SEATTLE CANCER CARE ALLIANCE. Financial Statements. June 30, 2014 and (With Independent Auditors Report Thereon)

Transcription

1 Financial Statements (With Independent Auditors Report Thereon)

2 KPMG LLP Suite Eighth Avenue Seattle, WA Independent Auditors Report The Board of Directors Seattle Cancer Care Alliance: Report on the Financial Statements We have audited the accompanying financial statements of Seattle Cancer Care Alliance (the Company), which comprise the balance sheets as of, and the related statements of operations and changes in unrestricted net assets, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seattle Cancer Care Alliance, as of, and the results of its operations and changes in net assets and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Seattle, Washington October 7,

4 Balance Sheets Assets Current assets: Cash and cash equivalents $ 37,616,000 39,815,000 Short-term investments 244,587, ,147,000 Patient accounts receivable, net of allowance for doubtful accounts of $1,190,000 and $2,405,000 in 2014 and 2013, respectively 47,442,000 46,672,000 Due from related parties 2,685,000 2,225,000 Other receivables 4,930,000 4,287,000 Current portion of assets whose use is limited 21,000 21,000 Supplies inventory, at cost 5,534,000 3,720,000 Prepaid expenses 2,840,000 2,184,000 Total current assets 345,655, ,071,000 Assets whose use is limited: Trustee held funds and other 9,788,000 9,664,000 Total assets whose use is limited 9,788,000 9,664,000 Less current portion (21,000) (21,000) Net assets whose use is limited 9,767,000 9,643,000 Property, plant, and equipment, net of accumulated depreciation 109,085, ,337,000 Deferred financing costs, net of accumulated amortization of $735,000 and $629,000 in 2014 and 2013, respectively 470, ,000 Intangible assets, net of accumulated amortization of $16,651,000 and $15,410,000 in 2014 and 2013, respectively 11,047,000 12,288,000 Investment in ProCure Seattle Holdings, LLC 5,000,000 Other assets 12,875,000 9,070,000 Total assets $ 488,899, ,985,000 Liabilities and Net Assets Current liabilities: Current portion of long-term debt $ 1,986,000 1,886,000 Accounts payable and accrued expenses 35,003,000 22,275,000 Due to related parties 25,056,000 22,447,000 Third-party payor settlements payable 7,039,000 7,825,000 Accrued interest payable 1,971,000 1,998,000 Total current liabilities 71,055,000 56,431,000 Long-term debt, net of current portion 98,692, ,556,000 Other long-term liabilities 961, ,000 Total liabilities 170,708, ,923,000 Commitments and contingencies Net assets: Unrestricted 315,816, ,810,000 Temporarily restricted 1,489,000 1,366,000 Permanently restricted 886, ,000 Total net assets 318,191, ,062,000 Total liabilities and net assets $ 488,899, ,985,000 See accompanying notes to financial statements. 3

5 Statements of Operations and Changes in Unrestricted Net Assets Years ended Operating revenues: Patient service revenue (net of contractual allowances and discounts) $ 407,864, ,206,000 Provision for bad debts (1,683,000) (1,757,000) Net patient service revenue less provision for bad debts 406,181, ,449,000 Other operating revenue 28,094,000 24,811,000 Net assets released from restriction used for operations 953,000 1,471,000 Total operating revenues 435,228, ,731,000 Operating expenses: Salaries, wages, and benefits 99,652,000 93,725,000 Purchased services 138,580, ,402,000 Supplies 108,141,000 91,377,000 Depreciation and amortization 15,915,000 15,729,000 Interest 6,345,000 6,430,000 Other 39,522,000 32,156,000 Total operating expenses 408,155, ,819,000 Net income from operations 27,073,000 29,912,000 Nonoperating income: Investment income 12,295, ,000 Investment in Procure Seattle Holdings, LLC (5,000,000) (24,500,000) Other income, net 394, ,000 Excess of revenues over expenses 34,762,000 6,578,000 Net assets released from restriction used for capital acquisitions 270,000 85,000 Grants and contributions restricted for capital acquisitions 740,000 Change in net unrealized losses on other than trading securities (26,000) (285,000) Change in value of investment in Procure Seattle Holdings, LLC 13,538,000 Change in unrestricted net assets 35,006,000 20,656,000 Unrestricted net assets, beginning of year 280,810, ,154,000 Unrestricted net assets, end of year $ 315,816, ,810,000 See accompanying notes to financial statements. 4

