Develop a chart of Director's financial presentation based on the Case Example, displayed in our text in Appendix Chapter 9-A, for Harris Memorial Hospital and Harris Community Foundation's Audited Financial Statements and Footnotes. In preparing your analysis, be sure to use theformatin Chapter 13, (Table13-7) and (Figure13-4) to display youranalysis and explanation for the comparative yearsDecember 31, 20X7 and 20X6.

The images below are of the Appendix 9-A, Table 13-7 and Figure 13-4. All information has been included.

Profitability

Total margin percentage: ____________

Operating margin percentage: ____________

Nonoperating revenue %: ____________

ROE percentage: ____________

Liquidity

Current: ____________

Days in accounts receivable: ____________

Days cash on hand (short term): ____________

Capital structure

Equity financing percentage: ____________

Long-term debt to equity %: ____________

Cash flow to debt percentage: ____________

Times interest earned

Activity

Total asset turnover: ____________

Fixed asset turnover: ____________

Current asset turnover

Other ratios

Average age of plant: ____________

CASE 9A

provide a basis for our audit opinion. subsidiaries at December 31, 20X7 and 20X6, and In our opinion, the financial statements referred the combined changes in their net assets and their to above present fairly, in all material respects, the cash flows for the years then ended in conformity combined financial position of Harris Memorial with U.S. generally accepted accounting principles. TABLE 9A-1 Harris Memorial Hospital and Harris Community Foundation Combined Balance Sheets (in Thousands) December 31, 20X7 December 31, 20X6 Assets Current assets Cash and cash equivalents $82,815 $59,696 Assets limited as to use, current portion 5,327 5, 088 Accounts receivable Patients, less allowance for doubtful accounts 70,025 59,939 ($25,302 in 20X7 and $23,014 in 20X6) Other 28,990 24,995 Supplies 7,078 6,663 Total current assets 194,235 156,381 Assets limited as to use For donor-restricted purposes 84,440 67,826 Board designated for specific purposes 382,835 378,413 Held by trustees under bond agreements 51,038 25,937 518,313 472,176 Less current portion 5,327 5,088 512,986 467,088 Property and equipment, net 563,349 458,829 Other assets 34,476 34,302 Total assets $1,305,046 $1, 1 16,600 Liabilities and net assets Current liabilitiesContingent professional liabilities 33,357 46,566 Institutional research 18,072 16,241 Investments held by subsidiary 19,925 16,019 Other board designated 178,453 180,969 382,835 378,413 Held by trustees under bond agreements 51,038 25,937 518,313 472, 176 Less current portion of assets limited as to use 5,327 5,088 $512,986 $467,088 Investment income or loss is included in the 9. Commitments and Contingencies excess of revenues and gains over expenses and losses, and includes realized and unrealized gains The Foundation leases equipment and a medi- and losses, interest, and dividends. cal office building under operating leases. These payments are due monthly through Decem- TABLE 9A-9 The Foundation's Assets Limited as to Use ber 2012. Rent expense totaled approximately $7,426,000 and $8,715,000 in 20X7 and 20X6, at December 31 (in Thousands) respectively. Future minimum lease commitments under December 31, December 31, operating leases that have initial or remaining 20X7 20X6 lease terms in excess of 1 year are as follows as of December 31, 20X7 (in thousands): Carried at fair value Money market $83,900 $58,833 accounts 20X8 $3,410 Certificates of 1,651 2,151 20X9 3,544 deposit 20XO 3,252 U.S. Treasury 74,896 75, 195 securities 20X1 2,886 Corporate debt 53,412 82,657 20X2 2,287 securities $15,379 Equity securities 304,454 253,340 518,313 472,176 Sale of Medical Office Building Less current 5,327 5,088 On December 29, 20X7, the Foundation sold a portion of assets medical office building to Ross Acquisition of limited as to use Alexandria (RA) for approximately $22,200,000. The building had a book value of approximately $512,986 $467,088 $10,900,000. The transaction included a ground lease with a term of 50 years and HR prepaidthe rent totaling approximately $900,000. The relief under Chapter 11 on February 17, 20X1. Foundation entered into lease-back agreements On October 6, 20X3, the Foundation learned for space within the building. The Foundation that the bankruptcy counsel for MGMTMatrix recognized an immediate gain of approximately filed, in U.S. Bankruptcy Court in the District $6,100,000 and a deferred gain of approximately of New York, an attempt to nullify the redemp- $4,300,000 to be recognized over a period equal to tion of certain MGMTMatrix commercial paper the operating lease term. including that divested by the Foundation. The case was settled in December 20X7 for approx- Other imately $3,900,000 and is included in accrued The Foundation is a defendant in various legal expenses and other liabilities in the accompany- proceedings arising in the ordinary course of ing combined balance sheets. The Foundation business. Although the results of litigation cannot paid the settlement amount in October 20X7. be predicted with certainty, management believes the outcome of pending litigation will not have a 10. Fair Values of Financial Instruments material adverse effect on the Foundation's com- Generally accepted accounting principles estab- bined financial statements. lished a framework for measuring fair value that On February 21, 20X3, the Foundation provides a fair value hierarchy that prioritizes the entered into a 10-year Master Customer Agree- inputs to valuation techniques used to measure ment with COTC, for the provision of services, fair value. The hierarchy gives the highest prior- supplies, and equipment. The agreement pro- ity to unadjusted quoted prices in active markets vides a platform for the development of the Zuber for identical assets or liabilities (Level 1 measure- Center as a fully integrated, all-digital facility. ments) and the lowest priority to unobservable COTC will