 25,749 $ 7,605 2
The following tables compare the consolidated results to prior year and current year budget and the variances to budget for the period: FMH and Subsidiaries Statement of Operations For the six months ended December 31, 2011 (000's) Prior Current Budget Variance Revenues: Net patient service revenues $ 165,789 $ 165,797 $ 172,173 $ (6,376) Other operating revenues 8,248 9,045 4,835 4,210 Total Operating Revenue 174,037 174,842 177,008 (2,166) Non-Capital Expenses 153,596 159,480 161,818 (2,338) Operating EBIDA 20,441 15,362 15,190 172 Capital Expenses: Depreciation/Amortization 9,522 9,938 10,985 (1,047) Interest Expense 2,307 2,280 2,270 10 Operating Income 8,612 3,144 1,935 1,209 Other income(expense): Nonoperating revenue 2,331 2,445 2,319 126 Net unrealized appreciation (depreciation) on investments 6,758 (6,714) - (6,714) Realized and unrealized gains (losses) - interest rate swap 273 (6,888) (1,320) (5,568) Excess of Revenues over Expenses 17,974 (8,013) 2,934 (10,947) Other changes in unrestricted net assets: Net assets released from restriction 97 109-109 Other - - - - Increase (decrease) in unrestricted net assets $ 18,071 $ (7,904) $ 2,934 $ (10,838) Operating EBIDA By Entity For the six months ended December 31, 2011 (000's) Prior Current Budget Variance FMH $ 20,098 $ 14,038 $ 14,975 $ (937) Subsidiaries FHSC 316 248 219 29 Emmitsburg - - - - Hospice 27 1,076 (4) 1,080 Total Subsidiaries 343 1,324 215 1,109 Operating EBIDA $ 20,441 $ 15,362 $ 15,190 $ 172 3
Hospital Revenue and Other Changes in Net Assets Total net patient service revenue for the period was below budget by $6.4 million. The components of that variance are described below: Frederick Memorial Hospital Net Patient Services Revenue - Variance to Budget For the six months ended December 31, 2011 (000's) Inpatient - Regulated $ (6,482) Outpatient - Regulated 2,318 Outpatient - Unregulated (1,589) HSCRC Assessments (779) Hospice 2 FHSC 154 Net Patient Services Revenue - variance to Budget $ (6,376) Inpatient cases, including nursery discharges, totaled 10,492; 1,333 cases below budget and 726 cases below prior year. As previously mentioned, the TCU was closed on January 30, 2011. Net regulated outpatient revenue was above budget by $2.3 million (4.2%). Positive variances in Cardiology, Surgical Services and Oncology were partially offset by negative variances in Emergency, Imaging, Lab, Observation, and Pharmacy. Net unregulated outpatient revenues were below budget by $1.6 million for the period. Shortfalls were experienced in Home Health and Hospice. In addition, the delayed start up of certain services in immediate care, imaging and orthopedics contributed to the unfavorable budget variance. The combined deductions from revenue and provision for uncollectible accounts as a percent of gross revenues was 22.9% compared to a budget of 22.4% and last year of 22.6%. Other non-operating income/expense includes realized investment gains and interest rate swap losses which were $22 thousand unfavorable and $40 thousand favorable to budget, respectively. Additionally, unbudgeted unrealized losses on investments and the interest rate swap were $6.7 million and $5.6 million, respectively. Other changes in unrestricted net assets consist of net assets released from restriction used for capital purposes of $109 thousand. 4
Hospital Volumes and EIPA s The following tables compare the Hospital volumes to prior year and current year budget and the variances to budget for the period: FMH Hospital Only For the six months ended December 31, 2011 Prior Current Budget Variance Var % Utilization Statistics: Inpatient Admissions - Acute inc. NICU 10,172 9,451 10,749 (1,298) -12.1% Average Length of Stay 4.21 4.24 4.15 0.09 2.3% Nursery Discharges 1,046 1,041 1,076 (35) -3.3% Inpatient Admissions - TCU* 314 Average Length of Stay - TCU* 10.10 Emergency Dept. Visits 38,204 39,635 40,292 (657) -1.6% Immediate Care Visits (Fred. & Urbana) 9,531 10,222 11,482 (1,260) -11.0% Inpatient Surgery Cases 2,866 2,589 2,895 (306) -10.6% Outpatient Surgery Visits 4,142 4,237 4,191 46 1.1% Equivalent Admissions (EIPA's) 20,605 19,336 21,457 (2,122) -9.9% HSCRC Case Mix Index 0.922 0.916 0.939 (0.023) -2.5% Payor Mix: Medicare 41.1% 39.2% xx Medicaid 8.7% 8.9% xx United MAMSI 12.3% 12.5% xx CareFirst 18.4% 18.7% xx HMO's 9.6% 9.7% xx Commercial 3.3% 3.5% xx Self Pay/Other 6.7% 7.5% xx 100.0% 100.0% * TCU was closed on January 30, 2011 Acute inpatient