ALTRU HEALTH SYSTEM AND AFFILIATES GRAND FORKS, NORTH DAKOTA AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
TABLE OF CONTENTS Page INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Combined Balance Sheets 3 Combined Statements of Operations 4 Combined Statements of Changes in Net Assets 5 Combined Statements of Cash Flows 6 Notes to Combined Financial Statements 7 SUPPLEMENTAL INFORMATION INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION 35 COMBINING FINANCIAL STATEMENTS 2014 Combining Balance Sheet - Assets 36 Combining Balance Sheet - Liabilities and Net Assets 37 Combining Statement of Operations 38 Combining Statement of Changes in Net Assets 39 Combining Statement of Cash Flows 40 2013 Combining Balance Sheet - Assets 41 Combining Balance Sheet - Liabilities and Net Assets 42 Combining Statement of Operations 43 Combining Statement of Changes in Net Assets 44 Combining Statement of Cash Flows 45
INDEPENDENT AUDITOR'S REPORT To the Board of Directors System and Affiliates Grand Forks, North Dakota We have audited the accompanying combined financial statements of System and Affiliates, (a non-profit corporation) Grand Forks, North Dakota, which comprise the combined balance sheets as of December 31, 2014 and 2013, and the related combined statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. -1-
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of System and Affiliates as of December 31, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. BRADY, MARTZ & ASSOCIATES, P.C. GRAND FORKS, NORTH DAKOTA April 21, 2015-2-
COMBINED BALANCE SHEETS ASSETS 2014 2013 CURRENT ASSETS Cash & Cash Equivalents $ 39,352,254 $ 35,054,439 Investments 131,505,980 113,692,552 Due From Restricted Assets 83,956 62,608 Receivables - Net 71,594,197 69,015,551 Notes Receivable 601,858 548,009 Inventories 8,260,696 7,064,608 Prepaid Expense 635,619 648,883 Assets Whose Use is Limited - Held by Trustee 1,618,428 1,259,976 Total 253,652,988 227,346,626 ASSETS WHOSE USE IS LIMITED Held by Trustee: Under Trust Agreements 9,732,015 8,237,159 Under Bond Indenture Agreements 6,674,045 6,826,694 By Donors 10,056,688 10,179,235 Total 26,462,748 25,243,088 PROPERTY, PLANT AND EQUIPMENT Land and Improvements 18,656,044 17,827,410 Buildings 277,023,691 262,706,591 Leasehold Improvements 1,977,438 1,972,981 Equipment 204,554,633 192,942,499 Construction in Progress 1,124,725 13,420,749 Total 503,336,531 488,870,230 Accumulated Depreciation (293,923,563) (267,064,008) Total 209,412,968 221,806,222 OTHER ASSETS Unamortized Bond Issue and Other Costs 5,116,307 5,511,025 Other 8,206,767 6,633,608 Total 13,323,074 12,144,633 TOTAL ASSETS $ 502,851,778 $ 486,540,569 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts Payable $ 10,790,389 $ 13,987,047 Estimated Third Party Payable 3,058,629 1,314,287 Deferred Revenue 677,449 460,648 Accrued Expenses 36,233,165 34,370,012 Current Portion of Long-Term Debt 6,161,032 5,931,369 Total 56,920,664 56,063,363 LONG-TERM LIABILITIES Special Assessments Payable 1,176,026 1,179,629 Revenue Bonds Payable 193,505,838 199,580,494 Pension & Post Retirement/Employment Benefit 16,549,644 7,080,035 Other 9,795,402 8,461,135 Total 221,026,910 216,301,293 Total Liabilities 277,947,574 272,364,656 NET ASSETS Unrestricted 214,889,316 204,039,094 Temporarily Restricted 7,147,504 7,401,438 Permanently Restricted 2,867,384 2,735,381 Total 224,904,204 214,175,913 TOTAL LIABILITIES AND NET ASSETS $ 502,851,778 $ 486,540,569 See Notes to the Financial Statements -3-
COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 UNRESTRICTED OPERATING REVENUE Net Patient Service Revenue $ 474,154,141 $ 450,123,616 Provision for Bad Debts (16,525,680) (23,981,119) Net Patient Service Revenue Less Provision for Bad Debts 457,628,461 426,142,497 Other Operating Revenue 31,684,591 31,246,108 Total Unrestricted Operating Revenue 489,313,052 457,388,605 UNRESTRICTED OPERATING EXPENSES Patient Care Services 74,874,777 71,978,316 Clinic Professional Services 145,761,268 143,720,603 Other Professional Services 78,429,704 78,541,095 Other Services 4,605,905 4,659,998 General Services 24,174,392 23,950,052 Administrative Services 47,170,259 43,507,657 Bond Issue Carrying Costs 499,255 531,903 Real Estate Taxes 1,376,873 1,352,205 Interest 8,675,200 8,598,024 Depreciation 29,039,958 27,031,101 Insurance 2,728,414 2,679,372 Employee Benefits and Payroll Taxes 54,393,422 52,402,449 Total Expense 471,729,427 458,952,775 INCOME (LOSS) FROM OPERATIONS 17,583,625 (1,564,170) Other Income - Primarily Investments 6,100,521 10,339,605 Other Expense (952,494) - Total Other Income (Expense) 5,148,027 10,339,605 EXCESS OF REVENUE OVER EXPENSE 22,731,652 8,775,435 Unrealized Gain/(Loss) on Investments (1,293,391) (3,515,973) CHANGE IN UNRESTRICTED NET ASSETS $ 21,438,261 $ 5,259,462 See Notes to the Financial Statements -4-
COMBINED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 UNRESTRICTED NET ASSETS Unrestricted Operating Revenue $ 489,313,052 $ 457,388,605 Unrestricted Operating Expense (471,729,427) (458,952,775) Other Revenue (Expense) 5,148,027 10,339,605 Unrealized Gain (Loss) on Investments (1,293,391) (3,515,973) Application of FASB ASC Topic 715 (10,588,039) 19,916,720 Change in Unrestricted Net Assets 10,850,222 25,176,182 TEMPORARILY RESTRICTED NET ASSETS Contributions 1,711,729 1,759,808 Unrealized Gain (Loss) and Impairment of Investments (215,481) 367,511 Investment Income 166,198 137,722 Assets Released from Restriction (1,915,380) (1,356,175) Transfer (to) from Permanently Restricted Net Assets (1,000) (300) Change in Temporarily Restricted Net Assets (253,934) 908,566 PERMANENTLY RESTRICTED NET ASSETS Contributions 131,003 177,955 Transfer (to) from Temporarily Restricted 1,000 300 Change in Permanently Restricted Net Assets 132,003 178,255 CHANGE IN NET ASSETS 10,728,291 26,263,003 NET ASSETS BEGINNING OF YEAR 214,175,913 187,912,910 NET ASSETS END OF YEAR $ 224,904,204 $ 214,175,913 See Notes to the Financial Statements -5-
COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 CASH FLOW FROM OPERATING ACTIVITIES: Increase in Unrestricted Net Assets: $ 21,438,261 $ 5,259,462 Adjustments to Reconcile Change in Net Assets to Net Cash from Operating Activities: Depreciation, Amortization and Impairment 30,455,635 27,669,146 Provision for Bad Debts 16,525,680 23,981,119 Loss on Disposal of Assets 137,598 1,051,240 Excess of Revenue Over Expenses - Limited Use Assets (159,300) (161,246) (Gain) Loss on Investments (2,774,874) (5,719,196) Unrealized (Gain) Loss 1,293,391 3,515,973 Noncash Asset Released from Restriction - (186) Effect on Operating Cash Flows from Changes in: Receivables (18,639,453) (16,106,560) Inventories (1,196,088) (194,495) Prepaid Expense (1,260,683) (3,590,286) Accounts Payable (3,197,359) 2,154,896 Estimated Third Party Payable 1,744,342 (761,691) Accrued Expenses 1,418,251 2,935,128 Unearned Income 216,801 (166,603) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 46,002,202 39,866,701 CASH FLOW FROM INVESTING ACTIVITIES: Acquisitions of Property and Equipment (18,999,776) (38,873,296) Proceeds from Sale of Property and Equipment 8,644 111,965 Proceeds from Sale of Cash Surrender Value Insurance 11,310 - Investments in Assets Whose Use is Limited (11,832,000) (12,096,000) Transfers from Assets Whose Use is Limited 11,785,497 12,042,001 Purchases of Investments (74,050,341) (69,492,490) Sales of Investments 57,569,063 91,630,354 Advances on Notes Receivable (1,023,836) (1,573,116) Payments Received on Notes Receivable 483,765 284,554 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (36,047,674) (17,966,028) CASH FLOW FROM FINANCING ACTIVITIES: Payments of Long-Term Debt (5,656,713) (6,468,771) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (5,656,713) (6,468,771) NET CHANGE IN CASH AND CASH EQUIVALENTS 4,297,815 15,431,902 CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 35,054,439 19,622,537 CASH AND CASH EQUIVALENTS END OF PERIOD $ 39,352,254 $ 35,054,439 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash Paid During the Year for Interest (Net of Amount Capitalized) $ 8,691,379 $ 8,601,518 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Notes Forgiven (see Note 5) 992,685 1,197,183 See Notes to the Financial Statements -6-
NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The accompanying combined financial statements include the accounts of System and its affiliates, Resources, including its wholly owned subsidiary Altru Specialty Services, and Foundation. All significant inter-company accounts and transactions have been eliminated from the combined financial statements. The above mentioned entities, with the exception of Altru Specialty Services, are North Dakota non-profit corporations providing general clinical and acute patient care, rehabilitation services, congregate housing and fundraising. The total patient service revenue represents approximately 60 percent hospital services and 40 percent clinic services. In May of 2011, System became the first member of the Mayo Clinic Care Network. This is a non-ownership relationship that benefits System physicians and patients from enhanced access to Mayo physicians and clinical resources. More specifically, physicians have access to Mayo Clinic s evidence-based disease management protocols, clinic care guidelines, and treatment recommendations and reference materials for complex medical conditions. Accounts Receivable Patient receivables are uncollateralized patient and third-party payor obligations. Payments on patient receivables are allocated to the specific claims identified in the remittance advice or, if unspecified, are applied to the earliest unpaid claim. Patient accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, System analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with self-pay patients, Altru records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. Altru s process for calculating the allowance for doubtful accounts for self-pay patients has not significantly changed from December 31, 2013 to December 31, 2014. Altru does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant write offs from third-party payors. Altru has not significantly changed its charity care or uninsured discount policies during fiscal years 2013 or 2014. -7-
Net Patient Service Revenue System has agreements with third-party payors that provide for payments to Altru at amounts different from its established rates. Payment arrangements include prospectively determined rates, reimbursed costs, discounted charges, and per diem payments. Net patient revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Altru recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered, as noted above. Altru also provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. Altru does not pursue collection of amounts determined to qualify as charity care, and they are not reported as revenue. Net Assets Assets, liabilities and related revenues and expenses are segregated into unrestricted and restricted net assets. Unrestricted net assets include general operating and other designated net assets and gifts, grants and bequests that are not donor-restricted. Restricted net assets include gifts, grants and bequest and other funds that are restricted as to their use by donors and other third parties. Assets released from restrictions are included in other operating revenue. Assets Whose Use is Limited Assets whose use is limited include