support the Foundation in five core inputs (Level 3 measurements). areas: healthcare information technology appli- The three levels of the fair value hierarchy cations and infrastructure, medical equipment, under Accounting Standards Codification (ASC) telecommunications power, and "smart" build- 820-10-50, Fair Value Measurement-Overall, are ing technologies. The agreement provides for a described here: commitment of approximately $200,000,000 from the Foundation to purchase certain goods and Level 1: Valuation is based on quoted prices for services at favorable prices. The Foundation has identical instruments traded in active markets. certain minimum yearly purchase commitments Level 1 securities include primarily overnight ranging from $10,000,000 to $25,000,000 over repurchase agreements, money market funds, the 10-year term of the agreement. For the years and mutual funds. ended December 31, 20X7 and 20X6, the Foun- Level 2: Valuation is based on quoted prices for dation purchased approximately $22,353,000 and similar instruments in active markets, quoted $26,372,000, respectively, in goods and services prices for identical or similar instruments in from Siemens and affiliated companies, which markets that are not active, and model-based exceeded the purchase commitments in those valuation techniques for which all significant years. Goods and services purchased under the assumptions are observable in the market. contract total approximately $137,400,000. At Level 2 securities include an unregistered The Foundation invests in short-term instru- mutual fund. ments as part of its money management program. Level 3: Valuation is generated from model-based These instruments include short-term govern- techniques that use significant assumptions not ment securities and investment grade commer- observable in the market. These unobservable cial paper. Generally, an investment firm on assumptions reflect the Hospital's estimates of behalf of the Foundation manages these invest- assumptions that market participants would ments, and the Foundation has invested in a num- use in pricing the asset or liability. Valuation ber of short-term investment grade commercial techniques include use of discounted cash flow papers over the years. On October 29, 20X1, the models and similar techniques. Level 3 securi- Foundation sold approximately $10,000,000 in ties include an equity fund limited partnership. MGMTMatrix commercial paper prior to matu- Fair value is based on the price that would be rity. MGMTMatrix filed a voluntary petition for received to sell an asset or paid to transfer aliability in an orderly transaction between market Cash and cash equivalents: The carrying amount participants at the measurement date. The Hos- reported in the combined balance sheet for cash pital maximizes the use of observable inputs and and cash equivalents approximates its fair value. minimizes the use of unobservable inputs when Investments: Fair values, which are the amounts developing fair value measurements. reported in the combined balance sheet, are based Fair value measurements for assets and lia- on quoted market prices. bilities where there is limited or no observable Interest rate swap agreements: Fair values, which market data and, therefore, are based primarily are the amounts reported in the combined bal- on estimates calculated by the Hospital, are based ance sheet as due to broker and other assets, are on the economic and competitive environment, based on market rates. the characteristics of the asset or liability and Long-term debt: The carrying amount of the other factors. Therefore, the results cannot be Foundation's borrowings under its revolving determined with precision and may not be real- line of credit and auction rate security bond ized upon an actual settlement of the asset or lia- issues approximates fair value. The fair value of bility. There may be inherent weaknesses in any the Foundation's other long-term debt is esti- calculation technique, and changes in the under- mated using discounted cash flow analyses, lying assumptions used, including discount rates based on the Foundation's current incremental and estimates of future cash flows that could borrowing rates for similar types of borrowing significantly affect the results of the current or arrangements. future values. The following methods and assumptions were 11. Functional Expenses used by the Foundation in estimating the fair The Foundation provides healthcare services to value of its financial instruments: residents within its geographical service area. TABLE 9A-10 The Carrying Amounts and Fair Values of the Foundation's Financial Instruments in the Combined Balance Sheets at December 31 (in Thousands) Carrying Amount Fair Value 20X7 Cash and cash equivalents $82,815 $82,815 Assets limited as to use 518,313 518,313 Due to broker 15,128 15, 128 Long-term debt 444,289 444,349 20X6 Cash and cash equivalents $59,696 $59,696 Assets limited as to use 472,176 472, 176 Due to broker 19,608 19,608 Long-term debt 338,262 340,809 Harris Memorial Hospital and Harris patient accounts receivable were 20% and 19% at Community Foundation December 31, 20X7 and 20X6, respectively, from government-related programs. Patient accounts Notes to Combined Financial Statements receivable from the Health Plan were 25% and December 31, 20X7 29% at December 31, 20X7 and 20X6, respectively. 