EXHIBIT 99.2
BAPTIST HEALTH SYSTEM
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
BAPTIST HEALTH SYSTEM
CONTENTS
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 4
Statements of operations and changes in net assets 5
Statements of cash flows 7
Notes to consolidated financial statements 8
2
[BDO LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees at
Baptist Health System
We have audited the accompanying consolidated balance sheets of Baptist Health
System (the "System"), a Texas nonprofit corporation, as of August 31, 2002,
2001 and 2000 and the related consolidated statements of operations and changes
in net assets and cash flows for the years then ended. These financial
statements are the responsibility of the System's management. 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 audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the System has suffered
recurring losses from operations, causing non-compliance with certain financial
covenants relating to the outstanding bonds. Although the System obtained
waivers for current defaults, it does not expect to meet certain financial
covenants in the future unless it can refinance or significantly extend the
maturity date and repayment provisions of the real estate lease obligation due
July 2004 or sell the property and repay the lease. Management's plans in regard
to these matters are also described in Note 2.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Baptist Health
System at August 31, 2002, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 4 to the consolidated financial statements, certain errors
resulting in overstatement of previously reported net assets as of August 31,
1999, were discovered by management of the System during the current year.
Accordingly, an adjustment has been made to net assets as of August 31, 1999, to
correct the errors.
/s/ BDO Seidman, LLP
Dallas, Texas
December 20, 2002
3
2000
August 31, 2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,394 $ 10,797 $ 14,153
Short-term investments 24,363 23,094 23,589
Accounts receivable -
Patient, net of allowance for doubtful
accounts of $17,038, $25,406 and
$24,945 in 2002, 2001 and 2000,
respectively 50,613 72,857 78,877
Due from third-party programs 2,523 1,592 112
Other 1,771 3,667 3,001
Inventory and other 15,089 12,258 13,273
---------- ---------- ----------
Total current assets 114,753 124,265 133,005
---------- ---------- ----------
ASSETS LIMITED AS TO USE
Required by loan agreements 10,166 10,231 12,343
Designated by board 13,099 11,968 9,453
Restricted by donors 4,389 4,277 5,139
---------- ---------- ----------
Total assets limited as to use 27,654 26,476 26,935
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 190,628 207,213 228,741
OTHER ASSETS
Investments and other 8,563 8,832 10,632
Unamortized deferred costs 6,628 6,982 7,337
---------- ---------- ----------
Total other assets 15,191 15,814 17,969
---------- ---------- ----------
Total assets $ 348,226 $ 373,768 $ 406,650
========== ========== ==========
BAPTIST HEALTH SYSTEM
CONSOLIDATED BALANCE SHEETS
2000
August 31, 2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES
Trade accounts payable $ 28,297 $ 26,530 $ 24,268
Accrued liabilities -
Payroll related 10,582 12,975 15,986
Workers' compensation 5,379 5,460 6,334
Accrued interest 2,789 2,766 2,845
Other 3,197 5,871 7,357
Note payable -- -- 4,000
Current portion of long-term debt 996 1,042 2,800
---------- ---------- ----------
Total current liabilities 51,240 54,644 63,590
---------- ---------- ----------
LONG-TERM DEBT, net of current portion 199,699 200,460 201,051
OTHER LIABILITIES 26,257 23,210 13,578
COMMITMENTS AND CONTINGENCIES
NET ASSETS
Unrestricted 66,871 91,264 123,359
Temporarily restricted 3,523 3,574 4,424
Permanently restricted 636 616 648
---------- ---------- ----------
Total net assets 71,030 95,454 128,431
---------- ---------- ----------
Total liabilities and net assets $ 348,226 $ 373,768 $ 406,650
========== ========== ==========
See independent auditors' report and accompanying notes
to consolidated financial statements.