admissions (adult & pediatric) were below budget for the period by 1,298 (12.1%) with shortfalls experienced in all service lines. Nursery discharges were below budget by 35 (3.3%). The average length of stay (adult & pediatric) was 4.24 days, 2.3% longer than budget. Emergency Department visits including inpatient and outpatient, adults and peds, were 1.6% below budget and 3.7% above last year. Immediate care visits were 11.0% below budget and 3.8% above last year and reflect the delayed start up at the Urbana location. Inpatient surgery cases were 10.5% below budget and outpatient surgery cases were 1.1% above budget for the period with positive variances in orthopedic, ophthalmology and general surgery and shortfalls in urology, thoracic and vascular surgeries. One measure of relative utilization performance is the equivalent inpatient admission (EIPA). EIPA is an industry standard measure that gives effect to the relative value of outpatient activity to arrive at a blended statistical unit for the Hospital inpatient and outpatient operations. The table below shows the calculation of EIPA s for the periods presented. EIPA s were 9.9% below budget and 6.2% below last year. 5
FMH Hospital Only EIPA's For the six months ended December 31, 2011 Prior Current Budget Variance Inpatient Revenue (000's) $ 103,131 $ 99,688 $ 105,888 $ (6,200) IP Admissions 10,486 9,451 10,749 (1,298) IP Revenue per admission $ 9,835 $ 10,548 $ 9,851 $ 697 Outpatient Revenue (000's) $ 99,517 $ 104,262 $ 105,485 (1,223) IP Revenue per admission $ 9,835 $ 10,548 $ 9,851 $ 697 IP Equivalent admissions 10,119 9,885 10,708 (823) EIPA's 20,605 19,336 21,457 (2,122) Hospital Only Non-Capital Expenses The following tables compare the Hospital Only Non-Capital expenses to prior year and current year budget and the variances to budget for the period: FMH Hospital Only Non-Capital Expenses For the six months ended December 31, 2011 (000's) Prior Current Budget Variance Salaries and Benefits $ 82,767 $ 87,251 $ 88,086 $ (835) Services and Fees 22,100 22,653 23,176 (523) Supplies, Drugs & Other 45,486 46,149 47,369 (1,220) Total Non-Capital Expenses $ 150,353 $ 156,053 $ 158,631 $ (2,578) The following table shows the non-capital expenses per EIPA: FMH Hospital Only Non-Capital Expenses per EIPA For the six months ended December 31, 2011 (000's) Prior Current Budget Variance Salaries and Benefits $ 4,017 $ 4,512 $ 4,105 $ 407 Services and Fees 1,073 1,172 1,080 91 Supplies, Drugs & Other 2,208 2,387 2,208 179 Total Non-Capital Expenses $ 7,297 $ 8,071 $ 7,393 $ 678 Salaries and benefits were favorable to budget by $835 thousand (0.9%) due to efforts to match staffing levels to patient volume partially offset by higher group health claims. Services and Fees were $523 thousand favorable to budget for the period (2.2%) mostly due to volume related fees and service contracts. Supplies, drugs & other were favorable to budget by $1.2 million (2.6%) due mostly to lower capital spending and lower cardiology and orthopedic volume. For the period, interest expense was $10 thousand unfavorable to the budget. 6
Subsidiary Results The results of operations for Frederick Health Services Corporation (FHSC) was an operating gain of $50 thousand for the period versus a budget of $1 thousand. The results of operations for Hospice of Frederick County (HOFC) was an operating gain of $1.0 million for the period versus a budgeted operating loss of $42 thousand, the result of a $1.0 million unrestricted donation received during the period. Consolidated Balance Sheets and Statement of Cash Flows The Balance Sheets for FMH and subsidiaries as of December 31, 2011 and June 30, 2011 and the Statement of Changes in Cash and Investments for the period are shown in the tables below. A $15.8 million decrease in combined unrestricted cash, short-term and long-term investments was experienced during the period. Cash generated by operating activities was $1.0 million. Cash used for investing activities was $14.4 million due mostly to decreases in the fair market valuation of investments of $4.1 million and capital spending of $10.7 million. Cash used in financing activities was $2.5 million, with the repayment of debt of $2.7 million. Frederick Memorial Hospital, Inc. and Subsidiaries Balance Sheet unaudited audited 31-Dec-11 30-Jun-11 Change Assets: Cash and Short Term Investments $ 15,575 $ 27,295 $ (11,720) Patient Receivables, net 50,643 45,977 4,666 Property and