6 Statements of Changes in Net Assets Years ended Temporarily Permanently Unrestricted restricted restricted Total Balance, June 30, 2012 $ 260,154, , , ,012,000 Excess of revenues over expenses 6,578,000 6,578,000 Restricted contributions, grants, and other 1,937,000 1,937,000 Net assets released from restriction for operations (1,471,000) (1,471,000) Net assets released from restriction for capital acquisitions 85,000 (85,000) Grants and contributions restricted for capital acquisition 740, ,000 Change in net unrealized gains (losses) on other than trading securities (285,000) 13,000 (272,000) Change in value of investment in Procure Seattle Holdings, LLC 13,538,000 13,538,000 Change in net assets 20,656, ,000 21,050,000 Balance, June 30, ,810,000 1,366, , ,062,000 Excess of revenues over expenses 34,762,000 34,762,000 Restricted contributions, grants, and other 1,265,000 1,265,000 Net assets released from restriction for operations (953,000) (953,000) Net assets released from restriction for capital acquisitions 270,000 (270,000) Change in net unrealized gains (losses) on other than trading securities (26,000) 81,000 55,000 Change in net assets 35,006, ,000 35,129,000 Balance, June 30, 2014 $ 315,816,000 1,489, , ,191,000 See accompanying notes to financial statements. 5

7 Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ 35,129,000 21,050,000 Adjustments to reconcile change in net assets to net cash provided by operating activities: Restricted donations and grants provided for property and other (270,000) (1,975,000) Net realized and change in unrealized (gains) losses on investments (6,777,000) 4,721,000 Amortization of premiums and discounts of other than trading securities (15,000) 5,000 Loss on disposal of assets 553,000 95,000 Loss on Investment in Procure Seattle Holdings, LLC 5,000,000 24,500,000 Change in value of investment in Procure Seattle Holdings, LLC (13,538,000) Depreciation and amortization 15,915,000 15,729,000 Amortization of discount on issuance of long-term debt 122, ,000 Donation of unrestricted financial assets 10,000 Provision for bad debts 1,683,000 1,757,000 (Increase) decrease in: Patient accounts receivable (2,453,000) (8,447,000) Due from related parties (460,000) (1,103,000) Other receivables (643,000) 429,000 Supplies inventory (1,814,000) 27,000 Prepaid expenses (656,000) (450,000) Other long-term assets (5,646,000) (4,615,000) Increase (decrease) in: Accounts payable and accrued expenses 11,733,000 2,486,000 Due to related parties 2,609,000 3,680,000 Third-party payor settlements payable (786,000) 945,000 Accrued interest payable (27,000) (29,000) Other long-term liabilities 25,000 84,000 Net cash provided by operating activities 53,222,000 45,476,000 Cash flows from investing activities: Purchases of property, plant, and equipment (12,110,000) (11,377,000) Proceeds from sale of property, plant, and equipment 77,000 5,000 Net purchases and sales of trading securities (42,275,000) (46,233,000) Proceeds from sale of other than trading securities 503,000 1,797,000 Net cash used in investing activities (53,805,000) (55,808,000) Cash flows from financing activities: Payment of debt issuance costs (19,000) Principal payments on long-term debt (1,886,000) (1,801,000) Restricted donations and grants provided for property and other 270,000 1,975,000 Net cash (used) provided by financing activities (1,616,000) 155,000 Net decrease in cash and cash equivalents (2,199,000) (10,177,000) Cash and cash equivalents at beginning of year 39,815,000 49,992,000 Cash and cash equivalents at end of year $ 37,616,000 39,815,000 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 6,202,000 6,295,000 Supplemental disclosures of noncash activity: Purchase of property, plant, and equipment included in accounts payable $ 1,480, ,000 See accompanying notes to financial statements. 6

8 (1) Organization Seattle Cancer Care Alliance (SCCA) is a nonprofit corporation organized in 1998 by Seattle Children s Hospital, the University of Washington Medicine (UW Medicine), and Fred Hutchinson Cancer Research Center (FHCRC) for the purpose of developing and offering a comprehensive program of integrated cancer care services. SCCA operates a 20-bed licensed hospital inside the University of Washington Medical Center (UWMC), a member organization of UW Medicine, and operates ambulatory cancer care service facilities. In addition to providing inpatient and outpatient cancer care services, SCCA provides programmatic direction to the adult inpatient cancer services provided by UWMC and the pediatric inpatient and outpatient cancer services provided by Seattle Children s Hospital. Members of SCCA share equally in the results of operations. (2) Summary of Significant Accounting Policies (a) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) (c) (d) (e) Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the date of purchase. SCCA maintains cash balances, which may exceed federally insured limits. SCCA does not believe that this results in any significant credit risk. As of June 30, 2014 and 2013, cash equivalents were $26,481,000 and $30,495,000, respectively. Supplies Inventory Inventory, consisting principally of surgical, medical, and pharmaceutical supplies, is carried at the lower of cost (first-in, first-out method) or market. Assets Whose Use is Limited The funds held by trustee are held under the terms of SCCA s Trust Indenture. Amounts required to meet current liabilities have been reclassified as current assets in the balance sheets at June 30, 2014 and These funds have been invested in various money market funds. Investments Investments consist principally of U.S. government obligations, corporate bonds, collateralized mortgage obligations, and mutual funds that are stated at fair market value. All investment transactions are traded and valued in U.S. dollars. Investments purchased prior to June 1, 2011 are accounted for as other than trading investments; investments purchased on June 1, 2011 or later are accounted for as trading securities, unless otherwise specified by management at the time of purchase. As of, SCCA s trading portfolio totaled $243,848,000 and $194,893,000, respectively. As of, SCCA s other-than-trading portfolio 7 (Continued)