4
BAPTIST HEALTH SYSTEM
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
2000
Years ended August 31, 2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
Operating revenues
Net patient service revenue $ 411,177 $ 425,301 $ 425,037
Other operating revenue 16,241 18,267 17,310
Investment income 2,332 3,504 3,045
Net assets released from restrictions for operations 1,330 1,069 845
---------- ---------- ----------
Total operating revenue 431,080 448,141 446,237
---------- ---------- ----------
Operating expenses
Salaries and wages 176,769 173,806 178,146
Employee benefits 29,926 30,256 36,345
Supplies 95,657 103,683 107,263
Other 83,283 89,256 78,974
Provision for bad debts 31,889 42,152 34,212
Depreciation and amortization 26,419 27,937 26,753
Interest 11,850 13,741 11,691
---------- ---------- ----------
Total operating expenses 455,793 480,831 473,384
---------- ---------- ----------
Loss from operations (24,713) (32,690) (27,147)
---------- ---------- ----------
Nonoperating gains (losses)
Contributions 251 343 96
Other -- (1,356) (1,242)
---------- ---------- ----------
Total nonoperating gains (losses) 251 (1,013) (1,146)
---------- ---------- ----------
EXPENSES AND LOSSES IN EXCESS OF REVENUES AND GAINS (24,462) (33,703) (28,293)
========== ========== ==========
5
BAPTIST HEALTH SYSTEM
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
(CONTINUED)
2000
Years ended August 31, 2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
OTHER CHANGES IN UNRESTRICTED NET ASSETS
Dividends paid -- -- (361)
Unrealized gain (loss) on investments other than trading
securities (118) 1,160 683
Contributions -- -- 341
Net assets released from restrictions for capital
expenditures 187 414 118
Other -- -- (165)
---------- ---------- ----------
DECREASE IN UNRESTRICTED NET ASSETS (24,393) (32,129) (27,677)
---------- ---------- ----------
CHANGES IN TEMPORARILY RESTRICTED NET ASSETS
Contributions 1,363 1,125 1,628
Investment income 169 73 206
Unrealized gains on investments 31 40 --
Net assets released from restrictions for operations (1,330) (1,069) (845)
Net assets released from restrictions for capital
expenditures (187) (414) (118)
Other (97) (521) 84
---------- ---------- ----------
INCREASE (DECREASE) IN TEMPORARILY RESTRICTED NET ASSETS (51) (766) 955
---------- ---------- ----------
INCREASE (DECREASE) IN PERMANENTLY RESTRICTED NET ASSETS 20 (82) (47)
---------- ---------- ----------
DECREASE IN NET ASSETS (24,424) (32,977) (26,769)
NET ASSETS, beginning of year (as previously reported
August 31, 1999) 95,454 128,431 174,041
Restatement for prior period adjustments to net assets -- -- (18,841)
---------- ---------- ----------
NET ASSETS, beginning of year (as restated in 1999) 95,454 128,431 155,200
---------- ---------- ----------
NET ASSETS, end of year $ 71,030 $ 95,454 $ 128,431
========== ========== ==========
See independent auditors' report and accompanying notes
to consolidated financial statements.
6
BAPTIST HEALTH SYSTEM
CONSOLIDATED STATEMENTS OF CASH FLOWS
2000
Years ended August 31, 2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Decrease in net assets $ (24,424) $ (32,977) $ (26,769)
Adjustment to reconcile decrease in net assets to net cash
provided by (used in) operating activities:
Restricted contributions received (1,363) (1,125) (1,628)
Provision for bad debts 31,889 42,152 34,212
Depreciation and amortization 26,419 27,937 26,753
Net unrealized (gains) losses on investments 87 (1,200) (683)
(Increases) decreases in:
Patient accounts receivable (9,645) (34,932) (40,823)
Due from third-party programs (931) (1,480) (5,838)
Other accounts receivable 1,896 (666) 1,403
Inventory and other current assets (2,831) 1,015 2,464
Increases (decreases) in:
Trade accounts payable 1,767 2,262 (19,372)
Accrued liabilities (5,125) (5,450) 11,353
Other long-term liabilities 3,047 9,632 7,633
---------- ---------- ----------
Net cash provided by (used in) operating activities 20,786 5,168 (11,295)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment (9,480) (6,142) (28,341)
Increases (decreases) in short-term investments (1,387) 1,655 26,629
Increases (decreases) in assets limited as to use (1,147) 499 16,536
Decrease in other assets 623 955 857
---------- ---------- ----------
Net cash provided by (used in) investing activities (11,391) (3,033) 15,681
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (1,161) (2,616) (1,864)
(Payment) borrowing of short-term notes payable -- (4,000) 4,000
Restricted contributions received 1,363 1,125 1,628
---------- ---------- ----------
Net cash provided by (used in) financing activities 202 (5,491) 3,764
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 9,597 (3,356) 8,150
CASH AND CASH EQUIVALENTS, beginning of year 10,797 14,153 6,003
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 20,394 $ 10,797 $ 14,153
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 11,850 $ 12,357 $ 11,691
========== ========== ==========
See independent auditors' report and accompanying notes
to consolidated financial statements.
7
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION Baptist Health System is a Texas non-profit
corporation exempt from federal income taxation under
Section 501(c)(3) of the Internal Revenue Code. The
accompanying consolidated financial statements
include the accounts of Baptist Health System
("Baptist"), Baptist Health System Foundation (the
"Foundation"), St. Luke's Phase I Cancer Research
Trust (the "Research Trust"), BMHS Healthcare
Corporation and BHS Medical Services Corporation
(collectively, the "System"). Baptist owns and
operates five hospitals in San Antonio, Texas,
together with other healthcare related businesses.
Until being sold, the accounts of Northeast Baptist
Ambulatory Surgery Center, LLC were consolidated as
part of the System. Baptist sold a portion of its
ownership interest in July of 2001, and now has 34%
ownership of the entity. Baptist also has investments
in other healthcare related organizations with up to
50% ownership or board representation. These
investments are accounted for using the cost and
equity methods.
