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MUNROE REGIONAL HEALTH SYSTEM, INC. d/b/a MUNROE REGIONAL MEDICAL CENTER

Financial Statements and Required Supplementary Information

September 30, 2011

(With Independent Auditors’ Report Thereon)


Table of Contents

Pages

Independent Auditors’ Report 1 – 2

Management’s Discussion and Analysis (Unaudited) 3 - 7

Balance Sheet 8 – 9

Statement of Revenues, Expenses, and Changes in Net Assets 10

Statement of Cash Flows 11 - 12

Notes to Financial Statements 13 – 34

Required Supplementary Information

Schedule of Employer Contributions (Unaudited) 35

Schedule of Funding Progress (Unaudited) 35

Independent Auditors’ Report

The Board of Directors Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center:

We have audited the accompanying balance sheet of Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center (the Health System) as of September 30, 2011, the related statements of revenues, expenses, and changes in net assets, and cash flows for the year then ended. These financial statements are the responsibility of the Health System’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Health System’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Munroe Regional Health System, Inc. d/b/a Munroe Regional Medical Center as of September 30, 2011, and the changes in its financial position and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in note 2 to the accompanying financial statements, net assets as of September 30, 2010 have been restated to the present financial statements of the Health System as a governmental entity in accordance with accounting principles established by the Governmental Accounting Standards Board.

In accordance with Government Auditing Standards, we have also issued our report dated March 6, 2012 on our consideration of the Health System’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards, and should be considered in assessing the results of our audit.

KPMG LLP Suite 1700 100 North Tampa Street Tampa, FL 33602

KPMG LLP, is Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

2

The management’s discussion and analysis on pages 3 to 7 and the required schedule of employer contributions and schedule of funding progress on page 35 are not a required part of the basic financial statements but are supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

March 6, 2012 Certified Public Accountants

MUNROE REGIONAL HEALTH SYSTEM, INC., d/b/a MUNROE REGIONAL MEDICAL CENTER

Management’s Discussion and Analysis

September 30, 2011

(Unaudited)

3 (Continued)

This section of the Munroe Regional Health System, Inc. (Munroe, the Health System or The Medical Center) annual financial report presents Munroe’s analysis of its financial performance as of September 30, 2011, and for the fiscal year then ended. Please read this analysis in conjunction with the basic financial statements, which follow this section.

Introduction

In 1984, the Marion County Hospital District, a special tax district, transferred the operations of Munroe Regional Medical Center to Munroe in the form of a lease. Munroe has been and remains a tax exempt, not-for-profit corporation under Internal Revenue Code 501(c) (3) and has previously utilized Financial Accounting Standards Board (FASB) financial reporting since inception.

Over the past several years, because of the relationship with the District, the Medical Center has pursued and been granted public hospital benefits such as Sovereign Immunity and Medicaid enhanced reimbursements. In 2010, the Medical Center type of control and classification by the Florida Agency for Healthcare Administration changed to “Government” – “Special Public”.

Because of this, and upon reassessment of the Medical Center’s Articles of Incorporation, Bylaws, Lease with Marion County Hospital District, interpretation of what constitutes a Governmental Health Care Entity in the Healthcare Audit Guide, and in consultation with our auditor, Munroe has determined that the Medical Center meets the definition of a governmental entity for accounting and reporting purposes. Thus, for fiscal year 2011, the Medical Center has adopted Governmental Accounting Standards Board (GASB) financial reporting. As such, Munroe is presenting audited financial results as of September 30, 2011 and the fiscal year then ended in single-year format. Comparative analysis will be presented in future years’ financial statements.

This section of Munroe’s financial statements presents analysis of the financial condition and the results of operations as of and for the fiscal year ended September 30, 2011. Along with the information in this section, the notes to the financial statements should be used to provide additional information that is essential for a full understanding of the basic financial statements.

Overview of the Financial Statements

Along with management’s discussion and analysis, the annual financial report includes the independent certified public accountants’ report, and the financial statements of Munroe. The financial statements also include notes that explain in more detail some of the information in the basic financial statements. By referring to the accompanying notes to the financial statements, a broader understanding of issues impacting financial performance can be realized.

Balance Sheet

The Balance Sheet presents the financial position of the Medical Center as of September 30, 2011 and includes all assets and liabilities of Munroe. Munroe’s net assets, or the difference between total assets and total liabilities, are one indicator of the current financial condition of Munroe. At September 30, 2011, Munroe’s total net assets were approximately $213 million. Changes in net assets are an indicator of whether the overall financial condition of the organization has improved or worsened over a period of time. During fiscal year 2011, net assets



September 30, 2011

(Unaudited)

4 (Continued)

increased by approximately $7 million. Assets and liabilities are generally measured using current values, with the exception of capital assets, which are stated at historical cost less allowances for depreciation.

A summary of Munroe’s Balance Sheet at September 30, 2011 and 2010 is presented below:

2011 2010(In thousands of dollars)

Current assets $ 88,839 114,713 Capital assets, net 143,867 133,901 Other assets 117,604 117,068 Deferred outflow of resources 4,235 3,679

Total assets and deferred outflows $ 354,545 369,361

Current liabilities $ 39,867 51,352 Long-term liabilities 101,751 111,941

Total liabilities 141,618 163,293

Net assets:Invested in capital assets, net of related debt 57,737 37,219 Restricted 3,733 3,733 Unrestricted 151,457 165,116

Total net assets 212,927 206,068 Total liabilities and net assets $ 354,545 369,361

Cash and cash equivalents and short-term investments decreased by approximately $34 million since September 30, 2010. See “Statement of Cash Flows” section below for further information regarding cash activity whereas, other current assets increased by approximately $8 million since September 30, 2010 due primarily to accounts receivable growth and amounts due from third party settlements.

Capital assets acquired in the fiscal year totaled approximately $24 million, primarily related to the project costs associated with the installation and implementation of clinical information systems, a medication safety system, a telemetry monitoring system, cardiac cath lab equipment, operating room equipment and patient beds.

Current liabilities decreased by approximately $11.5 million during fiscal year 2011 due to repayments to Medicaid, reduction in debt and reduced payroll related liabilities.

Long-term debt (noncurrent portion) and capital lease obligations (noncurrent portion) decreased approximately $9 million during fiscal year 2011 due to principal payments and debt liquidation.



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(Unaudited)

5 (Continued)

Statement of Revenues, Expenses and Changes in Net Assets

The following table presents Munroe’s condensed summary of revenues, expenses and changes in net assets for the year ended September 30, 2011 and 2010:

2011 2010

Net patient service revenue $ 291,008 297,101 Other operating revenue 3,840 4,063

Total operating revenues 294,848 301,164

Operating expenses 285,036 280,653

Operating income 9,812 20,511

Nonoperating gains (losses) net (3,378) 2,007

Excess of revenues over expenses before 6,434 22,518

Capital contributions 424 237 Increase in net assets $ 6,858 22,755

2011 Patient Activity & Statistics

In fiscal year 2011, total admissions were down about 7% from the prior year. However combined medical/surgical (Med/Surg) admissions and medical observation patients treated were down by less than 2% as Interqual admission criteria was utilized for the full fiscal year. (Adopted April 1, 2010). Surgical activity in fiscal year 2011 returned to levels experienced in 2008 and 2009 as the boost received in fiscal year 2010 from the additional operating room capacity and related increase (42%) in Orthopedic Surgeries was not replicated.