9 totaled $739,000 and $1,254,000, respectively. Investment income or loss (including realized gains and losses on investments, unrealized gains and losses on trading securities, and interest) is included in the excess of revenues over expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses on other than trading securities are excluded from the excess of revenues over expenses unless management has determined that an other-than-temporary impairment has taken place. A decline in the market value of any investment below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, SCCA considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investee or issuer. SCCA records an other-than-temporary impairment charge as realized impairment losses included in investment income for certain funds that are managed by external managers with the ability to trade securities at their discretion, since management does not meet the ability and intent criteria. Other than trading securities managed by external managers totaled $739,000 and $1,254,000, and represented 0.3% and 1% of SCCA s investments as of, respectively. SCCA recorded an other-than-temporary impairment charge (reported as realized impairment charge with investment income) of $2,000 and $23,000 for fiscal years 2014 and 2013, respectively. (f) (g) (h) (i) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Improvements and replacements of plant and equipment are capitalized, and repairs and maintenance are expensed. The cost and related accumulated depreciation of property, plant, and equipment sold or retired are removed from the accounts and the resulting gain or loss is recognized. Intangible Assets Intangible assets are stated at the value assigned to them upon contribution to SCCA, and are subject to amortization. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In 2014 and 2013, there were no impairment charges on intangible assets. Deferred Financing Costs Costs incurred to secure financing are presented as deferred financing costs and are amortized on a straight-line basis over the earlier of life of the debt or the initial bank loan tender term for private issue debt. Temporarily and Permanently Restricted Net Assets Gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. Temporarily restricted net assets are those whose use by SCCA has been limited by donors to a specific time period or purpose. Permanently 8 (Continued)

10 restricted net assets have been restricted by donors to be maintained by SCCA in perpetuity. When restricted funds to be used for operations are expended for their restricted purposes, these amounts are reflected in unrestricted net assets as net assets released from restrictions for operations and are included in operating revenues. Donor-restricted contributions whose restrictions are met in the same reporting period are reported as unrestricted support. When restricted funds are expended for the acquisition of property, plant, and equipment, these amounts are reflected in unrestricted net assets as net assets released from restriction for capital acquisitions. (j) (k) Grants and Contributions Restricted for Capital Acquisition SCCA is the recipient of grants and contributions restricted for capital acquisitions. Grants and contributions whose restrictions are met within the same year as received are reported as unrestricted net assets in the accompanying statements of changes in net assets and in grants and contributions restricted for capital acquisitions on the statements of operations and changes in unrestricted net assets. Depreciation Depreciation is computed using the straight-line method, which allocates the cost of depreciable property over the following estimated useful lives: Land improvements Buildings and fixed equipment Major movable and minor equipment 2 25 years 3 40 years 2 20 years (l) Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amount from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive agreements are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net patient service revenue is recognized in the period in which the services are performed. 9 (Continued)

11 (m) Allowance for Doubtful Accounts The allowance for doubtful accounts represents management s best estimate of probable losses inherent in the patient accounts receivable balance. This estimate is based on known troubled accounts and historical experience. Activity in the allowance for doubtful accounts was as follows for the years ended: Balance as of beginning of year $ 2,405,000 1,655,000 Provision for bad debts 1,683,000 1,757,000 Write-offs (2,898,000) (1,007,000) Balance as of end of year $ 1,190,000 2,405,000 (n) (o) Investment Income Investment income includes (1) interest and realized gains and losses on SCCA s cash equivalents, short-term investments, and assets whose use is limited, (2) unrealized gains and losses on trading securities, and (3) impairment charges on securities in accordance with SCCA s other-than-temporary impairment policy. Investment in ProCure Seattle Holdings, LLC SCCA holds an investment in ProCure Seattle Holdings, LLC (Midco) through a joint venture agreement, which is accounted for under the equity-hypothetical liquidation at book value method (HLBV). This method is applied because the capital structure gives different rights and priorities to its owners, namely SCCA is entitled to receive a priority return and a priority in distributions until its investment amounts have been returned, which makes traditional equity accounting unsuitable for recording the proper value for this investment. Under HLBV, SCCA calculates, at each balance sheet date, the amount that it would receive if Midco were to liquidate all of its assets at recorded amounts determined in accordance with Generally Accepted Accounting Principles (GAAP) and distribute the resulting cash to creditors and investors in accordance with their respective priorities. The amount SCCA would receive is referred to as SCCA s claim on Midco s book value. The difference between SCCA s claim on Midco s book value at the end of the period and its claim at the beginning of the period represents SCCA s share of Midco s earnings or losses for the period, taking into consideration any capital contributions or investments made by SCCA during the period and any distributions received by SCCA during the period. SCCA tests for impairment no less than annually using a fair market value approach. The fair market value is determined based on valuation techniques using the best information available and may include discounted cash flow projections and projected market demand. An impairment charge is recorded when the book value exceeds the fair market value of the investment. 10 (Continued)

