COMMUNITY HEALTH NETWORK, INC. & AFFILIATED ENTITIES Unaudited Consolidated Financial Statements As of and for the Quarter Ended March 31, 2012 and A-1
Quarterly Financial Information Community Health Network, Inc., an Indiana non-profit corporation and its non-profit and for-profit affiliates (collectively the Network ) comprises a full-service integrated health delivery system in central Indiana. The Network is a central Indiana health system consisting of six inpatient hospitals, six immediate care centers, a primary care physician network, forty ambulatory care centers, eleven freestanding surgery centers, four outpatient imaging centers, two ambulatory endoscopy centers, four nursing homes and one assisted living facility. The principal operating subsidiaries consist of the following: Community Hospitals of Indiana, Inc. -(Obligated group member) The Indiana Heart Hospital, LLC d/b/a Community Heart and Vascular- (Obligated group member) Visionary Enterprises, Inc. -(Obligated group member) Community Hospital of Anderson and Madison County, Inc. Indiana Osteopathic Hospital, Inc. and Affiliates d/b/a Community Westview Hospital Community Physicians of Indiana, Inc. d/b/a Community Physicians Network Community Health Network Foundation, Inc. Community Home Health Services, Inc. Indiana ProHealth Network, LLC Effective December 31,, Community Health Network, Inc. merged into Community Hospitals of Indiana, Inc. with Community Hospitals of Indiana, Inc. being the surviving corporation. Upon the merger, Community Hospitals of Indiana, Inc. was renamed Community Health Network, Inc. Effective August 1,, the Network affiliated with Community Westview Hospital. Community Westview Hospital s profits and losses are reflected in the Network s consolidated statement of operations from August 1, through December 31,. The following summary represents the unaudited consolidated financial statements of the Network as of and for the quarters ended March 31, 2012 and. The financial data provided in the historical financial information section represents the consolidated financial statements of Community Health Network, Inc. and Affiliated Entities. Community Hospital of Anderson and Madison County, Inc. and Community Health Network Foundation, Inc. are not members of the obligated group. Effective August 1,, the Network affiliated with Westview Hospital. Beginning in the third quarter of, Community Westview is included in the Network s consolidated financial statements. Community Westview is not a member of the obligated group. The unaudited consolidated financial statements include all adjustments, consisting of normal recurring and other accruals, which the management of the Network considers necessary for a fair presentation of financial position and results of operations and changes in net assets for these periods. Operating results for the quarter ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2012. The audited consolidated financial statements at December 31, and 2010 are posted on the Digital Assurance Certification, L.C.C. ( DAC ) website at www.dac-ey.com. The audited consolidated balance sheet at December 31, is also included below. The Network currently participates in the DAC disclosure system. A-2
Community Health Network, Inc. and Affiliates Summary Financial Information Consolidated Balance Sheets March 31, December 31, March 31, ($ in millions) 2012 (unaudited) (audited) (unaudited) Assets Current assets Cash and cash equivalents $ 147.0 $ 164.3 $ 154.3 Restricted cash 2.9 2.9 1.1 Patient accounts receivable 201.2 185.4 179.4 Other current assets 89.1 86.0 72.9 Total current assets 440.2 438.6 407.7 Board designated funds 439.5 401.2 417.9 Funds held by trustee, net of current portion 13.6 13.6 13.9 Reinsurance trust assets 12.6 12.8 10.7 Property, plant and equipment, net 674.7 682.2 642.9 Due to unconsolidated affiliates and related parties 20.2.7 19.6 Prepaid pension and postretirement assets 1.0 1.0 1.9 Other assets 36.0 47.2 16.8 Total assets $ 1,637.8 $ 1,597.3 $ 1,531.4 Liabilities and Net Assets Current liabilities Current portion of long-term debt $ 17.1 $ 17.1 $ 16.5 Short-term borrowings 43.1 43.1 18.6 Other current liabilities 203.8 205.7 167.1 Total current liabilities 264.0 265.9 202.2 Accrued postretirement benefit cost 4.6 4.5 4.3 Accrued pension benefit cost 43.8 52.5 84.7 Other liabilities 14.7 9.8 8.4 Pension underfunded liability 114.3 114.3 30.8 Long-term debt, net of current portion 413.1 413.9 422.8 Net assets Unrestricted 764.7 715.7 760.5 Temporarily restricted 4.8 4.7 5.0 Permanently restricted 4.3 4.3 4.3 Total net assets without non controlling interest 773.8 724.7 769.8 Non controlling interest 9.5 11.7 8.4 Total Network net assets 783.3 736.4 778.2 Total liabilities and net assets $ 1,637.8 $ 1,597.3 $ 1,531.4 A-3