assets held by trustees under bond indenture agreements and trust agreements and by donors. Investments Marketable equity securities and non equity securities are stated at fair value. Fair value is based on quoted market prices, or significant other observable inputs. Realized gains and losses are included in the statement of operations under the caption other revenue primarily investments. Prior reported unrealized gains and losses on investments sold are included in the statement of operations as a component of unrealized gain on investments. Inventories Inventories are valued at the lower of cost or market on a first-in, first-out basis. Property, Plant, and Equipment Property, plant and equipment are recorded at cost or at fair value when received as gifts. Depreciation is determined on a straight-line basis primarily utilizing useful life guidelines published by the American Hospital Association. The Organization s capitalization threshold is $1,000. Altru Specialty Services uses a lower capitalization policy of $300 for new rental equipment property. -8-
Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Bond Issue Costs Bond issue costs are deferred and amortized using the straight-line method over the life of the bonds. Tax Status The Organization is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income pursuant to Section 501(a) of the code. In addition, the Organization is exempt from state income taxes under corresponding provisions of the North Dakota Century Code. Resources wholly owned subsidiary (Altru Specialty Services) is a for profit corporation and is subject to federal and state income taxes. Accounting for Uncertainty in Income Taxes The Organization s policy is to evaluate the likelihood that its uncertain tax positions will prevail upon examination based on the extent to which those positions have substantial support within the Internal Revenue Code and Regulations, Revenue Rulings, court decisions and other evidence. It is the opinion of management that the Organization has no significant uncertain tax positions that would be subject to change upon examination. The federal income tax returns of the Organization are subject to examination by Internal Revenue Service generally for three years after they were filed, all filings are current. Compensated Absences Employees are compensated upon termination for unused paid time off hours. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less, excluding amounts whose use is limited by board designation or other arrangements under trust agreements or by donors. Fair Value Measurements The Organization follows FASB ASC Topic 820, Fair Value Measurements. This standard applies to all assets and liabilities that are being measured and reported on a fair value basis. It defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. -9-
When fair value measurements are required, various data is used in determining those values. This statement requires that assets and liabilities that are carried at fair value must be classified and disclosed in the following levels based on the nature of the data used. Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Level 3: Observable market based inputs or unobservable inputs that are corroborated by market data. Unobservable inputs that are not corroborated by market data. The application of valuation techniques applied to similar assets and liabilities has been consistently applied. The following is a description of the valuation methodologies used for instruments measured at fair value: Investment Securities The fair value of investment securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument. See Note 17. Advertising Costs Advertising costs have been expensed as incurred. Advertising costs were $915,998 and $901,799 for the years ended December 31, 2014 and 2013, respectively. Sales Tax Sales taxes collected from customers and remitted to taxing authorities are excluded from revenues and cost of sales, respectively. Use of Estimates The preparation of 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 at December 31, 2014 and 2013 and revenues and expenses during the years then ended. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements. Basis of Presentation The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America, ( GAAP ), as codified by the Financial Accounting Standards Board. NOTE 2 COST REIMBURSEMENT AGREEMENT Revenues under cost reimbursement agreements (Medicare) are subject to audit and retroactive adjustment. Subsequent adjustments arising from the audits of cost reports are reflected as adjustments to third party contractual allowances in the year such amounts are determined. -10-
The Medicare cost reimbursement reports have been settled on a final basis through December 31, 2011. The accompanying financial statements reflect management's estimated settlements on a cost reimbursement basis for the years which have not been settled. NOTE 3 UNRESTRICTED INVESTMENTS Investments, at market, held at December 31, 2014 and 2013 consist of the following: 2014 2013 Government Bonds $ 17,458,840 $ 18,254,032 Non-Government Bonds and Fixed Income Mutual Funds 58,290,817 66,012,457 Stocks and Equity Mutual Funds 42,183,959 29,426,063 Hedge Funds 13,572,364 - Total $ 131,505,980 $ 113,692,552 Investment income, gains and losses from unrestricted investments are comprised of the following for the years ended December 31, 2014 and 2013. Interest income is reported net of investment fees of $431,429 and $470,943 for 2014 and 2013 and consulting fees of $156,849 for 2014. 2014 2013 Interest Income $ 1,298,046 $ 2,334,166 Dividends Income 1,480,713 1,772,177 Gain (Losses) on Investments 2,733,785 5,590,005 Unrealized Gains (Losses) (1,293,391) (3,515,973) Total $ 4,219,154 $ 6,180,375 The following table shows the gross unrealized losses and fair value of the System and Affiliates investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2014. Less Than 12 Months Greater Than 12 Months Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Equities $ 10,606,260 $ (589,037) $ 2,639,561 $ (318,119) $ 13,245,821 $ (907,156) Government Bonds 1,615,775 (7,046) 1,967,585 (193,989) 3,583,360 (201,035) Non-Government Bonds 17,732,718 (178,500) 24,408,208 (834,106) 42,140,925 (1,012,606) Total $ 29,954,753 $ (774,583) $ 29,015,354 $ (1,346,214) $ 58,970,107 $ (2,120,796) -11-