12 (p) (q) (r) Excess of Revenues over Expenses The statements of operations and changes in unrestricted net assets include excess of revenues over expenses. Changes in unrestricted net assets that are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments of other-than-trading securities, and capital acquisitions related to grants and contributions of long-lived assets (including assets acquired using contributions, which by donor restriction were to be used for the purposes of acquiring such assets). Income Taxes SCCA has obtained a determination letter from the Internal Revenue Service indicating that it is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, except for unrelated business income tax. SCCA recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Reclassifications Certain reclassifications have been made to the prior year amounts in order to conform to current year presentation. (3) Fair Value Measurements (a) Fair Value of Financial Instruments The following methods and assumptions were used by SCCA in estimating the fair value of its financial instruments: Cash and Cash Equivalents The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. Investments and Assets Whose Use is Limited Investments in fixed income securities and equity securities with a readily determinable fair value are based on quoted market prices, if available, or estimated using quoted market prices for similar securities. Long-Term Debt The fair value of SCCA s total long-term debt at is $119,282,000 and $116,619,000, respectively. The estimated fair values of outstanding bonds are based on dealer-quoted market prices. 11 (Continued)

13 (b) Fair Value Hierarchy In accordance with Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, 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. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 Valuation is based upon quoted prices for identical assets in active markets. Cash and cash equivalents, equity, U.S. Treasury notes and bills, and mutual fund investments are included in this category. Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and independent pricing models or other model-based valuation techniques such as present value of future cash flows and adjusted for the security s credit rating, prepayment assumptions, and other factors such as credit loss assumptions for which all significant assumptions are observable in the market. Debt securities are included in this category. Level 3 Inputs are unobservable inputs for the asset or liability. SCCA does not own any Level 3 financial assets or liabilities. The level in the fair value hierarchy within which a fair value measurement falls, in its entirety, is based on the lowest level input that is significant to the fair value measurement. 12 (Continued)

14 The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value) at June 30, 2014: Fair value measurements at reporting date using Quoted prices in active Significant markets for other identical observable June 30, assets inputs 2014 (Level 1) (Level 2) Assets: Short-term investments: U.S. Treasury notes and bills $ 44,381,000 44,381,000 Equity mutual funds: Domestic 56,413,000 56,413,000 International (U.S. dollar denominated) 38,736,000 38,736,000 U.S. government agency bonds 1,667,000 1,667,000 U.S. government bonds 1,473,000 1,473,000 Corporate debt securities: Domestic financial services 21,562,000 21,562,000 Domestic utilities 11,477,000 11,477,000 Domestic consumer goods 3,541,000 3,541,000 Domestic other 9,093,000 9,093,000 International (U.S. dollar denominated) 17,162,000 17,162,000 U.S. mortgage-backed securities residential 16,361,000 16,361,000 Collateralized debt securities 20,526,000 20,526,000 Municipal bonds 2,195,000 2,195,000 Total short-term investments $ 244,587, ,530, ,057, (Continued)

15 The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value) at June 30, 2013: Fair value measurements at reporting date using Quoted prices in active Significant markets for other identical observable June 30, assets inputs 2013 (Level 1) (Level 2) Assets: Short-term investments: U.S. Treasury notes and bills $ 40,873,000 40,873,000 Equity mutual funds: Domestic 4,436,000 4,436,000 International (U.S. dollar denominated) 1,732,000 1,732,000 U.S. government agency bonds 16,365,000 16,365,000 U.S. government bonds 12,985,000 12,985,000 Corporate debt securities: Domestic financial services 17,281,000 17,281,000 Domestic utilities 11,654,000 11,654,000 Domestic consumer goods 7,955,000 7,955,000 Domestic other 12,071,000 12,071,000 International (U.S. dollar denominated) 12,789,000 12,789,000 U.S. mortgage-backed securities residential 34,242,000 34,242,000 Collateralized debt securities 21,082,000 21,082,000 Municipal bonds 2,682,000 2,682,000 Total short-term investments $ 196,147,000 47,041, ,106,000 There were no transfers into or out of Level 1 or Level 2 financial instruments during the years ended. The financial statements as of and for the years ended do not contain any nonrecurring fair value measurements relating to assets or liabilities that require disclosure under the provisions of ASC Topic (Continued)

