Unaudited Interim Financial Statements September 0, 201
Financial Statements Management Discussion & Analysis Consolidated Statements of Financial Position Consolidated Statements of Activities Consolidated Statements of Changes in Net Assets Consolidated Statements of Cash Flow Page 1-4 5 6 7 8 Additional Information Utilization Statistics and Payor Mix Consolidated Summary of Revenues and Expenses Days Cash on Hand 9 10 11 9
South Nass u COMMUNITIES HOSPITAL One Healthy Way, Oceanside, NY 11572 (516) 632-3000 www.southnassau.org This document is dated as of November 27,2015 SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS. Certain of the discussions included in the following document may include certain "forward-looking statements" which involve known and unknown risks and uncertainties inherent in the operation ofhealthcare facilities. Actual actions or results may differ materially from those discussed below. Specific factors that might cause such differences include competition from other healthcare facilities in the service area, federal and state regulation of healthcare providers, and reimbursement policies of the state and federal governments and managed care organizations. In particular, statements preceded by, followed by or that include the words "believes", "estimates", "expects", "anticipates", "plans", "intends", "scheduled" or other similar expressions are or may constitute forward-looking statements. South Nassau Communities Hospital are not required to update any of the statement in light of new information or future events, except to the extent required by applicable law. MANAGEMENT'S DISCUSSION AND ANALYSIS UNAUDITED QUARTERLY REPORT THIRD QUARTER ENDING information in this ran.n T has been provided by
The financial information furnished herein is unaudited and thus is subject to change; however, in the opinion of management, the information reflects all adjustments that are necessary to fairly state the consolidated financial position of South Nassau Communities Hospital (the "Hospital"), and the results of its operations and changes in its unrestricted net assets for the interim periods indicated. The Hospital presumes that users of this interim financial information have read or have access to the Hospital's audited financial statements and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The financial statements of the Hospital for the fiscal years ended December 31, 2014, and 2013 is on file at www.emma.msrb.org. Accordingly, footnotes and other disclosures that would substantially duplicate the disclosures contained in the Hospital's most recent audited financial statements have been omitted. Patient volumes and net operating revenues are subject to seasonal variations caused by a number of factors, including, but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy and other patient volumes, interest rates, unusual or non-recurring items and other seasonal fluctuations. These same considerations apply to all year-to-year comparisons. 2
Management's Discussion and Analysis Third Quarter Ending September 30, 2015 Financial Results For the nine months ended September 30, 2015, South Nassau Communities Hospital and subsidiaries recorded a deficiency of revenue and gains over expenses of $6.4 million compared to an excess of revenue and gains over expenses of $6.4 million for the nine months ended September 30, 2014. The largest contributing factor to the 2015 results were investment losses which were below a prior year gain by $9.7 million (a loss of $7.7 million for 2015 compared to a gain $2.0 million gain for 2014). Excluding the investment activity for both years, income from operations thru September 2015 was $1.1 million as compared to income from operations of $1.2 million for the same period 2014. Patient revenue, gross of uncompensated care, increased by $28.9 million as compared to 2014 due to increases in volume, rates, the new healthcare services in Long Beach (an Urgent Care Center that was converted into a Freestanding Emergency Room), and patient revenue associated with investments in and acquisitions of physician practices. Uncompensated care decreased by $0.3 million as compared to 2014, primarily due to a decrease in self pay volume. Total operating expenses increased by $28.8 million as compared to 2014. The components of the expense and the explanations for the variances are included below: 2015 $ 205.4 $ 1 6.8 6.6 20.3 $ $ "''""'"'"".-..c,, '""" to a Family Practice office provided to Employee benefits increased by $8.1 million primarily due to (i) an increase in medical benefits due to an increase in utilization and an increase high cost claims; (ii) 3
