THE QUEEN'S HEALTH SYSTEMS

THE QUEEN'S HEALTH SYSTEMS Account No. 95429370

1099 Alakea Street, Suite 1100' Honolulu, Hawaii 96813. Phone 1808) 532-6100. FAX: 1808) 532-6118

January 12, 2010

ML John McIntire Trust Review Analyst US Bank Corporate Trust Services 633 West Fifth Street, 24th Floor LM-CA-T24T Los Angeles, California 90071

RE: The Queen's Health Systems Annual Report as of and for the year ended June 30, 2009 (As Defined in the Master Continuing Disclosure Agreement, dated July 1, 1996 and as amended by Amendment No.1 to the Master Continuing Disclosure Agreement, dated March 30, 2009)

Dear ML McIntire:

Attached is the Annual Report of The Queen's Health Systems as of and for the year ended June 30, 2009, as required pursuant to Section 5 of the Master Continuing Disclosure Agreement dated July I, 1996, as amended by Amendment No, I to the Master Continuing Disclosure Agreement dated March 30, 2fl09,

J n accordance with the Master Continuing Disclosure Agreement and the amendment to the Securities and Exchange Commission Rule 15c2-12, please provide an electronic copy of this Annual RepOli to the Municipal Securities Rulemaking Board and notify us of this action in writing,

Please contact Kanoe Margol at (808) 535-8718 if there are any questions,

Sincerely,

Richard C, Keen Executive Vice President and Chief Financial Officer

Enclosure

The mIssion of The Queen ,. Health Systems is to fulfill the intent of Queen Emma and King Kamehameha IV to provide in perpetuity quality health care services to improve the well-being of Native Hawaiians and all o.fthe people ofHawai'i.

Account No. 95429370

ANNUAL REPORT (as defined in the Master Continuing Disclosure Agreement dated July 1, 1996 and amended by

Amendment No.1 to the Master Continuing Disclosure Agreement, dated March 30, 2009)

The Queen's Health Systems As of and For the Year Ended June 30, 2009

Annual Report - 2

ANNUAL REPORT The Queen's Health Systems

As of and For the Year Ended June 30, 2009

TABLE OF CONTENTS

1. Annual Report Certificate

2. Schedule I - List of Obligated Persons


3. Schedule A - List of Bond Insurers, Credit Enhancers and Liquidity Providers

4. Audited Consolidated Financial Statements of The Queen's Health Systems and Subsidiaries and The Queen's Health Systems Obligated Group Schedules as of and for the Years Ended June 30, 2009 and 2008

5. Financial Information a. Combined Statements of Umestricted Revenues, Expenses and Other

Changes in Umestricted Net Assets for The Queen's Health Systems Obligated Group for the Years Ended June 30, 2009 and 2008 (see item 4)

b. Consolidated Statements of Umestricted Revenues, Expenses and Other Changes in Umestricted Net Assets for The Queen's Health Systems and Subsidiaries for the Years Ended June 30, 2009 and 2008 (see item 4)

c. Sources of Revenue for The Queen's Health Systems Obligated Group for the Year Ended June 30, 2009

d. Capitalization of The Queen's Health Systems Obligated Group as of June 30,2009

e. Management's Discussion of Financial Performance

6. Operating Data The Oueen's Medical Center

a. Staffed acute beds b. Acute admissions c. Acute patient days d. Average length of stay e. Licensed beds

The Queen's Health Systems Obligated Group f. Employees

Annual Report - 3


Annual Report Certificate

The undersigned duly appointed and Executive Vice President and Chief Financial Officer of The Queen's Health Systems, which is the Obligated Group Agent under (and as defined in) the Master Trust Indenture dated as of July I, 1996, as supplemented and amended (the "Master Indenture") by and among the Members of the Obligated Group (as defined in the Master Indenture) and U.S. Bank Trust, National Association, as Master Trustee (the "Master Trustee"), hereby certifies on behalf of the Obligated Group Agent pursuant to the Master Continuing Disclosure Agreement, dated as of July 1, 1996, as amended by Amendment No.1, dated March 30, 2009 (the "Master Continuing Disclosure Agreement") between the Obligated Group Agent and U.S. Bank Trust, National Association, as Dissemination Agent (the "Dissemination Agent"), as follows:

1. Definitions. Capitalized te=s used but not defined herein shall have the meanings ascribed thereto in the Master Continuing Disclosure Agreement.

2. Annual Report. Accompanying this Annual Report Certificate is the Annual Report for the Fiscal Year ended June 30, 2009.

3. Compliance with Master Continuing Disclosure Agreement. The Annual Report is being delivered to the Dissemination Agent herewith not later than the last day of the seventh calendar month after the end of a Fiscal Year which is the applicable Annual Report Date for purposes of such Annual Report. The Annual Report contains, or includes by reference, Financial Information and Operating Data of the types identified in the Continuing Disclosure Certificate most recently delivered to the Dissemination Agent pursuant to Section 5 of the Master Continuing Disclosure Agreement. The Financial Information and Operating Data relates to the Obligated Persons identified in Schedule I hereto to the extent such Financial Info=ation and Operating Data is relevant to such Obligated Persons' operations, and such Obligated Persons constitute all of the Obligated Persons with respect to the Related Bonds for the Fiscal Year covered by the Annual Report. To the extent any such Financial Info=ation or Operating Data is included in the Annual Report by reference, any document so referred to has been previously provided to the Repositories or filed with the Securities and Exchange Commission (SEC) or, in the case of a reference to a Final Official Statement, has been filed with the Municipal Securities Rulemaking Board (MSRB).

Such Financial Info=ation and Operating Data have been prepared on the basis of the Audited Financial Statements. Such Audited Financial Statements are included as part of the Annual Report.

4. Attached hereto as Schedule A is a listing of the bond insurers, providers of any credit enhancement and the issuers of any liquidity facilities with respect to any related bonds.

Annual Report - 4


IN WITNESS WHEREOF the undersigned has executed and delivered this Annual Report Certificate to the Dissemination Agent, which has received such certificate and the Annual Report, all as ofthe 12th day of January, 2010.

Acknowledgment of Receipt:

U.S. BANK TRUST, NATIONAL ASSOCIATION, as Dissemination Agent

By: --~------------------------

Its: ______________________ _

THE QUEEN'S HEALTH SYSTEMS, as Obligated Group Agent

By: --"'---~-~7---1-· _~k----,--~ __ Its: Executive Vice President and Chief Financial Officer

Annual Report - 5

SCHEDULE I

List of Obligated Persons*

The Queen's Health Systems The Queen's Medical Center Queen's Development Corporation Diagnostic Laboratory Services, Inc.


'Note: Effective Aprill, 2009, Molokai General Hospital withdrew from the Obligated Group.

Annual Report - 6

SCHEDULE A

List of Bond Insurers, Credit Enhancers and Liquidity Providers

Bank of America, N,A. 800 Sth Avenue, 3Sth Floor

Mail Code: WAI-SOI-3S-0S Seattle, Washington 98104-318S

Wells Fargo Bank, National Association as Administrative Agent

333 Market Street, 18th Floor MAC A0119-186

San Francisco, CA 9410S

Ambac Assurance Corporation One State Street Plaza

NewYork,NY 10004

Annual Report - 7


The Queen's Health Systems and Subsidiaries Consolidated Financial Statements as of and for the Years Ended June 30, 2009 and 2008, Obligated Group Schedules as of and for the Years Ended June 30, 2009 and 2008, and Independent Auditors' Report

Annual Report - 8


THE QUEEN'S HEALTH SYSTEMS AND SUBSIDIARIES

TABLE OF CONTENTS

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED FINANCIAL STATEMENrS AS OF AND FOR THE YEARS ENDED JUNE 3(), 2009 AND 2008:

Balance Sheets

Statements of Ol)erarions and Changes in Net Assets

Statements of Cash Hows

Notes to Consolidated Financial Statements

SUPPLEMENTAL SCHEDULES:

Combined Balance Sheets for the Members of The Queen's Health Systems Obligated Group as of June 3(), 2()09and 20()8

(:Ornbin~.d Statements of Operations and Changes in Net Assets for the Members of The Queen's Health Systems Obligated Group for the years ended June 30, 2009 and 2()()8

Page

1-2

3-4

5-6

7-8

1)··31

32

33-34

35-36

Deloitte

INDEPENDENT AUDITORS' REPORT

To the Board of Trustees of The Queen's Health Systems and Subsidiaries:

Deloitte .& Touche LLP Suite 1200 i 132 Bis;hop Street Honolulu" HI %8L1I-·2.8'10 U5A

Tei:-+'I 80S 54,1 0700 filx: +1 80S 5261J2:{S www,Oeioiti.',e,>::Orn

We have audited the accompanying consolidated halance sheets of The Queen's Health Systems and subsidiaries (QHS) fLS of June 30, 2009 and 2008, and Il,e related consolidated statements of operations and chank"'s in net assets and cash llows for the years then ended. These consolidated Ilnandal statements are the responsibility of QHS' management. Our responsibility is to express an opinion on these consolidated l1nancial statement, based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require lhal we plan and perfon11 the audits to obtain reasonable assurance about whether the consolidated financial statements arefl'ee of material misstatement. An audit includes consideration of internal control over l1nancial [cpOtting usa basis for designing audit procedures that are appropriate in the circllmstances, but not for the pnrpose of expressing an opinioll on the effectiveness of QHS' internal control over financial re[JOlting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles nsed and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In onr opinion, such cOllSolidated financial statement~ present fairly, in allmatc!'ia! respects, the consolidated l1nancial position of QI!S at June 30, 2009 and 2008, and Ole conso.lidated resl1lt~ of its operations and changes in net assets, and its cash flows for the years then ended in confomlity with aceol1nting principles generally accepted in the United States of America.

