Methodist Healthcare Ministries of South Texas, Inc.
Consolidated Financial Statements December 31, 2011 and 2010
Methodist Healthcare Ministries of South Texas, Inc.
Table of Contents Independent Auditors’ Report Consolidated Statements of Financial Position Consolidated Statements of Activities Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
Page 1 2 3 4 5
Methodist Healthcare Ministries of South Texas, Inc.
Consolidated Statements of Financial Position December 31, 2011 and 2010
Assets Current Assets Cash and cash equivalents Prepaid expenses and other current assets Current portion of board‐designated investments: Programs and grants Line of credit Total current assets
2011 $
4,745,632 332,856
2010 $
9,874,341 278,641
68,328,504 ‐
53,368,857 35,000,000
73,406,992
98,521,839
100,000 298,480,633 480,070
100,000 296,045,500 417,244
299,060,703
296,562,744
68,328,504
88,368,857
230,732,199
208,193,887
23,969,856
24,616,778
Assets Limited as to Use Endowment fund Board‐designated investments Research and Development Fund Total assets limited as to use Less amount required to meet current obligations: Board‐designated investments Noncurrent assets limited as to use Property, Equipment, and Land – net Construction in Progress Investment in Methodist Healthcare System of San Antonio, Ltd., LLP
304,819
‐
338,577,305
325,018,405
$ 666,991,171
$ 656,350,909
Notes to consolidated financial statements form an integral part of these statements. ‐ 2 ‐
Liabilities and Net Assets Current Liabilities Accounts payable, accrued expenses, and other current liabilities Grants payable Line of credit Total current liabilities
2011 $
2,490,060 35,540,430 ‐
2010 $
2,062,414 25,274,145 35,000,000
38,030,490
62,336,559
628,844,758 15,923 100,000
593,890,159 24,191 100,000
628,960,681
594,014,350
$ 666,991,171
$ 656,350,909
Net Assets Unrestricted Temporarily restricted Permanently restricted Total net assets
Methodist Healthcare Ministries of South Texas, Inc.
Consolidated Statements of Activities Years Ended December 31, 2011 and 2010
2011 Unrestricted revenue, gains, and other support: Equity in earnings from Methodist Healthcare System of San Antonio, Ltd., LLP Total investment return Grant revenue and in‐kind support Other operating income
$ 106,058,900 (5,103,856) 33,738 516,007
2010
$ 114,531,383 34,524,486 39,738 259,715
101,504,789
149,355,322
24,191
27,523
101,528,980
149,382,845
60,181,326 5,682,543 710,512
48,635,267 4,717,484 511,217
Total unrestricted expenses
66,574,381
53,863,968
Change in unrestricted net assets
34,954,599
95,518,877
Net assets released from restrictions – grants/contributions Total unrestricted revenue, gains, and other support Unrestricted expenses: Program expenses Management and general expenses Management and general fixed expenses
Temporarily restricted net assets: Contributions Net assets released from restrictions – contributions Change in temporarily restricted net assets Change in net assets
Net assets at beginning of year Net assets at end of year
15,923 (24,191)
30,557 (27,523)
(8,268)
3,034
34,946,331
95,521,911
594,014,350
498,492,439
$ 628,960,681
$ 594,014,350
Notes to consolidated financial statements form an integral part of these statements. ‐ 3 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010
2011 Cash Flows From Operating Activities Change in net assets Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization Loss on disposal of equipment and building Realized gain on investments Unrealized (gain) loss on investments Earnings from investment in Methodist Healthcare System of San Antonio, Ltd., LLP Changes in: Prepaid expenses and other current assets Accounts payable, accrued expenses, and other current liabilities Grants payable
$
34,946,331
2010
$
95,521,911
1,742,141 19,025 (6,727,458) 14,969,969
1,673,989 272,758 (4,604,071) (26,687,699)
(106,058,900)
(114,531,383)
(54,215)
(52,166)
427,646 10,266,285
205,056 11,097,685
Total adjustments
(85,415,507)
(132,625,831)
Net cash used in operating activities
(50,469,176)
(37,103,920)
Notes to consolidated financial statements form an integral part of these statements. ‐ 4 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010 (Continued)
2011 Cash Flows From Investing Activities Purchases of property and equipment Purchases of research and development investments Purchases of investments Proceeds from sales/maturities of investments
$
Net cash used in investing activities
(1,419,065) (100,000) (247,077,159) 236,436,691
2010
$
(5,549,553) (450,000) (255,396,243) 183,039,141
(12,159,533)
(78,356,655)
92,500,000 2,768,000 (16,768,000) (21,000,000) ‐
101,000,000 35,000,000 ‐ ‐ (35,000,000)
Net cash provided by financing activities
57,500,000
101,000,000
Net decrease in cash and cash equivalents
(5,128,709)
(14,460,575)
9,874,341
24,334,916
Cash Flows From Financing Activities Distributions from investment in Methodist Healthcare System of San Antonio, Ltd., LLP Proceeds from line of credit Payments on line of credit Transfers from portfolio to pay line of credit Partner capital call
Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
$
4,745,632
$
9,874,341
Supplemental Disclosures of Cash Flow Information Cash paid for interest
$
194,572
$
6,319
Cash paid for income tax
$
300,835
$
289,075
Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies Organization Methodist Healthcare Ministries of South Texas, Inc. (“MHM”), a faith‐based, tax‐exempt nonprofit corporation incorporated under the laws of the state of Texas, was originally chartered in 1955 by the Southwest Texas Conference of The United Methodist Church (the “Conference”). The members of the Board of Directors (the “Board”) are approved annually by the Conference and represent a variety of community leaders, including a number of local United Methodist Church officials. At all times, at least 60% of the Board must be members of The United Methodist Church. MHM was formerly known as Southwest Texas Methodist Hospital (the “Hospital”), a hospital operated for charitable, scientific, educational, and religious purposes. On January 11, 1995, MHM entered into a partnership agreement with Columbia/HCA Healthcare Corporation of Central Texas (“HCA‐Central”), an indirect wholly owned subsidiary of HCA Inc. (HCA Inc. was acquired effective November 17, 2006 by Hercules Holding II, LLC), to form a Texas limited partnership, Methodist Healthcare System of San Antonio, Ltd., LLP (the “Partnership”), to provide healthcare services to San Antonio and surrounding areas. The Partnership filed a certificate to add the designation of limited liability partnership effective June 5, 2003. HCA Inc. is a holding company whose affiliates own and operate hospitals and related healthcare entities. The Partnership is structured with two general partners, MHM and HCA‐Central, each with a 20% general partnership interest. The two general partners also hold limited partnership interests, with MHM holding 30% and HCA‐Central and other wholly owned subsidiaries of HCA Inc. holding a combined 30%. Each partner, in exchange for its partnership interest, contributed substantially all its hospital‐related assets and liabilities located in the San Antonio area. All distributions shall be in proportion to each partner’s sharing percentage. Under the partnership agreement, as amended, the partners’ sharing percentages for allocation of partnership income or loss were 20% to each general partner and 30% to each limited partner. As a nonprofit corporation, MHM has the responsibility to ensure quality care is available to everyone at Methodist Healthcare System facilities, including those without financial means to pay for hospital services and in accordance with its eligibility policy for charity care. Since MHM owns 50% of the Partnership and appoints 50% of the Partnership’s Board of Governors, including the chair, the investment in the Partnership is accounted for using the equity method of accounting. Under the equity method of accounting, the Partnership’s accounts are not reflected within MHM’s consolidated statements of financial position and consolidated statements of activities; however, MHM’s share of the earnings or losses of the Partnership is reflected in the caption “equity earnings from Methodist Healthcare System of San Antonio, Ltd., LLP” in the consolidated statements of activities.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Organization (continued) On April 10, 1996, Wesley Primary Care Clinic (”WPCC”) was incorporated as a not‐for‐profit corporation under the Texas Non‐Profit Corporation Act. WPCC is certified as a not‐for‐profit health corporation under Chapter 177.1 of the Texas State Board of Medical Examiners rules and Section 5.01a of the Medical Practice Act of Texas. MHM is the sole member of WPCC, which was created for the purpose of hiring physicians, dentists, and advanced practice professionals to provide medical and dental services at MHM’s clinics. WPCC has responsibility for all medical and dental practice issues, including salaries and benefits for physicians, dentists, and advanced practice professionals. All other activities and expenses of WPCC are managed by MHM and are reflected as direct program expenses of MHM. The consolidated financial statements of MHM include the accounts of MHM and WPCC. All significant intercompany accounts and transactions have been eliminated in consolidation. Mission Statement “Serving Humanity to Honor God” To serve by improving the physical, mental, and spiritual health of those least served in the Southwest Texas Conference area of The United Methodist Church. Charity Program Spending MHM is committed to nurturing the health and well‐being of the whole individual – physically, mentally, and spiritually. It is also committed to the concept of empowering others – existing agencies, programs, and people – by providing resources so specific needs of the local communities are identified and met. Strict policies of review, selection, and oversight in resource allocation are maintained by the Board and staff of MHM to ensure the greatest results are achieved and existing services are not duplicated but enhanced. MHM incurred $60,181,326 in 2011 and $48,635,267 in 2010 for program expenses for operating programs and grants, and $830,482 in 2011 and $447,047 in 2010 for routine capital expenditures related to programs to improve individual and family health in South Texas for the least‐served. In keeping with MHM’s mission to provide access to care for the under‐ and uninsured, and to fulfill one of the goals identified in the Board’s strategic plan to provide additional clinic locations for uninsured clients, MHM purchased a $4,600,000 building in the South Texas Medical Center. In addition to the building purchase, building improvements were made totaling $491,940, in order to provide examination, laboratory, and radiology services. The purchase was finalized on February 1, 2010, and MHM contracted with Bexar County Hospital District, dba University Health System, to operate the Clinic. ‐ 6 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Charity Program Spending (continued) The following is a summary of program expenses for operating programs and grants: December 31, 2011
