Consolidated Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Pages Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Net Assets 5 Consolidated Statements of Cash Flows 6 7 28
KPMG LLP Suite 1700 100 North Tampa Street Tampa, FL 33602 Independent Auditors Report The Board of Trustees Marion County Hospital District d/b/a Munroe Regional Medical Center and The Board of Directors Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center: We have audited the accompanying consolidated balance sheet of Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center for the Account of Marion County Hospital District (the Health System) as of September 30, 2008, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Health System s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying financial statements of the Health System as of September 30, 2007, were audited by other auditors whose report thereon dated December 14, 2007, expressed an unqualified opinion on those statements and included an explanatory paragraph stating that the Health System changed the manner in which it accounts for defined benefit pension and other postretirement plans effective September 30, 2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Health System s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2008 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center for the Account of Marion County Hospital District as of September 30, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. January 22, 2009 Certified Public Accountants KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents $ 28,871,416 31,754,864 Certificates of deposit and other short-term investments 16,023,590 15,754,841 Patient accounts receivable, net of estimated uncollectibles of approximately $25,900,000 in 2008 and $22,600,000 in 2007 49,816,701 46,012,371 Estimated third-party payor settlements 5,885,289 672,724 Assets limited as to use 5,574,300 5,254,910 Inventories 5,924,369 6,171,086 Prepaid expenses and other current assets 4,378,376 5,799,232 Total current assets 116,474,041 111,420,028 Assets limited as to use: Held by trustee 6,108,996 12,517,950 Board designated and donor restricted assets 72,298,738 77,777,859 78,407,734 90,295,809 Less amounts required to meet current obligations (5,574,300) (5,254,910) 72,833,434 85,040,899 Property and equipment, net 144,066,153 150,494,532 Other assets: Unamortized deferred financing costs 855,246 934,234 Other 6,079,919 13,482,654 Total other assets 6,935,165 14,416,888 Total assets $ 340,308,793 361,372,347 2 (Continued)
Consolidated Balance Sheets Liabilities and Net Assets Current liabilities: Accounts payable $ 15,520,151 16,156,263 Accrued liabilities: Payroll 5,285,957 4,622,930 Employee benefits 10,230,090 7,503,387 Interest 2,068,754 1,816,971 State indigent assessment 4,351,474 4,235,522 Other 8,875,841 8,892,342 Current portion of bonds payable 3,590,000 3,525,000 Current portion of long-term debt 1,084,933 741,303 Total current liabilities 51,007,200 47,493,718 Bonds payable 101,742,321 105,355,859 Long-term debt 3,541,211 3,377,272 Other liabilities 8,652,668 7,329,442 Total liabilities 164,943,400 163,556,291 Interest of minority partner s in consolidated partnership 987,024 860,824 Commitments and contingencies Net assets: Unrestricted 172,662,756 194,573,974 Temporarily restricted 1,195,015 1,910,660 Permanently restricted 520,598 470,598 Total net assets 174,378,369 196,955,232 Total liabilities and net assets $ 340,308,793 361,372,347 See accompanying notes to consolidated financial statements. 3
Consolidated Statements of Operations Years ended Unrestricted revenues, gains, and other support: Net patient service revenue $ 317,772,679 306,593,075 Other revenue 1,942,425 4,001,859 Total unrestricted revenues, gains, and other support 319,715,104 310,594,934 Expenses: Salaries and benefits 135,413,421 128,311,913 Supplies 57,824,805 54,907,931 Other expenses 73,162,811 74,700,654 Provision for bad debts 38,929,312 32,082,085 Depreciation and amortization 15,574,444 15,637,746 Interest 5,338,346 5,033,904 Total expenses 326,243,139 310,674,233 Operating loss (6,528,035) (79,299) Nonoperating gains (losses): (Decrease) increase in fair value of derivative (2,133,604) 1,072,893 Investment (loss) income (3,686,384) 6,523,761 Reclassification of investment portfolio to trading 2,129,602 Loss on extinguishment of debt (2,535,337) Total nonoperating (losses) gains (3,690,386) 5,061,317 Excess (deficit) of revenues, gains, and other support over expenses, before elimination of minority partner s interest (10,218,421) 4,982,018 Elimination of minority partner s interest (1,010,825) (860,824) Excess (deficit) of revenues, gains, and other support over expenses (11,229,246) 4,121,194 Other changes in net assets: Change in net unrealized gains on other than trading securities 1,042,380 Net assets released from restrictions used for purchase of property and equipment 844,169 109,790 Net assets transferred to temporarily restricted (35,863) Reclassification of investment portfolio to trading (2,129,602) Effect of adoption of FASB Statement No. 158 (1,940,000) Pension liability adjustment (9,362,000) (Decrease) increase in fair value of derivative, net of minority partner s interest of $(20,723) in 2008 and $12,106 in 2007 (34,539) 20,177 Change in unrestricted net assets before cumulative effect of a change in accounting principle (21,911,218) 3,317,678 Cumulative effect of a change in accounting principle as a result of FASB Staff Position FASB Interpretation 45-3 (note 1) 625,215 (Decrease) increase in unrestricted net assets $ (21,911,218) 3,942,893 See accompanying notes to consolidated financial statements. 4