Equipment, net 181,562 180,833 729 Assets Limited As To Use 16,064 17,705 (1,641) Other Assets 14,638 13,251 1,387 Long Term Investments 101,671 105,795 (4,124) Donor Restricted Assets 5,529 6,174 (645) Total Assets 385,682 397,030 (11,348) Liabilities: Accounts Payable/Accrued Expenses 58,908 64,997 (6,089) Advances from Third Party Payors 8,496 8,178 318 Current Portion of LTD & Capital Lease Obligations 1,835 3,732 (1,897) Interest Rate Swap Contract 15,323 9,715 5,608 Long Term Debt & Capital Lease Obligations 141,756 142,567 (811) Total Liabilities 226,318 229,189 (2,871) Net Assets: Unrestricted 153,763 161,667 (7,904) Temporarily Restricted 4,625 5,198 (573) Permanently Restricted 976 976 - Total Net Assets 159,364 167,841 (8,477) Total Liabilities and Net Assets $ 385,682 $ 397,030 $ (11,348) 7
Frederick Memorial Hospital, Inc. and Subsidiaries Consolidated Statement of Change in Cash and Investments For the six months ended December 31, 2011 unaudited - in thousands of dollars Cash flows from operating activities Change in net assets $ (8,477) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation of property and equipment 9,938 Amortization of original issue discount and bond issue costs 100 Equity in earnings of joint ventures (205) Change in intangible assets 18 Change in unrealized (gains) losses on trading securities, net 6,714 Proceeds from realized (gains) losses on investments-trading 19 (Increase) decrease in investments-trading (2,742) Proceeds from restricted contributions (250) Change in pledges receivable 778 Realized and unrealized (gains) losses in interest rate swap, net 6,888 Change in operating assets and liabilities: Receivables, patient and other (4,688) Inventories and other assets (1,230) Accounts payable 1,491 Accrued expenses (6,239) Accrued pension expense (208) Advances from third party payors 318 Other short-term liabilities 56 Other long-term liabilities (1,189) Net cash provided by (used in) operating activities 1,093 Cash flows from investing activities Purchases of property and equipment (10,668) (Increase) decrease in assets limited as to use, non-trading, net 1,641 Realized gains (losses) in interest rate swap, net (1,280) Change in investments, trading (4,124) Net cash provided by (used in) investing activities (14,431) Cash flows from fundraising and financing activities Proceeds from restricted contributions 250 Repayments of long-term debt (2,756) Net cash provided by (used in) fundraising and financing activities (2,506) Net increase (decrease) in cash and investments (15,844) Cash and investments at the beginning of the year 133,090 Cash and investments at the end of the period $ 117,246 8
Notes to Consolidated Financial Statements December 31, 2011 (dollars shown in thousands) Organization and Mission Frederick Memorial Hospital, Inc. (the Hospital) is a not-for-profit hospital, exempt from federal income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) whereby only unregulated business income as defined by Section 512(a)(1) of the Code, is subject to Federal income tax. The Hospital is located in Frederick, Maryland, and provides health care services primarily to residents of Frederick County. The Hospital and Hospice of Frederick County have received determination letters from the Internal Revenue Service (IRS) stating that they are exempt from federal income taxes under Section 501(c) of the Internal Revenue Code. Frederick Health Services Corporation (FHSC) is subject to federal and state income taxes. No provision for income taxes has been recorded for 2011 and 2010 as FHSC does not have taxable income or current tax liabilities. Principles of Consolidation The accompanying financial statements include the accounts and transactions of the Hospital, its for-profit, wholly-owned subsidiary, Frederick Health Services Corporation (FHSC); Emmitsburg Properties, LLC; Hospice of Frederick County, Inc.; and Frederick Memorial Hospital Self-Insurance Trust. Hospice of Frederick County, Inc. (HFC) is an independent 501(c)(3) organization. HFC remains a separate entity, controlled by the Hospital, and operates as a fundraising organization for the benefit of hospice services and operates the Kline Hospice House. FHSC has three wholly-owned subsidiaries: Rosehill of Frederick, LLC and Corporate Occupational Health Solutions, LLC, which are for-profit limited liability companies, and Frederick Surgical Services Corporation (FSSC), all of which have been consolidated