Our audits were conducted for the pm'pose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedules listeD in the table of conlents am presented for the purpose of additional analysis, and are not Ii required part of the basic consolidated financial statements. These supplemental schedules are the responsibility of QHS' management Such supplemental schedules have been subjected to the aUditing procedures applied in our andit of tlle basic consolidated financial statements and, in our opinion, are fairly slated, in all malerial resp""l" when considered ill relation to the basic consolidated financial statements taken as a whole.

As discussed in Note Ito the consolidated financial statements, QHS lransfe'Ted ~ significant amount of its investment portfolio into the trading category on June 30, 2009.

Member of Dtioltt0 1'1)I.I(he T()htrmt~~l

As d.iscussed in Note 1 to the consolidated financial statements, QHS adopted Financial Accounting Standards Board (FASB) Stall Position (FSP) AICPA Statement of Position (SOP) <)4-3-1 and AICPA Audit and Accounting Guicie, Health Care Organizations (AAG HeO)-I, Omnibus Changes to Consolidation and Equity Metilod Guidance for Not:fdr-f'rq(it Orgalliz,ariolls. The adoption of this FSI' resulted in accounting for investments in limited liability entilies on the equity method, and classifying $53,737,000 of losses in nonoperaling income (expense) in the consolidated statements of operations and changes in net assets fOl' the year ended June 30, 2009.

Oclober 15, 2009

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CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008

ASSETS

CURRENT ASSETS: Cash and cash equivalentq Receivables - less allowances for nncollc<:tible accounts of $36,841 tn 2009 and $38.521 ill 2008

Due from government reimbursemelll programs Inventories Investments - current Assets whose use is limited or restricted - currenl Deferred income tax 'lsset - current Prepaid expenses and other assets

TOlal CUlTen! assets

INVESTMENTS - Less current portion

ASSETS WHOSE USE IS LlMJTED OR RESTRICTED - Less current por600

LAND, BUILDINGS, AND EQUIPMENT - Nel

GOODWILL

DEFERRED FINANCING FEES - Net

DEFERRED INCOME TAX ASSET - Less current portion

STRAIGHT,UNE RENTS RECEIVABLE

OTHER ASSETS

TOTAL

,3,

$

2009 2008

82,093 $ 46,955

93,205 93,1l7 1,454

9,438 8.447 393.233 497,995

9,274 8,958 1,423 1,396 7,900 _"",8-,098

596,566 666,420

103.248 90,055

26,331 66,666

4D0.352 397.556

7,643 7.657

7,328 8,294

12,917 I J,476

20.965 19,098

4,858

lUt271 ,296

(Conlinued)


CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008 (In thousands)

liABiliTIES AND NET ASSETS

CURRENT LlABlLmES: Account, payable and other accrued liahilities Other current liabilities Due to government reimbursement programs -"'" current Long-term debt ,- current

Total CUrren! liabilities

DUE TO GOVERNMENT REIMBURSEMENT PROGRAMS

LONG-TERM DEBT - Less current portion

PENSIGN AND POSTRETIREMENT LIABILITIES

OTHER LONG-TERM LIAB1LlTlES

Totalliabililies

NET ASSETS: Unrestricted Temporarily restricted Permanently restricted

Total net assets

TOTAL

See notes to consolidated financial statements,

- 4 -

2009 2008

$ 81,199 10,540 3,198

10,222

105,159

6,670

365,202

104,982

49,792

63],805

534,862 8,441 5,Joo

$1,J80.208

$ 82,105 10,605

102,235

3,936

375,581

40,433

32,3J~

554,498

704,834 7,572

716,798

$1,271,296

(Concluded)


CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (In thousands)

UNRESTRICTED OPERATING REVENUES: N\;.~ patient sen'ice revenucs RenlS and royalllcs Other

'rotal unrestricted npenning revenues

NET ASSETS RELEASED FROM RESTRIC'110NS

TotuI operating revenues nnd other support

UNRESTRICTED OPERATING EXPENSES: Salaries, w.ages. and employee bcneflls Supplieg Purchased services Depreciation and amortization Professional fees Provision for bad debts Rent and uUlities Interest Taxes - other toan income taxes Other

Total tmreSrricled operating expenses

OPERATING INCOME

NONOPERATING lNCOME (EXPENSE): Investment (loss) income - net Income tax (expense) benefit Loss on interest rate swap Other expense

Total nonoperating (expense) income

(DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES PRIOR TO BOND REFUNDING ACTIVITIES

LOSS ON BOND REFUNDING

(DEFrCIENCY) EXCESS OF REVENUES OVER EXPENSES (Forward)

- 5 -


CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008

(DHFICIENCY) EXCESS OF REVENUES OVER EXPENSES (Forwarded)

OTHER CHANGES: Pension relatt.':d cbanges other l:l)an net periodic pension cost Net unrealized losses on inve.'?tlTIc!)ts Net assets released from rcSlrictioIlS used for capital expenditures Other changes - net

Total other changes

(Decrease) increase in unrestricted net assets

TEMPORARILY RESTRICTED J\'ET ASSETS: Gifts and gratlts Investment loss - nel Net assets released from reslrJctJons used Cor operating expense." Net assets fe-leased from restrictions used fl..lf capital expendjmres Otll(~r -changes - net

Increase in temporarily rGstriclc:d net assets

l'ERMANElNTLY RESTRICTED NET ASSETS -- Restricled gifts

(DECREASE) INCREASE IN NET ASSETS

NET ASSEfS - Beginning of yL~ar

NET ASSETS -End o[year

See flotes to consolidated fin.ancial sta(cmC",oLI>,

- 6 '

2009 2008

(60,621) (26,493)

954 (5,606)

(l69,972)

4,724 (3,659) (4,824)

(954)

708

(12,184) (22,999)

1,315

7,433 (367)

(5,381) (1,315)

(6)

(168,395) 880

(Conc.iuded)


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008

OPERATING ACTIVITIES; (Dccl'Case) jncrx~ttS0 ill net usseLS

Adjuslments to fecondlc-(decrellsc) im:::r{."l.lsc in net assets 10 Het cash pro\'ided oy opcrnling activities: Net real.izcd and unrcaUzeu Immel> Oll jnvc~tment.s

and otl1cT-than-temporary !ORS on inv0snnen!.s Loss on int.erest rate SWl1p

Depredation and amorlization Restrict.ed gi hs Provision for bad deDts Loss on dl1)position or land, buildings. und equipment Loss on buod refunding Pension related changes other lhan net PC1'fOdic penBion cost Deferred income taxes Changes in operatlng assets and liabilities; Receivables Due to governrrrenll'eirnbLlfsemenl programs Accounls payable and other accmeclliabilities Other assets and liabilities

Net cash provided by operating acdvi1 ies

INVESTING ACTIVITIES: Purchases of' Investments and assets whose LL'iC is limited or r~"trictcd Proceeds from sales of investments and assels whose use ls limited or reSirlcted Purchases of land, buiJdings, and equipmenl Proceeds from sales of land, buildings, and equipfnem Other

Net cash used in investing nctivities

FlNANClNG ACTlVITlES: Restricted gifts Proceeds from Ihe issuan('e ofdcbl Repayment of \ong-lcnll debt Payment \If deferred financing Ctlt}i.S

Other

Net cash used in f'if1andng activities

INCREASE I N CASH AND CASH EQUlV ALENTS

CASH AND CASH EQUIVALENTS - Beginning o(ycnf

CASH AND CASH EQUIVALENTS .- End or yeaI'

- 7 -

2009 2008

$ (168,395J $ 880

130,448 12,154 49,389

(708) 26;667 3,217 1,079

60,621 297

(26,755) 7,336

(1 ;657) ,._ 4,992,

99,735

(:lS6,054) 386,755 (52,998)

49 (\'075)

(53.323)

708 78,670

(89,069) ( 1.583)

35J33

46,955

31,678 13,130 48,991

30,503 257

12,184 (S,02E)

(36.952) 7.117

1(],230 (2,039)

Ill,OOI

(249,601) 198,798 (47,992)

349 _(232)

(8,400)

(500)

3.423

(ContinuL'tl)


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 (In thousands)

SUPPI.EMENTALCASH PLOW INFORMATION: lukresl paid - net of UlI\DunlJ; capiwl11.ed

Income taxes paid

SUPPLEMENTAL DlSCLOSURES Of'· NONCASH INVESTING AND FINANCING ACT1VITIP$; Purchase of bllilclings and 0quipment included in accounts

payable ,and olher aeemed liahilities a( year-end

Capital lease obLigation:. ineurreu fDr tleW equipment

See nutes La consolldatcd financial sla(emctlUL

-8-

2009 2008

L.!.?.~~~.