Consolidated Statements of Changes in Net Assets Years ended Unrestricted net assets: Excess (deficit) of revenues, gains and other support over expenses $ (11,229,246) 4,121,194 Change in net unrealized gains on other than trading securities 1,042,380 Net assets released from restrictions used for purchase of property and equipment 844,169 109,790 Net assets transferred to temporarily restricted (35,863) Reclassification of investment portfolio to trading (2,129,602) Effect of adoption of FASB Statement No. 158 (1,940,000) Pension liability adjustment (9,362,000) (Decrease) increase in fair value of derivative, net of minority partner s interest of $(20,723) in 2008 and $12,106 in 2007 (34,539) 20,177 Cumulative effect of a change in accounting principle as a result of FASB Staff Position FASB Interpretation 45-3 (note 1) 625,215 (Decrease) increase in unrestricted net assets (21,911,218) 3,942,893 Temporarily restricted net assets: Pledges and donations 272,188 1,605,106 Provision for bad debts 96,742 (196,389) Investment income, net 50,044 39,063 Change in unrealized (losses) gain on investments (158,725) 56,144 Contributions from grants 230,397 Net assets released from restrictions used for property and equipment (844,169) (109,790) Net assets released from restrictions for operating activities (121,086) (394,525) (Decrease) increase in interest in net assets of Foundation and Auxiliary (10,639) 38,884 (Decrease) increase in temporarily restricted net assets (715,645) 1,268,890 Permanently restricted net assets: Contributions 50,000 Increase in permanently restricted net assets 50,000 (Decrease) increase in net assets (22,576,863) 5,211,783 Net assets: Beginning of year 196,955,232 191,743,449 End of year $ 174,378,369 196,955,232 See accompanying notes to consolidated financial statements. 5
Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ (22,576,863) 5,211,783 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 15,574,444 15,637,746 Amortization of debt financing costs and original issue discount and premium 55,450 104,623 Provision for bad debts 38,929,312 32,082,085 Minority partner s interest in consolidated partnership s income 1,010,825 860,824 Loss (gain) on disposal of property and equipment 282,392 (1,570,388) Net realized and unrealized gains on investments and assets limited as to use 6,382,754 (2,522,799) Decrease (increase) in fair value of derivatives 2,168,143 (1,052,716) Pension liability adjustment 9,362,000 Changes in operating assets and liabilities: Patient accounts receivable (42,733,642) (32,176,923) Estimated third-party payor settlements (5,212,565) 333,129 Inventories, prepaid expenses and other current assets 1,667,573 (1,120,933) Accounts payable (636,112) 1,752,627 Accrued liabilities 3,740,964 (401,063) Other liabilities (5,094,917) 1,055,119 Net cash provided by operating activities 2,919,758 18,193,114 Cash flows from investing activities: Increase in certificates of deposit and other short-term investments, net (268,749) (8,721,030) Change in assets whose use is limited 5,505,321 (10,262,993) Purchases of property and equipment (8,838,753) (6,696,790) Distribution of minority interest (884,625) Proceeds from sale of property and equipment 841,851 Decrease in prepaid pension cost (2,437,880) Decrease in other assets 2,290,735 267,000 Net cash used in investing activities (2,196,071) (27,009,842) Cash flows from financing activities: Repayments of long-term debt and capital lease obligations (82,135) (419,085) Repayments of bonds payable (3,525,000) (53,960,000) Proceeds from issuance of bonds payable 63,391,612 Payment of bond issuance costs (574,737) Net cash (used in) provided by financing activities (3,607,135) 8,437,790 Net decrease in cash and cash equivalents (2,883,448) (378,938) Cash and cash equivalents: Beginning of year 31,754,864 32,133,802 End of year $ 28,871,416 31,754,864 Supplemental schedule of cash flow information: Cash paid during the year for interest $ 4,677,963 4,906,814 Supplemental schedule of noncash investing and financing activities: Purchase of equipment under capital lease obligation 589,704 604,760 Purchase of equity interest in joint venture 798,700 See accompanying notes to consolidated financial statements. 6
(1) Summary of Significant Accounting Policies (a) Organization Effective September 1, 1984, Marion County Hospital District (the District) transferred the operations of Munroe Regional Medical Center (the Medical Center) to Munroe Regional Health System, Inc. (the Health System), a not-for-profit corporation, which prior to October 1, 1994 was known as Big Sun Healthcare Systems, Inc., in the form of a lease. On July 28, 2003, the District and the Health System made and entered into a revised lease agreement effective through September 30, 2013. The lease is renewable automatically for two (2) additional consecutive renewal terms of ten years each, unless canceled by either party, in accordance with the agreement. Annual lease payments are equal to the District s debt service obligations and normal and ordinary operating expenses incurred by the lessor. In addition, the lease also requires that $500,000 or an amount equal to the prior fiscal year operating margin, whichever is less, be set aside each year to fund special health care projects in the community as approved by the Board of Directors of the lessee. The consolidated financial statements include the accounts of the following: Munroe Regional Health System, Inc. primarily operates as Munroe Regional Medical Center providing a continuum of comprehensive healthcare services to residents of North Central Florida. Ocala Healthcare Associates, LLP of which the Health System is a 62.5% general partner, is a skilled nursing and rehabilitation facility. The portion of income or loss attributable to the minority interests, not to exceed the minority interest s equity in the consolidated entity, is eliminated in the line items in Health System s consolidated statements of operations entitled Elimination of minority partner s interest. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis. Net assets are classified as unrestricted, temporarily restricted, or permanently restricted in the accompanying consolidated balance sheets. Unrestricted Net Assets Include amounts earned during the period from operations and other assets held with no restrictions as to use. Temporarily Restricted Net Assets Contributions receivable and received which are limited by donor imposed restrictions that can be satisfied by the Health System or expire by the passage of time are reported as temporarily restricted net assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and are reported in the consolidated statements of operations as net assets released from restrictions. Donor 7 (Continued)
restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying consolidated statements of operations. Permanently Restricted Net Assets Net assets subject to donor-imposed stipulations that are required to be maintained permanently by the Health System are considered permanently restricted. All income earned on related investments is permitted to be used for general support of the Health System. (c) (d) (e) (f) Functional Expenses The Health System does not present expense information by functional classification because its resources and activities are primarily related to providing health care services. Further, since the Health System receives substantially all of its resources from providing health care services in a manner similar to a business enterprise, other indicators contained in these consolidated financial statements are considered important in evaluating how well management has discharged their stewardship responsibilities. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Health System considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Certificates of Deposit and Other Short-Term Investments Certificates of deposit and other short-term investments consist primarily of investments in high-grade commercial paper and certificates of deposit and are carried at fair value in the consolidated balance sheets. Fair value is based upon quoted market prices, which is generally equal to carrying amount due to the short maturity. Investment income or loss (including realized gains and losses on investments, unrealized gains and losses on trading securities, interest, and dividends) is included in the excess (deficit) of revenues, gains and other support over expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from the excess of revenues, gains and other support over expenses unless the investments are trading securities. 8 (Continued)
(g) (h) Inventories Inventories consist primarily of unused supplies and are stated at lower of cost (first-in, first-out method) or market. Assets Limited as to Use Assets limited as to use primarily include assets held by trustees under indenture agreements and designated assets set aside by the Board of Directors (the Board) for future capital improvements and/or debt retirement, over which the Board retains control and may at its discretion subsequently use for other purposes. Amounts required to meet current liabilities of the Health System have been reclassified in the consolidated balance sheets at. Assets limited as to use are carried at fair value based upon quoted market prices in the consolidated balance sheets. On October 1, 2007, the Health System changed the classification of all its debt and equity securities to trading. Prior to October 1, 2007, investments in debt or equity securities with readily determined fair values have been considered other-than-trading. Earnings on trading investments includes realized and unrealized gains and losses on investments, interest income, and dividends and are included in excess (deficit) of revenues, gains, and other support over expenses in the consolidated statements of operations, unless the income or loss is restricted by donor or law. Investment income and net gains restricted by donor stipulations is reported as an increase in temporarily restricted net assets. Prior to October 1, 2007, changes in unrealized gains and losses on investments are excluded from excess of revenues, gains, and other support over expenses and are included as a component of other changes in net assets. After the investment portfolio was reclassified as a trading portfolio on October 1, 2007, unrealized gains and losses are included in excess of revenues, gains and other support over expenses. Prior to the changes to a trading portfolio on October 1, 2007, the reduction in carrying amount associated with a decline in market value of an investment below cost that was determined to be other than temporary was charged to revenues, gains, and other support over expenses, and a new cost basis for the security was established. (i) Property and Equipment Property and equipment are recorded at historical cost at the date of acquisition, which includes capitalized interest, or at fair market value at the date of donation. Routine maintenance and repairs are expensed when incurred. Expenditures that materially increase the value, change the capacity or extend the useful life of an asset are capitalized. Major asset classifications and useful lives are generally in accordance with those recommended by the American Hospital Association. Depreciation is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization expense in the consolidated statements of operations. Upon sale or retirement of depreciable assets, the 9 (Continued)