16 (4) Investments Assets whose use is limited are composed of the following as of June 30: Trustee-held funds: Cash and cash equivalents $ 9,788,000 9,664,000 Less current portion (21,000) (21,000) $ 9,767,000 9,643,000 Other investments are composed of the following at June 30: Short-term investments: U.S. government bonds and agencies securities $ 3,140,000 29,350,000 Corporate debt securities domestic 45,673,000 48,961,000 Corporate debt securities international (U.S. dollar denominated) 17,162,000 12,789,000 U.S. Treasury notes and bills 44,381,000 40,873,000 Municipal bonds 2,195,000 2,682,000 Collateralized debt securities and U.S. mortgage-backed securities residential 36,887,000 55,324,000 Equity mutual funds 95,149,000 6,168,000 $ 244,587, ,147,000 Management classifies investments expected to mature or be sold within the following year and not restricted for other purposed as short-term investments. For other than trading debt securities whose fair values have declined below amortized cost, SCCA assesses whether it intends or would be required to sell the security before the expected recovery of the amortized cost basis. 15 (Continued)

17 Investment income, and gains and losses (for assets whose use is limited, cash equivalents, and other investments) comprise the following for the years ended June 30: Investment income: Interest income $ 5,573,000 5,140,000 Net unrealized gains (losses) on trading securities 9,931,000 (3,508,000) Realized losses on investments, net (3,207,000) (918,000) Realized impairment losses (2,000) (23,000) Total investment income $ 12,295, ,000 Other change in unrestricted net assets: Change in net unrealized losses on other than trading securities $ (26,000) (285,000) (5) Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes at June 30: Patient housing $ 252, ,000 Research 384, ,000 Specific clinics or treatment programs 235, ,000 Supportive care services 411, ,000 Other 207,000 83,000 $ 1,489,000 1,366,000 (6) Net Assets Released from Restriction Net assets were released from restriction for the following purposes for the years ended June 30: Patient housing $ 1,000 41,000 Research 640, ,000 Specific clinics or treatment programs 480, ,000 Supportive care services 102, ,000 Other 2,000 $ 1,223,000 1,556, (Continued)

18 (7) Property, Plant, and Equipment Property, plant, and equipment consist of the following as of June 30: Land and improvements $ 10,412,000 10,412,000 Buildings and fixed equipment 122,881, ,547,000 Major movable and minor equipment 71,236,000 66,311,000 Leasehold improvement 7,496,000 3,096,000 Construction in progress 8,000 8, ,033, ,374,000 Less accumulated depreciation (102,948,000) (92,037,000) $ 109,085, ,337,000 Depreciation expense for the fiscal years ended amounted to approximately $12,727,000 and $12,149,000, respectively. No interest was capitalized during the years ended June 30, 2014 or (8) Intangible Assets Intangible assets consist of the value assigned to a ground lease and contributed outpatient businesses. The ground lease was contributed by FHCRC. It relates to land upon which the SCCA s South Lake Union outpatient facility was constructed and has a term of 99 years. The outpatient businesses were contributed by FHCRC and by UWMC with the designation that SCCA be a site of practice for certain oncology-related outpatient activities. Amortization expense for intangible assets is calculated using the straight-line method and for the fiscal years ended amounted $1,241,000 for each year. The unamortized balance of the intangible assets consists of the following as of June 30: Amortization period Ground lease $ 3,116,000 3,152, years Outpatient businesses 7,931,000 9,136, years $ 11,047,000 12,288,000 The approximate amortization expense for the next five years related to these intangible assets is $1,241,000 for each year. (9) Investment in ProCure Seattle Holdings, LLC During fiscal year 2011, SCCA entered into an agreement with ProCure Washington Holdings, LLC (with its affiliates, ProCure) to form ProCure Seattle Holdings, LLC (Midco), a holding company with no operations. 17 (Continued)

19 Midco is the sole member of Seattle ProCure Management, LLC (Opco), an operating company that provides proton therapy treatments to cancer patients throughout the Northwest. As of June 30, 2012, SCCA made cumulative contributions to Midco of $29,500,000. In exchange for its investment, SCCA received and holds a 19% preferred equity ownership interest in Midco. In exchange for its contributions, ProCure indirectly received and holds the remaining 81% equity ownership interest in Midco. SCCA records this investment in Midco using the equity-hypothetical liquidation at book value method. This method is used due to Midco s capital structure, which provides different rights and priorities to the owners. Under the terms of the operating agreement, SCCA is entitled to receive a priority return and a priority in distributions until its initial investment amounts have been returned. SCCA s accrued priority return as of was $7,053,000 and $4,655,000, respectively, which have been fully reserved. Based on the current operating performance of Midco and Opco, SCCA is not likely to receive payment for this priority return until the debt of Opco is refinanced. Midco used the full amount of the equity investments of SCCA and ProCure to make an equity contribution to Opco. In addition, on August 24, 2010, Opco entered into a loan agreement for up to $116,800,000 to finance the construction of the new facility. Although Midco has guaranteed the indebtedness of Opco and has pledged its equity ownership interest in Opco to support such guarantee, such indebtedness is nonrecourse to SCCA and SCCA has not otherwise provided credit support and is not liable for any indebtedness of Midco or Opco. Construction of Opco s proton facility began in February 2011 and Opco began treating patients in March of SCCA has no obligations to make additional capital contributions to Midco or Opco and is not liable for any liabilities of Midco or Opco as of June 30, For the year ended June 30, 2014, SCCA recorded losses of $5,000,000 in Investment in Procure Seattle Holdings, LLC on the statement of operations and changes in unrestricted net assets, which was comprised entirely of operating losses.scca recorded losses of $24,500,000 on this investment for the year ended June 30, 2013, which was $8,708,000 in Midco operating losses and $15,792,000 in impairment charges to SCCA s equity ownership interest. Management evaluated the SCCA s equity interest in Investment in Procure Seattle Holdings for impairment as the following triggering events occurred: impact of current operating results of other facilities, the projected operating losses of Midco, and likely lack of future debt covenant compliance. As of, SCCA s investment in Midco was valued on the accompanying balance sheets at $0 and $5,000,000, respectively. 18 (Continued)