The Med/Surg average length of stay for patients admitted in 2011 increased to 4.8 days from 4.6 days in 2010 while the Case Mix Index remained constant at 1.58.

2011 2010 Net change Percentage

In-patient admissions:Medical/surgical 19,374 21,058 (1,684) (8.0)%Obstetric and pediatric 3,120 3,144 (24) (0.8)

Total 22,494 24,202 (1,708) (7.2)%

Medical observation admissions 5,254 4,010 1,244 31.0%Emergency visits 97,323 99,389 (2,066) (2.1)



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(Unaudited)

6 (Continued)

Operating Revenues

Patient service revenue, net of allowances for contractual discounts, charity care and bad debt expense, was approximately $291 million, a decrease of approximately $6 million, or 2.1% from fiscal year 2010. The primary factor for the decrease was that 2010 revenue included about $8 million in Medicaid funding related to prior periods and receipt of additional Low Income Pool dollars, and lower surgical activity in 2011. Other operating revenues of approximately $3.8 million were approximately $0.2 million lower than the prior year primarily related to the joint ventures.

Operating Expenses

Operating expenses for fiscal year 2011 were approximately $285 million, an increase of approximately $4.4 million, or 1.6% from fiscal year 2010. The primary factor influencing limited growth in expenses is related to less patient activity.

Nonoperating Losses, Net

Nonoperating losses, net for fiscal year 2011 were approximately $3.4 million. Investment income and interest expense are included in nonoperating revenues, net, in accordance with GASB Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments. Investment income was approximately $728 thousand. Interest expense was approximately $4.2 million.

Statement of Cash Flows

The statement of cash flows provides additional information in regard to Munroe’s financial results by reporting the major sources and uses of cash.

Total cash and cash equivalents and short-term investments decreased in fiscal year 2011 by approximately $34 million. Capital asset acquisitions during the fiscal year totaled approximately $24 million. Payment of principal on long-term debt and capital lease obligations was approximately $11.4 million. Munroe also funded the employee pension plan by approximately $1.1 million in excess of pension expense.



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(Unaudited)

7

Debt Outstanding

As of September 30, 2011, Munroe had approximately $86 million in debt outstanding compared to approximately $97 million the previous year. Long term debt is comprised of bond issues, capital leases and installment debt described in more detail in notes 5 and 6 to the basic financial statements. Approximately 71% of Munroe’s Bonds outstanding are fixed while 29% are variable. The Series 2007 Bonds are fixed rate bonds comprised of Serial Bonds and Term Bonds due in varying amounts through 2034. The Series 2009 Bonds are variable rate bonds due through 2030.

Capital Assets

At September 30, 2011, Munroe had approximately $144 million and $134 million in net capital assets as of September 30, 2011, and 2010, respectively. This represents an increase of approximately $10 million from the previous year. Munroe expects to make total capital expenditures of approximately $24 million in fiscal year 2012 primarily on expenditures related to the children’s emergency department expansion and observation bed project, facility upgrades, information systems and patient care equipment. These capital purchases are expected to be funded directly from operations and community donors.

2011 2010

Land $ 9,466,421 9,466,421 Construction in progress 1,417,680 698,120 Land improvements 1,691,423 1,893,905 Buildings and fixed equipment 94,758,667 95,403,387 Movable equipment 36,533,087 26,438,714

Total capital assets, net $ 143,867,278 133,900,547

Credit Ratings

Munroe has received underlying credit ratings of A3 and A– from Moody’s Investor Services and Fitch respectively. Both firms have assigned an outlook of “Stable”. The Moody’s rating was affirmed in March, 2011 and the Fitch rating was affirmed in May, 2011.

MUNROE REGIONAL HEALTH SYSTEM, INC.d/b/a MUNROE REGIONAL MEDICAL CENTER

Balance Sheet

September 30, 2011

Assets and Deferred Outflows

Current assets:Cash and cash equivalents $ 24,366,477 Short-term investments 2,790,521 Assets limited as to use- cash and investments 2,084,514 Patient accounts receivable, net of estimated uncollectibles of

approximately $32,519,000 42,525,087 Estimated third-party payor settlements 3,691,084 Inventories 7,084,057 Prepaid expenses and other current assets 6,196,089 Pledges receivable – donor restricted 101,150

Total current assets 88,838,979

Noncurrent assets:Noncurrent cash and investments:

Assets limited as to use - cash and investments:Held by trustee 1,540,331 Board designated 85,905,692

87,446,023

Less amounts required to meet current obligations (2,084,514)

85,361,509

Restricted investments 2,533,161 Long-term investments 15,178,360

Total noncurrent cash and investments 103,073,030

Capital assets, net of accumulated depreciation 143,867,278 Investment in joint ventures 5,354,507 Derivative instrument-interest rate swap 1,773,965 Net pension asset 6,753,180 Unamortized deferred financing costs 479,364 Pledges receivable – restricted 136,071 Other assets 33,382

Total noncurrent assets 261,470,777

Deferred outflow of resources-swap 4,234,747

Total assets and deferred outflows $ 354,544,503

(Continued)8


Balance Sheet

September 30, 2011

Liabilities and Net Assets

Current liabilities:Accounts payable $ 17,932,181 Construction contracts payable 294,324 Accrued liabilities:

Payroll 1,759,286 Employee benefits 2,495,255 Interest 1,584,514 State indigent assessment 4,552,691 Self-insured liabilities 3,800,000 Other liabilities 346,327 Liability for amounts held for others 83,542

Compensated absences 5,882,231 Current portion of bonds payable 500,000 Current portion of capital lease obligation and installments 637,614

Total current liabilities 39,867,965

Noncurrent liabilities:Bonds payable 84,444,809 Capital lease obligation and installments 548,114 Self-insured liabilities 11,650,000 Interest rate swap 4,234,747 Other liabilities 378,278 Liabilities for amounts held for others 494,271

Total noncurrent liabilities 101,750,219

Total liabilities 141,618,184

Net assets:

Invested in capital assets, net of related debt 57,736,741 Restricted:

For debt service 1,540,331 For donor purposes-capital, scholarships and community outreach programs 2,192,569

Unrestricted 151,456,678

Total net assets 212,926,319

Total liabilities and net assets $ 354,544,503

See accompanying notes to financial statements.