related cost and accumulated depreciation are removed and any gain or loss is included in operating loss. Estimated useful lives by major asset classification are summarized below: Land improvements Buildings and fixed equipment Leasehold improvements Moveable equipment 2 25 years 5 40 years 3 20 years 2 20 years (j) Unamortized Deferred Financing Costs and Bond Discounts and Premiums Unamortized deferred financing costs on the Series 1999, 2000 and 2007 bond issues are being amortized using the bonds outstanding method, which approximates the effective interest method. As of, unamortized deferred financing costs of approximately $855,000 and $934,000, net of accumulated amortization of approximately $1,021,000 and $944,000, respectively, and are included in other assets in the accompanying consolidated balance sheets. Bond discounts and premiums are being amortized using the bonds outstanding method, which approximates the effective interest method. Amortization of bond discounts and premiums is included in interest expense in the consolidated statements of operations. Unamortized bond discounts of $115,645 and $154,857 and bond premiums of $1,172,967 and $1,235,715 are included with the related debt in the consolidated balance sheets at, respectively. (k) Other Assets Included in other assets is the Health System s beneficial interest in the net assets of the Munroe Foundation, Inc. (the Foundation) and Munroe Regional Health Systems Auxiliary, Inc. (the Auxiliary) to recognize its rights to the assets held by the Foundation and Auxiliary. Changes in the Health System s interest in the net assets is reflected as an increase in either unrestricted, temporarily, or permanently restricted net assets. In May 2007, the Health System sold its Home Health division to Munroe Regional Home Care, LLC. Simultaneously, the Health System acquired a 49% interest in Munroe Regional Home Care, LLC, a joint venture with LHC Group, Inc. The investment balance of $757,000 is included in other assets at September 30, 2008. 10 (Continued)
The following is a summary of key financial data at and for the fiscal years then ended (in thousands): Foundation: Total assets $ 763 976 Total liabilities 485 493 Total net assets 278 483 Total revenues 59 40 Total expenses Auxiliary: Total assets 430 451 Total liabilities 96 109 Total net assets 334 342 Total revenues 289 283 Total expenses 255 292 Effective October 1, 2005, all past and future donations of the Foundation were transferred to the Health System except for numerous prior charitable gift annuities and a charitable remainder unitrust which will remain with the Munroe Foundation, Inc. As of, these charitable gift annuity agreements totaled $735,062 and $937,309, respectively, and the charitable remainder unitrust total $28,281 and $38,920, respectively. (l) (m) Nonoperating Gains and Losses and Excess of Revenues and Gains over Expenses Transactions deemed by the Health System to be ongoing, major or central to the provision of healthcare services are reported as unrestricted revenues and expenses. Peripheral or incidental transactions are reported as nonoperating gains and losses. The consolidated statements of operations and changes in net assets include excess of revenues and gains over expenses. Changes in unrestricted net assets, which are excluded from excess of revenues and gains over expenses, consistent with industry practices, consist of unrealized gains and losses on investments classified as other-than-trading securities, changes in beneficial interest in net assets of foundations, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets). Impairment of Long Lived Assets Management regularly evaluates whether events or changes in circumstances have occurred that could indicate impairment in the value of long-lived assets. If there is an indication that the carrying amount of an asset is not recoverable, the Health System estimates the projected undiscounted cash flows from the use and eventual disposition of the asset, excluding interest, to determine if an impairment loss should be recognized. The amount of impairment loss, if any, is determined by 11 (Continued)
comparing the carrying value of the asset to its estimated fair value. There were no such impairment losses recorded during the years ended September 30, 2008 or 2007. (n) (o) Self-Insurance The Health System is self-insured for professional liability, workers compensation, and employee health benefits. The provisions for estimated self-insured claims include estimates of the ultimate costs for both reported claims and claims incurred but not reported, based on an evaluation of pending claims and past experience. Net Patient Service Revenue The Health System has agreements with third-party payors that provide for payment at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and other for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. A summary of the basis of payment with Medicare, Medicaid and other third-party payors follows: Medicare Inpatient acute care services, inpatient rehabilitative services, hospital outpatient services and home health services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Certain outpatient services rendered to Medicare beneficiaries are paid based upon a cost reimbursement methodology. The Medical Center is reimbursed for cost reimbursable items at a tentative interim rate with final settlement determined after submission of annual cost reports and audits by the Medicare fiscal intermediary. The Medical Center s Medicare cost reports have been audited and final settlements determined by the Medicare intermediary for all fiscal years through September 30, 2006. Retroactive adjustments for cost report settlements are accrued on an estimated basis in the period when the related services are rendered and adjusted in future periods when final settlements are determined. Medicaid Inpatient and outpatient services (except for laboratory and pathology services) rendered to Medicaid program beneficiaries are reimbursed under a cost reimbursement methodology. Reimbursable cost is determined in accordance with the principles of reimbursement established by the Florida Title XIX Hospital Reimbursement Plan, supplemented by the Medicare Principles of Reimbursement. The interim rates are tentatively established on an individual per diem basis for each hospital, subject 12 (Continued)