The Foundation, a Texas non-profit corporation, and
Research Trust are publicly supported organizations
established to serve as advocates, to increase
community awareness and to develop resources in
support of the System in its guiding principles of
teaching, healing and providing spiritually mindful
health services to relieve human illness and
suffering. Grants from the Foundation and the
Research Trust are made only to Baptist.
2. OPERATING
ENVIRONMENT Beginning in fiscal year 2000 and continuing through
2001 and 2002, reported expenses and losses in excess
of revenues and gains were of an amount that caused
Baptist to be out of compliance with the debt service
coverage covenant of the master indenture of trust
and security agreement (the "MTI") relating to the
Series 1997A Revenue Refunding Bonds and Series 1997B
Revenue Bonds (see Note 6). As a result of
noncompliance and as required by the MTI, the System
engaged the services of a management oversight
8
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
company. The System incurred $2,720,000 in 2002,
$11,958,000 in 2001 and $0 in 2000 of consulting
expenses for the services of the management oversight
company and their recommended advisors.
The bond insurer (as the defined note holder) granted
Baptist waivers with respect to noncompliance of
financial covenants for fiscal 2002, 2001, and 2000.
A mortgage on the hospital facilities and new
liquidity related financial covenants were added to
the MTI in 2002. Baptist does not expect to meet
certain financial covenants during 2003 and 2004
unless the System can extend the maturity date and
repayment provisions of the real estate lease
obligation due in July 2004 or sell the property and
repay the lease.
During 2002, 2001 and 2000, the System explored
several operational and ownership alternatives.
Expenses incurred for consulting services related to
investigation and pursuit of the alternatives was
approximately $1,110,000, $0 and $0, respectively. On
October 8, 2002 the System entered into a definitive
purchase and sale agreement with Vanguard Health
Systems, Inc. ("Vanguard") for the sale of
substantially all its assets and healthcare
operations (see below).
On November 11, 2002 the Baptist General Convention
of Texas ("BGCT"), the sponsoring organization of the
System, ratified the terms of the definitive purchase
and sale agreement with Vanguard for the sale of
substantially all of the assets and healthcare
operations to VHS San Antonio Partners, L.P. ("VHS")
a subsidiary of Vanguard. Finalization of the
agreement is subject to and completion of certain
closing activities including federal and state
regulatory approval.
Management anticipates completion of the closing
activities in January 2003. Upon closing, the System
will receive approximately $295,000,000 from
Vanguard. Of the sales price, approximately
$247,000,000 will be in the form of cash,
approximately $30,000,000 will be in the form of
shares of Vanguard Payable in Kind Cumulative
Redeemable Convertible Preferred Stock,
9
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $17,642,000 will be in a Convertible
Subordinated Note at 8.18% interest due 2012 and
approximately $358,000 will be in common stock in the
VHS general partner. The System will transfer to VHS
all healthcare operations together with substantially
all property, plant and equipment, net working
capital and other long-term investments.
The System will maintain its cash, short-term
investments, third-party receivables, assets limited
to use, unamortized deferred costs, all debt
obligations and other long-term liabilities.
After closing, proceeds from the sale will be used to
repay outstanding debt and defease the MTI. No
assurance can be given that the sale will be
completed, or that if completed, the terms and
conditions will not be modified.
3. SIGNIFICANT
ACCOUNTING
POLICIES Basis of Consolidation - The consolidated financial
statements include the accounts of Baptist and its
majority-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in
consolidation.
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 and disclosure of contingent assets and
liabilities at the date of the financial statements
and reported amounts of revenue and expenses during
the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents
include certain investments in highly liquid
investments with original maturities of three months
or less such as demand deposits with financial
institutions. Cash balances were maintained in
financial institutions in excess of FDIC insured
limits. The System believes that these institutions
are financially sound.
10
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory - Inventory is valued at the lower of cost
or market.
Investments - Short-term investments consist of money
market mutual funds, corporate bond funds, United
States government securities and equity mutual funds
that are recorded at fair value.
Noncurrent investments in publicly-traded equity
securities and all investments in debt securities are
reported at fair value. Realized gains and losses on
investment sales are included in operating revenue in
the accompanying consolidated statements of
operations and changes in net assets unless the
income is restricted by a donor or by law. Unrealized
gains and losses are included in changes in
unrestricted net assets in the accompanying
consolidated statements of operations and changes in
net assets, unless the income is restricted by a
donor or by law.
Investments included in other assets include
investments in entities which are accounted for using
the cost or equity methods.