1. Organization and Significant Accounting The Foundation maintains allowances for Policies uncollectable accounts for estimated losses result- Organization and Basis of Combination ing from a payer's inability to make payments on accounts. The Foundation uses a balance sheet Harris Memorial Hospital (the Hospital) and Har- approach to value the allowance account based on ris Community Foundation (the Foundation) are historical write-offs, payer type, and the aging of the a hospital and charitable foundation located in accounts. Accounts are written off when collection Jersey, Ohio. The Hospital and Foundation are efforts have been exhausted. Management contin- exempt from federal income taxes under Section ually monitors and adjusts, as necessary, allow- 501(c)(3) of the Internal Revenue Code (IRC). ances associated with its receivables. The majority The Hospital and Foundation are collectively of uncollectable accounts are from uninsured and referred to herein as the Foundation. the patient portion of accounts receivable. The Foundation owns and operates the Renee Center, which has 27 skilled nursing beds; Harris Assets Limited as to Use Assurance, Ltd. (Assurance), a for-profit, wholly Assets limited as to use at December 31, 20X7, owned insurance subsidiary; and Harris Properties include 76% and 9% held under master trust (Condit Inn), a for-profit, wholly owned subsidi- agreements with Liberty Eagle Trustand Highbanks, ary. During 20X6, the Foundation formed the Har- respectively, and 15% held in government-insured ris Community Hospital Corporation (dba Harris time deposits and other financial instruments. Hospital) located in Oldstone, Ohio and the Harris Assets limited as to use at December 31, 20X6, Long Term Acute Care Hospital Corporation (dba include 78% and 5% held under master trust agree- Harris Continuing Care Hospital) located in Jersey, ments with Liberty Eagle Trust and Highbanks, Ohio. The 60-bed Harris Continuing Care Hospi- respectively, and 17% held in government-insured tal opened in May 20X7. Harris Hospital, with 92 time deposits and other financial instruments. The beds, opened in late July 20X7. At December 31, investments held under the master trust agree- 20X7, the Foundation has remaining commitments ments are diversified among equity, debt, and totaling approximately $7,360,000 under construct money market instruments and are reported at tion contracts for these and other capital projects. estimated fair value. The fair value of these invest- The Foundation is affiliated with the Harris ments is generally based on quoted market prices Health Plan (the Health Plan). The Health Plan's on national exchanges. financial statements are not included in these combined financial statements. The Foundation Property and Equipment provides healthcare services in the central Ohio Property and equipment are recorded at cost at region. All appropriate intercompany accounts the date of acquisition or estimated fair value at have been eliminated in combination. the date of donation. Depreciation is computed on the straight-line method using the estimated Cash Equivalents economic lives of the depreciable assets, gener- The Foundation considers all undesignated highly ally ranging from 3 to 40 years. Expenditures that liquid investments with maturities of 3 months or materially increase values, change capacities, or less when purchased to be cash equivalents. extend useful lives are capitalized. Routine main- Supplies tenance and repair items are charged to operating expenses. Supplies are stated at cost (first-in, first-out The Foundation evaluates whether events method), which is not in excess of market value. and circumstances have occurred that indicate Patient Accounts Receivable the remaining estimated useful life of long-lived assets may warrant revision or that the remaining Patient accounts receivable are stated at estimated balance of an asset may not be recoverable. The net realizable value. Significant concentrations of assessment of possible impairment is based onwhether the carrying amount of the asset exceeds Permanently restricted net assets have been the expected total undiscounted value of cash restricted by donors to be maintained by the flows expected to result from the use of the assets Foundation in perpetuity. The income from and their eventual disposition. No amounts were permanently restricted net assets is recorded recognized in 20X6. as unrestricted unless explicitly restricted by In 20X7, the Foundation recorded a charge of donors. Donor-restricted income on permanently $4,000,000, net of reimbursement, for unrecover- restricted net assets is generally available to sup- able costs incurred in connection with repair and port research and education and is reported as maintenance costs of the Condit Inn. temporarily restricted. Derivative Financial Instruments The Foundation's temporarily restricted net The Foundation accounts for its derivatives assets are restricted primarily for research, educa- under Statement of Financial Accounting Stan- tion, capital projects, and medical care programs and its permanently restricted net assets are pri- dards No. 133, Accounting for Derivative Instru- ments and Hedging Activities, or SFAS No. 133. marily restricted for endowment purposes. SFAS No. 133 requires that all derivative finan- Net Patient Service Revenue cial instruments that qualify for hedge account- Net patient service revenue is reported at esti- ing be recognized in the financial statements and mated net realizable amounts from patients, measured at fair value regardless of the purpose third-party payers, and others for services ren- or intent for holding them. Changes in the fair dered and includes estimated retroactive revenue value of derivative financial instruments are rec- adjustments due to future audits, reviews, and ognized periodically either in operations or in investigations. Retroactive adjustments are con- changes in unrestricted net assets. The Founda- sidered in the recognition of revenue on an esti- tion's policy is to not hold or issue derivatives for mated basis in the period the related services are trading purposes and to avoid derivatives with rendered, and such amounts are adjusted in future leverage features. periods as adjustments become known or as years Restricted Support are no longer subject to such audits, reviews, and The Foundation records unconditional promises investigations. of cash or other assets at estimated fair value on Charity Care the date the promises are received. The Foun- dation reports gifts of cash and other assets as The Foundation provides care without charge or at restricted support if