to cost ceilings with exceptions. The Medical Center is reimbursed at a tentative interim rate with final settlement determined when the prospectively determined rate is adjusted after the intermediary audit of the combined Medicare and Medicaid cost report that was used to determine the prospective rate. Retroactive adjustments for interim rate changes anticipated after the intermediary audit of the cost report are accrued on an estimated basis in the period when final settlements are determined. The Medical Center s Medicaid interim rates are based on the Medicare/Medicaid cost report. The cost reports for fiscal years 2002, 2003, 2006, 2007, and 2008 have not yet been audited by the fiscal intermediary. The classification of patients and the appropriateness of their admission are subject to review by the fiscal intermediaries administering the Medicare and Medicaid programs. Other The Health System has also entered into payment arrangements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment under these arrangements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined rates. Some of these arrangements provide for review of paid claims for compliance with the terms of the contract and result in retroactive settlement with third parties. Retroactive adjustments for other third-party claims are recorded in the period when final settlement is determined. Laws and regulations governing the Medicare and Medicaid Programs are complex and subject to interpretation. The Health System 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, compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid Programs. (p) Charity Care The Health System provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. A patient is classified as a charity patient by reference to certain established policies of the Board. Because the Health System does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. 13 (Continued)
The Health System maintains records to identify and monitor the level of charity care. Those records include charges for services and supplies furnished under its charity care policy. The following is a summary of uncompensated care provided by the Health System during the fiscal years ended : 2008 as measured by 2007 as measured by Established Established charges Costs charges Costs Traditional charity care $ 19,641,147 6,748,698 15,741,813 5,098,773 Bad debts, net 38,929,312 13,376,112 32,082,085 10,292,805 Community health services support 400,000 350,000 Special health care projects fund 500,000 500,000 Total uncompensated care $ 58,570,459 21,024,810 47,823,898 16,241,578 In addition to quantifiable uncompensated care provided during the fiscal years ended September 30, 2008 and 2007, the Health System provided many less quantifiable programs and services to the community which enhanced access to care, improved the health of the community and heightened community health awareness through health screenings and educational programs. In addition to the uncompensated care provided, the lease with the District in effect during fiscal years 2008 and 2007 required that each year $500,000 be set aside for special health care projects that benefit the community as a whole. The Health System received no tax support from Marion County toward the provision of Indigent care in fiscal years 2008 or 2007 and has not received local funding since fiscal year 1994. As of, the Health System received $100,000 each year from the Foundation Ax Fund which is restricted to indigent care and was used to assist providing care at the Heart of Florida clinic. (q) Income Taxes The Health System has been recognized by the Internal Revenue Service as a tax-exempt organization as described in Section 501(c) (3) of the Internal Revenue Code (the Code). Income earned in furtherance of the Health System s tax-exempt purpose is exempt from federal and state income taxes. The Code provides for taxation of unrelated business income under certain circumstances. The Health System has no significant unrelated business income. On October 1, 2007, the Health System adopted Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes. The Health System determined that FIN 48 did not have a material impact on its financial position or results of operations. 14 (Continued)