(Concluded)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 3D, 2009 AND :2008 (Dollars in thousands)

I, ORGANIZATION ANn SUMMARY OF SIGNIFICANT ACCOUNTING l'OLlCIES

Organization and Mission - The Queen's Healtb Systems (the "Parent Company") is a tax·,c~el11pt support organization as described ill Sections 501(c)(3) and 509(a)(3) of the Internal Revenue Code. The Parent Company's mission is to serve the health e1U'e need,s of the ci.tizens of the Slale of HawaiL Tile Parent Company is the sole member of The Queen's Medical Center (QMC), Queen Emma Land Company (QEL), and Molokl\i General Hospital (MGH), The Pareut Cl1Inpauy is also the parent of Queen's Development Corporation (QDC) and Queen's Insurance Exchange, Inc, (QIE),

QMC operates a 50S·bed acute care and 28,bed subacute care hospital located on the island of Oahu. MGH operates a IS-bed hospital on the isl1Uld of Molokai, QMC and MGH provide services to palients, substantially all of whom are Hawaii residents, lmder unsecured credit terms, QDC owns and manages income· producing, healthcarc related real estate and is engaged in other health-related businesses, QEL ownS land and buildings, most of which [ll'Oduce rental income. QlE is a Hawaii··domiciled, pure captive insurance company.

QMC, Parent Company, and QDC are members of The Queen's Health Systems Obligated Group (the "Obligated Group"), Prior to April 2009, MGH was a menlber of the Obligated Group and was subsequently Withdrawn. The following organizations are also members of the Obligated GrollP and are owned by QDC: DiagnostiC Labomtory Services, Inc. (DLS), a 90% owned subsidiary, and Ambulatory Services, Inc, (AS!, d.h.a, The Queen's Health Care Centers). On May 2,2008, AS) was merged into QDC

On July 1,2007, QMC transferred its !let invc.,tmem in ASr, a wholly owned [or-profit subsidiary operating primary, urgent, and specialty care clinics, to the Parent Company. The Parent Con~)[1llY then transferred its !let investment in AS] to QDC. QMC recorded a net asset transfer ()f $1, 169 to reflect this transfer of ownerShip interest in AS],

Significant Accounting Policies:

Principles [If Consolidation - These consolidated financial statements include the accounts of all entitjes for which tile Parent Company is the sole member or stockholder (collectively referred to as QHS) and conforms with accounting principles generally accepled in the Uniled States of America ("generally accepted accoullting principles"), Intercompany balances and transactions have been eliminated in the consolidated fin1Ulcial statements,

Use '~f Estimates - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assnmptions based on available information that affect tbe reported amounts of assets and !labilities und disciosll1'e of contingent assets and liabilities at the date of the consolidated financial statements, and the re.ported amounts of revenues and expenses during the reponing period. Actual results could differ from those estimates.

Cash and Cash Equivalents - Cash equivalents include short-term, highly liquid investments with muturities of three months or less at date of purchase, and are slated at cost, which approximates market value, Excluded arc amounts whose use is limited or restricted by board designations or other arrangements under trust agreements,

Allowance for Uncollectible Accounts - QHS provides for an allowance against aceonnts receiv'lble tJlllt could become uncolleclible by establishing an allowance to reduce the carrying value of sllch receivables to their estimated net realizable vaine, QHS estimates the allowance based on the aging of the account,<; receivable, historical collection experience by payor, and other relevant factors,

Inventories - Inventories, consisting princi pally of medical drugs aud suppJles, arc valued at the lower of cost (average cost lllethod) or market value,

Investments - Investments, including assets limitw or restricted as to use, include debt and equity securities. lnvestme,nts in debt and equity securities with readily determinable market values are measured at fajr value based on quoted market prices, Investments also include limited liability eutitie" (hedge funds, real estate investments, and private equities) accounted for under the equity method of accounting and arc valued at estimated fair values based em their proportionate share of the respective entities' fajr value:as Tecorde~ in the respective entities' financial statements. Management determines the a[>propriate classification of all investments at the date of purcllase and evaluates slIch designations at each balance sheet date, Investments that are available for current operations are classified as current assets, Investments that cannot be sold within a year due to restfictions contained in the agreements are classified as noncurrent assets,

Historically, QHS classified substantially all of its investments as available-for-sale, and accordingly, unrealized gains and losses on investments were excltlded from the (deficiency) excess of revenues over expenses, On July J, 2008, QHS adopted Financial Accollnting Standards BOilrd (FASB) SlafTPosition (FSP) AICPA Statement of Position (SOP) 94-3-1 and AICPA Audit and Accounting Guide, Health Care O':gani;:alions (AAG HCO)-l, Omnibns Changes to COl1solidmioll (fnll E'1u11), MelilO£1 Guidonce for Not1or-Pmjit Organizations, The adoption of this FSP resulted in the accounting for Ilmited liability entities Oil the equity rnethod, and classifying $53.737 of losses in nonoperating income (expense) in the consolidated statements of operations and changes in net assets for the year ended June 30, 2009,

On June 30, 2009, QHS transferred its investments in debt and equity securities thal are managed in "separate accounts" by fund managers frolll availabIe-for-sale to trading securities, The amollnt of the transfer approximated $163,481. In order to maximize the investment return un these securities, the external fund managers frequently buy aud scll these securities, Addilionally. in connection with tlle fund managers' arrangements to manage these securities, QHS provides the extemal fund managers the ability to sell and buy such securilies without consents, Therefore, QHS believes these investments are more approp,iate1y classified as trading securities, The tmnsfer had the effect of ,,,classifying $41,170 of unrealized gains from other changes in net assets to nonopel'llling income (expense) in the consolidated statements of operations and changes in net assets for the year ended June 30,2009,

Investment (loss) income, which is presented as a nonoperating c{)mponent of the (deficiency) excess of revenues over expenses, includes all dividends and interest, unrestricted realized gains and losses, net of investment manu"",mcnt fees, other-than-temporary impairment (OTT]), unrealized gains and losses on trading investments, and e,quity in earnings and losses of limited liability entities,

QHS assesses whether OTTl has occurred based upon a case-by-case evaluation of the underlying reasons for the decline in estimated fair value of its investment. All securities with a gross unrealizecl loss at each reporting period are subjected to a process for identifying 01''1'1. QHS considers a wide

- 10-

l"doge of filctors, as described below, about the security issuer and uses its best judgment in evaluating the canse of the decliue in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in the evaluation of each security arC assumptions and estimates about the operations of the issuer ,md its fnture earnings potential.

Considerations used by QHS in the impairment evaluation process include, but arc not limited to, the following;

• The duration and extent that the esti mated fair value has been below net carrying amount • Ability llnd intent to hold the investment for a period of time to allow for a recovery of value • Fundamenllll analysis of the liquidity and financial condition of the specific issues • Industry facwrs or conditions related w a geographic area that are negatively affecting the security • Underlying valuation of assets specifically pledged to SUppOlt the credit • Past due interest or principal payments or other violations of covenants • Deterioration orthe overall financial condition of the specific issuer .. Downgrades by a rating agency

Securities that are deemed to be other than temporarily impaired are written down to estimated fair value in the period the securities are deemed to be impaired (sec Note 2).