an increase in FICA expense due to an increase in salaries; (iii) an increase in Pension expense due to the impact of the new mortality table, decrease in discount rate, less than expected investment returns on pension assets and an increase in the Pension Benefit Guaranty Corporation premium due to an increase in their rates. Other than salary expenses increased by $9.6 million as compared to 2014 primarily due to non-personnel costs of acquiring a large physician practice in October 2014, increases in the cost of supplies and services and costs associated with acquiring additional properties in Long Beach and the opening of a Freestanding Emergency Department in Long Beach in August 2015. Included in non-operating gains and losses for the nine months ended September 30, 2014, is a loss and offsetting insurance recoveries associated with damage sustained to the Hospital and other costs related to Superstorm Sandy. Insurance proceeds of $1.7 million were received in June 2014 as final settlement of the Hospital's Superstorm Sandy insurance claim ($2.0 million and $1.5 million were received in 2013 and 2012, respectively). A loss of $2.0 million related to Long Beach Medical Center transactions was recorded for the nine months ended September 30, 2014. The asset purchase of Long Beach was completed in the fourth quarter of 2014 and therefore there are no nonoperating losses recorded for the nine months ended 2015 (see note 5). Utilization Discharges (including discharges associated with the transitional care unit of 3 7 5) for the nine months ended September 30, 2015 increased by 928 (5.8%) as compared to 2014 primarily due to a worse flu season in 2015 and the opening of the transitional care unit in November 2014. Patient days increased by 8,506 days (10.2%). 4
Unaudited Consolidated Statements of Financial Position Assets Current assets Cash and cash equivalents Investments Current portion of assets whose use is limited Patient receivables, less allowance for uncollectibles of $40,672,000 in 2015 of$36,403,000 in December 2014 Other current assets Total current assets Assets whose use is limited Long-term investments Other long-term assets Property and equipment, at cost, net of depreciation Total Assets September 30, 2015 $ 7,972,286 126,357,284 9,401,790 57,623,226 15,534,062 216,888,648 34,197,617 1,657,811 1,464,214 284,960,009 $ 539,168,299 December 31, 2014 $ 24,016,976 132,683,631 14,212,862 54,203,777 11,197,682 236,314,928 32,520,000 2,010,535 1,563,316 269,408,695 $ 541,817,474 Liabilities and Net Assets Current liabilities Amounts due under line of credit Accounts payable Accrued expenses Accrued and vacation Current of long-term debt Current portion of accrued postretirement benefits other than pension Current of estimated and liabilities Deferred grant revenue Estlmatted raf"t r.c.,~t-n.ra net to third $ 13,000,000 14,835,532 41,086,575 $ 13,000,000 15,021,896 36,977,763 Accrued postretirement benefits other than ~-'"'"'" vu, Estimated and Other liabilities Total liabilities Net assets Unrestricted '<>mma> a.. 111u restricted Permanermy restricted Total net assets Total Liabilities and Net Assets 5
Unaudited Consolidated Statements of Activities For the Nine Months Ended September 30, 2014 September 30, 2015 Operating revenue: Net patient service revenue, net of contractual allowances and other discounts $ Provision for bad debts Net patient service revenue, net of provision for uncompensated care Other revenue Total operating revenue 324,780,324 $ 352,970,106 (12,288,142) {11,270,922} 312,492,182 341,699,184 10,531,561 6,823,583 323,023,743 348,522,767 Operating expenses: Nursing services Other professional services Hospital and Community based physician practices Facilities services Administrative and general services Employee benefits Insurance Interest Expense Provision for depreciation and amortization Total operating expenses 101,371,780 105,534,570 89,444,648 92,416,618 16,295,002 25,783,273 18,987,732 20,126,194 31,398,451 33,671,767 31,966,324 40,072,421 6,590,273 6,896,118 2,121,213 2,657,663 20,459,771 20,260,077 318,635,194 347,418,700 Operating income (loss) 4,388,549 1,104,066 Non-operating gains (losses): 1,711,100 1,678,397 transactions 1,683,325 Excess of revenue and over expenses released from restrictions for Transfer to Related Entities Change in unrestricted net assets 409,995 6