Medical and dental services: Operating programs: Wesley Health & Wellness Center, Bishop Ernest T. Dixon, Jr. Clinic, and School‐Based Health Centers
$ 16,227,775
$ 12,581,372
7,163,048
6,591,241
1,578,495 1,474,733 1,879,348 1,678,751
1,433,635 1,357,070 1,622,050 951,325
30,002,150
24,536,693
1,226,667
1,111,363
28,678,195
22,724,535
274,314
262,676
$ 60,181,326
$ 48,635,267
$
$ 5,538,987
Health and wellness programs: Operating programs: Wesley Nurse Health Ministries™ Parenting programs: Meld, Born to Learn®, and Parents Helping Parents Family Wellness Programs Behavioral Health Services Health Education/Nutrition Total operating programs Research and policy Grants to external partners Other minor grants Total program expenses
Capital expenditures for programs
2010
830,482
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Charity Program Spending (continued) Brief descriptions of the operating programs funded by MHM include the following: Medical and Dental Services Operating Programs MHM owns and operates the Wesley Health & Wellness Center (“WHWC”), the Bishop Ernest T. Dixon Jr. Clinic, and School‐Based Health Centers. The Dixon Clinic provides full‐time medical and behavioral health services, including counseling and case management and patient education. WHWC provides holistic, multi‐disciplinary programs for families, adults, and children. Services include a primary care medical clinic and general dentistry, as well as patient education, counseling, case management, and emergency assistance. Health, dental, and counseling services are provided by MHM through School‐Based Health Centers that provide primary medical and dental care to school‐age children and their siblings up to age 21 who live in the Schertz‐Cibolo‐Universal City Independent School District, where such services are not readily available. The sites currently are at Krueger Elementary in Marion, Texas and Schertz Elementary in Schertz, Texas. Health and Wellness Programs Operating Programs Wesley Nurse Health Ministries program (“WNHM”) is a faith‐based, holistic program committed to serving the least served through education, health promotion, and collaboration. The majority of the WNHM sites are in churches in rural communities. Some are in larger cities, including a site at the historic San Fernando Cathedral in downtown San Antonio. All nurses in the program are specially trained registered nurses. Family wellness programs are available for youth, adults, and seniors to promote health and wellness through social interaction, building family unity, and education. Activities include exercise classes, parent and family trainings, support groups, and a community justice program. Parenting programs include Meld, Born to Learn®, and Parents Helping Parents (“PHP”) – parent education programs designed to inform parents about the importance of early education in the development of their children. MHM is a licensed network affiliate of the Parents As Teachers’ Meld program. MHM offers Meld programs for young moms, young dads, growing families, and
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Charity Program Spending (continued) Health and Wellness Programs (continued) Operating Programs (continued) parents of children with special needs. Born to Learn® is a licensed program of the Parents As Teachers. MHM conducts personal home visits with parents of children ages 0‐3, including prenatal visits. PHP is a program developed by MHM in partnership with the Texas Cooperative Extension in 1999. PHP provides training and technical assistance for volunteers to implement parent support groups in the rural areas of South Texas. MHM counseling services have been extended into the Coastal Bend Area, Rio Grande Valley, and Laredo through Church‐Based Counseling programs. Counseling is provided by licensed professional counselors and licensed clinical social workers. Grants to External Partners Beginning in 1996, MHM has partnered with other community health centers and providers with similar missions through grants. This collaborative effort allows MHM to provide healthcare services at a lower cost through partnering with existing organizations in the underserved areas of San Antonio and South Texas. MHM has become the largest private funding source for community healthcare to low‐income families and the uninsured in South Texas. One of MHM’s strategic goals is to support mental health initiatives in MHM’s area. In 2011, MHM’s Board approved funding of $9,447,089 over the next four years to partner with other organizations to provide a much needed higher level of care for the growing population of underserved individuals who suffer from mental illness. These grants will address the mental health professional shortage and provide capital for construction of mental health clinics and funding for services. All grants to partners, including those identified for multi‐year funding, are contingent upon performance and the availability of funds. Performance and compliance are reviewed quarterly by the Board and staff.