Assets Whose Use is limited or Restricled·- Assets whose use is limited or restricled include assets mstricled by the donors and assets held by Imste0s for the repayment of bonds and purchase of capital assets. Amounts required to mL'Ct current liabilities of QHS have been reflected as cltrrent assets in the consolidated balance sheets as of June 30, 2009 and 2008.

Land, Buildings, and Equipmenl···- Land, buildiugs, and equipment are recorded Oil the basis of cost or fair market value at the date of acquisition or donation, respectively. Bnildings and equipment, induding amonnts recorded under eapitallease obligatioos, are depreciated by the straight-line method over their estimated useful lives ranging from 3 to 40 years. Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful lives or the remaining tenn of the related leases. Development and interest costs arc capitalized during the construction period of major capital projects,

Goodwill - Goodwill is not amortized and is tested for impairment on au annual basis as of April 30 of each year.

Deferred Financing Fees - Costs of issuing long-term debt are defen-ed and amortized to expense using the straight-line method, which approximates tbe effective interest method, over the term of file debt.

Siraight-Line Rents Receivable ....... QHS (as lessor) has lease agreements that provide for scbeduled rent increases over the terms of celtain leases. Pm such leases, rental income is recognized on a straight-line basi.s over the term of tim leases. The difference between the straight-line amount and the amollnt in 1110 lease agreement is recorded as straight-line rents receivable.

Other Assets - Other assets include investments in affiliates. Investments in which QHS owns 20% or more and exercises influence, but which QHS does not control m'e accounted for under the equity method, The cao'ying values of these investmenks were $2,797 and $1,982 at.l une 30, 2009 and 2008, respectively.

- 11 -

LC/flg-lhed Assets - Long-lived assets held and used by QHS arc reviewed for impairment whenever events or changes in circumstances indicate that tbe carrying amount of an asset Illay not be recoverable. When such events or changes occur, an eslimale of the future cash flows expected to result fl'om the use of the assets and their eventual disposition is made. If the sum of such e~pected future cash flows (undiscounted and without imerest charges) is less than the carrying amount of tile asset, all impairment loss is recognized in an amount by which the assets' net book values exceed fair values.

Derivative Fil1anciallnslruments .~.- QHS periodically uscs derivative llnandal instruments such as interest rate hedgiug products to mitigate risk. The use of derivative instmments is limited t.o reducing its risk exposure by utiliz,ing interest rate swap agreements. QHS records the value of its swaps as other assets Of long-temlliabilities in its consolidated balance sheets and records the change in the fair value of the swaps In nonoperating inc.ome or expense.

Income Taxes - QDC and its snbsidiilry, DLS, 11Ie consolidated income tax returns. QlE Illes its federal tax return as a property/casualty insurer for federal income tax purposes. All other consDlidated affiliates are not-for-profit organizations that are exempt from federal and state income taxes pUrSual1llO Section 50 J (a) of the Inle-mnl Revenue Code and related Hawaii RevisL'Ci Statutes. QHS, QEL, and QMC arc subject to federal alld state income taxes solely on their unrelated business taxable income. Unrelated business taxable income is not material to the consolidated financial statements.

Defen-cd tax assets and liabilities are recorded for differences between the financial statement and income tax bases for assets and liabilities. A valuation allowance is recorded to reduce net defen-ed tax assets to the amount expeeted to be realized.

In June 2006, Ule FASB issued FASB Interpretation (FlN) No. 48, AccoUJ~lil1gfor Uncertainly ill Income Taxes - WI interpretation of FASB Sta!emel1l No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in QHS' consolidated financial statements by prescribing recognition thresholds and mea.'mrel11ent attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. The Obligated Group adopted the provisions of' FlN No, 48 all July 1, 2007, as it meets the definition of a public company as its debt is traded on a public exchange. The adoption of FIN No. 48 did not have a material impact on the Obligated Group's financial position or results of operations. FIN No. 48 is effective for the remaining subsidiaries (QEL and QIE) I' Of fiscal year ending June 30, 2010. Management is in the process of evaluating the effect of this stalement on the consolidated financial statements, bnt does not believe the effect will be materiaL

Temporarily and Permanently Restr;cted Net Assets - Restricted net assets consist of donations and otheT funds where restrictions have been imposed by donors as to the use of the funds. Te.111pOraIily restrict<xl net assets consist of those net assets whose use by QHS has been Ii miled by donor's to a specific purpose or time period. When a donor restriction expires, that is, whell a stipulated time restriction ends or purpose ,estriction is accomplished, tempomrily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions. Permanently restricted net assets cOllsist of the principal of net asscAs whose use by QHS has been lestrictedin perpetuity by the donors. Earnings on permanently restricted net assets are considered unrestrict.ed, lI11less otherwise restricted by the donor.

Net Patient Service Revenue .- Net patient service revenue is recogniz,('XJ and patient accounts receivable is recorded as services are provided and is repOited at tile estimated net realizable amOlll1ts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbllrsemenl agreements WiUI tbird-party payors.

- J2-

Significant concentrations of patient accounts receivable included Medicare of approximately 28% and 29% as of June 30, 2009 and 2008, respectively; Medicaid of approximately 14% and I j % as of June 30, 2009 and 2008, respectively; and Hawaii Medical Service Association (HMSA) of approximately 15% and 13% as of JUlle 30, 2009 and 2008, respectively,

Governmelll Reimbursement Progmms - QHS renders services to patients under contractual agreements with the Menicare and Medicaid programs. The percentage of patient service revenue attributnble to IJlo Medicare and Medicaid programs, respectively, approximated 40% and 15% in 2009 and 39% and 12% in 2008. Medicare acute inpatient serviL'e' are reimbufsed based on clinical, diagnostic, and other factors; ,md for Medicaid, a pcr diem rate for mUlino services and a per discharge rate for ancillary services. Outpatient services related to Medicare and Medicaid beneficiaries are paid based upon a prospective payment system, fce schedules, percentage of charges, or a cost reimhtll'sement method, Prospectively determined reimbursements are paid to QHS based on claims submitted.; however, certain items, such as medical education COSIS, eapitnleosts, bad debts, and disproportionate share hospital CDSH) payment adjustme.nts are reimbursed based upon estimated interim rates with final settlement determined after annual cost re[JOits submitted by QHS are audited by the fiscal intermeDiary. Normal esurnation differences between final setUements and amounts accrued in previous years due to audit adjustments recorded by the fiscal intermediary are repOIted as current year increases to revenues and (deficiency) excess of revenues over expe.nses and amounted to $8,732 and $7,725 for the years ended June 30, 2009 and 2008, respectively. QHS has the ability to appeal the adjustments based on a process eSlublished by Medicme and Medicaid.

In August 2008, QHS received $3,471 of cos! report appeal settlements relating to the years ended June 30, 2000, 2001, and 2002, These appeal settlements were recognized as an increase to revenue when realized.

QHS recognized $6,236 and $6,172 relating to DSH payments received from the State of Hawaii Dep,utmenl of Human Services for the years ended June 30, 2009 and 2008, respectively_ Amounts received from the state of Hawaii nnder this program are subject \0 annual determination.

Laws and regul~tions governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is a reasonHble probability that recorded estimates will change by a material amoun! in the near tertn, QHS believes that it is in compliance with applicable laws and regolations and actively resolves issues as identified" Compliance with snch laws and regulations can be snbject to future government review and interpretation, and noncompliance could result in significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs.

CharilY Care - QHS provides care to patients who meet certain criteria under its financial assistance policy without charge or at amounts less tiUU1 its established rates. Because collection of amounts determined to qualify as charity care is not pursued, they are not reporlc"llls net patient service revenues.

QHS maintains records to identify and monitor tile level of charity cafe it provides. These records include the amount of charges foregone for services and supplies furnished under its i1nancial assistance policy, the estimated cost of those services and supplies, and equivalent service statistics. The level of charity care provided during the years ended June 30, 2009 and 2008 \Vas as fhllows:

Cll£u'ges foregone, based on estahlished rates Estimated costs and expenses incurred to provide charity cafe

, 13,

2009 2008

$ 8,31 I 3,461

$ 4,487 1,812

Contributions - Unconditional promises by donors of cash and other assets are reported at fair value at the elate the promise is received. The gifts ate repOtied as either temporarily or penl1anently restricted support if tbey are received with elonor stipUlations tha! limit the use of ille donated assets. When a donor restriction expires, tempomrily restricted net assets are reclassified as unrestricied net assets and reported in the consolidated statements of operations and changes in net assets ,1$ net assets rcleased from restrictions.