Unaudited Consolidated Statements of Changes in Net Assets For the nine months ended September 30,2015 and the year ended December 31,2014 Temporarily Restricted Permanently Unrestricted Net Assets Restricted Total Net Assets General Ca~ital Cam~aign Net Assets Net Assets Balance, January 1, 2014 $ 245,858,204 $ 599,487 $ $ 1,028,076 $ 247,485,767 Excess of revenue over expenses 13,056,359 13,056,359 Restricted contributions and bequests 348,839 569,263 918,102 Net assets released from restrictions 13,814,268 (524,880) (10,250) 13,279,138 Pension and other post retirement liability adjustments (52,129,9642 {52,129,9642 Total changes in net assets {25,259,3372 {176,0412 559,013 {24,876,3652 Balance, December 31, 2014 220,598,867 423,446 559,013 1,028,076 222,609,402 Excess of revenue over expenses (6,413,799) (6,413,799) Restricted contributions and bequests 168,241 215,868 384,109 Net assets released from restrictions 3,329,546 (43,773) (693,060) 2,592,713 Transfer from related entities 616,807 616,807 Pension and other post retirement liability adjustments Total changes in net assets {2,467,446) 124,468 {477,1922 {2,820, 1702 Balance, September 30, 2015 $ 218,131,421 $ 547,914 $ 81,821 $ 1,028,076 $ 219,789,232 7
Unaudited Consolidated Statements of Cash Flows For the Nine Months ended Cash flows from operating activities Change in net assets Adjustments to reconcile changes in net assets to net cash provided by operating activities: Amortization ofbond premium Amortization of deferred financing fees and bond discount Loss on disposal of assets Provision for depreciation Net investment activity HEAL grant fund released., Capital Deferred revenue Restricted contributions Changes in operating assets and liabilities: Accounts receivable Other assets (current and long-term) Accounts payable and accrued expenses Accrued payroll and vacation Accrued pension Other liabilities Estimated retroactive net payable to third parties Estimated professional and general liabilities Other liabilities Accrued postretirement benefits other then pension Net cash provided by (used in) operating activities $ Se(!tember 30, 2014 Se(!tember 30, 2015 6,594,935 (614,685) 102,717 57,572 20,402,199 ( 1,978,359) 21,962,357 (190,355) (4,184,490) (6,029,948) (84,992) 2,595,676 (3,845, 133) (101,973) 6,786,000 1,254,000 2,538,207 {590,879~ 44,672,849 $ (2,820, 170) (593,082) 99,102 90,691 20,169,386 7,686,996 (872,830) (384,110) (3,419,449) ( 4,336,380) 3,922,448 5,180,873 (2,958,869) (37,825) (1,340,389) 1,677,617 (846,069) {590,879} 20,627,061 Cash flows from investing activities Purchases of property, plant and equipment Cash received on sale of equipment Transfers to Long Beach Medical Center Deposit in whose use is limited (DASNY loan) Net (deposits in) wjthctj aw al Withdrawal from (deposits in) contributions to long-term investments Net (deposits in) withdt awal (27,386,648) 28,101 4,465,316 ( 4,500,000) (2,167,313) 195,942 ( 1,254,000) (35,818,257) 6,866 (45,501) 352,724 (21,000,000) 4,500,000 (2,835,000) (3,370,000) in Cash and cash equivalents, beginning of period and cash of period Supplemental disclosures Cash paid for interest 8
Utilization Statistics and Payor Mix Utilization For the Nine Months Ended Admissions Discharges Patient Days Average length of stay Percentage of Occupancy (based on available beds) Emergency Room Visits Clinic Visits Ambulatory Surgery Visits Outpatient Visits Certified Beds Average Beds Available Medicare Case Mix Index September 30,2014 16,118 16,117 83,470 5.18 85.41% 49,874 38,290 10,567 157,971 435 358 1.53 September 30,2015 17,108 17,045 91,976 5.40 89.13% 51,970 42,921 10,449 158,136 455 378 1.56 Mix Percent of Net Patient Service Revenue by Payor For the Nine Months Ended Medicare and Medicare Medicaid and Medicaid Blue Cross All Other Commercial/ Other Total Care Care Care 41 11% 41.20% 9.35% 10.51% 18.11% 18.74% 28.00% 27.97% 3.43% L58% 9