into FHSC in the accompanying financial statements. The accompanying consolidated financial statements include the accounts of the Hospital and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. On June 28, 2011 the Hospital Board of Directors approved a corporate restructuring which included the creation of a non-profit 501(c)3 Parent Corporation to be known as Frederick Regional Health System (FRHS). Additionally two additional non-profit entities were organized, Monocacy Insurance, LTD and Monocacy Health Partners, both of which will be 100% owned by FRHS. Monocacy Insurance, LTD is a Cayman Islands domiciled Single Parent captive to provide a flexible risk financing structure to meet the needs of FRHS. Monocacy Health Partners will serve as a physician enterprise, providing governance, management and support functions for employed physicians. Completion of this restructuring will occur during fiscal year 2012. 9
Recent Accounting Pronouncements In January 2010, the FASB issued ASC Accounting Standards Update (ASU) No. 2010-06 (ASU 2010-06), Improving Disclosures about Fair Value Measurements, which clarifies certain existing fair value measurement disclosure requirements of ASC Topic 820 Fair Value Measurements and Disclosures and also requires additional fair value measurement disclosures. Specifically, ASU 2010-06 clarifies that assets and liabilities must be leveled by major class of asset or liability, and provides guidance regarding the identification of such major classes. Additionally, disclosures are required about valuation techniques and the inputs to those techniques, for those assets or liabilities designated as Level 2 or Level 3 instruments. Disclosures regarding transfers between Level 1 and Level 2 assets and liabilities are required, as well as a deeper level of disaggregation of activity within existing rollforwards of the fair value of Level 3 assets and liabilities. The adoption of this guidance did not have a significant impact on the Hospital s consolidated financial statements for the year ended June 30, 2011. In August 2010, the FASB issued ASU 2010-23, Health Care Entities: Measuring Charity Care for Disclosure a consensus of the FASB Emerging Issues Task Force, which provides guidance on measuring charity care for disclosure purposes. This guidance requires that cost be used as the measurement basis for charity care disclosure purposes and that cost identified includes both the direct and indirect costs of providing charity care. Disclosure requirements include the method used to identify or determine such costs. This guidance is effective for the Hospital for the fiscal year ending June 30, 2012. The Hospital is currently evaluating the impact of this guidance on its consolidated financial statements. In July 2011, the FASB issued ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation and disclosure of patient service revenue, provisions for bad debts, and the allowance for doubtful accounts for certain health care entities. This guidance changes the presentation of the statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, the guidance requires enhanced disclosures about the policies for recognizing revenue and assessing bad debts, as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This guidance is effective for the Hospital for the fiscal year ending June 30, 2013. The Hospital is currently evaluating the impact of this guidance on its consolidated financial statements. 10
Fair Value Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. FASB guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price ) in an orderly transaction between market participants at the measurement date, emphasizing that fair value is market-based measurement, not an entityspecific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and 2 of the hierarchy) and the reporting entity s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The Level inputs, as defined by FASB guidance for fair value measurements and disclosures, are as follows: Level 1: Level 2: Level 3: Inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Hospital has the ability to access at the measurement date. Inputs are inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the assets or liabilities (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Inputs are unobservable inputs for the assets or liabilities, which are typically based on an entity s own assumptions, as there is little, if any, related market activity. The determination of the fair value level within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Hospital s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. The following table presents the Hospital s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, as of December 31, 2011: 11