The following table shows the gross unrealized losses and fair value of the System and Affiliates investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2013. Less Than 12 Months Greater Than 12 Months Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Equities $ 2,614,212 $ (35,373) $ 429,040 $ (25,136) $ 3,043,252 $ (60,509) Government Bonds 6,556,517 (383,927) 4,491,886 (457,286) 11,048,403 (841,213) Non-Government Bonds 54,029,341 (920,803) 6,750,566 (260,641) 60,779,907 (1,181,444) Total $ 63,200,070 $ (1,340,103) $ 11,671,492 $ (743,063) $ 74,871,562 $ (2,083,166) Management evaluates securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Organization s intent to sell and whether it is more likely than not that the Organization will be required to sell. Government Bonds. The unrealized losses on the Organization s investments in U.S. government and direct obligations of U.S. government agencies were caused by interest rate increases. Because the Organization has the intent and ability to hold these investments until a recovery of fair value, which may be maturity, the Organization does not consider these investments to be other-than temporarily impaired at December 31, 2014 and 2013. Non-Government Bonds and Fixed Income Mutual Funds. The unrealized losses on the Organization s investment in corporate bonds were caused by interest rate increases. Because the decline in fair market value is attributable to changes in interest rates and not credit quality and because the Organization has the intent and ability to hold these investments until a recovery of fair value, which may be maturity, the Organization does not consider these investments to be other-than-temporarily impaired at December 31, 2014 and 2013. Stocks and Equity Mutual Funds. The Organization s investments in marketable equity securities consist primarily of investments in U.S. domestic common stock and international equity securities. Within the overall equity portfolio, no holdings at December 31, 2014 were in an unrealized loss position that exceeds management s fair value criteria for severity of impairment. The criteria is defined as having a 25% or greater fair value less than cost for the duration of greater than 9 months. Based on that evaluation and the Organization s intent to hold securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Organization does not consider any equity investments to be other-than-temporarily impaired at December 31, 2014 and 2013. -12-
NOTE 4 ACCOUNTS RECEIVABLE Following is a summary of accounts receivable composition as of December 31: 2014 2013 Accounts Receivable - Patients, Medicare and Other $ 155,700,219 $ 144,203,633 Allowance for Doubtful Accounts and Discounts (84,106,022) (75,188,082) $ 71,594,197 $ 69,015,551 NOTE 5 NOTES RECEIVABLE Notes receivable at December 31 is summarized below: 2014 2013 Notes Receivable Due from Wall's Pharmacy $ 133,570 $ 89,984 Notes Receivable from Physicians and Employees 4,681,594 4,977,750 Interest at 4.25% to 9.25%, Due through December 2023 Less: Allowance for Doubtful Accounts and Anticipated Note Forgiveness (4,213,306) (4,519,725) Total $ 601,858 $ 548,009 System forgave notes receivable due from certain physicians and employees in the amount of $992,685 in 2014 and $1,197,183 in 2013, in exchange for services provided by these individuals in the community. Amounts forgiven were originally advanced as part of an effort on behalf of the community to attract physicians and other skilled employees in underserved specialties. Altru Specialty Services, Inc. issued notes to Wall s Pharmacy on July 9, 2013 and June 18, 2014 for $89,000 and $40,000, respectively. Both notes bear interest at 3.25%. The balance at December 31, 2014 and 2013 includes accrued interest of $4,570 and $984. Altru Specialty Services, Inc. owns forty-nine percent of the stock of Wall s Altru Pharmacy, Inc. (see Note 7). NOTE 6 ASSETS WHOSE USE IS LIMITED OR RESTRICTED Assets whose use is limited that are required for obligations classified as current liabilities are reported as current assets. The composition of assets whose use is limited is as follows: Held by Trustee Under Bond Indenture Agreements: Under the terms of the long-term debt agreements, various amounts are on deposit with the trustee and certain specified payments are required for bond redemption, interest payments and asset replacement. -13-
The funds on deposit with the trustee at December 31, 2014 and 2013 are as follows: 2014 2013 Bond Funds $ 8,292,474 $ 8,086,670 Current 1,618,428 1,259,976 Non-Current 6,674,045 6,826,694 Total $ 8,292,474 $ 8,086,670 Investment income, gains and losses for assets whose use is limited are comprised of the following for the years ended December 31, 2014 and 2013: 2014 2013 Interest Income $ 159,300 $ 161,246 Held by Trustee Under 457(b) Plan: Assets whose use is limited also includes assets held under a 457(b) plan described in Note 11. The composition of these assets is as follows at December 31, 2014 and 2013: 2014 2013 Mutual Fund - Bonds $ 1,091,160 $ 2,370,671 Mutual Fund - Equity 3,976,065 3,237,543 Mutual Fund - Balanced 2,239,358 1,557,241 Mutual Fund - International 1,073,941 1,071,704 Cash and Cash Equivalents 1,244,094 - Total $ 9,624,618 $ 8,237,159 Investment income, gains and losses for 457(b) plan investments are comprised of the following for the years ended December 31, 2014 and 2013: 2014 2013 Dividend Income $ 349,562 $ 195,716 Realized Gain 184,948 578,939 Unrealized Gain 62,842 400,254 Total $ 597,352 $ 1,174,909 Income on 457(b) plan assets is recorded as an addition to assets and to the corresponding liability and not included in the statement of operations. -14-