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Statement of Revenues, Expenses, and Changes in Net Assets

Year ended September 30, 2011

Operating revenues:Net patient service revenue $ 291,008,465 Income from equity investments in joint ventures 1,375,598 Other revenue 2,463,954

Total operating revenues 294,848,017

Operating expenses:Salaries and benefits 144,353,945 Supplies 60,409,470 Drugs 10,896,863 Food 3,043,738 Utilities 4,000,938 Purchased services and other 47,456,243 Depreciation and amortization 14,875,051

Total operating expenses 285,036,248

Operating income 9,811,769

Nonoperating revenues (expenses):Interest expense (4,159,637) Investment income 728,674 Noncapital contributions 52,995

Total nonoperating revenues (expenses), net (3,377,968)

Excess of revenues over expenses before capital contributions 6,433,801

Capital contributions 424,528

Increase in net assets 6,858,329

Net assets, beginning of year, as restated (note 2) 206,067,990

Net assets, end of year $ 212,926,319


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Cash flows from operating activities:Cash received from patients and third-party payors $ 279,052,647 Cash received from joint ventures 1,963,969 Cash paid to suppliers (128,085,027) Cash paid to employees (150,823,347)

Net cash provided by operating activity 2,108,242

Cash flows from noncapital activity:Contributions received 52,995

Net cash provided by noncapital activity 52,995

Cash flows from capital and related financing activities:Principal payments on capital leases long-term installment debt (105,758) Principal payments on bonds payable (11,415,000) Interest paid (4,263,581) Purchase of capital assets (23,822,715) Capital contributions received 527,171

Net cash used in capital and related financing activities (39,079,883)

Cash flows from investing activities:Net proceeds from sales or maturities of investments and assets

limited to use 510,974 Purchases of investments – restricted and unrestricted (114,961) Investment income 5,828,621

Net cash provided by investing activities 6,224,634

Decrease in cash and cash equivalents (30,694,012)

Cash and cash equivalents, beginning of year, as restated (note 2) 55,060,489

Cash and cash equivalents, end of year $ 24,366,477

Cash flows from operating activities:Operating income $ 9,811,769 Adjustments to reconcile operating income to net cash provided by

operating activities:Depreciation and amortization 14,875,051 Provision for bad debts 44,422,852 Changes in operating assets and liabilities:

Patient accounts receivable (49,547,255) Estimated third-party payor settlements (9,295,369) Inventories, prepaid expenses, and other current assets (1,526,052) Accounts payable 1,299,051 Accrued payroll, employee benefits, and compensated absences (6,469,402) State indigent assessment accrual (98,868) Other assets 320,020 Investment in joint ventures 588,371 Self insurance liabilities (2,075,000) Other liabilities (196,926)

Net cash provided by operating activities $ 2,108,242

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Supplemental schedule of noncash operating activity:Allocation of profits from joint ventures $ 1,375,598

Supplemental schedule of noncash capital and related financing activities:Purchase of equipment under capital lease 871,431 Increase in accrued construction payable 147,636

Supplemental schedule of noncash investing activities:Unrealized losses on investments (4,519,047) Unrealized loss on derivative-instrument-swap (290,450)


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Notes to Financial Statements

September 30, 2011

13 (Continued)

(1) Summary of Significant Accounting Policies

(a) Reporting Entity

The Marion County Hospital District (the District) is a special tax district, which was created by special act of the Florida Legislature in 1965 and recodified in 2007. The Special Act provides for the appointment of seven (7) Trustees by the Marion County Board of County Commission for four (4) year terms. The Hospital District Board of Trustees is authorized to establish, construct, lease, operate, and maintain any hospital or clinic as its opinion is necessary for the use of the people of the District.

Effective September 1, 1984, the District transferred the operations of Munroe Regional Medical Center (the Medical Center) to Munroe Regional Health System, Inc. (the Health System or MRHS), a not-for-profit corporation, which prior to October 1, 1994 was known as Big Sun Healthcare Systems, Inc., in the form of a lease. The Health System Board of Directors comprises seven (7) District Trustees and six (6) Non-Trustee Directors. On July 28, 2003, the District and the Health System entered into a revised lease agreement which is currently effective through September 30, 2023. The lease is renewable automatically for an additional 10-year terms, unless canceled by either party. Annual lease payments are equal to the District’s debt service obligations and normal and ordinary operating expenses incurred by the lessor. In addition, the lease also requires that $500,000 or an amount equal to the prior fiscal year operating margin, whichever is less, be set aside each year to fund special healthcare projects in the community as approved by the Board of the lessee.

Related Organization

Munroe Regional Medical Center Auxiliary, Inc. (the Auxiliary) is a not-for-profit Florida corporation providing volunteers and charitable donations to the Health System. As the Health System does not appoint a voting majority of the Auxiliary’s board and is not financially accountable for the Auxiliary, the Auxiliary is therefore not included in the accompanying financial statements.

Joint Ventures

The Health System participates in various joint ventures for which there is an equity interest. The equity interest in these joint ventures is included in investment in joint ventures in the accompanying balance sheet. The Health System’s share of joint venture income is included in operating revenues in the accompanying statement of revenues, expenses, and changes in net assets:

Ocala Healthcare Associates, LLP (OHA) d/b/a Timber Ridge Nursing and Rehabilitation Center is a 180 bed for-profit skilled nursing and rehabilitation facility. OHA is a partnership owned by a managing partner and the Health System as a general partner. The Heath System’s ownership interest is 62.5% and its investment at September 30, 2011 was $3,203,945 and its share of profits for the year ended September 30, 2011 was $799,066.

The Health System is not financially accountable for OHA, and therefore, OHA is not included in the accompanying financial statements. Separate audited financial statements may be obtained by writing to: Timber Ridge Nursing and Rehabilitation Center, 9848 SW 110th Street, Ocala, Florida 34481.



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Timber Ridge Imaging Center, a partnership between the Health System and a corporation associated with a group of 17 radiologists, owns medical equipment and provides imaging services including x-ray, fluoroscopy, ultrasound, nuclear medicine, MRI, MRA, CT, digital mammography, and bone density to patients in Ocala. The Health System owns a 50% ownership interest and its investment at September 30, 2011 was $660,465 and its share of profits for the year ended September 30, 2011 was $281,646.

Medical Imaging Center is a partnership between the Health System and two other unrelated healthcare entities in Ocala. The partnership owns medical equipment and provides imaging services including x-ray, fluoroscopy, ultrasound, nuclear medicine, MRI, CT, digital mammography, and bone density to patients. The Health System owns a 33% interest and its investment at September 30, 2011 was $766,758 and its share of profits for the year ended September 30, 2011 was $269,591.

Munroe Regional Homecare LLC is a limited liability corporation between the Health System and a large home health entity that provides home health services including skilled nursing, aids, medical social workers and physical, occupational, and speech therapy to patients in Ocala. The Health System owns a 49% interest and its investment at September 30, 2011 was $723,339 and its allocated share of profits for the year ended September 30, 2011 was $25,295.

(b) Basis of Presentation

The accounting policies of the Health System conform to U.S. generally accepted accounting principles (GAAP) as applicable to governmental entities. The accounts of the Health System, which are organized as an enterprise fund, are used to account for the Health System’s activities that are financed and operated in a manner similar to a private business enterprise. Accordingly, the Health System maintains its records on the accrual basis of accounting. Revenues from operations, investments, and other sources are recorded when earned. Expenses (including depreciation and amortization) of providing services to the public are accrued when incurred. Under this basis, revenues are recognized in the period in which they are earned, expenses are recognized in the period in which they are incurred, depreciation of assets is recognized, and all assets and liabilities associated with the operation of the Health System are included in the balance sheet.

Nonexchange transactions, in which the Health System receives value without directly giving equal value in return, include grants from federal, state, and local governments. On an accrual basis, revenue from grants is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are required to be used or the fiscal year when use is first permitted, and expenditure requirements, in which the resources are provided to the Health System on a reimbursement basis.

Pursuant to GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, private-sector standards of accounting and financial reporting issued prior to December 1, 1989 generally are followed to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. The Health System also has the option of following subsequent



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private-sector guidance, subject to this same limitation. The Health System has elected not to follow subsequent private-sector guidance as it relates to its operations.