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Basis of Presentation In accordance with Not‐for‐Profit Entities topic of the Accounting Standards Codification (“ASC”), MHM reports information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted nets assets. Under these provisions, net assets and revenue, expenses, gains, and losses are classified as unrestricted, temporarily, and permanently restricted, based on the following criteria: Unrestricted Net Assets – Unrestricted net assets represent expendable funds available for operations which are not otherwise limited by donor restrictions. Unrestricted net assets may be designated for specific purposes by actions of the Board. Temporarily Restricted Net Assets – Temporarily restricted net assets consist of contributed funds subject to donor‐imposed restrictions contingent upon specific performance of a future event or passage of time before MHM may spend the funds. As of December 31, 2011 and 2010, temporarily restricted net assets consisted primarily of net assets held from remaining United States Department of Agriculture food grant funds, and for emergency relief, respectively. Permanently Restricted Net Assets – Permanently restricted net assets are subject to irrevocable donor restrictions requiring that assets be maintained in perpetuity, usually for the purpose of generating investment income to fund annual operations or to be used to provide charity care. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. Recent Accounting Pronouncement Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) In April 2011, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”), Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. This new guidance amends current ‐ 10 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Recent Accounting Pronouncement (continued) fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The new provisions are to be applied prospectively for annual periods beginning after December 15, 2011 and early adoption is not permitted. MHM does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations, or cash flows. Cash and Cash Equivalents Highly liquid investments are reported as cash equivalents, excluding amounts whose use is limited by Board designation. MHM routinely invests its surplus operating funds in investments such as money market funds, interest‐earning and non‐interest earning bank accounts, and other short‐term investments. The carrying amount reported in the consolidated statements of financial position approximates the fair value of all short‐term cash positions. Investments Investments are stated at fair value based upon quoted market prices, when available, or estimates of fair value in the consolidated statements of financial position. Unrealized gains and losses are included in the consolidated statements of activities and net assets. MHM has an investment policy that sets guidelines and constraints to ensure the portfolio is appropriately diversified. Assets Limited as to Use Assets limited as to use consisting of cash, money market funds, mutual funds, endowment, research and development investments, and debt and equity positions are carried at fair value. Investments in partnerships are recorded based on MHM’s share of the partnership’s underlying value of portfolio securities, as reported to MHM by the related investment managers. Gains and losses and investment income/losses are reported as unrestricted or temporarily/permanently restricted net assets, as appropriate. Any changes in the net asset value of the partnerships are reflected as unrealized gains or losses. Those assets will be kept in an investment capacity and not be used for operations during 2012. Property, Equipment, and Land Property and equipment acquisitions are recorded at cost. Depreciation is calculated on the straight‐ line method over the estimated useful life of the depreciable assets. Leasehold improvements are amortized over the lease term. In late 2010, the old WHWC daycare building was demolished. The remaining net book value was written off in the amount of $247,480. ‐ 11 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Property, Equipment, and Land (continued) The estimated life used in computing depreciation and amortization is as follows: Buildings Building improvements Leasehold improvements Major moveable/office furnishings
30 years 10‐15 years 3‐5 years 3‐15 years
Impairment of Long‐Lived Assets MHM reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, and the effects of obsolescence, demand, competition, and other economic factors. MHM did not recognize an impairment loss during the years ended December 31, 2011 and 2010. Medical Malpractice Self‐Insurance Prior to January 11, 1995, the Hospital self‐insured against malpractice claims. The Hospital established a trust for the purpose of setting aside assets based on actuarial funding recommendations. All assets and contingent liabilities for claims occurring prior to January 11, 1995, related to the trust, were transferred to MHM. Various levels of self‐insurance and excess coverage were in effect from July 1977 through January 10, 1995. As of December 31, 2003, all trust assets have been expended for malpractice claims, and all known claims have been resolved. If necessary, any future settlements or claims, which are not covered by insurance, would be paid out of Board‐designated assets. MHM obtained a tail policy on January 11, 1995, in the amount of $10,000,000 per claim and $10,000,000 annual aggregate above $3,000,000 per occurrence and $6,000,000 aggregate, retroactive to November 30, 1989. Any future settlements or claims would have to be paid out of other Board‐ designated assets. Currently, MHM maintains a professional liability policy for nurses and other ancillary staff with a $1,000,000 per claim and $3,000,000 aggregate per year limit with a $5,000 deductible. An excess liability umbrella policy covering both general liability and professional liability claims is also in effect with a $15,000,000 limit per claim. ‐ 12 ‐
Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Grants Grants are reported as either temporarily or permanently restricted support when they are received with donor stipulation that limits the use of the donated assets. When a grantor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Contributions All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. However, if a restriction is fulfilled in the same time period in which the contribution is received, the organization reports the support as unrestricted income. In‐Kind Support and Donated Personal Services of Volunteers In‐kind support is recorded as revenue and expense in the accompanying consolidated statements of activities only if the contribution meets the requirements of Not‐for‐Profit Entities of the ASC. In accordance with the ASC, for contributed services to be recognized as revenue, services must be those that would normally be paid for, the same as those normally provided by the donor, and clearly measurable. In‐kind support consists primarily of donated meals for the youth development programs at WHWC. The costs of the meals are recorded at their estimated fair value at the date of donation. The estimated value of these meals totaled $0 and $39,739 at December 31, 2011 and 2010, respectively. The cost of donated meals decreased from 2010 to 2011, as all meals are now prepared in‐ house in the WHWC kitchen. Volunteers at WHWC donate their time to support the various programs. Donated volunteer hours, for which no value has been assigned, totaled 4,146 hours and 3,030 hours at December 31, 2011 and 2010, respectively. MHM receives rental space, for a nominal amount, for the medical and dental operating sites at the Marion and Schertz‐Cibolo‐Universal City Independent School Districts. In addition, MHM leased the daycare building on the Columbia Heights property for a nominal amount during 2010. In late fall 2010, the daycare building was demolished as part of a master plan for the property. No amounts have been recognized for this rental space in the consolidated statements of activities because an estimated value could not be determined.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies (continued) Functional Allocation of Costs The costs of providing the program and other activities have been summarized on a functional basis in the consolidated statements of activities. Accordingly, costs are allocated to the programs and management and general expenses based on actual use or estimated use, if actual use is not readily determinable. Reclassification Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation. 2. Fair Value Measurements and Disclosures The requirements of Fair Value Measurements and Disclosures of the ASC apply to all financial instruments and all nonfinancial assets and nonfinancial liabilities that are being measured and reported on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair Value Measurements and Disclosures also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2. Fair Value Measurements and Disclosures (continued) A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. The following table represents assets measured at fair value on a recurring basis as reported on the consolidated statements of financial position as of December 31, 2011 and 2010 and by level within the fair value measurement hierarchy: Total Fair Value Measurement at December 31, 2011 Texas Methodist Foundation State of Israel Jubilee Bond
$
Managed accounts: Equity Fixed income Total managed accounts Mutual funds Alternative investments: Overseas CAP Partners, Inc. Black Diamond, Ltd. Double Black Diamond, Ltd. Black Diamond Structured Opportunities II, LP Eagle Income Appreciation, LLC OZ Overseas Fund II, Ltd. Incube Ventures II, LP Targeted Technology Fund, LP Total alternative investments $ Percent of investment portfolio
2,731,850 25,000
Level 1
Level 3
2,731,850 25,000
$ ‐ ‐
$ ‐ ‐
2,756,850
2,756,850
‐
‐
176,140,269 25,595,845
176,140,269 25,595,845
‐ ‐
‐ ‐
201,736,114
201,736,114
‐
‐
40,653,039
40,653,039
‐
‐
18,615,307 8,797,339 11,142,233
‐ ‐ ‐
18,615,307 8,797,339 11,142,233
‐ ‐ ‐
3,580,500 6,855,782 4,443,469 254,759 225,311
‐ ‐ ‐ ‐ ‐
3,580,500 6,855,782 4,443,469 ‐ ‐
‐ ‐ ‐ 254,759 225,311
53,914,700
‐
53,434,630
480,070
$ 53,434,630
$ 480,070
299,060,703 100.0%
$
Level 2
$ 245,146,003 82.0%
17.9%
0.1%
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2.
Fair Value Measurements and Disclosures (continued) Total Fair Value Measurement at December 31, 2010
Texas Methodist Foundation State of Israel Jubilee Bond
$
Level 3
$ ‐ ‐
$ ‐ ‐
8,691,829
8,691,829
‐
‐
181,726,298 20,583,918
181,726,298 20,583,918
‐ ‐
‐ ‐
202,310,216
202,310,216
‐
‐
Mutual funds
38,494,304
38,494,304
‐
‐
Alternative investments: Overseas CAP Partners, Inc. Black Diamond, Ltd. Double Black Diamond, Ltd. Eagle Income Appreciation, LLC Incube Ventures II, LP Targeted Technology Fund, LP
17,406,341 8,858,806 11,280,906 9,103,098 180,805 236,439
‐ ‐ ‐ ‐ ‐ ‐
17,406,341 8,858,806 11,280,906 9,103,098 ‐ ‐
‐ ‐ ‐ ‐ 180,805 236,439
Total alternative investments
47,066,395
‐
46,649,151
417,244
$ 46,649,151
$ 417,244