Assets Limited as to Use - Assets limited as to use
consist of cash equivalents and marketable securities
that are designated by the Board of Trustees for
specific uses, required pursuant to loan agreements
or subject to donor-imposed restrictions. The Board
may, at its discretion, use the Board-designated
assets for any purpose. The use of assets required by
loan agreements is limited to payment of debt service
on bonds and notes. All assets required by loan
agreements are held by trustees. Donor restricted
assets are to be used to acquire equipment or fund
certain educational and clinical costs incurred by
Baptist. Donor restricted assets include investments
whose principal is to be held in perpetuity.
Property, Plant and Equipment - Property, plant and
equipment acquisitions are reported at cost on the
date of purchase or fair value on the date of
contribution. Expenditures that extend useful lives
or equipment capabilities are capitalized, while
routine maintenance and repair expenditures are
charged to expense. Interest costs incurred during
the construction period are capitalized as a
component of the cost of acquiring those assets.
Depreciation
11
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense is provided using the straight-line method
over the estimated useful lives of the property and
equipment. Property, plant and equipment and related
accumulated depreciation as of August 31, 2002, 2001
and 2000 are as follows:
Estimated 2000
Useful Lives 2002 2001 (Restated)
------------ --------- --------- ----------
(in thousands)
Land -- $ 14,819 $ 14,819 $ 14,819
Land improvements 10-20 years 7,792 7,792 7,771
Buildings and fixed equipment 5-40 years 222,996 219,667 215,903
Movable equipment 3-18 years 192,053 186,993 185,371
Construction-in-progress -- 1,732 641 562
----------- --------- --------- ----------
439,392 429,912 424,426
Less - Accumulated depreciation and
amortization (248,764) (222,699) (195,685)
----------- --------- --------- ----------
Property, plant and equipment, net $ 190,628 $ 207,213 $ 228,741
========= ========= ==========
Assets under capital lease obligations are amortized
over the shorter period of the lease term or the
useful life of the asset. The cost and the related
accumulated amortization of capital leases totaled
approximately $34,065,000 and $10,833,000,
respectively, as of August 31, 2002, $34,065,000 and
$9,123,584, respectively, as of August 31, 2001 and
$33,881,000 and $6,701,000, respectively, as of
August 31, 2000.
The System evaluates whether events and circumstances
have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision
or that the remaining balance of an asset may not be
recoverable. The assessment of possible impairment is
based on whether the carrying amount of the asset
exceeds its fair value. For the years ended August
31, 2002, 2001 and 2000, no impairment of long-lived
assets was identified.
Other Assets - Include advances and loans with
extended maturity dates, as well as unamortized
deferred costs, primarily unamortized bond issuance
costs which are being amortized over the life of the
bonds using the effective interest method.
12
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contributions and Gifts - When received or pledged,
unrestricted contributions are reported as
nonoperating gains and donor-restricted contributions
are reflected as increases to temporarily restricted
net assets or permanently restricted net assets. In
the absence of donor specification that investment
income and gains on donated funds are restricted,
such income and realized gains are reported as
operating revenue with unrealized gains reported as
other changes in unrestricted net assets,
respectively. Contributions of long-lived assets are
reported as other changes in unrestricted net assets
and are excluded from excess of expenses over
revenues, unless explicit stipulations specify how
the donated assets must be used. Gifts of long-lived
assets with explicit restrictions are reported as
temporarily or permanently restricted.
Temporarily and Permanently Restricted Net Assets -
Temporarily restricted net assets consist of
unexpended contributions that are restricted as to
use by donors to a specific time period or purpose. A
transfer from temporarily restricted net assets to
unrestricted net assets occurs when expenditures are
made in accordance with donor restrictions.
Temporarily restricted net assets at August 31, 2002,
2001 and 2000, are available for the following
purposes:
2000
2002 2001 (Restated)
------- ------- ----------
(in thousands)
Patient care $ 2,811 $ 2,612 $ 2,562
Health education 576 862 1,148
Capital improvements 136 100 192
Future operation -- -- 522
------- ------- -------
Total $ 3,523 $ 3,574 $ 4,424
======= ======= =======
Permanently restricted net assets consists of
contributions that must be maintained in perpetuity
and only the income from the original principal can
be expended for purposes designated by the donor.
Income from these investments is available for health
education. Income on permanently restricted assets is
reported in the
13
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accompanying consolidated statements of operations
and changes in net assets as temporarily restricted
investment income.
Insurance - The System self-insures a portion of its
medical malpractice liability. Loss protection for
individual claims in excess of $4,000,000 in 2002,
$3,000,000 in 2001 and $3,000,000 in 2000 and
aggregate claims in excess of $10,000,000,
$10,000,000 and $6,000,000 in 2002, 2001 and 2000,
respectively, is provided by a commercial insurer.
The System self-insures a portion of its workers'
compensation liability. Loss protection for aggregate
claims in excess of $5,300,000, $5,300,000 and
$2,000,000 in 2002, 2001 and 2000, respectively, is
provided by a commercial insurer.