Consolidated Statements of Revenue and Expense For the Nine Months Ended Net patient service revenue Other revenue Total operating revenue Operating Expenses before interest, depreciation, and amortization Excess of operating revenue over expenses before interest, depreciation and amortization Interest expense Provision for depreciation and amortization Operating income Non-operating gains (losses): Net investment gain (loss) Unrestricted contributions and bequests Loss related to storm Insurance recoveries related to storm Loss on Long Beach Medical Center transactions Excess (deficiency) of revenue and gains over expenses September 30, 2014 3 12,492, 182 10,531,561 323,023,743 296,054,210 26,969,533 2,121,213 20,459,771 4,388,549 1,978,360 391,894 (69,450) 1,683,325 6,380,882 September 30, 2015 $ 341,699,184 6,823,583 348,522,767 324,500,960 24,021,806 2,657,663 20,260,077 1,104,066 (7,686,995) 169,130 (6,413,799) in unrestricted net Detail of For the Nine Months Ended Investment income Other operating revenue Total other revenue 10
For the twelve months ended September 30, 2014 and 2015 Days Cash on Hand Twelve Months Ended September 30, 2014 September 30, 2015 Cash and cash equivalents Investments Total cash and investments $ 30,226,316 $ 6,815,484 130,325,975 126,357,284 160,552,291 133,172,768 Total operating expenses Depreciation and amortization Adjusted operating expenses 390,119,867 411,376,109 25,512,658 23,123,023 364,607,209 388,253,086 Days cash on hand 160.7 125.2 * In accordance with the terms of the Master Indenture, the Days Cash on Hand information presented above relates to South Nassau Communities Hospital only, and does not include any of its subsidiaries. 11
Notes to Unaudited Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization South Nassau Communities Hospital (the Hospital) is a not-for-profit acute care teaching hospital that provides inpatient, ambulatory, home health, restorative, preventive and emergency medical care to the community. The Hospital is the sole member of SN Services Corporation (SN Services). SN Services owns 100% of the outstanding shares of South Nassau Healthcare Services, Inc. (SN Healthcare ). Winthrop University Hospital (Winthrop) and the Hospital are members of the Winthrop South l'jassau University Health System (the System). Winthrop South Nassau University Health System, Inc. (WSNUHS) is the sole member of the Hospital and Winthrop, and WSNUHS wholly owns Homecare Alliance, Inc. (inactive) and the Winthrop South Nassau Management Services Organization, Inc. (inactive) which, therefore, are related parties. In November 2008, the Hospital and Winthrop entered into a nonbinding Statement of Principles and Intent (the Statement of Principles) pursuant to which the two hospitals agreed to explore the of the corporate relationship them of restructuring the indebtedness of Winthrop South Nassau University Health System Obligated Group 20 Hospital, Winthrop LJ.V ~IJJ.I.<AL~ or care or at time prior to, on, or after June 30, 2015. In October 2012, the parties refinanced and refunded the Obligated Group Debt, resulting in the dissolution of the Obligated Group. 12
Notes to Unaudited Consolidated Financial Statements (continued) 1. Organization and Summary of Significant Accounting Policies (continued) Principles of Consolidation The unaudited accompanying consolidated financial statements include the accounts of the Hospital and the following entities for which it is the sole member or controls through other means: SN Healthcare, South Nassau SN, LLC, South Nassau Neonatal Services P.C., South Nassau Physician Practice P.C., Oceanside Counseling Center, SN Services, South Nassau Primary Medical Care P.C., South Nassau Oncology P.C., SN Radiological Practice P.C., South Nassau Cardiovascular P.C., South Nassau Family Medicine P.C., South Nassau Medical Group P.C., South Nassau Obstetrics and Gynecology P.C., Radiological Associates of Long Island P.C., South Nassau Oncology Practice P.C. and 203 Merrick Road Holding Corp. All intercompany accounts and transactions have been eliminated in consolidation. Investments and Investment Gains, Losses and Income Marketable securities are primarily invested in debt and equity securities and are carried at fair value (quoted market prices). Gains and losses on investments are reported as unrestricted, temporarily restricted or permanently restricted, when appropriate. The Hospital classifies marketable securities as trading securities. 13