Held by Trustee Under 457(f) Plan: Assets whose use is limited also includes assets held under a 457(f) plan described in Note 11. The composition of these assets is as follows at December 31, 2014 and 2013: 2014 2013 Mutual Fund - Balanced $ 52,834 $ - Cash and Cash Equivalents 54,563 - Total $ 107,397 $ - Investment income, gains and losses for 457(f) plan investments are comprised of the following for the years ended December 31, 2014 and 2013: 2014 2013 Dividend Income $ 1 $ - Unrealized Loss (661) - Total $ (660) $ - Assets restricted by donors consist of the following: 2014 2013 Cash and Cash Equivalents $ 480,262 $ 953,825 Stocks and Other Equity Mutual Funds 4,873,063 4,751,886 Government Bonds 1,338,990 1,548,915 Non-Govt Bonds & Fixed Income Mututal Funds 3,313,152 2,875,137 Pledges Receivable - Net 46,468 18,028 Charitable Gift Annuities 59,849 62,317 Other (55,095) (30,873) Total $ 10,056,688 $ 10,179,235-15-
The fair value measurements at December 31, 2014 and 2013 are as follows: Fair Value Measurements at Reporting Date Using Quoted Observable Unobservable Prices Inputs Inputs Description 2014 (Level 1) (Level 2) (Level 3) Common Stocks Technology $ 400,980 $ 400,980 $ - $ - Consumer Cyclical 265,394 265,394 - - Consumer Non-Cyclical 163,426 163,426 - - Energy 159,603 159,603 - - Financial 299,275 299,275 - - Healthcare 287,358 287,358 - - Industrials 230,033 230,033 - - Other 136,153 136,153 - - Equity Mutual Funds - US 1,129,940 1,129,940 - - International 1,800,901 1,800,901 - - US Treasuries 901,805 901,805 - - US Government Securities 1,601,742-1,601,742 - Mortgage Backed Securities 4,386-4,386 - Collateralized Mortgage Obligations 18,073-18,073 - Corporate Bonds 1,052,191-1,052,191 - Bond Mutual Funds 1,073,944 1,073,944 - Total $ 9,525,205 $ 6,848,812 $ 2,676,393 $ - Fair Value Measurements at Reporting Date Using Quoted Observable Unobservable Prices Inputs Inputs Description 2013 (Level 1) (Level 2) (Level 3) Common Stocks Technology $ 354,748 $ 354,748 $ - $ - Consumer Cyclical 239,385 239,385 - - Consumer Non-Cyclical 189,545 189,545 - - Energy 189,321 189,321 - - Financial 302,475 302,475 - - Healthcare 265,994 265,994 - - Industrials 207,800 207,800 - - Other 141,909 141,909 - - Equity Mutual Funds US 1,158,131 1,158,131 - - International 1,702,577 1,702,577 - - US Treasuries 1,026,057 1,026,057 - - US Government Securities 1,427,118-1,427,118 - Mortgage Backed Securities 24,548-24,548 - Asset Backed Securities 1,066-1,066 - Collateralized Mortgage Obligations 23,580-23,580 - Corporate Bonds 1,306,132-1,306,132 - Bond Mutual Funds 615,552 615,552 - - Total $ 9,175,938 $ 6,393,495 $ 2,782,443 $ - -16-
The following assumptions were used to estimate the fair value of each class of financial instrument listed above: Common Stocks and Mutual Funds: Valued at the closing price reported on the active market on which individual securities are traded. U.S. Government Securities: Valued using pricing models maximizing the use of observable inputs for similar securities. Fixed Income Bonds: Evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information, and for structured securities also incorporate cash flow and, when available, loan performance data to value fixed income securities including municipal bonds, asset backed securities, and corporate bonds. To evaluate a wide range of fixed-income securities, evaluators draw parallels from the trading and quoting of bonds with similar features (comparable bonds). Characteristics used to identify comparable securities may include such things as: sector, type of bond, coupon, credit quality ratings, bond insurance or other credit enhancements, maturity, call, put sinking fund or other early redemption features. While the Organization believes their valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Income and gains from restricted investments are comprised of the following for the years ended December 31, 2014 and 2013. Interest income is reported net of investment fees of $27,101 and $23,892 for 2014 and 2013, respectively. 2014 2013 Interest Income $ 97,244 $ 110,304 Dividend Income 146,881 110,987 Gain (Loss) on Investments 326,592 301,456 Unrealized Gain (Loss) (215,482) 367,511 Total $ 355,235 $ 890,258 Foundation s Board of Directors approved classification of certain Foundation restricted investment earnings as unrestricted in the accompanying financial statements. The restricted investment earnings classified as unrestricted includes realized income and gains/losses aggregating $404,518 for 2014 and $385,025 for 2013. -17-