20 Unaudited summarized financial information for Midco was as follows: As of June 30: Current assets $ 8,141,000 1,990,000 Other assets 108,700, ,424,000 Total assets $ 116,841, ,414,000 Current liabilities $ 8,969,000 3,323,000 Other liabilities 120,126,000 99,487,000 Equity (12,254,000) 10,604,000 Total liabilities and equity $ 116,841, ,414,000 For the twelve-month period ended June 30: Operating revenues $ 15,644,000 1,575,000 Operating expenses 30,338,000 13,665,000 Operating loss (14,694,000) (12,090,000) Other loss (10,575,000) (2,890,000) Net loss (25,269,000) (14,980,000) Other comprehensive gain 2,251,000 4,622,000 Comprehensive loss $ (23,018,000) (10,358,000) 19 (Continued)

21 (10) Long-Term Debt Long-term debt consists of the following as of June 30: Washington Health Care Facility Authority, Weekly Rate Demand Revenue Bonds, Series 2010, at an average variable interest rate of 1.33% and 1.44%, for the years ended, respectively, maturing on February 1, 2038, at increasing principal amounts of $426,000 to $1,371,000 $ 19,817,000 20,243,000 Washington Health Care Facility Authority, Fixed Rate Demand Revenue Bonds, Series 2008, at an average fixed interest rate of 7.22% and 7.20%, for the years ended, respectively, maturing on March 1, 2038, net of unamortized bond discount of $2,494,000 and $2,616,000, respectively, at increasing principal amounts of $1,460,000 to $47,380,000 80,861,000 82,199, ,678, ,442,000 Less current portion (1,986,000) (1,886,000) Long-term debt, net $ 98,692, ,556,000 The maturities by year of the long-term debt obligations are as follows: 2015 $ 1,986, ,082, ,208, ,277, ,494,000 Thereafter 92,125, ,172,000 Less unamortized net discounts (2,494,000) $ 100,678,000 (a) Washington Health Care Facility Authority, Weekly Rate Demand Revenue Bonds, Series 2010 In fiscal year 2011, SCCA borrowed the proceeds of the Washington Health Care Facility Authority s $21,415,000 Weekly Rate Demand Revenue Bonds, Series 2010 (the 2010 Bonds) to provide a portion of the funds necessary to refund specified outstanding bonds and to pay a portion of the costs of issuing the 2010 Bonds. Interest is payable monthly at a rate of 65% of the sum of (LIBOR plus 1.88% effective November 1, 2012; LIBOR plus 2.15% prior to November 2012). 20 (Continued)

22 Upon issuance, SCCA entered into a private placement agreement with KeyBank National Association (Key), which was in effect as of June 30, Per the agreement, the initial bank tender date was November 1, 2013, and has since been extended to November 18, Should this agreement expire, the debt becomes public debt or a new agreement is signed. Under the terms of the credit agreement with Key, SCCA is subject to certain covenants including a requirement to maintain a minimum debt service coverage ratio of 1.75 to 1.00, Long-Term Indebtedness to sum of Long-Term Indebtedness plus Unrestricted Net Assets to not exceed 0.50 to 1.00, and 75 days of Cash on Hand. Obligations issued under the master indenture, including the obligation issued to secure the Series 2010 Bonds, are secured by a deed of trust on SCCA s South Lake Union outpatient facility. Payments on this bond will be made by SCCA; the member organizations do not guaranty any of SCCA s financial obligations, including loan repayments. (b) Washington Health Care Facility Authority, Revenue Bonds, Series 2008 In fiscal year 2009, SCCA borrowed the proceeds of the Washington Health Care Facility Authority s $90,000,000 Revenue Bonds, Series 2008 (the 2008 Bonds) to finance or reimburse the costs of constructing, remodeling, renovating, and equipping certain facilities, refund specified outstanding bonds, fund a debt service reserve fund for the 2008 Bonds, and pay certain costs of issuing the 2008 Bonds. Principal is paid upon maturity of the bond and interest is paid semiannually. SCCA has the option to redeem outstanding bonds prior to their maturity dates provided certain conditions are met. Under the debt issuance agreement, SCCA is subject to certain covenants including a requirement to maintain a minimum debt service coverage ratio of 1.10 to In addition, SCCA is required to maintain a reserve account equaling maximum annual aggregate interest, principal, and mandatory sinking fund payments for any current or future year. As of, the reserve account had a balance of $7,392,000, and is included in trustee held funds in the accompanying balance sheets. SCCA has pledged as collateral gross receivables, and a deed of trust on SCCA s outpatient facility at South Lake Union. Payments on this bond will be made by SCCA; the member organizations do not guaranty any of SCCA s financial obligations, including loan repayments. (c) Line of Credit SCCA entered into a line of credit in the amount of $3,000,000 with an expiration date of December 1, SCCA shall pay interest on the outstanding principal balance of this line of credit at the rate per annum equal to the daily LIBOR rate plus 2.5%. No funds have been drawn on this line of credit for the years ended June 30, 2014 or (Continued)