Notes to Unaudited Consolidated Financial Statements (continued) 1. Organization and Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of the unaudited consolidated financial statements in conformity with United States of America generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including estimated uncollectibles for accounts receivable for services to patients, and liabilities, including estimated payables to third-party payors, estimated pension and postretirement benefits and professional malpractice insurance liabilities, at the date of the consolidated financial statements. Estimates also affect the amounts of revenue and expenses reported during the period. There is at least a reasonable possibility that certain estimates will change by material amounts in the near term. Actual results could differ from those estimates. Tax Status The Hospital, SN Services, Oceanside Counseling Center, South Nassau Neonatal Services P.C., South Nassau Oncology P.C., South Nassau Physician Practice P.C. South Nassau Women's Primary Medical Care P.C., SN Radiological Practice P.C., South Nassau Cardiovascular P.C., South Family Medicine South Nassau Medical Group South Obstetrics and Gynecology Radiological Associates of Long Island P.C., South Nassau and Holding Corp. are Section (c)(3) 14
Notes to Unaudited Consolidated Financial Statements (continued) 3. Retirement Plans Effective January 1, 2014, the Hospital established a defined contribution pension plan (the Plan). The Plan includes an employer basic contribution equal to a percentage of the participant's compensation based on the participant's years of service and an employer matching contribution equal to 1 OOo/o of voluntary employee deferrals up to 2% of the participant's eligible compensation. The Hospital has contributed $7,24 7,283 to the Plan for the nine month period ended September 30,2015. The Hospital has related pension expense of$7,222,508 for the same period. Effective December 31, 2013, the accrued benefit for all Plan participants was frozen. Under the terms of the Plan freeze, no compensation earned or service performed after December 31, 2013 shall be considered in determining a participant's accrued benefit, however, service performed after December 31, 2013 shall continue to be considered for vesting purposes under the Plan. The Hospital has contributed $5,000,000 to the Defined Benefit Retirement Plan for the nine month period ended September 30, 2015. The Hospital has recorded pension expense of $2,054,770 for the same period. 4. Estimated Loss Related to Storm 15
Notes to Unaudited Consolidated Financial Statements (continued) 5. Long Beach Medical Center The Hospital has been working with the New York State Department of Health (NYSDOH) and the Dormitory Authority of the State of New York (DASNY) to develop a health care service delivery model that will replace Long Beach Medical Center (LBMC), which was closed as a result of extensive damage sustained from the storm in October 2012. In December 2013, in anticipation of a bankruptcy filing by Long Beach Memorial Nursing Home, Inc. (LBMNH) and LBMC (the LBMC Bankruptcy), the Hospital, LBMC and LBMNH were working on an agreement pursuant to which the Hospital would acquire all or substantially all of the assets of LBMC and LBMNH through a "Section 363 Sale." In connection with the LBMC Bankruptcy, the Hospital anticipated making certain loans to LBMC both prior to LBMC's filing for bankruptcy (Pre-DIP Loan) and after LBMC's filing for bankruptcy (DIP Loan). In December 2013, the Hospital received notification of a Health Care Efficiency and Affordability Law for New Yorkers grant award in the amount of $21,962,357 (the HEAL Grant), to be used to assist the Hospital with the retirement of debt associated with outstanding bank leases and fund legal and other expenses incurred related to the LBMC transaction. Early v......,.._...,... of the outstanding bank would Hospital's debt obligation by approximately $21,000,000 through 7. economic benefit from the debt reduction allowed that it will The a loan 1 amount of $1,500,000 (the On February 18, 2014, the Hospital entered into an asset purchase agreement with LBMC and LBMNH to acquire all or substantially all of their assets (the Asset Purchase Agreement) for approximately $21,000,000. On February 19, 2014, LBMC and LBMNH each filed voluntary 16