(c) Use of Estimates

The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(d) Cash and Cash Equivalents

The Health System considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

(e) Investments

Investments are reported at fair value based on quoted market prices, except for short term highly liquid investments that have a remaining maturity at the time they are purchased of one year or less, which are reported at amortized cost.

(f) Assets Limited as to Use-cash and investments

Assets limited as to use – cash and investments primarily include assets held by trustees under indenture agreements and designated assets set aside by the Board for future capital improvements and/or debt retirement over which the Board retains control and may at its discretion subsequently use for other purposes. Amounts required to meet current liabilities of the Health System have been reclassified to current assets in the balance sheet.

(g) Inventories

Inventories consist primarily of unused supplies and are stated at lower of cost (first-in, first-out method) or market.

(h) Capital Assets

Capital assets are recorded at historical cost at the date of acquisition, which includes capitalized interest, or at fair market value at the date of donation. Routine maintenance and repairs are expensed when incurred. Expenditures that increase the value, change the capacity, or extend the useful life of an asset are capitalized. Major asset classifications and useful lives are generally in accordance with those recommended by the American Hospital Association. Depreciation is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization expense in the statement of revenues, expenses, and changes in net assets. Upon sale or retirement of depreciable assets, the related cost and accumulated depreciation are removed and any gain or loss is included in nonoperating loss.



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Estimated useful lives by major asset classification are summarized below:

Land improvements 2 – 25 yearsBuildings and fixed equipment 5 – 40 yearsLeasehold improvements 3 – 20 yearsMoveable equipment 2 – 20 years

(i) Premiums, Discounts, Issuance Costs, and Deferred losses on Refundings

Bond premiums and discounts, as well as issuance costs and losses on refundings, are deferred and amortized over the life of the bonds using the bonds outstanding method, which approximates the effective-interest method. Unamortized bond issuance costs are included in other assets. Bonds payable are reported net of the applicable bond premium, discount, and deferred loss on refunding.

(j) Compensated Absences

Employees are eligible for vacation and personal sick leave based upon years of continuous service and their payroll classification. Employees will have their vacation paid in full upon termination if they have worked for the Health System for greater than ninety days. Personnel sick leave is forfeited upon termination unless hired prior to September 18, 1993, in which case an employee may received a percentage pay-out. The Health System estimates the expense related to vacation and personal sick leave based on pay rates currently in effect.

(k) Net Asset Classification

Net assets are displayed in three components:

Invested in capital assets, net of related debt consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets.

Restricted net assets consist of net assets with constraints placed on the use either by (1) external groups such as creditors, grantors, donors, or laws or regulations of other governments or (2) laws through constitutional provisions or enabling legislation. It is the Health System’s policy to first apply restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available.

Unrestricted net assets consist of net assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt.”

(l) Classification of Revenues and Expenses

The Health System’s statement of revenues, expenses and changes in net assets distinguishes between operating and nonoperating revenues and expenses. Operating revenues result from exchange transactions associated with providing health care services. Nonexchange revenues, including grants, contributions received for purposes other than capital acquisition are reported as



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nonoperating revenues. Operating expenses are all expenses incurred to provide health care services, other than financing costs.

(m) Net Patient Service Revenue

The Health System has agreements with third-party payors that provide for payment at amounts different from its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors.

Gross patient charges $ 1,405,475,032 Contractual adjustments (1,070,043,715) Provisions for bad debts (44,422,852)

Net patient service revenue $ 291,008,465

The 2011 gross patient charges are comprised of the following:

Percent Percent Percentinpatient outpatient totalrevenue revenue revenue

Payor:Commercial 16.48% 24.97% 19.69%Medicare 66.86 52.42 61.39Medicaid 11.27 13.77 12.22Private/other 5.39 8.84 6.70

Total 100.00% 100.00% 100.00%

A summary of the basis of payment with Medicare, Medicaid, and other third-party payors follows:

Medicare

Inpatient acute care services, inpatient rehabilitative services, and hospital outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Certain outpatient services rendered to Medicare beneficiaries are paid based upon a cost-reimbursement methodology. The Medical Center is reimbursed for cost reimbursable items at a tentative interim rate with final settlement determined after submission of annual cost reports and audits by the Medicare fiscal intermediary.

The Medical Center’s Medicare cost reports have been audited and final settlements determined by the Medicare intermediary for all fiscal years through September 30, 2006. Retroactive adjustments for cost report settlements are accrued on an estimated basis in the period when the related services



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are rendered and adjusted in future periods when final settlements are determined. At September 30, 2011, retroactive positive adjustments for prior years cost report settlements were approximately $2,066,000 and included in net patient service revenue in the statement of revenues, expenses, and changes in net assets.

Medicaid

Inpatient and outpatient services (except for laboratory and pathology services) rendered to Medicaid program beneficiaries are reimbursed under a cost-reimbursement methodology. Reimbursable cost is determined in accordance with the principles of reimbursement established by the Florida Title XIX Hospital Reimbursement Plan, supplemented by the Medicare Principles of Reimbursement. The interim rates are tentatively established on an individual per diem basis for each hospital, subject to cost ceilings with exceptions. The Medical Center is reimbursed at a tentative interim rate with final settlement determined when the prospectively determined rate is adjusted after the intermediary audit of the combined Medicare and Medicaid cost report that was used to determine the prospective rate. Retroactive adjustments for interim rate changes anticipated after the intermediary audit of the cost report are accrued on an estimated basis in the period when final settlements are determined. The Medical Center’s Medicaid interim rates are based on the Medicare/Medicaid cost report. The cost reports for fiscal years 2002, 2003, 2006, 2007, 2008, 2009, 2010, and 2011 have not yet been audited by the fiscal intermediary.

The classification of patients and the appropriateness of their admission is subject to review by the fiscal intermediaries administering the Medicare and Medicaid programs.

Other

The Health System has also entered into payment arrangements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment under these arrangements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined rates. Some of these arrangements provide for review of paid claims for compliance with the terms of the contract and result in retroactive settlement with third parties. Retroactive adjustments for other third-party claims are recorded in the period when final settlement is determined.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates associated with these programs will change by a material amount in the near term. The Health System believes that it is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.



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(n) Unsponsored Community Benefit

Community benefit is a planned, managed, organized, and measured approach to a healthcare organization’s participation in meeting identified community health needs. It implies collaboration with a “community” to “benefit” its residents, particularly the poor and other underserved groups, by improving health status and quality of life. Community benefit projects and services are identified by healthcare organizations in response to finding of a community health assessment, strategic and/or clinical priorities, and partnership areas of attention.

Community benefit categories include financial assistance, community health services, health professions education, and donations. The Health System has a long history of providing community benefits and has quantified these benefits using national guidelines developed by the Catholic Health Association in collaboration with the Voluntary Hospital Association.

The Health System has policies providing financial assistance for patients requiring care but who have limited or no means to pay for that care. These policies provide free or discounted health and health-related services to persons who qualify under certain income and asset criteria. Because the Health System does not pursue collection of amounts determined to qualify for financial assistance, they are not reported as net patient service revenue. The Health System maintains records to identify and monitor level of financial assistance it provides. Charges foregone for services provided under the Health Systems’ financial assistance policy as a percentage of total charges for the year ended September 30, 2011 was approximately 1.86%.