Total managed accounts
$ Percent of investment portfolio
296,562,744 100.0%
$
Level 2
8,666,829 25,000
Managed accounts: Equity Fixed income
8,666,829 25,000
Level 1
$ 249,496,349 84.1%
15.8%
0.1%
Investments in managed accounts and mutual funds have prices in actively traded markets that are easily quoted. These investments consist of equity shares, fixed income units, and mutual fund shares. Investments in the Texas Methodist Foundation and the State of Israel Jubilee Bond are fixed income investments for which MHM receives monthly pricing. MHM’s participation in alternative investments is via limited partnership. For Overseas CAP Partners, Inc. (“CAP”); Black Diamond, Ltd.; Double Black Diamond, Ltd.; Black Diamond Structured Opportunities II, LP; and OZ Overseas Fund II, Ltd., MHM owns shares of the partnership, and the value of those shares are reflected by their net asset value (“NAV”). While these shares are not traded in an active market, the NAV of the shares is reported by the partnership on a monthly basis. Since it would be possible for MHM to redeem the shares at NAV within the near term of the reporting date of December 31, 2011 and 2010, these investments qualify as Level II investments.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2. Fair Value Measurements and Disclosures (continued) For the other alternative investments, Eagle Income Appreciation, LLC; Incube Ventures II, LP; and Targeted Technology Fund, LP, the value of MHM’s investment is maintained in a capital account. Eagle Income Appreciation, LLC provides this capital account balance on a monthly basis; therefore, this investment is being reported as a Level II asset. Incube Ventures II, LP and Targeted Technology Fund, LP are venture capital funds which provide capital account balance updates on an annual basis as reported on Internal Revenue Service (“IRS”) Schedule K‐1 from IRS Form 1065 for partnership returns. As such, they are reported as Level III assets. The following table represents the redemption frequency and redemption notice period for alternative investments held by MHM as of December 31, 2011 (does not include investments held in the South Texas Healthcare R&D Fund): Fair Value
Multi‐strategy hedge funds Residential mortgage backed securities fund Master limited partnership funds
Redemption Frequency
Redemption Notice Period
Quarterly and Annually
30‐45 days
Quarterly
45 days
3,580,500
‐
Quarterly
30 days
6,855,782
9,103,098
$ 53,434,630
$ 46,649,151
Total
December 31 2011 2010 $ 42,998,348
$ 37,546,053
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2. Fair Value Measurements and Disclosures (continued) The limited partnership investments in CAP; Black Diamond, Ltd.; Double Black Diamond, Ltd.; and OZ Overseas Fund II, Ltd. are each market‐neutral hedge funds that are designed to have a nondirectional correlation with financial markets. Strategies used by these funds include relative value arbitrage, risk arbitrage, convertible arbitrage, long/short equity, and credit. Black Diamond Structured Opportunities II, LP is a partnership that invests in residential mortgage backed securities. The investment in Eagle Income Appreciation, LLC is a limited partnership that invests solely in the shares of publicly traded master limited partnerships. Black Diamond, Ltd. and Double Black Diamond, Ltd. offer quarterly redemptions and require a 45‐day withdrawal notification. No shares in either of these funds are currently under any lock‐up period. New investments in either Black Diamond, Ltd. or Double Black Diamond, Ltd. would be subject to multiple share class options depending on fee level and lock‐up period from the date of investment. The Black Diamond Structured Opportunities II, LP fund was initially invested in on December 1, 2011. Those shares have a one year lock‐up period, and the first eligible redemption date is December 31, 2012. Redemptions are available subsequently on a quarterly basis with a 45‐day notice requirement. Shares of CAP purchased January 1, 2006 and earlier are under no lock‐up restrictions and can be redeemed on any calendar quarter with 30‐days notice. This applies to 1,998.9367 of MHM’s 10,038.5062 total shares held of CAP, or 20.0%. For shares purchased after January 1, 2006, any withdrawal made on an end‐of‐quarter date other than June 30 would incur an additional fee per the following: September 30 – 4% of NAV, December 31 – 3% of NAV, March 31 – 2% of NAV. This applies to 80% of CAP shares held by MHM. The Eagle Income Appreciation, LLC has a one‐year lock‐up period that has expired on any existing shares owned and any withdrawal would require 30‐days notice. The investment in OZ Overseas Fund II, Ltd. was made on June 1, 2011. That investment is under a one year lock‐up period, meaning the first eligible redemption date would be June 30, 2012. Subsequent redemptions are available quarterly with a 30‐day notification requirement.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2. Fair Value Measurements and Disclosures (continued) The changes in investments measured at fair value for which MHM has used Level II inputs to determine fair value are as follows: Overseas CAP Partners, Inc.
Black Diamond, Ltd.
Double Black Diamond, Ltd.
Black Diamond, Structured Opportunities II, LP
Balance at December 31, 2010 $ 17,406,341 $ 8,858,806 $ 11,280,906 $ ‐ Net realized gains Net change in unrealized gains Contributions Distributions
Eagle Income Appreciation II, LLC
$
OZ Overseas Fund II, Ltd.