The following table shows the gross unrealized losses and fair value of Foundation s restricted investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2014. Less Than 12 Months Greater Than 12 Months Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Equities $ 314,649 $ (32,720) $ 187,789 $ (82,779) $ 502,438 $ (115,499) Government Bonds 106,605 (631) 236,191 (16,623) 342,796 (17,254) Non-Government Bonds 816,627 (40,108) 813,096 (24,945) 1,629,723 (65,052) Total $ 1,237,881 $ (73,459) $ 1,237,076 $ (124,347) $ 2,474,957 $ (197,805) The following table shows the gross unrealized losses and fair value of the Foundation s restricted investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2013. Less Than 12 Months Greater Than 12 Months Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Equities $ 139,633 $ (4,011) $ 206,319 $ (39,416) $ 345,952 $ (43,427) Government Bonds 541,611 (40,994) - - 541,611 (40,994) Non-Government Bonds 2,011,653 (56,698) 382,154 (18,474) 2,393,807 (75,171) Total $ 2,692,897 $ (101,703) $ 588,473 $ (57,890) $ 3,281,370 $ (159,592) Management evaluates securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Organization s intent to sell and whether it is more likely than not that the Organization will be required to sell. Government Bonds: The unrealized losses on the Organization s investments in U.S. government and direct obligations of U.S. government agencies were caused by interest rate increases. Because the Organization has the intent and ability to hold these investments until a recovery of fair value, which may be maturity, the Organization does not consider these investments to be other-than temporarily impaired at December 31, 2014 and 2013. Non-Government Bonds and Fixed Income Mutual Funds: The unrealized losses on the Organization s investment in corporate bonds were caused by interest rate increases. Because the decline in fair market value is attributable to changes in interest rates and not credit quality and because the Organization has the intent and ability to hold these investments until a recovery of fair value, which may be maturity, the Organization does not consider these investments to be other-than-temporarily impaired at December 31, 2014 and 2013. -18-
Stocks and Equity Mutual Funds: The Organization s investments in marketable equity securities consist primarily of investments in U.S. domestic common stock and international equity securities. Within the overall equity portfolio, no holdings at December 31, 2014 were in an unrealized loss position that exceeds management s fair value criteria for severity of impairment. The criteria is defined as having a 25% or greater fair value less than cost for the duration of greater than 9 months. Based on that evaluation and the Organization s intent to hold securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Organization does not consider any equity investments to be other-than-temporarily impaired at December 31, 2014 and 2013. NOTE 7 OTHER ASSETS System purchased common stock of VHA, Inc. (VHA) aggregating $200,000. The System records this investment at cost. VHA is a performance improvement company that serves selected health care organizations (HCO s). VHA is an owner in a joint venture that will provide a portfolio of medical-surgical and pharmaceutical supplies, capital equipment and distribution services to HCO s. Altru can sell the stock subject to certain restrictions, as defined in the stock purchase agreement. As a condition to purchasing the common stock, the System agreed to commit up to $100,000 to VHA for future capital contributions. System acquired land and began construction of a clinic building in December 2010. The carrying value of land at December 31, 2014 and 2013 is $5,891,987, including special assessments. Management has evaluated the impairment of the land held for investment as of December 31, 2014 resulting in no adjustment of the value. System incurred costs associated with the master plan construction starting in 2010. Due to the project being postponed, the costs were evaluated by management in 2014 for impairment. Of the total previously capitalized costs of $2,494,612 of costs incurred to date, $952,494 were written off in 2014 with the remaining $1,542,118 to be evaluated for impairment until the project is continued. On January 1, 2011, System acquired forty-nine percent of the stock of the Altru Clinic Pharmacy and the Altru Pharmacy-Family Medicine Center. On January 1, 2013, Altru Specialty Services, Inc. acquired forty-nine percent of the stock of Wall s Altru Pharmacy, Inc. These investments are accounted for under the equity method. NOTE 8 NOTE PAYABLE AND OTHER COMMITMENTS System entered into a line of credit arrangement with US Bank. This line of credit for $10,000,000 bears a variable rate of interest of 2.5% above one month LIBOR, but not less than 3.25%. The effective rate at December 31, 2014 is 3.25%, is unsecured, and matures on August 1, 2015. There is no outstanding balance related to lines of credit at December 31, 2014 and 2013. Altru Specialty Services entered into a line of credit arrangement with Frandsen Bank and Trust. This line of credit for $500,000 bears a variable rate of interest of equal to New York Prime with a floor of 3.5% and matures on July 1, 2015. There is no outstanding balance related to lines of credit at December 31, 2014 and 2013. -19-
System has also entered into a letter of credit arrangement with US Bank drafted in favor of the State of North Dakota Workforce Safety & Insurance in the amount of $55,064, expiring December 31, 2015. NOTE 9 LONG TERM DEBT Long-term debt at December 31, 2014 and 2013 is summarized below: 2014 2013 City of Grand Forks Healthcare Facilities Revenue Bond, Series 1996, Daily Variable Interest, Due Annually in Varying Amounts to December 1, 2025 $ 8,000,000 $ 8,700,000 City of Grand Forks Healthcare System Revenue Bonds, Series 2005, interest 4.00% to 5.00%, Due Annually in Varying Amounts to December 1, 2026, including Unamortized Bond Premium of $223,226 and $241,958 31,998,226 33,691,958 City of Grand Forks Health Care System Revenue Bonds, Series 2007, Interest at 5.50%, Due in Varying Amounts to December 1, 2024, including Unamortized Bond Premium of $582,196 and $640,904 27,142,196 27,820,904 City of Grand Forks Health Facilities Revenue Note, Series 2011, Interest at 3.32%, Due in Monthly Installments To August 1, 2019 16,410,000 18,690,000 City of Grand Forks Healthcare System Revenue Bonds, Series 2012, Interest 4.00% to 5.00%, Due Annually, In Varying Amounts Starting December 1, 2013, to December 1, 2035, including Unamortized Bond Premium of $4,125,072 and $4,322,287 116,030,072 116,527,286 Special Assessments, Due in Installments Over Periods up to 20 Years 1,262,402 1,261,344 Total Long-Term Debt 200,842,896 206,691,492 Less- Current Maturities (6,161,032) (5,931,369) Long-Term Debt $ 194,681,864 $ 200,760,123 The maturities of long-term debt for each of the next five years and thereafter are as follows: 2015 $ 6,161,032 2016 6,406,032 2017 6,996,032 2018 7,320,374 2019 7,230,048 Thereafter 166,729,378 $ 200,842,896-20-