In addition to financial assistance, the Health System provides benefits for the boarder community. The cost of providing these community benefits can exceed the revenue sources available. Examples of the benefits provided by the Health System and general definition regarding those benefits are described below:

Community health services include activities carried out to improve community health. They extend beyond patient care activities and are usually subsidized by the healthcare organization. Examples include community health education and healthcare screenings.

Donations include funds benefiting the community-at-large.



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The Health System’s unsponsored community benefits at cost for the year ended September 30, 2011 is as follows:

Financial assistance provided – charity care at cost $ 5,350,418 Unreimbursed Medicaid 2,720,721 Amount of bad debts eligible for financial assistance 4,083,008

Net unreimbursed financial assistance 12,154,147

Bad debt, at cost 4,990,344

Benefits for the broader community:Community health services 1,518,740 Donations 609,365

Total quantified benefits for the broader community 2,128,105

Total unsponsored community benefits $ 19,272,596

The cost of financial assistance provided was determined by applying the Health Systems’ overall cost to charge ratio to total charges foregone. Cost of benefits for the boarder community represents actual expenses incurred.

The Health System plays a leadership role in the communities it serves by providing additional community benefits that have not been quantified. This role includes serving as the sole provider of obstetrical services in Marion County. This service includes a midwifery program, which provides prenatal care and delivery for low-income patients.

In addition to the community benefits described above, the Health System provides additional benefits to the community through advocacy of community service by employees. The Health System employees serve numerous organizations through board representation, in-kind and direct donations, fund-raising, youth sponsorship, and other related activities.

(o) Income Taxes

The Health System has been recognized by the Internal Revenue Service as a tax-exempt organization as described in Section 501(c)(3) of the Internal Revenue Code (the Code). Income earned in furtherance of the Health System’s tax-exempt purpose is exempt from federal and state income taxes. The Code provides for taxation of unrelated business income under certain circumstances. The Health System’s unrelated business income was not significant in 2011.

(2) Restatement

After reassessing its articles of incorporation and bylaws, the Health System determined that it meets the definition of a governmental entity and thus, should apply U.S. generally accepted accounting principles applicable to governmental entities. The Health System had previously reported following the provisions established by the Financial Accounting Standards Board (FASB).



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Net assets at September 30, 2010 have been restated for the adoption of provisions established by the Governmental Accounting Standards Board (GASB). The financial statements accounts primarily affected by the adoption were pension assets, derivatives, bonds payable and other assets.

Net assets at September 30, 2010, as previously reported $ 182,989,954 Adjusted for:(a) Defined benefit pension plans 16,932,616 (b) Derivative instruments 3,973,146 (c) Losses on debt refundings 2,412,927 (d) Elimination of equity method investment (240,653) Net assets at September 31, 2010, as restated $ 206,067,990

(a) The Health System, as the sponsor of the Defined Benefit Plan, previously accounted for the pension plan under the provisions of FASB ASC Codification Topic 715-20-65-1, Compensation – Retirement Benefits. Under this accounting, the Health System previously reported a pension liability in the amount of $9,705,000 related to the Defined Benefit Plan and $1,606,000 related to the Supplemental Employee Retirement Plan. However, had the Health System applied the provisions of GASB 27, Accounting for Pensions by State and Local Government Employers, the Health System would have reported a pension asset in the amount of $5,621,616 (see note 10) thus resulting in an adjustment in the amount of $16,932,616.

(b) The Health System previously accounted for derivatives under the provisions of FASB ASC Codification Topic 815, Derivatives and Hedging. Under this accounting, the Health System previously accounted for the 2008 interest rate swap (notional amount of $22,925,000) as an investment derivative. Accordingly, the Health System previously reported a liability of $3,973,146 for this interest rate swap, which represented its fair value as of September 30, 2010. However, had the Health System applied the provisions of GASB 53, Accounting and Financial Reporting for Derivative Instruments, the Health System would have accounted for the 2008 interest rate swap as a hedging derivative and would have reported an offsetting amount on the balance sheet as a deferred outflow of resources instead of expense.

(c) The Health System previously accounted for losses on debt refundings under the provisions of FASB Certification Topic ASC 470-50, Debt. Under this accounting, the loss on extinguishment of debt was expensed. However, had the Health System applied the provisions of GASB 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Funds, the Health System would have reported a deferred loss on refundings as a component of bonds payable in the amount of $2,412,927. (See note 5).

(d) The Health System previously accounted for an interest in the Auxiliary under the provisions of FASB Codification ASC Topic 320, Investments- Debt and Equity Securities. Under this accounting, the Health System recorded an equity investment in the amount of $240,653. However, had the Health System applied the provisions of GASB 39, Determining Whether Certain Organizations are Component Units, the Health System would have reported no investment, thus resulting in an adjustment of ($240,653).



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In addition to the above, the Health System previously accounted for its investment in OHA under the provisions of FASB ASC Codification Topic 810-10, Consolidation. Under this accounting, the Health System’s interest in OHA was consolidated into one reporting entity. However, had the Health System applied the provisions of GASB 39, the Health System would have reported its interest in OHA as a joint venture with an equity interest. There was no impact to net assets; however, certain balance sheet accounts were impacted by the de-consolidation as follows:

September 30, 2010, September 30,

as previously 2010,reported Adjustment as restated

Investment in joint venture $ — 2,600,485 2,600,485 Cash and cash equivalents 57,523,013 (2,462,524) 55,060,489 Patient accounts receivable, net 39,076,989 (1,676,305) 37,400,684 Prepaid expense and other current —

assets 5,229,636 (139,071) 5,090,565 Capital assets, net 138,689,266 (4,788,719) 133,900,547 Unamortized deferred financing costs 599,338 (17,900) 581,438 Capital lease obligations and —

installments (3,072,814) 2,652,759 (420,055) Accounts payable (16,981,196) 348,066 (16,633,130) Accrued payroll (8,276,485) 904,515 (7,371,970) Estimated third-party settlements (5,985,000) 380,715 (5,604,285) Other current liabilities (12,262,618) 211,688 (12,050,930) Other long-term liabilities (22,022,803) 426,000 (21,596,803) Interest of minority partner (1,560,291) 1,560,291 —



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(3) Deposits and Investments

At September 30, 2011, cash and cash equivalents and investments, including assets limited as to use, at fair value, include the following:

Cash and cash equivalents:Deposits $ 19,522,736 Money market account 4,770,455 Other 73,286

Total cash and cash equivalents 24,366,477

Short-term investments:Money market accounts 72,741 Taxable municipal bonds 755,000 U.S. treasury bills 1,962,780

Total short-term investments 2,790,521

Assets Limited as to Use:Held by trustee under indenture agreements:

Mutual fund 1,540,331 Board designated

Money market mutual funds 479,077 Certificates of deposit 1,266,524 U.S. government and agency obligations 11,026,109 U.S. treasury bills 899,610 Taxable municipal bonds 1,933,597 Common stock 9,849,110 Corporate obligations 8,295,840 Other fixed income securities 51,891,293 Equity funds 204,971 Accrued interest 59,561

Total assets limited as to use 87,446,023

Restricted investments:Money market accounts 81,003 Mutual funds 2,344,659 U.S. government and agency obligations 52,478 U.S. treasury bills 34,103 Corporate obligations 20,918

Total restricted investments 2,533,161



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24 (Continued)

Other investments:Money market funds $ 107,567 U.S. government and agency obligations 8,499,766 U.S. treasury bills 5,872,050 Corporate obligations 698,977

Total other investments 15,178,360

Total cash, cash equivalents, and investments $ 132,314,542

(a) Deposits

The Health System requires bank deposits be secured per Chapter 280 Florida Statutes. This requires local governments to deposit funds only in financial institutions designated as qualified public depositories by the Chief Financial Officer of the State of Florida and creates the Public Deposits Trust Fund, a multiple financial institutions pool with the ability to assess its member financial institutions for collateral shortfalls if a default or insolvency has occurred. At September 30, 2011, the Health System’s deposits were entirely covered by federal deposition insurance or by collateral pledged with the State treasurer pursuant to Chapter 280, Florida Statutes.