(r) (s) (t) Derivative Financial Instruments The Health System records all derivative instruments on the consolidated balance sheets in other long-term assets and long-term liabilities at fair value. The net market value of the derivative instruments at was approximately $1,184,000 and $1,005,000, respectively. Changes in the fair value are recorded each period in either the excess of revenues, gains, and other support over expenses or in other changes in unrestricted net assets, depending on the type of derivative transaction and qualification as a hedge. The Health System s derivatives are interest rate swaps. The Health System uses its derivative financial instruments primarily for the purposes of hedging exposures to fluctuations in interest rates. The differential to be paid or received on the interest rate swaps is recognized as an adjustment to interest expense. New Accounting Pronouncements On September 28, 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (FASB No. 158), which addresses how Companies must recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans (collectively referred to herein as benefit plans) on their balance sheets. Employers will not be permitted to offset one plan s net assets with another plan s net liabilities. Recognizing the funded status of a company s benefit plans as a net liability or asset will require an offsetting adjustment to unrestricted net assets. Not-for-profit organizations were required to adopt the recognition and disclosure provisions effective for fiscal years ending after June 15, 2007. The Health System has adopted the provisions of SFAS No. 158 as of September 30, 2007 (note 7). Reclassifications Certain items in the 2007 presentation were reclassified to conform to the 2008 presentation. Such classifications had no impact on net assets or changes in net assets. 15 (Continued)
(2) Investments (a) Assets Limited as to Use The composition of assets limited as to use as of, is set forth in the following tables: Held by trustee: Sinking fund (2000 Issue) $ 813,999 762,266 Bond service account 3,635,160 3,611,853 Construction fund (2007 Project) 6,719,216 Cost of issuance (2007 Issue) 21 2,451 Sinking fund (2007 Issue) 1,555,655 1,215,678 Accrued interest 104,161 206,486 6,108,996 12,517,950 Board designated and donor restricted assets 72,298,738 77,777,859 78,407,734 90,295,809 Less amount included in current assets (5,574,300) (5,254,910) $ 72,833,434 85,040,899 16 (Continued)
Held by trustee under indenture agreements: Short-term investments $ 6,004,835 12,311,464 Accrued interest 104,161 206,486 6,108,996 12,517,950 Board designated and donor restricted assets: Money market mutual funds 14,904,676 11,689,268 Certificates of deposit 361,842 339,267 U.S. government and agency obligations 15,355,831 18,446,735 Common stock 9,517,987 12,125,858 Mortgage and asset backed securities 9,345,490 15,744,934 Corporate obligations 21,609,827 18,362,781 Other fixed income securities 150,000 150,000 Equity funds 630,059 520,070 Accrued interest 423,026 398,946 72,298,738 77,777,859 78,407,734 90,295,809 Less amount included in current assets (5,574,300) (5,254,910) $ 72,833,434 85,040,899 (b) Certificates of Deposit and Other Short-Term Investments Certificates of deposit and other short-term investments as of, include: Commercial paper $ 16,023,590 15,754,841 17 (Continued)
Investment income and gains for cash equivalents, certificates of deposits and other short-term investments, and assets limited as to use or restricted are comprised of the following for the fiscal years ended : Nonoperating gains (losses): Interest income and dividends $ 2,537,645 3,554,762 Net realized gains (losses) on sale of investments (631,295) 2,968,999 Unrealized losses on trading investments, net (5,592,734) Reclassification of investment portfolio to trading 2,129,602 Total nonoperating gains (losses) (1,556,782) 6,523,761 Other changes in unrestricted and temporarily restricted net assets: Interest income and dividends 50,044 39,063 Changes in unrealized gains (losses) on other-thantrading investments (158,725) 1,098,524 Reclassification of investment portfolio to trading (2,129,602) Total investment return $ (3,795,065) 7,661,348 The effect of the change in classification of investments to trading resulted in approximately $2,130,000 of net unrealized gains being reclassified to nonoperating gains at October 1, 2007. Subsequent to October 1, 2007, the Health System recorded unrealized losses of approximately $5,593,000 in nonoperating gains (losses). (3) Property and Equipment Property and equipment consisted of the following at : Land $ 9,296,914 9,296,913 Land improvements 5,178,980 5,011,367 Buildings and fixed equipment 187,334,494 187,570,184 Movable equipment 107,857,807 100,082,842 Construction in progress 1,021,163 654,441 310,689,358 302,615,747 Less accumulated depreciation (166,623,205) (152,121,215) $ 144,066,153 150,494,532 18 (Continued)
Depreciation and amortization expense was $15,653,432 and $15,637,746 during the years ended, respectively. Construction in progress at September 30, 2008 consists primarily of building renovations and improvements. There were numerous projects underway at September 30, 2008, which are being funded primarily through operations, board designed assets and the foundation s capital campaign. As of September 30, 2008, estimated costs to complete the projects were approximately $6,218,000. Included in moveable equipment are assets leased under capital leases with a net book value of $1,174,110 and $1,953,291 as of, respectively. (4) Long-Term Debt Long-term debt consisted of the following at : Loan payable to bank, due in monthly installments of $31,445, plus interest at LIBOR plus 1.90% (4.39% and 7.18% at, respectively), with balance due in November 2016, collateralized by certain property and equipment $ 3,359,971 3,458,111 Capital lease obligations for medical equipment 1,266,173 660,464 Less current portion (1,084,933) (741,303) $ 3,541,211 3,377,272 Principal maturities for the loan and capital lease obligation payable are as follows: Fiscal year ending: 2009 $ 1,084,933 2010 848,867 2011 448,019 2012 377,709 2013 377,340 Thereafter 1,489,276 $ 4,626,144 Ocala Healthcare Associates LLP has an interest rate swap agreement with a financial institution on the loan payable to bank. Under the swap agreement, the partnership pays the lower of the London Inter-Bank Offered Rate (LIBOR) plus 0.90% or a fixed rate of 7.88%. LIBOR was 2.49% and 4.9% as of, respectively. The fair value of the derivative at September 30, 2008 and 2007 of $(358,029) and $(302,767), respectively, is reflected as other long-term liabilities in the 19 (Continued)