they are received with donor amounts less than its established rates to patients stipulations that limit the use of the donated assets. who meet certain criteria under its charity policy. When a donor restriction expires, that is, when a Because the Foundation does not pursue collect stipulated time restriction ends or a purpose of tion of amounts determined to qualify as charity restriction is accomplished, temporarily restricted care, they are not reported as revenue. Hospital net assets are reclassified to unrestricted net assets charges foregone for charity care, based on estab- and reported in the combined statements of oper- lished rates, were approximately $35,200,000 ations or combined statements of changes in net in 20X7, prior to application of disproportion- assets (based on nature of restriction) as net assets ate share funds of approximately $4,800,000 released from restrictions. received from the State of Ohio, and $35,300,000 The Foundation reports gifts of land, build- in 20X6, prior to application of disproportionate ings, and equipment as unrestricted support share funds of approximately $5,800,000 received unless explicit donor stipulations specify how from the State of Ohio. Clinic charges forgone the donated assets must be used. Gifts of long- for charity care, based on established rates, were lived assets with explicit restrictions that specify $12,525,000 and $10,216,000 in 20X7 and 20X6, how the assets are to be used and gifts of cash or respectively. other assets that must be used to acquire long- Health Insurance Program Reimbursement lived assets are reported as restricted support. The Foundation reports expirations of donor restrict Revenue from the Medicare and Medicaid pro- tions when the donated or acquired long-lived grams accounted for approximately 45% and assets are placed in service. 8%, respectively, of the Foundation's net patient service revenue for the year ended December31, 20X7, and 51% and 11%, respectively, for the unrealized gains and losses on investments other year ended December 31, 20X6. Laws and reg- than trading investment securities, and invest- ulations governing the Medicare and Medicaid ment returns restricted by donors. programs are extremely complex and are subject to interpretation. Federal regulations require the Use of Estimates submission of annual cost reports covering med- ical costs and expenses associated with services The preparation of financial statements in con- provided to program beneficiaries. Medicare and formity with accounting principles generally Medicaid cost report settlements are estimated accepted in the United States requires manage- in the period services are provided to benefit ment to make estimates and assumptions that ciaries. As a result, there is at least a reasonable affect the amounts reported in the combined possibility that recorded estimates will change by financial statements and accompanying notes. a material amount in the near term. The 20X7 Actual results could differ from those estimates. and 20X6 net patient service revenue increased Other (decreased) approximately $10,340,000 and $(1,332,000), respectively, due to changes in Certain reclassifications of donor trust liabilities, allowances previously estimated as a result of previously included in assets limited as to use, the final settlements for years that are no longer were made to the 20X6 combined financial state- subject to audits, reviews, and investigations. ments to conform to the 20X7 presentation. The Foundation believes that it is in compli- Additionally, in previous years, the Foun- ance with all applicable laws and regulations dation's investment portfolio (see Note 7) was and is not aware of any pending or threatened classified as other than trading. As such, unreal- investigations involving allegations of potential ized gains and losses that were considered tem- wrongdoing. porary were excluded from excess of revenues Medicare cost reports filed by the Hospital and gains over expenses and losses. During for all years before 20X4 have been audited and fiscal year 20X7, the Foundation determined settled as of December 31, 20X7. Medicare cost that substantially all of its investment portfolio reports filed by the Clinic for all years before 20X0 was more accurately classified as trading with have been audited and settled as of December 31, unrealized gains and losses included in excess 20X7. Amounts due to the Medicare and Medic- of revenues and gains over expenses and losses. aid programs totaled approximately $7,380,000 Therefore, a reclassification was made in the and $12,633,000 at December 31, 20X7 and 20X6, accompanying 20X6 combined financial state- respectively, and are included in due to third- ments to reflect this change in classification. A party payers in the accompanying combined bal- net unrealized loss of approximately $9,183,000 ance sheets. was reclassified from change in net unrealized gains and losses on investment securities to Nonoperating Gains and Losses investment income. Nonoperating gains and losses include unre- stricted contributions, gifts and bequests, interest 2. Contingent Professional Liabilities earnings on investments, net assets released from The Foundation self-insures substantially all of restrictions for research and education expendi- its professional liability risk through its wholly tures (net of contributions for such expenditures), owned insurance subsidiary. A commercial insur- change in interest rate swap value and put agree- ance policy is maintained to insure claims exceed- ments, and other gains and losses unrelated to the ing $7,000,000 individually or $35,000,000 in the Foundation's primary operations. aggregate in 20X7 on a claims-made basis. Con- Excess of Revenues and Gains over Expenses tingent professional liabilities are recorded for and Losses incurred but not reported claims and reported claims based on estimates by independent actu- Included in excess of revenues and gains over aries. Management established a fund for the expenses