(b) Investments

The Health System’s investment authority is derived from the approved investment policy for the Medical Center and the Munroe Regional Medical Center Funded Depreciation Portfolio – Statement of Investment Policies and Guidelines. Time deposits made in banks and savings and loan associations must be made with qualified public depositories in accordance with Chapter 280, Florida Statutes.

Interest Rate Risk – Interest rate risk is the risk that the fair value of investments will decrease as a result of an increase in interest rates. The Health System’s investment policy limits interest rate risk by requiring the matching of investment securities with known cash needs and anticipated cash flow requirements. Investments of core operating funds shall have maturities of no longer than twelve (12) months. Investments of reserves, project funds, debt proceeds, and other nonoperating funds shall have a term appropriate to the needs for funds in accordance with debt covenants, but in on event shall exceed five (5) years and the average duration of the funds as a whole may not exceed three (3) years.



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At September 30, 2011, the Health System had the following fixed-income investments with the respective weighted average maturity in years:

Weightedaveragematurityin years

U.S. government agency securities, by type:Federal Home Loan Banks 2.24 Federal Home Loan Mortgage Company 0.54 Federal National Mortgage Association 0.42

U.S. Treasury bills 1.39 Corporate bonds 0.56 Taxable Municipal Bonds 0.59 PIMCO Total Return Fund 8.00 Mutual funds 4.76

Credit Risk– Credit risk is the risk that the Health System will not recover its investments due to the ability of the counterparty to fulfill its obligation. The Health System minimizes credit risk by restricting authorized investments to: U.S. government securities, U.S. government agency securities, federal instrumentalities, interest-bearing time deposit or savings accounts, repurchase agreements, commercial paper, corporate notes, bankers acceptances, state and/or local taxable and/or tax-exempt debt, open-ended management type or registered investment companies registered under the Federal Investment Company Act of 1940, mortgage-backed securities, and short-term bond funds.

At September 30, 2011, the Health System’s fixed-income investments had the following credit ratings:

Fair Creditvalues ratings

U.S. government securities by type:Federal Home Loan Banks $ 4,482,240 AAAFederal Home Loan Mortgage Company 4,601,058 AAAFederal National Mortgage Association 10,495,055 AAA

U.S. Treasury bills 8,768,543 AAACorporate bonds 9,015,735 A to AAATaxable Municipal Bonds 2,688,597 AA to AAAPIMCO Total Return Fund 51,891,293 AAMutual funds 3,884,990 A to AAA

$ 95,827,511



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26 (Continued)

Concentration of Credit Risk – Concentration of credit risk is the risk of loss attributable to the magnitude of investments in a single issuer. The Health System’s investment policies establish limitations on portfolio composition by investment type and issuer to limit its exposure to concentration of credit risk. The investment policy provides for a maximum of 100% of available funds may be invested in U.S. government securities; a maximum of 50% of available funds may be invested in U.S. government agencies, with a limit of 25% to an individual agency; a maximum of 80% of available funds may be invested in federal instrumentalities, with a limit of 50% to an individual agency; a maximum of 25% of available funds may be invested in interest-bearing time deposits or savings accounts, with a limit of 15% to any one issuer; a maximum of 50% of available funds may be invested in repurchase agreements excluding one business day agreements and overnight sweep agreements, with a limit of 25% to any one institution; a maximum of 35% of available funds may be invested in commercial paper, with a limit of 10% to any one issuer; a maximum of 15% of available funds may be invested in corporate notes, with a limit of 5% to any one issuer; a maximum of 35% of available funds may be invested in bankers’ acceptances, with a limit of 10% to any one issuer; a maximum of 20% of available funds may be invested in taxable and tax-exempt debt; a maximum of 75% of available funds may be invested in money market funds, with a limit of 25% to any one fund; a maximum of 20% of available funds may be invested in mortgage-backed securities, with a limit of 20% to any one security; and a maximum of 25% may be invested in bond funds, with a limit of 10% to any one bond fund.

At September 30, 2011, the composition of the Health System’s investments by investment type that represents greater than 5% of the total portfolio is Federal National Mortgage Association which represented 9.72% of the portfolio.

(c) Investment Return

Investment income and gains (losses) for cash and investments comprise the following for the fiscal year ended September 30, 2011:

Nonoperating gains (losses):Interest income and dividends $ 4,782,037 Net realized gain on sale of investments 756,134 Unrealized losses on investments, net (4,519,047) Unrealized loss on derivative instrument (290,450)

Total investment income $ 728,674



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27 (Continued)

(4) Capital Assets

Capital asset activity for the year ended September 30, 2011 was as follows:

Balance atSeptember 30,

2010, Balance atas previously September 30,

reported Adjustments 2010,2010 See Note 2 as restated Additions Deletions 2011

Nondepreciable capital assets:Land $ 9,674,914 (208,493) 9,466,421 — — 9,466,421 Construction in progress 1,678,030 (979,910) 698,120 719,560 — 1,417,680

Total nondepreciablecapital assets 11,352,944 (1,188,403) 10,164,541 719,560 — 10,884,101

Depreciable assets:Land improvements 5,113,607 (28,540) 5,085,067 10,687 — 5,095,754 Buildings and fixed equipment 195,146,565 (6,897,877) 188,248,688 6,352,707 (403,484) 194,197,911 Movable equipment 118,221,709 (542,926) 117,678,783 17,751,148 (1,324,497) 134,105,434

Total depreciablecapital assets 318,481,881 (7,469,343) 311,012,538 24,114,542 (1,727,981) 333,399,099

Less accumulated depreciation:Land improvements (3,191,162) — (3,191,162) (213,169) — (3,404,331) Buildings and fixed equipment (96,559,567) 3,714,266 (92,845,301) (7,002,705) 408,762 (99,439,244) Movable equipment (91,394,830) 154,761 (91,240,069) (7,659,177) 1,326,899 (97,572,347)

Total accumulateddepreciation (191,145,559) 3,869,027 (187,276,532) (14,875,051) 1,735,661 (200,415,922)

Total depreciationcapital assets, net 127,336,322 (3,600,316) 123,736,006 9,239,491 7,680 132,983,177

Total capital assets,net $ 138,689,266 (4,788,719) 133,900,547 9,959,051 7,680 143,867,278

Construction in progress at September 30, 2011 consists primarily of building renovations and improvements. There were numerous projects underway at September 30, 2011, which are being funded primarily through operations, board-designed assets, auxiliary pledges, and the foundation’s capital campaign. As of September 30, 2011, estimated costs to complete the projects were approximately $6,776,000. There were no amounts capitalized into interest expense in 2011.

Included in moveable equipment are assets leased under installment debt and capital leases with a net book value of $936,662 as of September 30, 2011.