accompanying consolidated balance sheets. The change in fair value of the derivative of $55,262 and $32,283 for the fiscal years ended, respectively, is recognized in other changes in net assets. Ocala Healthcare Associates LLP has a $400,000 line of credit with a financial institution. There were no draws made on the line of credit during the fiscal years ended. (5) Bonds Payable Bonds payable consisted of the following at : 3.70% to 6.0% Fixed Rate Refunding and Improvement Revenue Bonds, Series 1999, comprised of $18,050,000 serial bonds due in varying amounts through 2015 and 5.625% $1,370,000 term bonds due October 1, 2019, 5.625% $110,000 term bonds due October 1, 2020 (net of unamortized discount of $115,645 and $154,857 in 2008 and 2007, respectively) $ 16,639,355 19,375,143 Variable Rate Improvement Revenue Bonds, Series 2000 due October 1, 2030 26,175,000 26,925,000 5% Fixed Rate Refunding and Improvement Revenue Bonds, Series 2007, comprised of $6,555,000 serial bonds due in varying amounts through 2017, $9,060,000 term bonds due October 1, 2022, $20,645,000 term bonds due October 1, 2029 and $25,085,000 term bonds due October 1, 2034 (net of premium of $1,172,966 and $1,235,715 in 2008 and 2007, respectively) 62,517,966 62,580,716 105,332,321 108,880,859 Less current portion (3,590,000) (3,525,000) $ 101,742,321 105,355,859 The remaining principal installments on the Series 1999 Bonds are payable through 2020, with mandatory redemption from 2016 to 2020. The Series 2007 and Series 1999 Bonds are payable from and collateralized by the gross revenue of the Health System. The Master Trust Indenture contains certain covenants, the most restrictive of which relates to maintenance of specified levels of debt service coverage. The Health System is in compliance with the covenants at. The Health System entered into an interest rate swap agreement with CitiBank, N.A. New York (the Counterparty) on March 21, 2003 that matures on October 1, 2029. The notional amount of the swap 20 (Continued)
agreement is $45,170,000. The Health System pays the Counterparty a variable rate equivalent to the Bond Market Association Municipal Swap Index (BMA), which was 7.96% and 3.84% as of September 30, 2008 and 2007, respectively. The Counterparty pays the Health System a combination of a fixed rate computed as 0.60% of the notional amount and a payment computed as 67% of LIBOR, which was 3.09% and 5.66% as of, respectively. On August 4, 2006, the Health System entered into a separate basis swap overlay agreement with CitiBank, N.A. New York (the Counterparty) that matures on October 1, 2029. The notional amount is $45,170,000. The Health System pays the Counterparty a variable rate equivalent to 67% of one-month LIBOR which was 2.49% and 3.84% at, respectively. The Counterparty pays the Health System 61.5% of 5-year LIBOR which was 3.44% at September 30, 2008. On July 18, 2008 the Health System entered into a Synthetic Fixed Rate Debt Swap with R. J. Capital Services Inc. (the Counterparty) that matures on October 1, 2030. The notional amount is $26,175,000. The Health System pays a monthly fixed rate of 3.364%. The Counterparty pays the Health System 67% of one-month LIBOR which was 2.49% at September 30, 2008. The interest rate swaps have a fair value of $(826,163) and $1,307,441 as of, respectively. At, the fair value of the interest rate swaps is included in other long-term liabilities and other assets, respectively, in the consolidated balance sheets. The change in fair value of $(2,133,604) and $1,072,873 was recorded as part of excess of revenues, gains and other support over expenses in the consolidated statements of operations. The net effect of the interest rate swap was a reduction in interest expense of $24,802 and $271,651 for the years ended, respectively. Interest on the Series 2000 Bonds is variable based on a weekly interest rate set by the Remarketing Agent to sell such Series 2000 Bonds on such date of determination at a price equal to the principal outstanding not to exceed 15%. This interest rate was 7.95% and 3.89% at, respectively. The Series 2000 Bonds are collateralized by the gross revenues of the Health System and a letter of credit which expires in July 2010. A summary of interest cost and investment income on borrowed funds held by trustee under the Series 1999, 2000 and 2007 Bonds for the fiscal years ended, is as follows: Interest cost: Charged to operations $ 4,961,190 4,713,124 Investment income: Credited to revenue 133,768 248,273 21 (Continued)
Maturities and principal sinking fund requirements for the Series 1999, 2000 and 2007 Bonds are as follows: Fiscal year ending: 2009 $ 3,590,000 2010 3,750,000 2011 2,875,000 2012 4,175,000 2013 4,335,000 Thereafter 85,550,000 104,275,000 Less unamortized net premium 1,057,321 $ 105,332,321 (6) Self-Insurance The Health System purchases professional liability insurance to cover medical malpractice claims. The insurance provides coverage for claims exceeding the self-insured retention amounts of $2,000,000 per medical incident subsequent to January 24, 2003. Excess coverage, on a claims made basis, is provided up to $25,000,000 per claim and in the aggregate. Claims of approximately $8,399,000 and $8,200,000 as of, respectively, are accrued in other current liabilities based upon the expected ultimate cost of the expenses to date (including a provision for unknown incidents). During fiscal years ended, the Health System recorded approximately $3,260,000 and $4,217,000, respectively, in medical malpractice expense based on independent actuaries employed by the Health System