and losses in the accompanying com- purpose of setting aside assets based on estimates bined statements of operations are all changes made by independent actuaries, and these funds in unrestricted net assets other than net assets are reported in the combined balance sheets as released from restrictions for capital expenditures, assets limited as to use.TABLE 9A-5 Property and Equipment and Related Accumulated Depreciation (in Thousands) December 31, 20X7 December 31, 20X6 Land and improvements $26,945 $26,610 Buildings and improvements expenditures 447,897 265,965 Fixed and movable equipment 469,441 427,882 Construction-in-progress 112,880 189,807 1,057,163 910,264 Less accumulated depreciation 493,814 451,435 $563,349 $458,829 4. Long-Term Debt Bonds, current refund $58,410,000 of the Series In July 20X7, the Foundation issued the Series 20X7 20X1 Revenue Bonds, and finance and/or refi- LTACH Revenue Bonds totaling $15,700,000. The nance expansion projects. The Series 20X6 Bonds Series 20X7 LTACH Revenue Bonds are due July were issued as Auction Rate Securities and gen- 20X2 with principal and interest payments due erally bear interest for successive 7-day auction monthly. Interest accrues at 65% of LIBOR plus periods at interest rates determined through 100 basis points. Effective with the issuance of the Dutch auctions on the business day preceding bonds, the Foundation entered into a fixed rate the auction period. Any series or subseries of the swap agreement for the amount of the bonds by Series 20X6 Revenue Bonds may be converted at which the Foundation pays a fixed rate of interest the option of the Foundation, subject to certain of 4.55%. The change in fair value for the period restrictions, to bonds that bear interest in differ- ended December 31, 20X7 was not significant to ent rate periods, including daily, weekly, flexible, the increase in net assets. term, or fixed rate periods. The Series 20X6 Rev- In November 20X6, the Foundation issued enue Bonds contain certain restrictive covenants, Series 20X6 Revenue Bonds with a par amount including minimum levels of debt service cover- of $233,350,000. Proceeds were used to advance age. Management believes the Foundation is in refund $31,280,000 of the Series 20X0A Revenue compliance with all covenants. TABLE 9A-6 Long-Term Debt (in Thousands) December 31, 20X7 December 31, 20X6 Revenue bonds, LTACH Series 20X7; interest at 65% of LIBOR $15,679 plus 100 basis points (4.647% at December 31, 20X7); principal and interest payable monthly through July 20X2 Revenue bonds, Series 20X6A-1; interest accrues for successive 42,375 7-day auction periods at interest rates determined through Dutch auctions (3.800% at December 31, 20X7) Revenue bonds, Series 20X6A-2; interest accrues for successive 42,400 7-day auction periods at interest rates determined through Dutch auctions (3.800% at December 31, 20X7)Revenue bonds, Series 20X6B; interest accrues for successive 56,550 7-day auction periods at interest rates determined through Dutch auctions (3.850% at December 31, 20X7) Revenue bonds, Series 20X6C; interest accrues for successive 55,275 7-day auction periods at interest rates determined through Dutch auctions (3.850% at December 31, 20X7) Revenue bonds, Series 20X6D; interest accrues for successive 36,750 7-day auction periods at interest rates determined through Dutch auctions (3.900% at December 31, 20X7) Revenue bonds, Series 20X1; interest accrues at a daily rate 90,360 151,800 determined by the remarketing agent (3.960% at December 31, 20X7); interest and principal payable annually through 20X1 (principal payments began in 20X6) Revenue bonds, Series 20X0A; interest at 5.375%; interest and 2,700 35,230 principal payable annually through 20X9 Revenue bonds, Series 20XOB; interest accrues at a daily rate 83,200 84,500 determined by the remarketing agent (3.960% at December 31, 20X7); interest and principal payable annually through 20X9 Line of credit 19,000 46,686 Interim construction loan 7,000 Other 13,046 444,289 338,262 Less current maturities 4,692 5,908 $439,597 $332,354 In January 20X6, the Foundation entered into The Foundation issued Series 20X0A Rev- a revolving line of credit with Bank of Central Ohio enue Bonds with a par amount of $42,025,000 to fund interim construction costs and provide for that were partially refunded in November liquidity and other short-term needs. In accordance 20X6 and Series 20XOB Revenue Bonds with with terms of the loan agreement, the total available a par amount of $91,200,000. The majority of for borrowing was decreased from $70,000,000 to the proceeds from the Series 20X0A and Series $30,000,000 30 days following the issuance of the 20XOB Revenue Bonds were used to refund the Series 20X6 Revenue Bonds. The total amount current Series 19X8 Revenue Bonds with an drawn as of December 31, 20X7 was $19,000,000. outstanding balance of $19,147,000 and a note Interest is payable quarterly at a rate equal to the lesser of the maximum lawful rate or LIBOR plus payable with an outstanding par amount of $88,000,000. 15 basis points (5.71% at December 31, 20X7). The Series 20X0A and Series 20XOB Revenue Amounts drawn are due in full June 25, 20X9. Bonds and the Series 20X1 Revenue Bonds con- The Foundation issued Series 20X1 Revenue Bonds with a par amount of $158,000,000 that tain certain restrictive covenants, including mini- were partially refunded in November 20X6. The mum levels of debt service coverage. Management believes the Foundation is in compliance with all net proceeds were used to fund expansion projects. covenants.The Series 20XOB Revenue Bonds and the respectively. Interest paid during fiscal 20X7 and Series 20X1 Revenue Bonds are variable rate 20X6 was $16,937,249 and $9,084,500, respec- bonds in a daily mode and can be tendered by tively, net of amounts capitalized. holders upon demand. A remarketing agent selected by the Foundation determines the inter- 5. Concentrations of Credit Risk est rates and remarkets both series of bonds. Harris Memorial