In April 1996, the City issued Series 1996A Bonds in the amount of $18,200,000. The proceeds were used to finance construction projects, renovation and equipment purchases. These Bonds are secured by a letter of credit and liquidity facility agreement dated June 18, 2010, which expires April 10, 2017. The 2017 and 2018 maturities of these bonds were retired June 14, 2012. In December 2005, the City issued Series 2005 Bonds in the amount of $40,000,000. The proceeds were used to finance construction projects, renovation and equipment purchases. The timely payment of principal and interest on these bonds is insured by Assured Guaranty Corp. On April 22, 2008, the 2005 Series Bonds were converted to a fixed rate mode. In August 2007, the City issued the Series 2007 Bonds in the amount of $29,740,000. The bonds are secured by the gross receivables and mortgage on certain property of the corporation. In August 2011, the City issued the Series 2011 Health Facilities Revenues Bonds in the amount of $23,620,000. These bonds are subject to the terms of the Master Trust Indenture and the Eleventh Supplemental Indenture dated August 1, 2011. The proceeds were used to retire the outstanding 1994 Series Bonds and the 2012 through 2018 maturities of the 1997 Series Bonds. In May, 2012, the City issued the Series 2012 Health Facilities Revenues bonds in the amount of $112,375,000. These bonds are subject to the terms of the Master Trust Indenture and the Twelfth Supplemental Indenture dated May 1, 2012. The proceeds were used to retire the outstanding 1992B Series Bonds, the 1997 Series Bonds, the 2010A Series Note, and the 2010B Series Note. Proceeds were also used to finance facilities, infrastructure and equipment. NOTE 10 INTEREST COST The Organization follows the policy of capitalizing interest as a component of the cost of property and equipment constructed for its own use. In 2014, total interest incurred was $9,004,705 of which $329,505 was capitalized and $8,675,200 was charged to operations. In 2013, total interest incurred was $9,090,509 of which $492,485 was capitalized and $8,598,024 was charged to operations. NOTE 11 BENEFIT PLANS System and Affiliates sponsor a defined benefit pension plan covering substantially all employees. As a result of integration, the United Hospital Retirement Income Plan (Prior Plan) was converted to a cash balance plan on July 1, 1997. Benefits are based on organization contributions determined by a percentage of compensation plus interest credits. Prior to September 1, 2008, employees of System that were age 40 or older prior to integration and who participated in the Prior Plan were permitted to elect the greater of the benefit derived from the Altru Cash Balance Pension Plan or the Prior Plan. After September 1, 2008, this greater option was converted to a replacement Cash Balance Plan. This replacement plan benefits this group in a close approximation to the Prior Plan, only under a Cash Balance provision versus the Prior Plan s defined benefit framework. The funding policy is to contribute the total cost of the plan annually. -21-
System and its affiliates also sponsor a defined benefit post retirement health care plan that covers substantially all full-time employees that meet certain age and years of service requirements. The plan permits eligible post-retirees healthcare coverage at percentages of full premium, varying from 102% to 115%. The plan was closed to new participants in 2013. Expenditures are expected to continue through 2020. The following table sets forth the funded status and amounts recognized in the Organization's statement of financial position for the pension benefit plan, and also provides a reconciliation of the accumulated postretirement benefit obligation to the liabilities reflected in the accompanying statement of position at December 31, 2014 and 2013. The post retirement benefit plan is not funded currently. Postretirement Pension Benefits Medical Benefits 2014 2013 2014 2013 Change in Benefit Obligation Benefit obligation at beginning of year $ 154,572,354 $ 165,916,208 $ 802,342 $ 3,066,218 Service cost 10,669,720 11,483,946 34,501 139,293 Interest cost 6,952,193 5,634,368 22,064 84,536 Amendments - (2,920,426) Actuarial loss (gain) 11,639,708 (18,543,881) (161,013) 518,145 Benefits paid (8,801,719) (9,918,287) (48,172) (85,424) Benefit obligation at end of year 175,032,256 154,572,354 649,722 802,342 Change in Plan Assets Fair value of plan assets at beginning of year 148,242,041 139,395,587 - - Actual return on plan assets 10,576,284 6,764,741 - - Employer contribution 9,000,000 12,000,000 48,172 85,424 Benefits paid (8,801,719) (9,918,287) (48,172) (85,424) Fair value of plan assets at end of year 159,016,606 148,242,041 - - Funded Status of Plan Funded status as of fiscal year end (16,015,650) (6,330,313) (649,722) (802,342) Amounts Recognized in the Statement of Financial Position Consist of: Current liabilities - - 215,727 152,620 Noncurrent liabilities 16,015,650 6,330,313 433,995 649,722 $ 16,015,650 $ 6,330,313 $ 649,722 $ 802,342 Accumulated Benefit Obligation and Fair Value of Plan Assets Projected and accumulated benefit obligation 175,032,256 $154,572,354 N/A N/A Fair value of plan assets 159,016,606 148,242,041 N/A N/A Weighted-average assumptions as of December 31 Discount rate 4.70% 4.70% 1.50% 1.50% Rate of compensation increase 4.00% 4.00% N/A N/A The amounts of net actuarial loss and prior service credit expected to be amortized in net periodic pension cost in 2015 are $2,096,510 and $938,300, respectively, for the pension plan. -22-