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(5) Long-Term Obligations

Changes in long-term liabilities for the year ended September 30, 2011 were as follows:

Balance atSeptember 30, Balance at

2010 September 30, Balance at Amountas previously Adjustments 2010 September 30, due within

reported (See note 2) as restated Additions Deletions 2011 one year

Bonds payable $ 97,685,000 — 97,685,000 — 11,415,000 86,270,000 500,000 Less loss on refundings — (2,412,927) (2,412,927) 103,016 — (2,309,911) — Add issuance premiums 989,933 — 989,933 — 5,213 984,720 —

Bonds payable,net 98,674,933 (2,412,927) 96,262,006 103,016 11,420,213 84,944,809 500,000

Capital lease obligationsand installments 3,072,814 (2,652,759) 420,055 871,431 105,758 1,185,728 637,614

Self insured liabilities 17,525,000 — 17,525,000 2,430,744 4,505,744 15,450,000 3,800,000 Other liabilities 281,240 — 281,240 97,038 — 378,278 —

$ 119,553,987 (5,065,686) 114,488,301 3,502,229 16,031,715 101,958,815 5,437,614

(6) Bonds Payable

Bonds payable consisted of the following at September 30, 2011:

5% Fixed Rate Refunding and Improvement Revenue Bonds, Series 2007,comprised $6,555,000 serial bonds due in varying amounts through 2017,$9,060,000 term bonds due October 1, 2022, $20,645,000 term bonds dueOctober 1, 2029, and $25,085,000 term bonds due October 1, 2034 (net ofpremium of $984,720 and loss on refundings of $2,136,735) $ 60,192,988

Variable Rate Revenue Refunding Bonds, Series 2009 (net of loss onrefundings of $173,176) due October 1, 2030 24,751,821

84,944,809 Less current portion (500,000)

$ 84,444,809

On February 15, 2011, the District redeemed the balance of the Series 1999 Bonds outstanding.

The Series 2007 Bonds are payable from and collateralized by the gross revenue of the Health System. The Master Trust Indenture contains certain covenants, the most restrictive of which relates to maintenance of specified levels of debt service coverage. The Health System is in compliance with the debt service coverage ratio at September 30, 2011.

On October 7, 2009, the Health System redeemed the balance of the Series 2000 Bonds outstanding and issued $25,425,000 Health System Revenue Refunding Bonds, Series 2009. The Series 2009 Bonds are variable rate demand obligations due October 1, 2030. These bonds were sold to Regions Bank, as the sole



September 30, 2011

29 (Continued)

owner of 100% of the outstanding principal amount. The interest rate to Regions Bank shall be a variable rate of interest equal to 67% LIBOR, plus the applicable margin based upon current ratings by Moody’s and Fitch, which was 1.81% at September 30, 2011. The 2009 Bonds may be redeemed by the Health System at any time and are subject to a tender date on October 15, 2012.

Maturities and principal sinking fund requirements for the Series 2007 and 2009 Bonds are as follows:

Principal Interest Total

Fiscal year ending:2012 $ 500,000 3,669,705 4,169,705 2013 500,000 3,646,338 4,146,338 2014 1,095,000 3,622,328 4,717,328 2015 1,810,000 3,568,109 5,378,109 2016 1,975,000 3,477,527 5,452,527 2017 – 2021 10,450,000 15,874,856 26,324,856 2022 – 2026 14,470,000 12,793,886 27,263,886 2027 – 2031 32,750,000 8,527,608 41,277,608 2032 – 2035 22,720,000 2,909,500 25,629,500

86,270,000 58,089,857 144,359,857 Plus unamortized net premium 984,720 Unamortized loss on refundings (2,309,911)

$ 84,944,809

(7) Derivative Instruments

The Health System uses interest rate swaps, which are recorded based upon the criteria set forth in GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments to manage net exposure to interest rate changes related to its borrowings and to lower its overall borrowing cost. The fair value amounts were determined by the Health System’s swap advisors, using market prices in effect on September 30, 2011.

Hedging Derivative Instruments

Objectives of the hedging derivative instruments: To hedge changes in cash flows on the Series 2009 variable bonds.



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30 (Continued)

Terms at September 30, 2011: Associated Notional Health Health Fair value at Net cash Counterparty

bond amount Effective System System Termination September 30, flows during Change in creditissue of swap Counterparty date pays receives date 2011 2011 fair value rating

RJ Capital 67% of 1-2009 $ 22,925,000 Services 8/1/2008 3.364% month LIBOR 10/1/2030 (4,234,747) (768,569) (556,065)* BBB

Definitions: LIBOR is the London InterBank Offering Rate* included in deferred out flow of resources

Risks

Credit risk: The Health System is exposed to credit risk on hedging derivative instruments that are in asset positions. To minimize its exposure to loss related to credit risk, it is the Health System’s policy to require counterparty collateral posting provisions in its nonexchange-traded swaps. These terms require full collateralization of the fair value of the swaps in asset positions (net of the effect on applicable netting arrangements) should the counterparty’s Moody’s credit rating fall below Baa3. The Health System is not required to post collateral to the counterparty in any circumstance. Collateral is to be posted in the form of U.S. Treasury securities held by a third-party custodian.

Basis risk: The Health System is exposed to basis risk on its pay-fixed, receive variable interest rate swaps because the variable rate payments received by the Health System are based on an index other than the interest rates the Health System pays on its hedged variable rate obligations, which are remarketed on a monthly basis.

Termination risk: The Health System or its counterparties may terminate the derivative instrument if the other party fails to perform under the terms of the contract. Additionally, the Health System has the right to terminate the contract upon two business days written notice.

Any termination of a contract would cause a settlement payment or receipt at the market value of the instrument. If at the time of termination, a hedging derivative instrument is in a liability position the Health System would be liable to the counterparty for a payment of that amount.

Investment Derivative Instruments

The Health System has entered into two swaps that are accounted for as investment derivative instruments.



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Terms as of September 30, 2011:

Associated Notional Health Health Fair value at Net cash Counterpartybond amount Effective System System Termination September 30, flows during Change in creditissue of swap Counterparty date pays receives date 2011 2011 fair value rating

SIFMA Swap 67% of 1-index 1-month

1999 $ 42,840,000 Citibank 3/25/2003 LIBOR 10/1/2029 $ 148,383 228,956 47,326* A

67% of 1- 61.5%month five - year

1999 $ 42,840,000 Citibank 8/1/2007 LIBOR LIBOR 10/1/2029 $ 1,625,582 484,544 (337,776)* A

Definitions: SIFMA is the Securities Industry Financial Markets Association benchmark rate* included in investment income

Risks

Credit risk: The Health System is exposed to credit risk on investment derivative instruments that are in asset positions. Because the swaps rely upon the performance of the third party who serves as the counterparty, the Health System is exposed to credit risk, or the risk that the counterparty fails to perform according to its contractual obligations. Although the Health System executes derivative instruments with various counterparties, two contracts, comprising 100% of the exposure to credit risk, are with one counterparty with a credit rating of A.

(8) Capital Lease Obligation

Capital lease obligation consisted of the following at September 30, 2011:

Capital lease obligations, installment debt, and other notes payable $ 1,185,728 Less current portion (637,614)

$ 548,114

Capital lease obligation payments are as follows:

Fiscal year ending:2012 $ 637,614 2013 527,867 2014 20,247

$ 1,185,728

(9) Risk Management

The Health System is exposed and various risks of loss related to general, professional, patient care and worker’s compensation.