to estimate the actual costs. In management s opinion, an adequate reserve for loss contingencies has been recorded in the consolidated financial statements. The Health System is self-insured for workers compensation up to $500,000 per occurrence subsequent to October 1, 2002 and $350,000 per occurrence prior to October 1, 2002, and has purchased excess coverage from commercial carriers up to the amount allowed by Florida Statutes. During the fiscal years ended, the Health System recorded approximately $2,366,000 and $1,834,000, respectively, in workers compensation expense based on independent actuaries employed by the Health System to estimate the actual costs. In management s opinion, an adequate reserve for loss contingencies has been recorded in the consolidated financial statements. Ocala Healthcare Associates, LLP is self-insured for professional liability claims. As of September 30, 2008 and 2007, the Health System reflects $375,000 as accrued expenses related to its exposure for professional liability claims. As a provider of health care services, the Health System is subject to malpractice claims and litigation through the normal course of operations. Certain of these matters are covered by insurance arrangements described above. Losses which are subject to the deductible provisions have been estimated and accrued in 22 (Continued)
the accompanying consolidated financial statements. Management believes that these matters will be resolved without material adverse effect on the Health System s future financial position, results of operations or cash flows. (7) Pension Plan On September 30, 2007, the Health System adopted the recognition and disclosure provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB No. 87, 88, 106 and 132(R). This Standard retains the previous periodic expense calculation on an actuarial basis under the provisions of SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. In addition, SFAS No. 158 requires an employer to recognize the net funded status of defined benefit pensions and other postretirement benefit plans (benefit plan) as an asset or liability in its balance sheet and to recognize changes in the funded status through net assets. Additional minimum pension liabilities (AML) and related intangible assets are derecognized upon adoption of the new Standard. For pension plans, the benefit obligation is the projected benefit obligation; for other postretirement plans, the benefit obligation is the accumulated postretirement benefit obligation. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position effective for fiscal years ending after December 15, 2008. The Health System currently uses a September 30 valuation date for its benefit plan. The incremental effects of adoption of the provisions of FAS 158 on the Health System s consolidated balance sheet at September 30, 2007 are presented in the following table. The adoption of FAS 158 had no effect on the Health System s income for any period presented, and it will not effect the Health System s operating results in future periods. The effect of adopting FAS 158 is included in the table below. September 30, 2007 Prior to Effect of adoption adopting As of FAS 158 FAS 158 reported Prepaid pension asset (induded in other assets) $ 5,675,000 (563,000) 5,112,000 Total assets 361,935,347 (563,000) 361,372,347 Current postretirement benefit liability (included in accrued employee benefits) (13,000) (13,000) Noncurrent postretirement benefit liability (included in other liabilities) (1,364,000) (1,364,000) Total liabilities (1,377,000) (1,377,000) Unrestricted net assets 196,513,974 (1,940,000) 194,573,974 The Medical Center has a noncontributory defined benefit pension plan (the Plan) covering substantially all of its employees. The Plan provides benefits based on a Pension Equity formula, equal to the product of 23 (Continued)
a participants total Pension Equity Percentage, as defined, accumulated over total years of Credited Service (as defined) and their final average earnings; plus the product of a participants total Excess Pension Equity Percentage accumulated over total years of Credited Service and their final average earnings in excess of $12,000. The Medical Center s policy is to fund the pension contribution due on an annual basis, using the aggregate cost method, in accordance with the guidelines provided by the Employee Retirement and Income Security Act (ERISA). For financial statement reporting purposes, the Medical Center uses the projected unit credit cost method. A Supplemental Executive Retirement Plan (SERP) was established in 1999 to assist with executive recruitment and retention. The SERP s assets and liabilities have been combined with the Plan s assets and liabilities for reporting purposes in the consolidated balance sheets at. The following table sets forth the change in projected benefit obligation, change in Plan and SERP assets, weighted average assumptions and components of net periodic pension cost for the Plan and SERP: Accumulated benefit obligation $ 37,206,000 37,054,000 Change in projected benefit obligation: Projected benefit obligation, beginning of year $ 46,150,000 45,512,000 Service cost 3,160,000 3,014,000 Interest cost 2,949,000 2,816,000 Actuarial (gain) loss (2,288,000) (892,000) Benefits paid (3,272,000) (4,327,000) Plan amendments 27,000 Projected benefit obligation, end of year 46,699,000 46,150,000 Change in plan assets: Fair value of plan assets at beginning of year 49,885,000 43,700,000 Employer contributions 3,230,000 4,041,000 Actual return on plan assets (7,443,000) 6,471,000 Benefits paid (3,272,000) (4,327,000) Fair value of plan assets at end of year 42,400,000 49,885,000 Funded status $ (4,299,000) 3,735,000 24 (Continued)