grants credit without collateral The Series 20XOB Revenue Bonds and the Series to its patients, most of whom are local residents 20X1 Revenue Bonds are supported by Standby and are insured under third-party payer agree- Bond Purchase Agreements (the Agreements) ments. The mix of receivables from patients and with liquidity providers pursuant to which the third-party payers was as follows: providers will purchase any bonds the remar- keting agent is unable to market. The termina- tion date of the two Agreements related to the TABLE 9A-7 Mix of Receivables Series 20XOB Revenue Bonds was December 6, 20X7. On October 18, 20X7, these Agreements December 31, December 31, were extended to December 4, 20X8. There are 20X7 20X6 also two Agreements associated with the Series 20X1 Revenue Bonds. The termination date of Medicare 21% 19% the first Agreement related to the Series 20X1 2 Revenue Bonds was December 6, 20X7, and on Medicaid 2 October 18, 20X7, was extended to December Major payer 1 15 15 4, 20X8. The termination date of the second Agreement related to the Series 20X1 Revenue Major payer 2 11 11 Bonds is December 15, 20X5, as extended in November 20X4. All Agreements include cov- Major payer 3 11 13 enants that are customary in credit agreements of this nature. Repayment of bonds purchased Other third-party 28 28 under the Agreements is subject to a 5-year pay- payers out beginning July 20X6, if other liquidity facil- ities, as defined in the bond agreements, are not Private pay 12 12 executed. The maturities of long-term debt, net of unamortized premium, as of December 31, Tota 100% 100% 20X7, are shown below (in thousands): 6. Interest Rate Swap Agreements 20X8 $4,692 Effective December 20X1, the Foundation entered 20X9 23,902 into an interest rate swap agreement with an ini- tial notional amount of $150,000,000. The interest 20XO 5,136 rate swap agreement converts a notional amount of $150,000,000 of floating rate borrowings to 20X 1 5,353 fixed rate borrowings. The Foundation pays a fixed rate of interest (5.17%) and receives, from 20X2 19,896 the counterparty, a variable rate of interest based on the SIFMA Municipal Swap Index (SIFMA Thereafter 385,310 Index) on the outstanding principal balance of the Series 20X1 Revenue Bonds until 2031. $444,289 The Foundation has elected not to apply hedge accounting; therefore, the change in fair value is included in nonoperating (gains) losses. The Total interest costs incurred during fiscal fair value of the interest rate swap at December 20X7 and 20X6 were $16,779,140 and $9,339,000 31, 20X7 and 20X6, is a liability of approximately respectively, including $5,805, 140 and $3,194,000 $9,498,000 and $16,530,000, respectively, and is of capitalized interest costs in 20X7 and 20X6, included in due to broker in the accompanyingAccounts payable $32,572 $24,631 Accrued expenses and other liabilities 58,878 53 , 725 Due to third-party payers 7,380 12,633 Current maturities of long-term debt 4,692 5,908 Total current liabilities 103,522 96,897 Long-term debt, less current maturities 439,597 332,354 Contingent professional liabilities 33,260 48,487 Due to broker 15,128 19,608 Other liabilities 20,713 5,298 Postretirement benefit obligation, other than pensions 8,207 7,694 Total liabilities 620,427 510,338 Net assets Unrestricted 600,179 538,436 Temporarily restricted 55,213 40,393 Permanently restricted 29,227 27,433 Total net assets 684,619 606,262 Total liabilities and net assets $1,305,046 $1,116,600 TABLE 9A-2 Harris Memorial Hospital and Harris Community Foundation Combined Statements of Operations (in Thousands) December 31, 20X7 December 31, 20X6 Operating revenues and other support Net patient service revenue $829,005 $774,662 Provision for doubtful accounts (55,851) (57,975) Net patient service revenue less provision for doubtful accounts 773,154 716,687 Other operating revenue 27,055 29,334 Total operating revenue 800,209 746,021 (continues)TABLE 9A-2 Harris Memorial Hospital and Harris Community Foundation Combined Statements of Operations (in Thousands) (continued) Operating expenses Salaries and wages $371,449 $329,668 Employee benefits 81,532 77,231 Supplies and purchased services 228,244 225,497 Advertising 3,072 2,376 Staff enrichment 10,767 8,591 Occupancy cost 14,346 13,442 Depreciation 44,392 41,627 Interest 10,974 6,145 Operating expenses 764,776 704,577 Excess of revenue over expenses 35,433 41,444 Nonoperating gains (losses) Contributions, gifts, and bequests 3,189 1,318 Net assets released from restrictions for research expenditures 14,070 14,474 Research, education, and other nonoperating expenses (22,980) (24,773) Change in interest rate swap value and put agreements 1,578 9,397 Investment income 30,453 18,402 26,310 18,818 Excess of revenues and gains over expenses and losses $61,743 $60,262 TABLE 9A-3 Harris Memorial Hospital and Harris Community Foundation Combined Statements of Changes in Net Assets (in Thousands) December 31, 20X7 December 31, 20X6 Unrestricted net assets Excess of revenues and gains over expenses and losses $61,743 $60,262 Net assets released from restrictions for capital expenditures 119 239 of 586Cumulative effect of change in accounting principle (3,943) Increase in unrestricted net assets 61,743 56,438 Temporarily restricted net assets Contributions, gifts, and bequests 20,435 15,512 Investment income 8,455 3,972 Net assets released from restrictions for research expenditures (14,070) (14,474) Net assets released from restrictions for capital expenditures (119) Increase in temporarily restricted net assets 14,820 4,891 Permanently restricted net assets Contributions, gifts, and bequests 1,794 3,218 Increase in permanently restricted net assets 1,794 3,218 Net assets at beginning of year 606,262 541,715 Net assets at end of year $684,619 $606,262 TABLE 9A-4 Harris Memorial Hospital and Harris Community Foundation Combined Statements of Cash Flows (in Thousands) December 31, 20X7 December 31, 20X6 Operating activities Increase in net assets $78,357 $64,547 Adjustments