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32 (Continued)

The Health System has a self-insurance program for its medical malpractice exposure. The Health System claims entitlement to the protections of Sovereign Immunity under Section 768.28, Florida Statutes. In addition, the Health System purchases excess professional liability coverage for claims exceeding the self-insured retention amounts of $3 million per medical incident up to $25 million per claim and in the aggregate. Claims of approximately $9,750,000 as of September 30, 2011 are included in the balance sheet based upon the expected ultimate cost of the expenses to date (including a provision for unknown incidents). During the fiscal year ended September 30, 2011, the Health System recorded approximately $1,786,000 in medical malpractice expense based on analysis performed by independent actuaries employed by the Health System to estimate the actual costs. In management’s opinion, an adequate reserve for loss contingencies has been recorded in the accompanying financial statements.

The Health System is self-insured for workers’ compensation up to $600,000 per occurrence subsequent to October 1, 2010 and has purchased excess coverage from commercial carriers up to the amount allowed by Florida Statutes. Workers’ compensation claims of $5,700,000 as of September 30, 2011 are accrued and included in the balance sheet based on analysis performed by independent actuaries employed by the Health System to estimate the expected costs. In management’s opinion, an adequate reserve for loss contingencies has been recorded in the accompanying financial statements.

Many years ago, the Health System was a member of both the Florida Hospital Worker’s Compensation Self-Insurance Fund and the Florida Hospital Excess Trust Fund. Both of these funds ceased writing insurance in the mid-1990s and have been operated in a run-off mode since that time. Presently, both funds have a surplus.

As a provider of healthcare services, the Health System is subject to malpractice claims and litigation through the normal course of operations. Certain of these matters are covered by insurance arrangements described above. Losses that are subject to the deductible provisions have been estimated and accrued in the accompanying financial statements. Management believes that these matters will be resolved without material adverse effect on the Health System’s future financial position, results of operations, or cash flows.

A summary of the self insurance activities for malpractice and workers compensation is as follows:

Medical Workers’malpractice compensation Total

Balance at September 30, 2009 $ 10,860,000 6,000,000 16,860,000

Claims and changes in estimates 1,574,912 1,736,079 3,310,991 Claim payments (1,034,912) (1,611,079) (2,645,991)

Balance at September 30, 2010 11,400,000 6,125,000 17,525,000

Claims and changes in estimates 979,817 1,450,927 2,430,744 Claim payments (2,629,817) (1,875,927) (4,505,744) Balance at September 30, 2011 $ 9,750,000 5,700,000 15,450,000



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33 (Continued)

(10) Defined Benefit Pension Plan

Plan Description

The Defined Benefit Pension Plan (the Plan) is a single-employer defined benefit plan administered by the Health System. The Plan provides retirement benefits to participants upon reaching retirement. As of October 1, 1985, those employees who are 21 years of age with one credited year of service may participate in the Plan. The Plan issues separate financial statements that can be obtained by contacting the Health System.

Funding Policy

The participants do not contribute to the Plan. The contribution requirements of the Health System is based upon the actuarially determined minimum required contribution. During the year ended September 30, 2011, the Health System contributed $4,000,000 to the Plan.

Annual Pension Cost and Net Pension Obligation (Asset)

The Health System’s annual pension cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB 27. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years.

The Health System’s annual pension cost and net pension obligation (asset) for the year ended September 30, 2011 is as follows:

Annual required contribution $ 2,816,488 Interest on net pension obligation (asset) (435,675) Adjustment to annual required contribution 487,623

Annual pension cost 2,868,436

Contributions made (4,000,000)

Increase in net pension asset (1,131,564)

Net pension asset, beginning of year (5,621,616) Net pension asset, end of year $ (6,753,180)



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34 (Continued)

The Health System’s annual pension cost, the percentage of annual pension cost contributed to the Plan and the net pension obligation (asset) for the year ended September 30, 2011 is as follows:

PercentageAnnual of annualpension pension cost Net pension

cost contributed asset

2009 $ 3,249,916 92% $ (854,596) 2010 2,332,980 304 (5,621,616) 2011 2,868,436 139 (6,753,180)

Funded Status and Funding Progress

As of October 1, 2010, the most recent actuarial valuation date, the actuarial value of the assets was $44,890,000, the actuarial accrued liability was $45,487,349, resulting in an unfunded actuarial accrued liability (UAAL) of $597,349. The covered payroll was $77,835,259 and the ratio of the UAAL to the covered payroll was 0.77%.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of events in the future. Examples include assumptions about future employment and mortality. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future.

The Schedule of funding progress, presented as Required Supplementary Information (RSI) following the notes to the basic financial statements, presents multiyear trend information about whether the actuarial values of the Plan assets are increasing or decreasing over time relative to the AAL for benefits.



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Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and participants) and include the types of benefits provided at the time of each valuation and the historical pattern of pension costs of the employer. The table below identifies actuarial assumptions used in the October 1, 2010 valuation:

Actuarial-cost method Projected unit credit

Amortization method Level-dollar

Amortization period 30 years open

Asset-valuation method Market

Mortality 2010 IRS Static Mortality Table

Investment rate of return 7.5%

Rate of compensation increase 5%

Retirement age 65, or immediately if over 65

(11) Concentrations of Credit Risk

Patient accounts receivable, net, included approximately $17,106,000 or 40.01%, due from the Medicare program as of September 30, 2011. The credit risk for other concentrations of receivables is limited due to the large number of insurance companies and other payors that provide payments for services. Accounts receivable are reported net of an estimated allowance for uncollectible accounts in the accompanying balance sheet.

(12) Subsequent Events

On December 15, 2011, the Health System restructured the Series 2009 Bonds and the credit agreement with Regions Bank (100% owner of the outstanding principal of the Series 2009 Bonds) by amending the interest rate formula to 67% of one-month LIBOR plus 129 basis points and extending the tender date to December 15, 2014.


Required Supplementary Information Defined Benefit Retirement Plan

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36

Schedule of Employer Contributions (Unaudited)

Annualrequired Percentage

contribution Contribution contributed

Year ended September 30:2008 $ 2,061,488 3,166,000 153%2009 3,239,710 3,000,000 932010 2,325,083 7,100,000 3052011 2,816,488 4,000,000 142

Schedule of Funding Progress (Unaudited)

(a) (b) (c) (a/b) (d) (c ) + (d)Unfunded Unfunded(asset in actuarial

excess of) liability, asActuarial Actuarial actuarial a percentage

Actuarial value of accrued accrued Funded Covered of coveredvaluation date assets liability liability ratio payroll payroll

10/1/2007 $ 49,885,000 40,792,840 (9,092,160) 122.29% $ 67,188,392 (13.53)%10/1/2008 42,400,000 43,783,551 1,383,551 96.84 71,241,096 1.9410/1/2009 39,705,000 44,937,595 5,232,595 88.36 75,645,231 6.9210/1/2010 44,890,000 45,487,349 597,349 98.69 77,835,259 0.77

* information was not available prior to 2007.

Documents

MUNROE REGIONAL HEALTH SYSTEM, INC. d/b/a …extranet.acsysweb.com/vsitemanager/MunroeRHC/Public/Upload/Docs... · Independent Auditors’ Report The Board of Directors Munroe Regional