Etpenses by FuncriJJlul/ ClassificclIiol! .". The functional classification of expenses by major classes of program services and supporting activities for the years ended June 30, 2009 and 2008 is summarized as follows:

Patient services Real property investment and management Other health care-related activities Administration and general

2009

$506,425 35,953 80,458

101,173

$724,009

2008

$463.994 38,438 76,562 95,298

$674,292

PeiformclI1ce IndicCllor - QHS' performance indicator is the (deJlciency) ex{;ess of revenues over expmlses, The indicator excludes net unrealized gain.s (losses) on available-for-sale investments, net assets released from restrictions used for capital expenditures, and pension related changes other than net periodic pension cost.

Subsequent Events - Management has evaluated subsequent events through October 15,2009 which is the date the tlnanchtl statements were available to be issued.

Recently Issued Accounting Pronouncements -In DeL 'ember 2008, FASB issned FSP PAS 132(R)-I, Employers' Disclosures abnut Postretirement Benefit Plan Assets, amending FASB Statement 132(R), Employers' Disclosures about Pensions and Other PostretiremelU Bellefils, effective for fiscal years ending after December 15,2009. FSP FAS I 32{R)- 1 requires an employerto disclose investment policies and strategies, categories, fair valne measurements, and significant concentrations of risk among its postretirement benefit plan assets. Management is evaluaring the effect that FSP FAS 132(R)-j will have on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No, j 60, Mmcontrollil1g Interests in Consolidated Financial Statements _ .. an amendmenT of ARB No. 51, which changes the accounting and reporting for minority interests. Minority inlerests will be reeharacteriyed as noncontrolling interests and will be reported as a wmponent of net assets separate from the pm'ont's llet assets, and purchases or sales of equity interests that do not result in a change in control will be accounted for as net asset transactions, In addition, net income attributable to the lloncontrolJing interest will be included in excess of revenues over expenses and, upon a loss of control, the illterest sold, as well as any interest retained, will be recorded at fair value with any gain 01" loss recognized in excess of revenues over expenses. SIlAS No. 160 is effective beginning July 1,2009, and will apply prospectively, except for Ille presentation and disclosure requiremenls, which will apply relrOSpe{;tively. Management does not expect that the adoption of SFAS No. 160 wiJ] have a material impact on the consolidated financial statements.

In March 2008, the FASB issoed SPAS No. 161, Disclosures about Derivative Instruments anti fledgjng Activities - an amendment of FASB Slatement No. 133. This statement requinos enhanced disclosures

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about an entity's derivatives and hedging aClivities and is effective for fiscal years beginning after November 15,2008. Management is evaluating the effoct that SFAS No. 161 will have on the. consolidated financial statements.

[n June 2009, the FASE issned SFAS No. 168, The FASB AccormJing Standards Codificafiol1™ and the Hierm<'iry of Generally Accepted Accounting Principles - a replacement (,{ PASS Stalemem No. J 62. The FASH AccouJlting Standards Codification ("Codification") will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. SFAS No. 168 is effective for interim and annual periods ending after September 15,2009. The Codification does not change generally accepted accounting principles and will not have it material impact on the consolidated financial statements,

2. INVESTMENTS ANDIiAlU VALUE MEASliREMENTS

QHS adopted SFAS No. 157, Fair Value Measurements, for the fiscal year beginning July 1,2008, subject to the deferral provisions of FSP PAS 157-2, Effective Date ofFASll Statement No. 157. This standard defines fair values, establisl.'les a fTamework for measuring fair valLIe, and expands disclosure about fair value measurements. The fair value hierarchy is as follows:

Level I -. Quoted (unadjusted) prices for identical ""ets or liabilities in active markets

Level 2 - Olherobservable inputs, either directly or indirectly, including:

• Quoted prices for similar assets or liabilities in active markets

• Quoted prices for identical or similar assets in nonactive markets (few transactions, limited information, noncurrent prices, high variability over time, etc.)

• Inputs other tlian quoted prices that are observable for the asset (in teres! mles, yield curves, volatilities, default rates, e[c.)

• Inputs that are derived principally from Or corroborated by other observable market data

Level 3 - Unobservable inputs that cannot be corroborated by observable market data

Fair values of available-for-sale and trading securities ure based on quoted market prices, where available. The Bank of New York Mellon, as custodian for QHS, obtains one price [or each security primarily Fro111 a third-party pricing service ("pricing service"), which generally uses Leve.1 I or Level 2 inputs for the determination of fair value in accordance with SFAS No. 157. The pricing service normally derives the security prices from recently reporled trades for identical or similar securities, making adjustments tbrough the reporting date bu,ed upon available observable market information. In the absence of a vendor, system trude/cost or broker pticc for debt instruments the pricing staff will price the 5e<eurity al l.em. When a vendor. system tratie/cost or bmker price Is not available for equities the price will be repeated for 90 days. After 90 days, the price will be defaulted to zero. As QHS is responsible for the determination of fair value. it performs periodic ana!yses on tbe prices received from the pricing service to detenuine whether the prices are reasonable eSlimates or fair valne. As a result of the reviews, QHS has not historically adjusted fhe priL.'es obtained from the pricing service.

III the instances in which the inputs used (0 measure the fair value fall into different levels of the fair value hierarchy, the fair value measurement has bcen determined based on the lowest-level input thai is significant to the fair value measurement in its entirety. QHS' assessment of the significance of a

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particular item to Ibe fair value measurement in its entirety requires judgment, including tbe consideration of inputs specific to the asset.

The following table presents information abOlll the fair value of QFfS' financial assets and liabilities at Junc 30, 2009 according to the valuation techniques QFfS used to determine their fair values:

Assets

Cash and cash equivalentsmoney market funds

Investments and assets whose usc is limited or restricted: Money market funds U.S. Govel'llment obligations and corporate debt securities

Equity securities Mutual funds COI1UllOn (mst funds

Total investments and assets whose use is limited Or restricted

liabilities

Other long-term liabilities -inteJest rate swap liabilities

Level 1

7,495

1,894 143,460 11.5,620

.. _----

$268,469

Level 2 Level 3 Total

$ 58,581

70.743 78,238

21,630 23,524 143,460 115,620

8,329 8,329

$100,702 $369,171

$ 19,906 ~ 19,906

The following methods and assumptions were used to estimate the fair value of each class of financial instrument

Money Market Funds - Fair value estimates for money market funds were based 011 quoted market prices and/or other market data for comparable funds in establishing the prices. Fair values of money market funds that do not trade on a regular basis in active markets were classified as Level 2.

u.s. Government Obligations and Corporate Debt Securities - The estimated fair values of U.S. GoVel'llIllent oblig'dtions and corporate debt securities were based on quoted market prices and/or other market data for the same or comparable instruments and transactions ill establishing prices. Due to the nature of pricing fixed income secnrities, management has c1assi11ed the majority of the debt seenrities as Level 2 .

.Equity Securities --- Fair value estimates for publicly traded securities were based on quoted market prices.

Mllluall?nl'lds··· The eslimated fair value of mutual funds were based on quoted market price.s.

Common Tmsll?um\s - The estimated fair value of tile CDI111l10n tms! funds were based nn miler market data for the same or comparable instruments and transactions in establishing prices. The COmmon trust funds were not actively traded and were therefore classified as Level 2.

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Interest Rate Swap Liabilities - The faif value of QHS' interest rate swaps were estimated using the terms of the swaps and publicly available market yield curves. Because the swaps are unique and are not actively traded, the fair values were classified as Level 2 estimates. As required by SFAS 157, QHS considered ilS OWn nonperformance risk as observed through the credit default swap market, bond market, and prices for recent tmdes in determining the valuation of the inte,re"t rate swap liability.