to reconcile increase in net assets to net cash provided by operating activities Change in net unrealized gains and losses on investment (26,358) 11,432 securities Cumulative effect of change in accounting principle (3,943) Depreciation 44,392 41,627 Gain on sale or disposal of assets, net (6,119) Provision for bad debts 55,851 57,975 Change in interest rate swap value and put agreements (1,578) (9,397) (continues)TABLE 9A-4 Harris Memorial Hospital and Harris Community Foundation Combined Statements of Cash (continued) Flows (in Thousands) December 31, 20X7 December 31, 20X6 Changes in operating assets and liabilities Assets limited as to use (19,779) (14,274) Accounts receivable (65,937) (51,251) Other assets (7,071) (43) Supplies (415) 840 Accounts payable 7,941 10,613 Accrued expenses and other liabilities 20,568 8,430 Due to third-party payers (5,253) (4,877) Contingent professional liabilities (15,227) 3,743 Postretirement benefit obligation, other than pensions 513 456 Net cash provided by operating activities 59,885 115,878 Investing activities Property and equipment acquired (142,793) (159,943) Cash used in investing activities (142,793) (159,943) Financing activities Repayment of long-term debt (177,294) (5,545) Proceeds from borrowing 283,321 57, 614 Net cash provided by financing activities 106,027 52,069 Net increase in cash and cash equivalents 23, 119 8,004 Cash and cash equivalents at beginning of year 59,696 51,692 Cash and cash equivalents at end of year $82,815 $59,696TABLE 13-7 Forecasted Financial Ratios for OHF 20X7 20X8 20X9 20XO 20X1 rofitability Total margin percentage 3.9 49 4.9 5.0 5.0 Operating margin percentage 1.3 2.3 2.0 1.7 1.4 Nonoperating revenue % 2.6 2.9 3.0 3.2 3.5 ROE percentage 8.2 9.7 8.8 8.5 8.0 Liquidity Current 1.11 1.11 1.09 1.09 1.09 Days in accounts receivable 54.8 54.8 54.8 54.8 54.8 Days cash on hand (short term) 20.0 20.0 20.0 20.0 20.0 Capital structure Equity financing percentage 44.1 46.4 48.7 50.9 53.0 Long-term debt to equity % 63.3 55.6 49. 43.2 38.4 Cash flow to debt percentage 14.9 17.4 18.0 18.8 19.6 Times interest earned 2.65 3.19 3.31 3.43 3.59 Activity Total asset turnover 0.93 0.91 0.89 0.87 0.85 Fixed asset turnover 2.32 2.37 2.43 2.52 2.63 Current asset turnover 4.44 4.44 4.44 4.44 4.44 Other ratios Average age of plant 8.8 9.3 9.7 10.2 10.7 high price structure, which it may not be able to maintain. A 2% growth rate is predicated on zero Salaries and wages: In the labor intensive healthcare growth in net prices but a 2% growth in volume of industry the second most important assumption in services. A 2% growth in services seems reason- any financial forecast is salaries and wages. Salary able given previous growth in outpatient and clinic and wage cost are the product of three factors: services. The assumptions made about revenue Salary and wage costs = Volume of services growth (volume and price) are the most import- ant variables in terms of impact on the financial x Staffing ratios X Wage rates plan. Small changeOmega Health Foundation 20X7 Return on equity % 8.4 Operating Total asset Nonoperating Equity margin % turnover revenue % financing % 1.3 0.93 2.7 0.44 FIGURE 13-4 Financial 338 of 586 mega Health FoundationAppendix 9-A 237 combined balance sheets. The change in the fair and receives, from the counterparty, a variable rate value of the interest rate swap is included in non- of interest based on the SIFMA Index on the out- operating gains (losses) and totaled approximately standing principal balance of the Revenue Bonds $(7,032,000) and $(6,885,000) for the years ended until 2031. The Foundation has elected not to apply December 31, 20X7 and 20X6, respectively. The hedge accounting; therefore, the change in fair value change in fair value for the year ended December is included in nonoperating (gains) losses. The fair 31, 20X7 includes the amendment fee paid to the value of the interest rate swap at December 31, 20X7 counterparty of $7,037,000, realized as a part of and 20X6, is a liability of approximately $3,020,000 the Series 20X1 Revenue Bond refunding. and $3,078,000, respectively, and is included in due Simultaneous with entering into the interest to broker in the accompanying combined balance rate swap agreement, the Foundation also entered sheets. The change in the fair value of the inter- into a put agreement with the counterparty. The est rate swap is included in nonoperating gains counterparty may exercise this put agreement if (losses) and totaled approximately $(58,000) and the daily weighted average of the SIFMA Index is $(3,639,000) for the years ended December 31, greater than 7.00% for the 180-day period end- 20X7 and 20X6, respectively. The change in fair ing on the day the counterparty exercises the value includes the amendment fee of $176,000 paid put option. Under this agreement, the Founda- to the counterparty to terminate the portion of the tion pays a variable rate of interest, based on the interest rate swap agreement associated with the SIFMA Index, on the outstanding principal bal- Series 20X1 Revenue Bonds. Simultaneous with ance of the proposed bonds until 2031. For this entering into the interest rate swap agreement, the put agreement, the counterparty pays the Founda- Foundation also entered into a put agreement with tion an annual premium of 77.30 basis points on the counterparty. The counterparty may exercise an initial notional amount of $150,000,000 over the term of the put agreement, for a net effective this put agreement if the daily weighted-average of the SIFMA Index is greater than 6.00% for the combined annual payment by the Foundation to 180-day period ending on the day the counterparty the counterparty for the swap agreement and the exercises the put option. Under this agreement, the put agreement of approximately 4.39%. The pre- Foundation pays a variable rate of interest, based mium payment, however, will cease upon exer- on the SIFMA Index, on the outstanding principal cise of the put agreement. This put agreement, if balance of the