9,103,098 $ ‐
Total
$ 46,649,151
‐
‐
‐
‐
‐
‐
‐
208,966 1,000,000 ‐
(61,467) ‐ ‐
(138,673) ‐ ‐
80,500 3,500,000 ‐
752,684 ‐ (3,000,000)
(256,531) 4,700,000 ‐
585,479 9,200,000 (3,000,000)
Balance at December 31, 2011 $ 18,615,307 $ 8,797,339 $ 11,142,233 $
3,580,500 $
6,855,782 $ 4,443,469 $ 53,434,630
Research and Development Fund In February 2010, the Board approved the creation of the South Texas Healthcare Research & Development Fund (“R&D Fund”). The purpose of the R&D Fund is to boost healthcare‐related research and development in MHM’s service area by making strategic capital investments that focus on development of healthcare related devices, treatments, processes, and drugs. The initial amount allocated to this fund by the Board was up to $5,000,000. The R&D Fund operates under its own investment policy statement. The initial funding is to be put to work over time as suitable opportunities present themselves. As of December 31, 2011 and 2010, the R&D Fund had positions in two limited partnerships, Incube Ventures II, LP and Targeted Technology Fund, LP. The total committed capital for those partnerships was $1,500,000 and, as of December 31, 2011, $550,000 of that had been called ($450,000 in 2010). According to the limited partnership agreements, the remaining $950,000 is to be called within five years of the agreement date.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
2. Fair Value Measurements and Disclosures (continued) Research and Development Fund (continued) MHM’s capital accounts, per the unaudited financial information of each limited partnership, were used to approximate fair value. Per Fair Value Measurements and Disclosures of the ASC, these partnerships are categorized as Level 3 investments. Value at Agreement Total Called December 31, Limited Partnership Date Commitment Capital 2011 Incube Ventures II, LP Targeted Technology Fund, LP
Limited Partnership Incube Ventures II, LP Targeted Technology Fund, LP
August 2010 $ February 2010
1,000,000 500,000
$ 300,000 250,000
$
254,759 225,311
$
1,500,000
$ 550,000
$
480,070
Total Commitment
Called Capital
August 2010 $ February 2010
1,000,000 500,000
$ 200,000 250,000
$
180,805 236,439
$
1,500,000
$ 450,000
$
417,244
Agreement Date
Value at December 31, 2010
3. Investment in Methodist Healthcare System of San Antonio, Ltd., LLP – Equity Method During 2011 and 2010, $92,500,000 and $101,000,000, respectively, were distributed to each partner. The Partnership evaluates the cash position and projected future cash flows each month and proposes distributions or cash calls with the goal of maintaining cash on hand of approximately $15,000,000.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
3.
Investment in Methodist Healthcare System of San Antonio, Ltd., LLP – Equity Method (continued)
A summary of MHM’s earnings and distributions re ceived from its investment in the Partnership is as follows: December 31, 2011 2010 Investment in the Partnership at beginning of year Earnings from the Partnership Distributions from the Partnership Partner capital call
$ 325,018,405 106,058,900 (92,500,000) ‐
$ 276,487,022 114,531,383 (101,000,000) 35,000,000
Investment in the Partnership at end of year
$ 338,577,305
$ 325,018,405
The Partnership made capital calls in 2010 of $35,000,000 from each of its partners to fund the purchase of Methodist Texsan Hospital. A summary of the Partnership’s assets, liabilities, and partners’ capital and results of operations as of and for the years ended December 31, 2011 and 2010 is as follows: 2011 2010 Total assets
$
944,683,000
$
935,341,000
Total liabilities
$
138,395,000
$
157,056,000
Partners’ capital Noncontrolling interest
802,072,000 4,216,000
774,956,000 3,329,000
Total equity
806,288,000
778,285,000
Total liabilities and partners’ capital
Total revenues Total expenses
$
944,683,000
$
935,341,000
$ 1,428,483,000 1,216,367,000
$ 1,348,478,000 1,119,414,000
$
$
212,116,000
229,064,000
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
3.
Investment in Methodist Healthcare System of San Antonio, Ltd., LLP – Equity Method (continued)
The difference between the amount of underlying equity in partners’ capital and the amount at which the investment in the Partnership is carried at December 31, 2011 is as follows: Partners’ capital at December 31, 2011 $ 404,578,305 Less excess working capital payments by HCA Inc. (13,714,000) Less parity payment by HCA Inc. (74,750,000) Plus equity reclassed to intercompany debt with HCA Inc. 22,463,000 Investment in the partnership
$ 338,577,305
In furtherance of MHM’s mission, the Partnership provides charity care to patients without financial means to pay for hospital services in accordance with its eligibility policy. Charity admissions, as a percentage of total patient admissions, were 2.7% and 2.1% at December 31, 2011 and 2010, respectively. Charity cost (calculated based on the overall cost‐to‐charge ratio per the Partnership’s consolidated financial statements), totaled $27,200,000 and $22,200,000 at December 31, 2011 and 2010, respectively. Charity cost as a percentage of net patient revenue totaled 1.8% and 1.5% at December 31, 2011 and 2010, respectively. 4. Property, Equipment, and Land Property, equipment, and land consist of the following: December 31, 2011 2010 Land Buildings and land improvements Leasehold improvements Office furnishings and equipment Less accumulated depreciation and amortization Net property and equipment
$ 2,527,278 22,815,939 427,078 5,226,788
$ 2,217,477 22,608,044 421,308 4,732,670
30,997,083 7,027,227
29,979,499 5,362,721
$ 23,969,856
$ 24,616,778
Depreciation and amortization expense for the year ended December 31, 2011 totaled $1,742,141 ($1,673,989 in 2010).