The System utilizes an independent actuarial firm to
estimate the ultimate cost, if any, that may arise
from the settlement of claims. The actuaries
determine estimates based on known claims and
incidents as well as expected claims from unreported
incidents. The estimated medical malpractice claims
expense is included in other operating expenses and
the estimated liability of $26,257,000, $23,210,000
and $13,463,000 as of August 31, 2002, 2001 and 2000,
respectively, is included in other non-current
liabilities. The estimated workers' compensation
claims expense is included in employee benefit
expense and the estimated liability is included in
current liabilities.
Derivatives - The System utilizes an interest rate
swap agreement to reduce interest rate fluctuation
risk. The fair value of this derivative instrument is
determined based on estimated settlement costs using
current interest rates. Changes in the fair market
value and quarterly interest settlements are charged
to or credited to interest expense. The System does
not hold or issue derivative financial instruments
for speculative or trading purposes (see Note 6).
4. RESTATEMENT OF
NET ASSETS Subsequent to preparing the 1999 financial
statements, management determined that certain
previously reported items needed to be revised. The
following table represents the items revised and
their impact on net assets:
14
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999
--------
Adjustments to accumulated depreciation of
property, plant and equipment $ 8,030
Adjustments to accruals for third-party program
liabilities 4,741
Adjustments to bad debt allowances (1,190)
Adjustments to charity care allowances 11,863
Adjustment against contractual allowances against
patient receivables (39,698)
Adjustment to miscellaneous accounts receivable (1,165)
Adjustment for understatement of workers'
compensation accrual (1,491)
Other 69
--------
Total $(18,841)
========
As a result of the above, the System has recorded an
adjustment of approximately $18,841,000 to decrease
its previously reported net assets at August 31,
1999.
15
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS Marketable debt and equity securities included in
short-term investments and assets limited as to use,
are stated at estimated fair value based on quoted
market prices. Investment securities as of August 31,
2002, 2001 and 2000 are as follows:
2000
2002 2001 (Restated)
-------- -------- ----------
(in thousands)
Short-term investments -
Money market mutual funds $ 2,486 $ 1,645 $ --
Corporate bonds and bond funds 20,486 20,414 22,347
Equity securities 970 613 705
U.S. government securities -- 190 381
Interest receivable 421 232 156
-------- -------- --------
Total $ 24,363 $ 23,094 $ 23,589
======== ======== ========
Assets limited as to use -
Money market mutual funds $ 16,716 $ 15,612 $ 4,569
Certificates of deposit 3,809 3,267 434
U.S. government securities 1,457 976 3,186
Equity securities 1,165 875 860
Commercial paper -- -- 10,029
Corporate bonds and bond funds 4,445 5,736 6,439
Other 62 10 1,418
-------- -------- --------
Total $ 27,654 $ 26,476 $ 26,935
======== ======== ========
Investment income and unrealized gains (losses)
related to assets limited as to use, cash
equivalents, and short-term investments for the years
ended August 31, 2002, 2001 and 2000, are as follows:
2000
2002 2001 (Restated)
-------- -------- ----------
(in thousands)
Investment income -
Interest income, including realized
gains $ 2,501 $ 3,577 $ 3,251
Unrealized gains (losses) (87) 1,200 683
-------- -------- --------
Total $ 2,414 $ 4,777 $ 3,934
======== ======== ========
16
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT Long-term debt and capital lease obligations as of
August 31, 2002, 2001 and 2000, consist of the
following:
2000
2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
SERIES 1997A REVENUE
REFUNDING BONDS -
Serial bonds, interest at 6%,
payable semi-annually,
principal due annually from
2010 through 2015 $ 30,485 $ 30,485 $ 30,485
Term bonds, interest ranging
from 5.25% to 5.375%,
payable semi-annually,
principal due annually from
2016 through 2027 103,685 103,685 103,685
Capital appreciation bonds at
accreted value with a yield to
maturity of 5.4%, due in the
amount of $1,025,000 in 2010 715 671 624
SERIES 1997B REVENUE BONDS -
Term bonds, interest at 5.25%,
payable semi-annually,
principal due annually from
2028 through 2031 40,000 40,000 40,000
MORTGAGE NOTE PAYABLE -
Annually adjusted variable
interest rate currently at
5.75%, with principal and
interest due monthly through
January 2012 520 559 591
NOTES PAYABLE -
Interest at variable rates (6.63%
at August 31, 2000) based on
30 day LIBOR, payable
quarterly with principal due
July 31, 2001 -- -- 1,880
17
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000
2002 2001 (Restated)
---------- ---------- ----------
(in thousands)
REAL ESTATE LEASE OBLIGATION -
Interest at variable rates
(approximately 2.8% at
August 31, 2002) based on
90-day LIBOR payable
monthly, principal due
quarterly from 2002 through
2004 28,091 28,184 28,000
EQUIPMENT LEASE OBLIGATIONS -
Interest ranging from 6.06% to
7.53% with principal and
interest due monthly through
2003 568 1,494 2,383
---------- ---------- ----------
204,064 205,078 207,648
Less -
Unamortized original issue bond
discount (3,369) (3,576) (3,797)
Current maturities (996) (1,042) (2,800)
---------- ---------- ----------
Total long term debt $ 199,699 $ 200,460 $ 201,051
---------- ---------- ----------
18
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled principal maturities of long-term debt and
capital lease obligations are as follows:
Capital
Long-Term Lease
Year Ending August 31, Debt Obligations
----------- -----------
(in thousands)
2003 $ 38 $ 958
2004 45 27,701
2005 48 --
2006 51 --
2007 54 --
Thereafter 175,479 --
---------- --------
175,715 28,659
Less - Accreted interest on
bonds (310) --
---------- --------
$ 175,405 $ 28,659
========== ========
In July 1997, Baptist entered into financing
agreements to provide funds to advance refund the
System's Series 1994 and Series 1990 bonds, establish
a debt service reserve fund and pay costs of
issuance. Proceeds of the Series 1997A bonds used to
advance refund the Series 1994 and Series 1990 bonds
were deposited with an escrow agent and invested in
U.S. Treasury obligations. As a result of the advance
refunding transactions, the liens and rights pursuant
to the Series 1994 and Series 1990 financing
agreements were terminated.