Investments including assets whose lise is limited at June 30, 2009 and 2008 were as follows:

Investments at fair value: Money market funds U.S. Government obligations

and corporate d",bt securities Equity securities Mutual funds Common trust funds

Total investments at fuir value

Investments llsing equity method: Publicly traded equities Hedge funds Private equities Real estate

Total investments using equity method

Total investmems and assets whose use is limited

2009 2008

$ 78,238 $ 98,631

23,524 27,672 143,460 214,] 84

.115,620 86,913 8,329

369,171 427,400

18,107 25,347 98,561 147,411 32,689 41,660 13,558 21,856

161915 236,274

$ 532,C!,86 $663,674

The following represents the cJassiticatiol1 of investments in the consolidated balance sheets as of June 30, 2009 and 2008:

2009 2008

Total investments $ 532,086 $ 663,674 Less assets whose use is limited or restricted (35,605) _(75,S;24)

Total unrestricted investments 496,48 l 588,050

Less current portion (393,233) "t4:'ll,995)

N0l1curren1 ponion $I03,24~~ ~ 90,055

With the adoption of FSP SOP 94-3-1 and AAG HCO-l, the investmenls reported under the equity method are publicly traded equities, hedge funds. private equities, and real estate. Hedge funds may include investments in eqnities, equity-related instruments. fixed income/structured credit and other debt related instruments, private investments, distressed public investments, and as,'et-based lending businesses (ownership percentages range from less tban I % to 2.8%), Private equities include, bm am not limited la, investments in undervalued debt, real eslate related equity securities, and investments in

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energy, telecommunications, media, and heaithcare industries (ownership pereentages range from less than I % to 7%),

At June 30, 2009, QHS was committed to invest approximately $12,800 of additional capital in various private equity investments,

The total return on the investment pottfolios for the years ended June 30,2009 aud 2008 was comprised of the following:

Tolal investment (loss) income -..... net: Interest and dividend income Realized (losses) gains -net ar expenses Reclassification of unrealized gains on trading securities Eqnity in losses of limited liability entities Other-than-temporary loss 00 investments

Total unrestricted inveslment (loss) income - nel

Other changes in unrestricted net assets: Reclassification of unrealized gains on trading securities Net unrealized gains (los,ses) on inve,stmenls

Net unrealized losses on unrestricted investments

Other changes in temporarily restricted net assets: Investment (losses) gains Net llnreali7.ed gains (losses) on investments Other,·than-temporary loss on in vestments

Total temporarily restrlcted illvestmentloss - net

2009

$ 14,880 ( 11.274) 41,170

(53,737) (74,]Q(l)

$ (83,061)

.$ (4 I, 170) 14,677

$(26,493)

.$ (47) 720

(4,332)

~- (3,659)

2008

$ 23~365 15,635

(24.311)

$ 14,686

$ (22,~~

.$ (22,999)

.$ 1,210 (744) (833)

$ (367)

During fiscal year 20()9, QHS recogniz.ed $78,432 of OTTI on its investments, As described ill Note I, the transfer Oil June 30, 2009 of its investments in puhlicly traded securities that are managed in "separate accounts" by external fund managers, from the available-for-sale to the trading category resulted ill reclassifying $41,170 of nnrealized gains From other changes in net assets to nonoperatiog income (expense) and the adoption of PSI' SOP 94-3-1 and AAG HCO-I resulted in recording $53,737 of equity in losses on unrestricted investments in the consolidated statements of operations and changes in net assets for the year ended June 30, 2009.

The investments classified as trading are comprised mainly of equity secllfities and U,S. Government obligations and corporate debt securities, The fair val"es of these investments were $ I 63,4S I at June 30, 2009, The invesllllents classified as available-·for-sale are Illutual funds and COIll1l10nll'Ust funds. The fair values of these investments were $123,949 at J lln" 30, 2009,

Included in investments were $722 and $3,066 of lmrealized losses of which $0 Ilnd $1,809 bave been in a continuous "urealized loss position for 12 Illonths or longer as of June 30, 2009 and 2008, respeclive.ly, QHS does not believe the unrealized losses represent other-than-temporary impairments based on available evidence at June 30,2009,

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Assets whose use is limited or restricted at June 30, 2009 and 2008, consisted of the following:

Cash and cash equi valems Investlllenls

Less current portion

Noncurrent portion

3. LAND, lHULDINGS, ANI) l1,QIJII'MENT

Property at June 30, 2009 and 2008 consisted of the following:

Land and land improvements Buildings and ieaseJ101d improvements Equipment and furnishings Eql~ipment under capital leases Construction in progress

Total

Less accumulated depreciatinn and amortization

Land. buildings. and equipment net

2009

$20,757 14,848

35,605

(9,274)

$ 26,331

2009

$ 88,933 306,475 406,277

10,528 42,846

855,059

(454.707)

~~.352

2008

$43,009

75,624

(8,958)

$66,666

2008

$ 94,138 32<),737 484,387

14,440 20,572

943,274

.1545.718)

!.m,55§

During fiscal year 2009, QHS retired $138,652 of costs of fixed assets which resulted in a loss on disposal of $3,217.

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4. LONG·TERM DEBT

Long-tem1 debt at June 30, 2009 and 2008 consisted of the following:

Special Purpos'C Revenue Refwlding Bonds 2009 Series A, variable interestra!es (average interest rate of 0.3%), with final maturity in July 2029

Special Purpose Revenue Refunding Bonds 2009 Series 13, variable interest rales (average interest rale. of 0,4%), with final maturity in July 2029

Special Purpose Revenue Refunding Bonds 2006 Series A. vLtriable interest rates (average interest rate of 2.0%), with final maturity in July 2025

Special Purpose Revenue Refunding Bonds 2006 Series B, variable interest rates (average interest rate of 2.0%), with final maturity in July 2024

Special Purpose Revenue Refunding Bonds 2006 Series C, variable interest rates (average interest rate of 4.8%), refunded in 2009

Special Purpose Revenue Refunding Bonds 2003 Series A, variable interest rates (average interest rate of 2.4%), witb final maturity in July 2029

Special Purpose Revenue Refunding Bonds 2003 Series B, variable interest rates (average interest rate of 2.4%), with final maturity in July 2029

Special Purpose Revenue Refunding Bonds 2003 Series C, variable interest rates (average interest rate of 6.7%), refunded in 2009

Special Purpose Revenue Bonds 1998 Series B, interest at 5.0% with final maturity in July 2008

Special Purpose Revenue Bonds Refunding 1996 Series A, interest 1115.7%, with final maturity in July 2008

Commercial paper Capital Jease and other obligations

Total

Less current portion

Total noncurrent portion

2009 2008

$ 39,335 $

39,335

54,550 58,250

83,800 83,800

45, ISO

39,275 39,475

38,550 38,750

34,505

I,ISO

2,065 75,130 75,130

5,449 6,80]

375,424 385, W6

(10,222) (9,525)

$365,202 $375,581

In May 2009, the Obligated Group issued $78,670 of State of Hawaii Special Purpose Revenue Bonds. This issue was comprised of $39,335 from 2009 Series A and $39,335 from 2009 Series B Bonds (the "Series 2009A and 2009B Bonds"), QMC was allocated all of the. bonds, Thepl'Occcds of the Series 2009A and 200913 Bonds were used 1.0 refund $34,330 of Series 2003C Bonds and $45,150 of Series 2006C Bonds. The cost of the refunding \Va<; $2,079 primarily related to the write-off of unamortized bond issuance costs of the Series 2003C and 2006C Bonds.

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The Series 2003C Bonds were supported by a liquidity facility agreement which provided financing in the event that remarketing effort~ fail for bonds tendc,red, 1l1e liquidity facility agreement expired in May 2009, upon the refunding of the Series 2003C Bonds, In the event of a failed remarkeLi,ng, the liqnidity facility bank is required to temporadly purchase and hold the bonds until the bonds are successfully remarketed. Upon successful remarketing of the bonds, the proceeds are paid to the liquidity facility bank. In December 2008, there were three failed n,marketings re.lated to the Sedes 2003C Bonds. The par amounts purchased by the liquidity bank were. $17,900, $150, and $695. QHS was required \D pay interest to the liquidity bank at its prime rate (average rate of 3.25%). The average variable rate at the. time of the failed remarketing was 6.45%. The bonds were successfully remarketed by the end of January 2009.

The Series 2003A and 2003B Bonds are auction rate securities which bear a valiable rate of interest. The Series 2003C Bonds were variable rate demand obligations and were refunded in 2009. Principal on the Series 2003A and 200313 Bonds is due in annual installments ranging from $2,300 to $5,050, The Obligated Group entered into an interest rate swap agreement to pay a fixed interest rate of3.521% on all of its Selies 2003A, 200313, and 2003C Bonds. The interest rate differential paid or received is recognized during the term of the agreements. The interest rate swap agreement expires in 2029 or earlier if the ObJigdted Group exercises early termination provisions. The notional amollnt of $1 j 2, 155 at June 30, 2009 decreases annually based on the originally scheduled principal payments of the Series 2003A, 2003B, and 20mC Bonds.

The Series 2006,1. and 2006B Bonds are auction rate securities which bear a variable rate of imerest. '1110

Series 2006C Bond, were vmiable rute demand obligations and were refunded in 2009. Principal on the Series 2006A and 200613 Bonds is due in annual installments ranging from $5,875 to $10,425. The Obligated Group entered into interest rate swap agreements tD pay a fixed interest rate of 3A53% on the Series 2006B Bonds and a fixed interest rate of 3.58% on Series 2006C Bonds. The interest rate diffe~rential paid or reccAved is recognized during tbe term of the agreements. The interest rate swap agre,emenls [or the Series 200613 Bonds expire in 2024 and for the Series 20D6C Bonds expires in 2028 or earlier if the Ohligated Group exercises eady termination provisiot\s. The notional amount of $128,950 nt June 30,2009 decreases annually based on the originally scheduled principal payments of the Series 200GB and 2006C Bonds.