related bonds until 2031. For this exercised, will offset the cash flows of the interest put agreement, the counterparty pays the Foun- rate swap agreement noted above. The fair value of the put agreement at December 31, 20X7 and dation an annual premium of 110.10 basis points 20X6, is an asset of $4,200,000 and $7,016,000, on an initial notional amount $96,400,000 over the erm of the put agreement, for a net effective com- respectively, and has been included in other pined annual payment by the Foundation to the assets. The change in the fair value of $(2,816,000) and $(552,000) for the years ended December 31, counterparty for the swap agreement and the put 20X7 and 20X6, respectively, has been included in agreement of approximately 3.24%. The premium payment, however, will cease upon exercise of the nonoperating gains (losses) since the put agree- ment is not a hedge and must be adjusted to fair put agreement. This put agreement, if exercised, value through the performance indicator. A por- will offset the cash flows of the interest rate swap tion of the change in fair value for the year ended agreement noted above. The fair value of the put December 31, 20X7 includes the amount related agreement at December 31, 20X7 and 20X6, is an to the partial refunding of the Series 20X1 Reve- asset of approximately $4,970,000 and $5,056,000, nue Bonds. The amendment fee received from the respectively, and has been included in other assets. This change in fair value of $(86,000) and counterparty was $2,005,000. On October 30, 20X2, the Foundation entered $(575,000) for the years ended December 31, 20X7 and 20X6, respectively, has been included in non- into an interest rate swap agreement with an ini- operating gains (losses) since the put agreement tial notional amount of $96,400,000 ($88,400,000 Series 20X0A and Series 20XOB and $8,000,000 is not a hedge and must be adjusted to fair value Series 20X1). The interest rate swap agreement through the performance indicator. The change in converts a notional amount of $96,400,000 of float- fair value includes the amendment fee of $198,000 ing rate borrowings to fixed rate borrowings. The received from the counterparty to terminate the Foundation pays a fixed rate of interest (4.34)% portion of the put agreement associated with the Series 20X1 Revenue Bonds.In anticipation of the issuance of the Series 7. Pension Plans 20X6 Bonds, the Foundation entered into five inter- est rate swap transactions in October 20X6 with an The Foundation implemented a 401(a) defined initial notional amount totaling $233,350,000. contribution plan and a 403(b) voluntary savings The swap transactions serve to substantially plan covering substantially all employees. The fix the expected net interest expense associated Foundation contributes from 6% to 13% of par- with the Series 20X6 Bonds by converting float- ticipating employees' compensation. Prior to Jan- ing rate borrowings with a notional amount of uary 1, 20X6, the Foundation's contributions were $233,350,000 to fixed rate borrowings. For the based on participating employees' age. The plan swaps related to the Series 20X6A and 20X6B was amended January 1, 20X6 and these contribu- Bonds, the Foundation pays a fixed rate of 3.502% tions are now based on years of service. The Foun- per annum, and the counterparty pays a vari- dation's contribution expense was approximately able rate of interest at a rate equal to 57.4% of the $28,495,000 and $26,121,000 in 20X7 and 20X6, 1-month LIBOR rate plus a spread of 0.33%. For respectively. the swaps related to the Series 20X6C Bonds and The Foundation sponsors a defined benefit 20X6D Bonds, the Foundation pays a fixed rate of postretirement plan that provides medical and 3.496% per annum, and the counterparty pays a dental benefits to retirees who meet specific eli- variable rate of interest at a rate equal to 57.4% of gibility requirements upon termination of active the 1-month LIBOR rate plus a spread of 0.33%. service. The plan is unfunded and requires cov- The Foundation has elected not to apply hedge ered retirees to contribute a portion of the cost accounting; therefore, the change in fair value is of benefits. The Foundation uses an incremental included in nonoperating (gains) losses. The fair cost approach in estimating the annual accrued value of the interest rate swaps at December 31, cost related to postretirement benefits other than 20X7 is a liability of approximately $2,610,000, pensions, which is based on estimates by indepen which equates to the change in fair value from dent actuaries. Such an approach is considered inception of the swaps through the year ended appropriate since substantially all of the health- December 31, 20X7. care benefits are provided by the Foundation to The Foundation can terminate any of these retirees, using the Health Plan to manage the care agreements at any time at current market value. provided. Plan expenses incurred by the Foun- The Foundation would make or receive a pay- dation were $880,000 and $822,000 for the years ment depending on market value on the date of ended December 31, 20X7 and 20X6, respectively. termination. 8. Assets Limited as to Use The Foundation is exposed to credit losses in Certain cash and investments, where their use is the event of nonperformance by the counterparty to the agreements. The counterparty is a credit- limited due to board designations or other pur- poses as set forth below, are reported as assets lim- worthy financial institution, and the Foundation anticipates that the counterparty will be able to ited as to use. The carrying values (in thousands) are at estimated fair values, which are summarized fully satisfy its obligation under the agreements. in TABLE 9A-8. TABLE 9A-8 Assets Limited as to Use December 31, 20X7 December 31, 20X6 Assets limited as to use and long-term investments For donor-restricted purposes, such as research, $84,440 $67,826 lectureships, and capital projects Board designated for specific purposes Funded depreciation 133,028 118,618