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
5. Construction in Progress The construction in progress at the end of 2011 consisted primarily of planning fees for the WHWC and child care center expansion approved by MHM (see Note 8). The construction in progress balance was $304,819 and $0 at December 31, 2011 and 2010, respectively. Assets Limited as to Use 6. Endowment Fund The endowment fund is considered a permanently restricted asset. The investment is to be held in perpetuity with the income designated for charity care. Investments are stated at fair value, which approximates cost and are composed of the following: December 31, 2011 2010 Texas Methodist Foundation
$ 100,000
$ 100,000
Board‐Designated Investments Investments that are designated by the Board for funding of future programs and potential partnership capital calls are stated at fair value based on market prices, with the exception of certain investments in partnerships that hold investments in market‐neutral hedge funds. All investments stated at fair value have an inherent level of market risk associated. Investments are composed of the following: December 31, 2011 2010 Texas Methodist Foundation State of Israel Jubilee Bond Managed accounts: Equities Fixed income Investments in limited partnerships Mutual funds Interest receivable
$
2,631,850 25,000
$
8,566,829 25,000
176,140,270 25,356,226 53,434,630 40,653,039 239,618
181,726,298 20,354,633 46,649,151 38,494,304 229,285
$ 298,480,633
$ 296,045,500
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
6. Assets Limited as to Use (continued) Summary of Activity Market value at December 31, 2009
$ 192,363,874
Net contributions Realized gains Interest and dividend income Investment fees Change in market value
69,125,000 4,604,071 4,314,376 (1,082,275) 26,720,454
Market value at December 31, 2010
296,045,500
Net contributions Realized gains Interest and dividend income Investment fees Change in market value
7,502,449 6,727,458 4,545,150 (1,407,129) (14,932,795)
Market value at December 31, 2011
$ 298,480,633
Research and Development Fund The purpose of the R&D Fund is to boost healthcare‐related research and development in MHM’s service area by making strategic capital investments that focus on development of healthcare related devices, treatments, processes, and drugs. December 31, 2011 2010 Research and Development Fund
$ 480,070
$ 417,244
Due to the volatility of the stock market, there is a reasonable possibility of changes in fair value and additional gains and losses in the near term subsequent to December 31, 2011.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
7. Retirement Plan MHM has established a defined contribution pension plan offered through two different options, a 401(k) plan and a 403(b) plan, which cover substantially all eligible employees. All employees are eligible to participate in either plan; however, matching employer contributions are only made to the 401(k) plan. MHM matches employee contributions to the 401(k) plan up to 7% of annual salary (employees with ten years of service are eligible for an additional 2% match) subject to IRS limitations. Contributions to the defined contribution pension plan totaled $736,406 and $488,671 at December 31, 2011 and 2010, respectively. In addition to these plans, MHM also makes available a 457 deferred compensation plan for top management of MHM. 8. Commitments and Contingencies Malpractice claims that fall within the Hospital/MHM’s adopted policy of self‐insurance (see Note 1) could be asserted against the Hospital/MHM. There could be additional incidents that could have occurred through January 10, 1995, which may result in the assertion of additional claims. Management has no knowledge of potential claims. In August 2011, MHM renewed its agreement with Frost Bank for a $50,000,000 line of credit with a variable rate at prime plus 0.0%. The line imposes certain minimum investment balance restrictions. Subsequent to year end the line of credit was renegotiated at a rate equal to 1 month LIBOR plus 1.5% which will be effective starting in June 2012. The amount outstanding on this line of credit was $0 and $35,000,000 as of December 31, 2011 and 2010, respectively. In an effort to expand services to the underserved in the community served by WHWC, the Board approved an expansion of the WHWC building and the construction of a new child care center building (to be operated by another entity) on the property. The estimated cost of the project is $12,600,000 and construction is planned to begin in the summer of 2012.
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Methodist Healthcare Ministries of South Texas, Inc.
Notes to Consolidated Financial Statements
8. Commitments and Contingencies (continued) Leases MHM leases six facilities for programs and clinics under operating leases expiring at various dates through December 2016. Rental expense in 2011 and 2010 for all operating leases totaled $237,860 and $203,107, respectively. Future minimum rental commitments under noncancellable operating leases (with an initial or remaining term in excess of one year) at 2011 are as follows: Year ending December 31, 2011 2012 $ 224,782 2013 215,199 2014 130,058 2015 3,099 2016 1,895 Thereafter 1,801 $ 576,834
9. Income Taxes MHM has been determined to be exempt from federal income taxes pursuant to Section 501(c)(3) of the Internal Revenue Code, as amended. After examination by the IRS challenging MHM’s tax‐exempt status, MHM entered into a closing agreement dated October 2, 2001, which reaffirms MHM’s tax‐exempt status under Section 501(c)(3). MHM files IRS Form 990T, Exempt Organization Business Income Tax Return, annually. Taxes paid for unrelated business income in 2011 and 2010 totaled $300,835 and $289,075, respectively. 10. Subsequent Events MHM has evaluated subsequent events through June 11, 2012, the date the consolidated financial statements were available to be issued.
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