System and Affiliates reviews the latest ten-year rate of return on the cash balance plan to develop the expected return on plan assets. Postretirement Postretirement Pension Benefits Pension Benefits Medical Benefits Medical Benefits 2014 2013 2014 2013 Components of Net Periodic Benefit Cost Service cost $ 10,669,720 $ 11,483,946 $ 34,501 $ 139,293 Interest cost 6,952,193 5,634,368 22,064 84,536 Expected return on plan assets (10,142,305) (9,634,056) - - Amortization of prior service cost (938,300) (938,300) (584,085) (150,260) Recognized actuarial loss/(gain) 1,403,373 2,916,577 637,087 162,246 Curtailment (gain)/loss recognized - - - (41,519) Net periodic benefit cost $ 7,944,681 $ 9,462,535 $ 109,567 $ 194,296 Weighted-average assumptions for determining net periodic benefit cost -Discount Rate 4.70% 3.55% 2.40% 2.40% -Expected Return on Plan Assets 7.00% 7.00% N/A N/A -Rate of Compensation Increase 4.00% 4.00% N/A N/A Estimated Future Benefit Payments Postretirement Year Pension Plan Medical Plan 2015 $ 8,876,167 $ 215,727 2016 10,111,262 196,617 2017 11,147,713 167,246 2018 12,777,633 69,124 2019 17,045,958 1,396 2020-2024 91,171,614 1,044 Expected Contributions During Fiscal 2015 Altru expects to contribute approximately $9,700,000 to its pension plan and approximately $215,727 to its postretirement medical plan during 2015. Plan Assets- Percentage of Fair Value By Category Pension Plan Postretirement Medical Plan Assets at December 31, Assets at December 31, 2014 2013 2014 2013 Equity Securities 34.9% 35.6% N/A N/A Debt Securities 64.5% 63.6% N/A N/A Cash and Cash Equivalents 0.6% 0.8% N/A N/A Total 100.0% 100.0% N/A N/A Investment managers are authorized to invest up to 37 percent of assets in equities. -23-
System and Affiliates also sponsor a retirement savings plan, a money purchase pension plan, and a 403(b) plan for the benefit of its employees. The retirement savings plan provides that Altru contributes 50 percent of the first 4 percent of base compensation that a non-physician or specified administrative participant contributes to the Plan. The retirement savings plan also provides that Altru contributes 5 percent of physician and specified administrative participant s eligible compensation up to $200,000 for 2014 and 2013. Eligible employees include those having completed one year of service, having attained the age of twenty-one years and are employed on the last day of the plan year. The retirement savings plan also has a 401(k) feature whereby employees may elect to make salary reduction contributions up to 50% of annual salaries. Total employer contributions to the retirement savings plan for the years ended December 31, 2014 and 2013 totaled $4,021,710 and $3,841,558, respectively. The money purchase plan provides that Altru contributes 5.05 percent of total participants wages up to $200,000. An additional contribution of 4.85 percent is made on participants wages that exceed the social security wage base up to $200,000 for 2014 and 2013. Eligible employees include physicians and specified administrative personnel that have completed one year of service, have attained the age of twenty-one years and are employed on the last day of the plan year. Total employer contributions to the money purchase plan for the years ended December 31, 2014 and 2013 were $2,612,318, and $2,519,213, respectively. Altru does not contribute to the 403(b) plan. Eligible employees include those that work a minimum of 20 hours a week. They may enter the plan on the first day of the month following their date of hire. Employees may elect to make salary reduction contributions up to 50% of annual salaries not to exceed $17,500. This maximum includes any contributions made to the Altru retirement savings 401(k) plan. Altru also offers a 457(b) Top Hat deferred compensation plan. This plan is available to our physician and officer group and allows for current salary to be deferred and invested for disbursement at a later date. Altru does not contribute to this plan. The fair value of the plan assets and liabilities reported in the accompanying balance sheet is $9,624,618 and $8,237,159 at December 31, 2014 and 2013, respectively. Altru also offers a 457(f) Non-Qualified deferred compensation plan. This plan is available to a select group of administrators and provides that Altru allocate a percentage of current salary, as determined by the Board of Directors, which is then reduced by other Altru contributions to its qualified plans. The plan is funded upon benefits vesting. The allocations become 100% vested to the participants only upon the occurrence of certain events. Those events are 1) continued employment at 5 years after date of annual contribution, 2) attainment of age 65, or 3) death of the participant. The vested amounts are distributed upon the occurrence of any of the triggering events. Allocation made in 2014 was $147,600, of which $40,203 was immediately vested and distributed. The fair value of $107,397 is reported in assets whose use is limited held under trust agreements for 2014. -24-