23 (11) Patient Service Revenue SCCA has agreements with third-party payors that provide for payments to SCCA at amounts different from its established rates. Gross patient service revenues were billed to the following payors for the years ended : Medicare 30% 29% Medicaid 10 9 Commercial: Premera Blue Cross (WA state) Regence Blue Shield (WA State) Other Self-pay 1 1 Other 6 6 Total 100% 100% Net patient service revenue consists of the following for the years ended June 30: Gross patient service revenue $ 698,070, ,400,000 Deductions from gross patient service revenue (290,206,000) (256,194,000) Patient service revenue, net 407,864, ,206,000 Provision for bad debts (1,683,000) (1,757,000) Net patient service revenue less provision for bad debts $ 406,181, ,449,000 A summary of the payment arrangements with major third-party payors follows: (a) Medicare Medicare pays for inpatient hospital services under the prospective payment system (PPS) unless the provider is statutorily exempt from PPS (Exempt Hospital). PPS hospitals are paid a predetermined flat rate for inpatient care that is based on the patient s diagnosis at discharge while Exempt Hospitals are paid based on the reasonable cost of the services provided subject to an annual rate of increase limit. Exempt Hospitals receive an interim payment based on a percentage of charges submitted that is adjusted based on the filed cost report. Certain types of cancer hospitals are currently included among the Exempt Hospitals. SCCA s inpatient facility has been recognized by Medicare as an Exempt Hospital. Medicare has historically paid for outpatient services on the basis of the cost of or a portion of the cost of providing the services. The Balanced Budget Act of 1997 (BBA) required a phased in prospective payment system for outpatient services (OP PPS). The Center for Medicare and 22 (Continued)

24 Medicaid Services (CMS), an agency of the United States Department of Health and Human Services (HHS), issued regulations implementing OP PPS, which became effective as of August 1, Before the effective date of OP PPS, the Balanced Budget Refinement Act of 1999 (BBRA) established a hold harmless provision for cancer hospitals ensuring that they would be supplemented for certain covered services incurred under OP PPS. Under the hold harmless provision, if the amount of payment the cancer hospital would receive under OP PPS is less than what it would have received before OP PPS implementation, the amount of payment due to the cancer hospital will be increased by the amount of such difference. As an Exempt Hospital, SCCA qualifies for payment under the hold harmless provision. The Budget Control Act of 2011 requires automatic spending reductions beginning April 1, 2013 to reduce the federal deficit, including Medicare spending reductions of up to 2% for a fiscal year, with a uniform percentage reduction across all Medicare programs. In 2013, the Centers for Medicare and Medicaid Services notified SCCA that Medicare fee-for-service claims with dates-of-service or dates-of-discharge on or after April 1, 2013 will incur a 2% reduction in Medicare payments. Adjustments from finalizations from prior year cost reports and other third-party settlement estimates resulted in an increase of net patient service revenues of approximately $2,049,000 in 2014 and $1,501,000 in (b) Medicaid SCCA is paid for services provided to Medicaid patients under the state s fee schedule, which is based on a modification of Medicare s prospective payment systems for inpatient and outpatient care. In 2009, the State of Washington enacted a safety net assessment program involving Washington State hospitals to increase funding from other sources and obtain additional federal funds to support increased payments to providers for Medicaid services. SCCA is participating in the program and has recorded increases in Medicaid payments through net patient service revenue and assessments in other operating expenses during the year ended June 30, 2014 and decreases during the year ended June 30, (c) Commercial Case Rate Contracts For certain commercial payors, SCCA has negotiated a single payment (case rate) for a defined period of care (case rate period) related to providing a bone marrow or stem cell transplant. All of SCCA s case rate contracts specify a minimum and maximum payment calculation based on a review of actual gross charges provided during the case rate period. In addition to the case rate payments, the case rate contracts also specify negotiated fee-for-service rates for services performed outside of the case rate period. Case rate contracts extend to SCCA related parties. SCCA serves as the collection agent for the case rate payments. All case rate payments are remitted to SCCA, which in turn remits payment to each respective related party for its proportionate share of services rendered. Any liability to related parties has been accrued in accounts payable and accrued expenses at. 23 (Continued)