The Series 2009,1. and 200913 Bonds are variable rate demand obligations which hear a variable rate of interest. Principal is due in annual Instll11menlS mnging from $450 to $5,130.

During rbe years ended June 30, 2009 and 2008, the change in the market value of the liabilities associated with the swap agreements discussed above. resulted in losses'of $12,154 and $13,180, respectively, which were rec'Ognizerl. in nonoperating expense. The market value of liabilities associated with the swaps as of June 30, 2009 and 2008. was $19,906 and $7,752, respectively, and was included in other long~tennliabi1ities,

The 20(J3 and 2006 swaps are separate contracts between QHS and the swap connlerparties. They were Ilotlerminated as pali. of the St.ries 2003C and 2006C Bonds refuuding due to unfllvorable market conditions. As such, QHS is still required to fulfill its contractual obligations under these agreements by paying the preestablished fixed interest rates to the respective swap counterpaI1ies.

During fiscal years 2009 and 2008. QHS experienced failed auctions related to its auction rate securities. In the event of a failed auction, QHS is reqUired to pay interest at a preestablished rate that is a multiple of London InterBank Offe.red Rate (LlBOR). At June 30, 2009. the rate being paid on these securities was 175% of LIB OR,

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The Obligated Group has commercbl paper outstanding of $75, 130 at June 30, 2009, The Obligated Group is jointly and severally liable for this debt At lune 30, 2009, the Obligated Group has a loan agreement for $90,000 that expires on January 24, 2011, that allows for the refinancing orthe commercial paper outstanding to a term loan with a maturity period of up to two years after 2011,

The terms of the Series 2003A, 20mB, 2003C, 200GA, 2006B, 2OD6C, 2009A, and 2009B Bonds Master Trusllndenture (MTl) require the Obligated Group to make payments solely from amounts held in funds and accounts established pursuant to the indenture, which are pJedged to secure payment of the principal and interest on the Series 2003A, 2003B, 2003C, 2006A, 2006B, 2006C, 2009A, und 2009B Bonds, The commercial paper is also secured under l11e MTL The MTI also limits the ability of the Obligated Gmup to incur additiooal indebtedness, make certain other commitments, or dispose of certain assets, The Obligated Group is subject 10 various financial ratio covenants, Management is not aware of any instances of noncompiifUlce with financial covenants.

QRS has equipmentleascs thal are accounted for as eapitalleascs, The cost of such equipment wa, $10,528 and $14,440, and accumulated depreciation was $4,593 and $6,205, at June 30, 2009 and 2008, respectively,

QRS incnrred lotal inlerest costs of $16,774 and $17,105 during 2009 ancl 2008, respecti vely, of which $1,451 and $ 1,374, respectively, was capitalized in construction in progress,

At June 30, 2009, long-term debt matures as follows:

Revenue Bonds Less Years Ending and Commercial Capital Capital Lease June 30 Paper Leases Interest Total

2010 $ 8,625 $1,780 $ (183) $ 10,222 2011 II ,890 1,406 (l31) 13,165 2012 12,500 1,406 (81) 13,825 2013 12,935 1,198 (26) 14,J07 2014 13,375 81 ( I) .13,455 Thereafter 3 JO,6S0 310,650

Total ~75 12,,871 :t(422) ~m~1~,424

The carrying valnes of dIe bonds, commercial paper, and GapitalIea,es apprm,imated their fair values at June }(), 2009 and 2008,

At JUIlC 30,2009, QRS had an available line of credit of $7,500, which expires on JUIlC 30, 2010. There were no outstanding borrowings nndcr this agreement as of June 30, 20119,

5, SELF -INSURANCE PROGRAMS

Gelleral and Professiollal Liability Reserve - QHS maintains a funded sclf-illsuranee program for its general and professional liability exposure, This sel!~inSllred program is funded thIQugh QrE, Premiums are determined based on QHS' loss experience, as well as insurance industry data,

QRS recorded a reserve for losses and loss adjustment expenses for the estimated repfJJ1ed and unreported losses ineun'cd through June 30, 2009 and 2008, The reserve for unpaid losses and I()ss adjustment. expenses was determined by QHS using estimates from independent conSUlting actuaries,

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based on industry and hospillli specific data. The general and professioualliability reserve was $13,933 and $10,025 at June 30, 2009 and 2008, respectively, and was recorded in other long-term liabilities at June 30, 2009 and 2008.

QHS has cxc",ss general and professional insurance coverage through reinsurance agreements with unrelated insurers for amounts exceeding $2,000 per occurrence. The reinsurance agreements do not relieve QHS from its obligations should the third-party reinsurers not be able to meet the obligations assumed under the reinsurance agre"menls.

Wor!u!rs' CmllpclIsalJon Reserve - QHS is self-insured for workers' compensationiosscs up to $400 per oceun·ence. Losses above this amount are insured with an independent eseess carrier. QHS had workers' compensation reserves of $3,314 and $3,344 at June 30,2009 and 2008, respectively, which were discon1ll.ed aJ. a rate of 6.5% as of June 30, 2009 and 2()()g. The workers' compenSiltinn reserves were recorded in other cun'cnt liabilities at June 3(), 2009 and 2008,

Medical neserve - QH:> has a self-funded medical benetlts plan covering substantially all of its employees, The medical reserve was $3,4()0 and $2,480 at June 30,2009 and 2008, respectively, and was included in oiller cun'ent liabilities aJ. June 3D, 2009 and 2008.

6. NET ASSETS

Te111porariiy restricted net assets at June 30, 2009 and 2008 were available only for the following pnrposes:

Education and research Plant replacement and expansion Indigent care and other

Total

2009 2008

$3,103 1,558 3,78.2.

$8,441

$ 517 2,282

.. 4,773

$7,572,

Permanently restricted net assets at June 30, 2Q()9 and 2008 were restricted to investment in perpetnity, the income from which is expendable to support:

indigent care Education and f0search Other

Total

2009 2008

$ 2,941 1,329

830

$5,100

$2,941 621 1>30 -_ ..

From time to lime, the fair value of assets associated with individual dOllor-restricted endowment funds may fall below the level that the donor requires QHS to retain as a fund of perpetual duralion. In accordance with generally accepted accounting principles, deficiencies of this nature that are reported as adjustments in unrestricted net assets were $646 as of .Tune 30, 2009. These deficiencies resulted from unfavorable market fluctuations in investments. '[llere were no such deneiencie.s as of June 30, 2008.

- 23 -

7. EMPLOYEE BENEFrr PLANS

Eligible employees of QHS are covered by The Qoeen's Health Systems Pension Plan (the "Plan"). which is a noncontributory defined benefit pension plan. Pension benefits are provided to participants under several types of retirement options based upou years of continuous service, age, and compensation. Retirement benefits are paid to pensioners or benefi.ciaties in various forms of joint and snrvivor ammities, including a lump-sum payment option. The funding policy is to contl'ibute amounts as deemed necesSIll)! on an actuarial hasis to provide asset, sufficient to meet the benetits to be paid to Plan members.

QHS has three unfuncled, defined benefit postretiremeut plans, covering substantially all of its employees, that pl'Ovide medical benefits (until age 65), dmg and vision benefits, and life insurance beuefits, Tbe postretirement medical and drug and vision plans are contributory and also contain other cost-Sharing features, such as deductibles and coinsnrallce.

Certain executi yes also participate in a Ilonqualified, unfunded pension plan, At June }O, 2009 and 2008, the benefit liability related to this plan was $776 and $S90, respectively. Benetlt expense related to this plan was $129 and $105 for the years ended June 30, 2009 and 2008, respectively.

Certain key executives ,m' also covered by a nOl1qualified, unfunded supplemental executive retirement plan. At JlUle 30, 2009 and 2008, the benefit liability re-Iated to this plan was $5,632 and $5,458, respectively. Benefit expense related to this plan was $525 lmd $410 for the years ended June 30, 2009 and 2008, respecli vcly.

111 fiscal year 2009, as required under SPAS No. 158, Employers' AccountingJor Defined Benefit Pension and Other Postretirement Plans, an amendment (if FASB Stalemellts No. 87, 88, 106, and J 32(R), QHS changed the measurement d2lle on whleh it measures the plans' assets and obligations to June 30, which did nOl have a material effect on the consolidated financial statements.