Community Health Network, Inc. and Affiliates Unaudited Summary Financial Information Consolidated Statements of Operations and Changes in Net Assets Quarter ended March 31, ($ in millions) 2012 Change in Unrestricted Net Assets Total unrestricted revenues and gains $ 362.0 $ 320.0 Operating expenses Salaries and benefits 200.2 167.2 Other expenses 126.5 118.1 Depreciation and amortization 17.1 16.6 Provision for bad debts.2.2 Interest 3.3 3.3 Total operating expenses 347.3 305.4 Income from operations 14.7 14.6 Investment income (loss)- realized/unrealized 37.9 13.7 Other, net - - Excess of revenues over expenses before federal income 52.6 28.3 taxes Provision for income taxes.3 1.0 Excess of revenues over expenses 52.3 27.3 Less: Excess of revenues over expenses attributable to non controlling interest (3.1) (2.8) Excess of revenues over expenses attributable to Network 49.2 24.5 Change in non controlling interest (2.2) (2.9) Other changes (.2) - Increase in unrestricted net assets 46.8 21.6 Change in Temporarily Restricted Net Assets Restricted contributions received.3.3 Net assets released from restrictions (.2) (.3) Investment income - - Reclassification of previously temporarily restricted net assets - - Increase in temporarily restricted net assets.1 - Change in Permanently Restricted Net Assets Restricted contributions received -.1 Reclassification of previously temporarily restricted net assets - - Increase in permanently restricted net assets -.1 Increase in net assets 46.9 21.7 Net assets, beginning of period 736.4 756.5 Net assets, end of period $ 783.3 $ 778.2 A-4
Management Discussion of Historical Financial Performance- Quarter ended March 31, 2012 versus March 31, Effective January 1,, the Network adopted ASU -07, Healthcare Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowances for Doubtful Accounts for Certain Health Care Entities, which requires certain health care entities to change the presentation of their 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). The Network elected to early adopt the provisions of ASU -07 and thus has reflected the revised presentation in the financial statements above and the footnotes below for the quarters ended March 31, 2012 and. The Network s operating margin for the quarter ended March 31, 2012 was 4.1% as compared to a forecasted operating margin of 4.0% and a prior period margin of 4.5%. During the quarter, the Network experienced growth in volumes in several areas as compared prior period including: Admissions- 4.3% increase. The Network s East, North and South Hospital facilities experienced the largest admissions growth for the quarter; Outpatient Hospital Based Surgeries- 10.9% increase. The Network s East and South facilities experienced the largest growth; Surgery Center Based Surgeries- 3.4% increase. Both the Network s Indiana and Michigan markets experienced increases; Imaging Scans- 11.8% increase. The Network s Heart and South Hospital facilities experienced the largest growth; Inpatient Surgeries- 7.7% increase. The Network s South and Anderson Hospital facilities experienced the largest growth; The Network s strong performance for the quarter was despite increases in salaries and wages expense and rent expense due to the employment of several primary care and specialty physicians during the quarter. Through integration strategies the Network added over 30 new primary care and specialty physicians during the quarter. Additionally, the Network recognized additional operating costs associated the implementation of the Network s new clinical information system. The first wave of implementation began in April 2012. The remaining waves are estimated to be completed by early 2013. Comparing Q1 2012 to Q1, the Network experienced an unfavorable shift in governmental payor mix from WellPoint payor mix. The Network s payer mix is as follows: Payer Mix March 31, 2012 March 31, Medicare 40.0% 39.5% Medicaid 12.5% 12.4% Wellpoint 22.5% 23.5% Self-pay 4.4% 3.9% Other commercial 20.6% 20.7% Deductions from revenue increased from 60.4% of total patient revenue for the quarter ended March 31, to 61.4% for the quarter ended March 31, 2012. Included within deductions from revenue are charity care charges of $24.4 million and $18.3 million for the quarters ended March 31, 2012 and, respectively. The Network s total margin for the quarter ended March 31, 2012 was 13.6% as compared to a prior period total margin of 7.7%. The increase in total margin is due to improved investment performance during Q1 2012. The Network experienced unrealized gains of $35.0 million on its board designated funds for the quarter ended March 31, 2012 and $2.6 million of realized gains. The Network marks to market its investments on a monthly basis. A-5
Total cash and investments increased from $565.5 million at December 31, to $586.4 million at March 31, 2012. The increase in total cash and investments during Q1 2012 is due to the improvement in investment performance the Network experienced in Q1 2012 despite $15.3 million of defined benefit pension plan contributions made during the quarter. Total days cash decreased from 169 days at December 31, to 162 days at March 31, 2012. Days in accounts receivable increased from 53 days at December 31, to 55 days at March 31, 2012. Long-term debt decreased from $413.9 million at December 31, to $413.1 million at March 31, 2012 due to payments made on the principal amounts of outstanding debt. A-6