In September 1997, the Series 1997B bonds were issued
to provide funds to construct, renovate and equip the
hospital facilities of the System.
19
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since July 1997, Baptist has been the only member of
the Obligated Group. The Series 1997A and 1997B bonds
are secured by a pledge of the Obligated Group's
revenue (as defined by the financing agreements),
mortgages on hospital facilities and the assets
limited as to use required by loan agreements. The
financing agreements establish certain operational
and financial covenants that limit the Obligated
Group's ability to, among other activities, borrow
funds, dispose of assets or merge. For the years
ended August 31, 2002, 2001 and 2000, the Obligated
Group was not in compliance with the MTI's specified
level of calculated debt service coverage. The System
has obtained a waiver from the holder of the bonds
for all instances of noncompliance for 2002, 2001,
and 2000. The next measurement date for the covenant
compliance is February 28, 2003. Although management
expects that the condition of noncompliance will
still exist, based on management's assessment of the
current status and proposed timing of the pending
sale of the System (see Note 2), management believes
it is not probable that the bonds will be outstanding
February 28, 2003. As such, the bonds have been
classified as non-current at August 31, 2002, in
accordance with the provisions of EITF 86-30,
"Classification of Obligations When a Violation is
Waived by the Creditor". No assurance can be given
that the pending sale will occur or that the bonds
will be repaid by February 28, 2003.
In fiscal 1997, the System entered into a real estate
lease obligation for an existing medical building,
land and estimated costs related to construction and
finish out of a medical office building and a parking
garage. In fiscal 1998 and 1999, additional land was
added to the lease. The real estate lease obligation
is secured by land and buildings acquired at
execution of the lease.
The mortgage note is secured by a medical office
building adjacent to one of the hospital facilities.
Each equipment lease obligation is secured by the
equipment acquired at execution of the specific
lease.
During April 1998, the System entered into an
interest rate swap agreement on a notional amount of
$26,500,000 in connection with
20
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
borrowings related to the real estate lease
obligation. This interest rate swap involved the swap
of a U.S. dollar based LIBOR to a European index,
market average LIBOR, with an 8 percent fixed
interest rate cap. This interest rate swap agreement
matures during May 2004. The fair value of this
agreement at August 31, 2002 and 2001 was a liability
of approximately $1,384,000, which is included in
other current liabilities in the accompanying
consolidated balance sheets. The fair value of this
agreement at August 31, 2000 was immaterial to the
financial statements.
7. NET PATIENT SERVICE
REVENUE Discounts from established rates are given to
Medicare and Medicaid program beneficiaries and to
patients with health insurance coverage through
certain managed care organizations. Net patient
service revenue consists of gross patient charges,
less discounts and adjustments of approximately
$583,933,000 in 2002 and $588,305,000 in 2001 and
$533,873,000 in 2000, that are a result of the
contractual agreements with the third party payors.
Payment for services provided to inpatient and
outpatient Medicare beneficiaries and inpatient
Medicaid beneficiaries is based on a combination of
prospectively determined payment rates per discharge
and reimbursement for certain pass-through costs, as
defined. The rates per discharge vary according to a
patient classification system that is based on
clinical, diagnostic and other factors. Payment for
services provided to outpatient Medicaid
beneficiaries is based on operating costs, as
defined. The System qualifies as a disproportionate
share provider and as such, receives additional
payments from the Texas Medicaid program based on the
number of Medicaid inpatients served and the funds
appropriated by the Texas legislature for all
disproportionate share qualified providers.