Fair Value (continued) Fair Value at December, 31, 2011 Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Assets Cash and cash equivalents $ 25,267 $ 25,267 $ - $ - Equity securities 34,886 34,886 - - U.S. government obligations 8,538-8,538 - Corporate and other bonds 4,554-4,554 - Mutual Funds 45,421 45,421 - - Mortgage-backed securities 5,486-5,486 - Contributions receivable 2,500 - - 2,500 Total assets $ 126,652 $ 105,574 $ 18,578 $ 2,500 Liabilities Interest rate swap liability $ (15,323) $ - $ (15,323) $ - Total liabilities $ (15,323) $ - $ (15,323) $ - The fair value of the Hospital s trading securities is determined by third-party service providers utilizing various methods dependent upon the specific type of investment. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Where significant inputs, including benchmark yields, broker-dealer quotes, issuer spreads, bids, offers, the LIBOR curve and measures of volatility, are used by these third-party dealers or independent pricing services to determine fair values the securities are classified within Level 2. Assets utilizing Level 1 inputs include exchange-traded equity securities and equity and fixed income mutual funds. Assets and liabilities utilizing Level 2 inputs include U.S. government securities, corporate bonds, mortgage-backed securities and interest rate swaps. Assets utilizing Level 3 inputs are contributions receivable. The Hospital entered into an interest rate swap agreement in conjunction with the issuance of variable rate bonds. The swap contract is valued using models based on readily observable market parameters for all substantial terms of the contract. The fair market value of the swap agreement is included as interest rate swap contract in the accompanying balance sheets. The fair market value calculation at December 31, 2011 includes a credit valuation adjustment (CVA) as required by FASB. At December 31, 2011, the valuation of the interest rate swap agreement liability position was reduced by $2,092 when applying the CVA. The change in the fair market value of the swap agreement is included in excess (deficiency) of unrestricted revenue and other support over expenses, as the swap is not designated as an effective hedge. 12
Fair Value (continued) Credit exposure associated with non-performance by the counterparty to the derivative instrument is generally limited to the uncollateralized fair value of the asset related to instruments recognized in the balance sheets. Assets utilizing Level 3 inputs are contributions receivable. Contributions receivable are recorded net of allowance for uncollectible pledges and discounted to net present value. The present value of estimated future cash flows using a discount rate commensurate with the risks involved is an appropriate measure of fair value for unconditional promises to give cash and is considered Level 3. The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3): Contributions Receivable Total Balance at June 30, 2011 $ 3,278 $ 3,278 Purchases, issuances and settlements -778-778 Balance at December 31, 2011 $ 2,500 $ 2,500 Long Term Debt Long-term debt consists of the following: Dec 31, 2011 June 30, 2011 MHHEFA Series 2002 Bonds $ 66,152 $ 66,983 MHHEFA Series 2008 Bonds 70,948 71,944 Note payable Emmitsburg 328 373 Capital lease obligations 6,163 6,999 143,591 146,299 Less current maturities 1,835 3,732 $ 141,756 $ 142,567 Series 2008 MHHEFA Revenue Bonds In July 2008, the Hospital advance refunded its Series 2006 MHHEFA Revenue Bonds (auction rate securities) totaling $75,000 in part through the issuance of Series 2008 MHHEFA Revenue Bonds (Series 2008 Bonds) in the amount of $72,160. The Series 2008 Bonds are variable rate demand bonds. The bond insurance securing the Series 2006 Bonds was terminated. The general terms of the original $75,000 interest rate swap contract remained in place. However, due to the lower principal amount on the new issuance, a portion of the swap was terminated ($2,840) and a partial termination fee was incurred of approximately $218. A loss on extinguishment of debt of $2,370 was recognized as a result of the write-off of unamortized deferred financing cost and original issue discounts. In conjunction with the issuance of the Series 2008 Bonds, the Hospital 13