Notes to Unaudited Consolidated Financial Statements (continued) 5. Long Beach Medical Center (continued) petitions for relief under Chapter 11 of the Bankruptcy Code, and also filed a motion seeking Bankruptcy Court approval of the sale, subject to higher or better offers. On February 21, 2014, the Hospital entered into a debtor-in-possession loan and security agreement with LBMC and LBMNH in the amount of up to $4,500,000. The HEAL Grant was received in March 2014. In December 2013, the Hospital paid off its outstanding bank leases in the amount of $21,028,191, which the HEAL Grant was used to reimburse the Hospital for. The remaining $934,166 of the HEAL Grant will be used to reimburse the Hospital for legal and other expenses related to the LBMC transaction. Included in the loss related to the LBMC transaction in the accompanying 2013 consolidated statement of activities are $674,239 of legal and other transaction expenses. In 2014, the Hospital recorded $13,3 78,329 as grant revenue related to the purchase of LBMC, with $365,944 being included in operating income and $13,012,385 being included in net assets released from restrictions. Amounts received for which the Hospital has not yet met the criteria set forth in the HEAL grant are recorded as deferred grant revenue in the accompanying consolidated statement of financial position. On March 13, 2014, the Bankruptcy Court entered an order approving bidding procedures and L}...,,...,,...... an auction for LBMC LBMNH assets. 14. or ~ ~~~ ~ Bankruptcy Court Approval) for consideration of (a) $10.25 million in (b) assumption of up to $1.0 million in unpaid employee obligations of LBMC, including paid time off and severance, solely with respect to certain current and former LBMC employees; and (c) an additional amount totaling at least $500,000 in proceeds from the of the furniture, fixtures 17
Notes to Unaudited Consolidated Financial Statements (continued) 5. Long Beach Medical Center (continued) and equipment included in the assets acquired by the Hospital and located at LBMC. Bankruptcy Court also approved the sale of LBMNH' s assets to a third party. The On June 27, 2014, the Hospital entered into an Amended and Restated Asset Purchase Agreement with LBMC (the Amended Asset Purchase Agreement), pursuant to which the Hospital agreed to acquire all or substantially all of the assets oflbmc (and not oflbmnh) on terms consistent with those set forth in the Bankruptcy Court Approval. The Amended Asset Purchase Agreement superseded the original Asset Purchase Agreement. On July 1, 2014, the Hospital opened the South Nassau Urgent Care Center at Long Beach, located on the LBMC campus. Upon approval from the State of New York, this temporary center may be transitioned to a center with emergency 911 receiving capability. On July 28, 2014, FEMA approved the transfer to the Hospital of certain LBMC project worksheets with respect to which the scope of work had not yet been completed. The closing of the sale for certain LBMC assets to the Hospital occurred on October 16, 2014. At closing, the Hospital a the cash portion purchase price in the amount of $4,756,824 for the outstanding principal, interest and reimbursement of expenses to DIP that upon of extent ""rn<r>c><:>rt C'...!"-,...,, FEMA approved a 10,576 (90% and 10% non-federal cost-share) for the Hospital to either demolish, repair or restore the LBMC facilities damaged by Super Storm Sandy, or implement an alternative procedure pilot project. In that letter, FEMA agreed to work with the State of New York and the Hospital to develop and execute an alternative procedure 18
Notes to Unaudited Consolidated Financial Statements (continued) 5. Long Beach Medical Center (continued) pilot project for permanent work and a supporting project worksheet in accordance with 42 U.S.C. 5189f and the parties' letter of understanding. The Hospital repaid the DASNY Loan on November 14, 2014 in the amount of$6,045,904. In January 2015, FEMA approved (or "obligated" under FEMA regulations) a project worksheet for the capped P A Grant, totaling $171,224,942. This amount represents the total approved grant of $176,910,576 less $5,685,633 in deductions related to insurance proceeds received by LBMC, and certain other amounts that were disbursed by FEMA to LBMC, prior to the Hospital acquiring the LBMC facilities and other property in October 2014. 19