Settlements for retrospectively determined payment
amounts are estimated in the period the related
services are rendered and are adjusted in future
periods, as final settlements are determined, after
submission of annual cost reports by the System and
the audit by fiscal intermediaries. Payments for
services provided to managed care patients are based
on negotiated amounts for specified services. The
basis for payment to the System under these
agreements includes prospectively determined rates
per discharge, discounts from established rates and
prospectively determined daily rates.
21
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CHARITY CARE AND
OTHER COMMUNITY
BENEFITS The System provides care to patients who lack
financial resources and are deemed to be medically or
financially indigent. Because the System does not
pursue collection of amounts determined to qualify as
charity care, these amounts are not reported in net
patient service revenue. The charges related to this
care totaled approximately $13,660,000 in 2002,
$15,563,000 in 2001 and $18,505,000 in -- 2000. In
addition, the System provides services to other
indigent patients under the Medicaid program. Such
programs pay the System amounts which are less than
the cost of providing services to program
beneficiaries.
The System commits time and resources to community
health education and outreach endeavors and critical
services to meet otherwise unfulfilled community
needs. Many of these activities are entered into with
the understanding that they will not be
self-supporting or financially viable.
9. CONCENTRATIONS OF
CREDIT RISK Patient accounts receivable are stated at net
realizable value and collateral is generally not
required. Significant concentrations of gross patient
accounts receivable at August 31, 2002, 2001 and
2000, are as follows:
2000
2002 2001 (Restated)
----- ----- ----------
Government-related programs 36% 33% 33%
Managed care, commercial insurers and other payors 59 62 62
Self-pay patients 5 5 5
----- ----- -----
100% 100% 100%
===== ===== =====
Receivables from government-related programs,
Medicare and Medicaid, represent the only
concentrated group of credit risk for the System.
Management does not believe that there are any credit
risks associated with these government programs.
Commercial and managed care receivables consist of
receivables from various payors involved in diverse
activities and subject to differing economic
22
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
conditions, and do not represent any concentrated
credit risks to the System. Furthermore, management
continually monitors and adjusts its allowances
associated with its receivables.
10. FUNCTIONAL
EXPENSES The System provides general health care services to
residents within its geographic area. Expenses
related to providing these services for the years
ended August 31, 2002, 2001 and 2000 were as follows:
2000
2002 2001 (Restated)
--------- --------- ----------
(in thousands)
Healthcare services $ 357,347 $ 382,863 $ 362,438
General and administrative 83,596 74,409 79,123
Other 14,850 23,559 31,823
--------- --------- ---------
Total $ 455,793 $ 480,831 $ 473,384
========= ========= =========
Other includes expenses related to professional
office building management and fundraising.
11. LEASES The System leases certain equipment and office space
under operating and capital leases that are
noncancelable. At August 31, 2002, the minimum
rentals due under these operating and capital lease
agreements were approximately as follows:
23
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Capital
Years ended August 31, Leases Leases
--------- ----------
(in thousands)
2003 $ 7,020 $ 1,972
2004 5,191 28,703
2005 3,171 --
2006 1,800 --
2007 890 --
Thereafter 1,030 --
--------- ----------
$ 19,102 30,675
=========
Less: amount representing interest (2,016)
----------
Present value of minimum lease payment $ 28,659
==========
Total rental expense for various equipment and office
space under operating leases was approximately
$9,700,000 in 2002, $9,800,000 in 2001 and
$10,100,000 in 2000.
The terms of the lease agreements for three medical
office buildings and a parking garage require the
System to pay rent or rent subsidies in an amount
sufficient for the facilities' owners to meet debt
service (as defined) associated with the facilities.
The total rent subsidy payment requirements are
dependent upon rent receipts from tenants other than
the System. The rent subsidy payments are refundable
if the facilities' cash flow is sufficient to meet
debt service obligations. Rent and rent subsidies are
included in other operating expense in the
accompanying consolidated statements of operations
and changes in net assets. During 2002, 2001 and 2000
the System expensed approximately $830,000, $618,000
and $615,000, respectively, for rent subsidies. Rent
subsidies are not included in the minimum rentals due
as shown above. However, under these agreements
future losses may be incurred, which losses presently
are not reasonably estimable. The facilities are
owned by limited partnerships in which the System has
varying levels of partnership interests. In each
lease
24
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement, the System has a first right of refusal
option in the event of a sale of the property.
12. RETIREMENT PLAN The System provides an individual tax-sheltered
annuity plan for substantially all employees who have
completed two years of continuous service. The System
contributes five percent of the eligible and enrolled
employee's salary in conjunction with employee
contributions of two percent of salary. The System's
contributions to the plan of approximately $4,191,000
in 2002, $4,104,000 in 2001 and $4,457,000 in 2000
are included in employee benefits in the accompanying
consolidated statements of operations and changes in
net assets.