Long Term Debt (continued) secured a three year letter of credit with a bank covering the entire bond issue. The letter of credit was amended on June 25, 2010 with terms for tender advances of the greater of Libor +2.75% or 4.00% for the first 90 days, the greater of Libor +3.25% or 4.00% for days 91-366. Tender advances are due 366 days after initial draw. The new termination date of the letter of credit is July 8, 2013. The Series 2008 MHHEFA Revenue Bonds are net of original issue discounts of $144 which are being amortized over the life of the bonds using the yield method. Accumulated amortization was $28 at June 30, 2011. During the year ended June 30, 2011 the interest rate on these variable rate demand bonds has varied from 0.10% - 0.35%. Interest is payable monthly through July 1, 2035. The fair value of the Series 2008 MHHEFA Revenue Bonds is estimated based on the quoted market prices for the same or similar issues. As of June 30, 2011, the carrying value of the MHHEFA Series 2008 Bonds approximates fair value. Under the provisions of the bond agreement, the Hospital has granted to the Authority a security interest in all receipts now owned and hereafter acquired. The Series 2008 Bonds are secured ratably with the Series 2002 Bonds. The bond agreement contains certain financial covenants. Series 2002 MHHEFA Revenue Bonds In August 2002, the Hospital obtained a loan of $71,715 in MHHEFA Revenue Bonds, Frederick Memorial Hospital Issue, Series 2002. The MHHEFA Series 2002 Bonds were issued to finance and refinance costs of construction, renovation and equipping certain Hospital facilities. The Series 2002 Bonds are net of an original issue discount of $2,361 which is being amortized over the life of the bonds using the yield method. Accumulated amortization was $868 and $824 at December 31, 2011 and June 30, 2011, respectively. The annual interest rate on the bond loan ranges between 3.250% and 5.125%. Interest is payable semiannually on each January 1 and July 1, through July 1, 2035. In connection with the bond issuance, the Hospital was required to deposit as collateral, in a trusteed Debt Service Reserve Fund, an amount equal to the maximum annual debt service on the Series 2002 Bonds of $4,058. Series 2002 Bonds maturing on or after July 1, 2012 are subject to redemption or purchase prior to maturity, beginning on July 1, 2012 at the option of the Authority at the principal amount of the Series 2002 Bonds to be redeemed plus accrued interest thereon to the date set for redemption. Under the provisions of the bond agreement, the Hospital has granted to the Authority a security interest in all receipts now owned and hereafter acquired. The Series 2002 Bonds are secured ratably with the 2008 Bonds. The fair value of the Series 2002 MHHEFA Revenue Bonds is estimated based on the quoted market prices for the same or similar issues. As of June 30, 2011, the fair value of the MHHEFA Series 2002 Bonds is estimated as $68,520. The bond agreement contains certain financial covenants. 14
Long Term Debt (continued) Note Payable Emmitsburg In December 1994, the Hospital acquired a 100% interest in Emmitsburg Properties, LLC and subsequently conveyed a 1% interest in the limited liability company to FHSC. In accordance with the terms of the purchase agreement, the Hospital executed two notes payable to the former owners aggregating $1,219. The notes are payable in monthly installments of principal and interest of $10, bear interest at 8%, and are due December 31, 2014. Capital Lease Obligations Future payments under certain capital lease obligations used to mainly to secure major medical diagnostic equipment are as follows: Years ending June 30: 2012 $ 1,024 2013 1,846 2014 1,732 2015 1,443 2016 624 Total payments 6,669 Less: interest payments 506 Total lease obligations, principal 6,163 Less: current portion 901 Long-term obligations under capital leases $ 5,262 Debt service requirements on long-term debt and capital lease obligations, excluding the original issue discounts on the MHHEFA Bonds at December 31, 2011 of $1,605 are as follows: Principal Years ending June 30: 2012 $ 1,835 2013 3,711 2014 3,763 2015 5,177 2016 4,538 Thereafter 126,172 $ 145,196 15