25 (d) Charity Care SCCA provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because SCCA does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Approximately $7,415,000 and $7,940,000 in gross charges were provided for charity care in 2014 and 2013, respectively. The estimated net cost of charity care provided was approximately $4,301,000 and $4,605,000 in 2014 and 2013, respectively. The net cost of charity care was calculated using a percentage of cost to charges, which was 58% in 2014 and The number of charity care patients served was 2,100 in 2014 and 2,147 in SCCA provides services to patients covered under Medicaid at a cost that exceeds payments. During 2014 and 2013, SCCA provided uncompensated care to Medicaid patients, measured at cost, of $24,274,000 and $21,031,000, respectively. (e) Bad Debt For patients that do not qualify for charity care, SCCA recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a portion of SCCA s patients will be unable or unwilling to pay for the services provided. Thus, SCCA records a provision for bad debts related to patients in the period the services are provided. (12) Related Party Transactions Members of SCCA share equally in the capital contributions and in the results of operations. The initial capital contributions of the members were based on a contribution schedule in accordance with the Members Agreement dated June 15, Contributions in 1998 consisted of cash payments, contributed equipment, a ground lease, and the fair value of existing businesses. The fair value of existing businesses was recorded as intangible assets at the time that the related programs were transferred to the SCCA. No contributions have been made since fiscal year (a) Outpatient and Other Services SCCA and its member organizations have entered into various affiliate agreements in order to optimize the use of clinical and support functions available from member organizations. Certain affiliate agreements relate to support functions, including human resources, information technology, and cover the cost of staff, purchased services and supplies, including pharmaceuticals and medical supplies. Affiliate agreements are based upon negotiated fixed monthly amounts or other specified terms and conditions for each prescribed service. Such amounts are renegotiated annually. In addition, SCCA leases out lab space to UW Medicine under a noncancelable operating lease expiring February SCCA purchased support functions from affiliates totaling $163,104,000 and $142,468,000 in fiscal years 2014 and 2013, respectively, which are included in purchased services and supplies on the statements of operations and changes in unrestricted net assets. SCCA sold support functions to member organizations in the amount of $17,157,000 and $14,295,000 in fiscal years 2014 and 2013, respectively, which are included in other operating revenue on the statements of operations and changes in unrestricted net assets. 24 (Continued)

26 In addition, SCCA sells certain services to Seattle ProCure Management, LLC (Opco) to support the operations of the clinic. During the years ended, SCCA recognized income of $6,000 and $267,000, respectively, from services sold to Opco, which is included in the other operating revenue line of the statements of operations and changes in unrestricted net assets. (b) Inpatient Services Under the Pediatric and Adult Inpatient Services Agreement, SCCA operates certain ambulatory cancer care services and facilities, and obtains inpatient services from Seattle Children s Hospital for pediatric patients and UWMC for adult patients. SCCA provides programmatic direction for the inpatient cancer services at UWMC and Seattle Children s Hospital as set forth in the respective agreements. UWMC and Seattle Children s Hospital make their personnel and facilities available to FHCRC, as set forth in the respective agreements, to enable FHCRC to meet its requirements in connection with pediatric and adult cancer research and obtain certain research and related services. The Pediatric and Adult Inpatient Services Agreement was amended and restated effective July 1, In addition, SCCA operates a 20-bed adult inpatient unit within UWMC s facility. SCCA has received notification from the fiscal intermediary that this inpatient unit is designated as a hospital within a hospital. Therefore, gross revenues for these inpatient services are recorded by SCCA, which provides medical oversight and management for the inpatient unit. UWMC provides patient care services to SCCA including necessary personnel, equipment, and ancillary services. SCCA pays UWMC for services provided to SCCA inpatients based upon the agreement. SCCA recognized $39,425,000 and $38,815,000 of expenses related to these services in fiscal years 2014 and 2013, respectively, which are included in purchased services in the statements of operations and changes in unrestricted net assets. SCCA also makes its personnel and facilities available to FHCRC, to enable FHCRC to meet its requirements in connection with adult cancer research. SCCA purchases from FHCRC certain research and development support, data collection and analysis, physician assistant services, consulting services, and license rights to use the FHCRC name in connection with the inpatient cancer services program. SCCA incurred $6,346,000 and $6,217,000 in expenses related to these services in fiscal years 2014 and 2013, respectively, which are included in purchased services in the statements of operations and changes in unrestricted net assets. 25 (Continued)