13. FAIR VALUE OF
FINANCIAL
INSTRUMENTS Fair values of cash and cash equivalents, short-term
investments, and financial instruments included in
assets limited to use are estimated based on quoted
market prices. Fair values of bonds payable are based
on estimated market trade values. Fair values of
long-term debt (other than bonds) are based on
discounted cash flow at an estimated market rate for
similar borrowing arrangements. Estimated fair values
and carrying amounts of financial instruments at
August 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------------------- --------------------- ----------------------
FAIR CARRYING Fair Carrying Fair Carrying
VALUE AMOUNT Value Amount Value Amount
-------- -------- -------- -------- -------- ---------
Cash and cash equivalents $ 20,394 $ 20,394 $ 10,797 $ 10,797 $ 14,153 $ 14,153
Short-term investments 24,363 24,363 23,094 23,094 23,589 23,589
Assets limited as to use 27,654 27,654 26,476 26,476 26,935 26,935
Short-term debt -- -- -- -- 4,000 4,000
Long-term debt 208,299 200,695 209,713 201,502 197,799 203,851
14. RELATED PARTY
TRANSACTIONS In fiscal 2002, the System purchased air medical
transport services, managed care services, laundry
services and office space from entities in which the
System has ownership interests for
25
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $4,005,000, $0, $2,081,000 and
$1,227,000 respectively. Similar purchases in fiscal
2001 for air medical transport, managed care, laundry
services and office space from entities in which the
System has ownership interests totaled approximately
$3,173,000, $4,893,000, $2,462,000 and $1,220,000,
respectively. In fiscal 2000, similar purchases for
air medical transport, managed care, laundry services
and office space from entities in which the System
has ownership interests totaled approximately
$2,579,000, $4,361,000, $2,327,000 and $1,416,000,
respectively.
15. COMMITMENTS AND
CONTINGENCIES The System maintains a self-insurance program to
cover malpractice and workers' compensation claims.
Claims that fall within the System's adopted policy
of self-insurance have been asserted against the
System. Certain of the claims could result in losses
and additional claims may be asserted arising from
services provided to patients. In the opinion of
management, adequate provisions have been established
for estimated losses and the ultimate disposition of
asserted and unasserted claims will not have a
material adverse effect on the operations or
financial position of the System.
In connection with its self-insured workers
compensation plan, the System established standby
letters of credit totaling $5,600,000, $4,816,000 and
$4,425,000 at August 31, 2002, 2001 and 2000,
respectively. The System has pledged certificates of
deposit as collateral against the letters of credit
totaling $3,225,000, $2,500,000 and $2,200,000 at
August 31, 2002, 2001 and 2000, respectively. As of
August 31, 2002, 2001 and 2000, no amounts had been
drawn on the standby letters of credit.
The healthcare industry is subject to numerous laws
and regulations of federal, state and local
governments. These laws and regulations include, but
are not necessarily limited to, matters such as
licensure, accreditation, government healthcare
program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and
abuse. Government activity has continued with
26
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and
regulations by healthcare providers. Violations of
these laws and regulations could result in expulsion
from government healthcare programs together with the
imposition of significant fines and penalties, as
well as significant repayments for patient services
previously billed. Management believes that the
System is in compliance with fraud and abuse as well
as other applicable government laws and regulations.
While certain regulatory inquiries have been made and
are currently being evaluated and discussed,
management believes these inquiries will not have a
material effect on the financial position or results
of operations of the System. Compliance with such
laws and regulations can be subject to future
government review and interpretation as well as
regulatory actions unknown or unasserted at this
time.
The System is involved in litigation and regulatory
investigations arising in the normal course of
business. Management estimates that these matters
will be resolved without material adverse effect to
the System's future financial position or results of
operations.
16. NEW ACCOUNTING
PRONOUNCEMENTS In July 2001, SFAS No. 143, "Accounting for Asset
Retirement Obligations", was issued and established
the accounting and reporting standards associated
with the retirement of tangible long-lived assets.
SFAS No. 143 is effective for the Company for fiscal
years beginning after June 15, 2002.
In August 2001, SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", was
issued and established the accounting and reporting
requirements associated with long-lived asset
impairment and disposal. SFAS No. 144 is effective
for the System for fiscal 2003. The System has
adopted this standard with no impact on the financial
statements.
In April 2002, SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, "Amendment of FASB
Statement No. 13, and Technical Corrections", was
issued and established the accounting
27
BAPTIST HEALTH SYSTEM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and reporting standards associated with the reporting
of gains and losses from extinguishment of debt and
to provide consistent accounting treatment for
certain lease modifications that have similar
economic effects as a sale-leaseback transaction. The
System has adopted this standard with no impact on
its financial statements.
In June 2002, SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", was
issued and established the accounting and reporting
standards associated with the proper recognition of
certain costs related to exit or disposal activities.
SFAS No. 146 applies to exit or disposal activities
initiated after December 31, 2002. Currently, the
System is not involved in any activities addressed by
SFAS No. 146.
28