Contingencies The Hospital has been named as a defendant in various legal proceedings arising from the performance of their normal activities. In the opinion of management, after consultation with legal counsel and after consideration of applicable insurance, the amount of the Hospital s ultimate liability under all current legal proceedings will not have a material adverse effect on their consolidated financial position or results of operations. The Hospital was insured for professional liability under an occurrence basis policy through June 30, 2005. Effective July 1, 2005, the Hospital established a new irrevocable self-insurance trust to set aside funds to cover future professional liability claims. Total disbursements from the fund for a covered loss by one or more persons as a result of any one occurrence shall not exceed $1,000 and $3,000 in the aggregate in any one fiscal year. Concurrently, the Hospital purchased excess umbrella coverage through a commercial carrier with a per-occurrence and aggregate limit of $10,000 per policy period. The funded balance of the trust was $6,217 and $6,984 at December 31, 2011 and June 30, 2011, respectively, and is included as assets limited as to use on the consolidated balance sheets. There are known claims and incidents that could result in the assertion of additional claims, as well as claims from unknown incidents that could be asserted arising from services provided to patients. The Hospital maintains reserves, in the amount of $5,518 and $6,733 at December 31, 2011 and June 30, 2011, respectively, to cover estimated costs incurred within the self-insured period. The Hospital employs an independent actuary to estimate the ultimate settlement of such claims. These reserves are recorded at a discounted interest rate of 4%. In management s opinion the amounts recorded provide an adequate reserve for loss contingencies. However, changes in circumstances affecting professional liability claims could cause these estimates to change by material amounts in the short term. Pension, 403(b) and Deferred Compensation Plans The Hospital has a trusteed, defined benefit pension plan that covers substantially all employees. The Hospital s funding policy is to make a minimum annual contribution approximating the net periodic pension cost for the Plan year as determined by its actuary. The Hospital uses a measurement date of June 30 to determine plan assets and benefit obligations. Effective June 30, 2007 the Hospital curtailed the Plan. The curtailment is such that participants will no longer accrue benefits under the Plan and no new participants will be accepted. Current participant accounts will not receive any service credits beyond June 30, 2007, however the Hospital will make annual contributions to the plan in accordance with actuarially determined amounts to meet future accumulated benefit obligations under the frozen plan. Expense recognized for the six months ended December 31, 2011 and 2010 was $950 and $1,483, respectively. The pension liability was $16,268 and $16,476 on December 31, 2011 and June 30, 2011 respectively. The Hospital also has a tax-deferred annuity savings (403b) plan available to substantially all employees. In conjunction with the curtailment of the defined benefit pension plan, the Hospital modified the 403b plan effective July 1, 2007. Under the terms of the modified plan, every eligible employee receives a base contribution of 2.5% of earnings. The Hospital will match 50% 70% on employee contributions up to 5% of employee earnings depending on years of 16
Pension, 403(b) and Deferred Compensation Plans (continued) service. In addition, certain employees are eligible for transition credits based on age and years of service to the Hospital. The Hospital s contribution for base matching and transition credits totaled $2,783 and $2,846 for the six months ended December 31, 2011 and 2010, respectively. In December, 2005, the Hospital adopted two non-qualified deferred compensation plans with an effective date of December 15, 2004, for certain members of executive management. Under the plans, participating employees may contribute amounts from their compensation to the plan and may receive a discretionary employer contribution. Employees are fully vested in all employee contributions to the plans. Vesting in employer contributions occurs in accordance with the underlying plan documents. All assets of the plans are held in separate trusts. Total Hospital contributions to the plans were $154 and $106 for the six months ended December 31, 2011 and 2010, respectively. 17