- 24-

The following compares the changes in benefit obligations, changes in pl'Ul assets and funded status of the pension and postretirement plans with the amounts recognized in the consolidated balance shects as of June 3D, 2009 and 2008 (measurement date of June 30, 2009 and April 30,2008, respectively):

Change in benefit oblig'dtions: Benefit obligations ,- beginning of year

Service cost Interest cos! AcrlJariai (gain) loss Benefits pllid Plan amendments

Benefit obligation ,-" end of Y0",f

Change in plan assets: Fair value of plan assets--

beginning of year Actual (loss) return all plan assets Employer contributions Benefits paid

Fair value of pJan assets -end of year

Funded starns

Amounts recognized in the balance sheets consisted of: Other CUtTent liabilities Pension and other postretirement

benefits

Net. amounts recognized

Pension Benefits 2009 2008

$ 217,406 lO,994 14,884 (5,714) (9,206)

228

228,592

202,252 (48,062)

6,000 _19,206)

~O,984

$ (77,608)

$

(77,608)

$ (77,608)

$204,551 8,948

11,766 1,046

(8,905)

_£.U,406

202,193 2,664 6,300

(8,905)

202,252

$ 05,154)

$

(15,154)

$ (15,154)

Other Postretirement Benefits

2009 2008

$ 20,365 836

1,443 (177) (470) 563

_:?2,560

470 (470)

----

$ (22,560)

$ (686)

(21,874)

$ 20,962 700

Ll20 (2,114)

(303)

20,365

303 (303)

l!pO,3~

$ (639)

JJ 9,?:?£l

$ (22,560) H20,~)

AmounlS recognized in unrestricted net assets al June 30, 2009 and 2008 wel10 as follows:

Net transition asset Prior service Cosl Net loss

Total

Pension Benefits 2009 2008

(273) 90,909

$90,636

- 25 -

$ (625)

29,476

$ 28,851

Other Postretirement Benefits

2009 2008

$ 99 3,370 1,203

$4,672

$ 125 3,334 1,433

Amounts recognized in unrestricted net assets at June 30, 2()09, tbat arc expected to be recognized as components of bcnel1t cost in the year ending June 30, 2010 were as follows:

Net transition obligation Prior service cost --Net loss

Total

Pension Benefits

$ -(106)

.Ji,874

Other Postretirement

Benefits

$ 22 493

COillponcnts of net periodic pension cost and amounts recognized in other changes in unrestricted net assets, but not yet included in net periodic benefit costs were as follows:

Net periodic pension costs: Service cost Interest cost Expected return OIl plall assets Amortization of obligation AmOltizalion of prior service cost Recognized net actuarial loss

Net periodic pension cost"

Other changes j fl plan assets and henefit obligations recognized in other changes in unrestricted net assets: Net actuarial loss (gain) Prior service cost (credit) Recognized gain Recognized Obligation

Total recognized in other change.s in unrestricted net asset"\}

Pension Benefits 2009

$ 9,423 12,758

(17,138)

( 1(6) 779

$ 5,716

$ 62,342 352

(909)

$ 61,785

- 26 -

2008

$ 8,948 11,766

(17, (41)

(129)

$ 3,444

$ 15,523 129

other Postretirement Benefits

2009

$ 715 1,234

22 445

$2,416

$ (230) 36

(26)

$ (220)

2008

$ 700 1,120

22 413 29

$ 2,284

$ (2, 114) (413)

(29) . __ (.?:;0

Weighted-average assumptions used to detennine the benefit obligation and net periodic benefit cost at June 30, 2009 and 2008 were as follows:

Benefit obligation: Discount rate Rate of compensation increase

Net periodic benefit cost: Discount rale Expected retum OIl plan asselS Rate of compensation increase

Pension Benefiis 2009 2008

6,35 % 4,00

6,00 8.50 4.00

6,00 % 4,00

5.75 8,50 4.00

Other Postretirement

Benefits 2009 2008

6.35 % 6,00 %

6,00 5.75

The accumulated benefit obligation for the Plan was $208,246 and $197,900 at June 30, 2009 and 2008, respectively.

The primary objective of the Plan investments is to prudently fund the liabilities for benelils under the Plan, The investment policy for the Plan sets a long-term target raJlge for the asset aUocation of the Plan's investment portfolio, The Plan's asset allocation at Juue 30, 2009 and 2008, and the target range, was as follows:

Cash and cash equivalents Domestic and intemationalequities Fix_ed income securities Real estate investments Hedge l~md investments Private equity investments Tactical investments

Target

30-44% 18-33 18-26 14-20 7-11 3-8

2009

4.2 % 32.1 18,9 15.4 18,6 5,5 5,3

WO,O %

2008

1.2 % 41.0 15.5 18.9 17.8 5.6

100,0 %

The annual rate of increase in the pel' capita cost of medical benefits (Le., health care cost trend rate) was assumed to be 9% in 2009, declining by 0.5% pel' year through 2016, and then remaining at 5% thereafter. A one-pel'cen(-age point increase or decrease in this rate would increase or decrease the Plan's accumulated postrctirement benefit obligation by $627 and $460, respectively, as of JUlle 30, 201l9, and the Plan's service cost and interest cost component of net periodic postretirement benefit cost for the year ended June 30, 2009, by $70 and $54, respectively.

- 27 -

QHS anticipates making contributions of $6,000 to the pension plan and $708 to the postretirement beneftt plan during fiscal year 2010. The future estimated benefit payments for each plan are as follows:

Other Years Ending Pension Postretirement June 30 Benefits Benefits

20lO $ 12,296 $ 708 2011 12.099 834 2012 12,405 941 20J3 13,352 1,032 2014 13,736 .1.130 2015-2019 73,49 I 7,J77

QHS has defined contribution retirement plans (the "Retirement Plans") that cover substantially all employees and provide panicipants the ability to make pretax deduction contributions for deposit i.nto retirement savings aCCOlilltS. The pDJ1icipantB' contributions are matched al a Jlcreentage of their total contributions and up to annual dollar limits per participant as defined by tile Retirement Plans. QHS' expense relating to the above Retirement Plans was approximately $8,129 and $7,620 for the years ended June 30. 2009 and 2008. respectively.

8. INCOME TAXES

QIE, QDC, and DLS arc subject to Federal and Hawaii income ta:<es. At Jnne 30, 2009, these companies had operating Joss canyforwards for income tax purposes of approximately $14,080 thaI expire through 2028. At JUlle 30, 2009. QHS had net operating loss can'yforwards of$1 ,272 related to its unrelated business income. The net operating Joss canyJ'orwards expiro through 2028.

The components of income lax (expense) benefit for the years ended June 30. 2009 and 2008, were as follows:

Current income tax Deferred income lax

Total

2009 2008

$(1,34!) (297)

$ (1,638)

$(1,360) 5,023

Por the year ended June 30, 2009. the effective tax rate differed from the statutory rate primarily due to lax credits and changes in the valuation allowance in deferred (JiX assets for QIE. For the year ended .June 30, 2008. the e.ffeclive tax rale differed from tbe statutory rate primarily due to the reversal of a valuation allowance 0stablisbcd for lJet openlling IDsses of AS!.

,28 -

At June 30, 2009 and 2008, deferred income tax assets and liabilities resulted principally from operating loss carr-yfof'Nards and from temporary differences for fixed assets, intangible assets, allowance for uncollectible accounts, pension costs, and accrued vacalion. Defened income tax assets and liabllitic$ at Jnne 30, 2009 and :1,008, were as follows:

Deferred income tax assets Deferred income tax liabilities

Less valuation allowance

Less cunent

Noncunenl

2009

$ 16,263 (725)

15,538

__ .(1J981

14,340

(l,423)

$ 12,917

2008

$ 14,452 ___ .(77(~)

13,676

_ (804)

12,872

_.0,39(5)

$lI,~I<?

Deferred income tax assets 111USt he reduced by it valuation allowance if it is more likely than not tilal some portion or all of the deferred tax asset will not be realized. During :1.008. $7,121 of the allowance was !'eversed due to ASI receiving a private letter I1lling that allowed AS!', net operating loss calTyforwards (0 bc utilized by QDC.

9. OPERATING LEASES

As Lessor - Rents and royalties are received frtlm operating leases (land and leasehold interest with a carrying value of approximately $27.904). The. lease terms range from monthly tenancy to 41 remaining yea.rs and provide for periodic rent escalation and renegotiation l reimbursement of celtain operaling costs, and contingent ",,,nls based on the lessee's sales or production. Contingent renls of $1 ,2() J and $1.613 were !,()co6~]ized in 20()9 and 2008, respectively.

Office space in buildings owned by QHS is leased to physicians and other lel1al!ts under operating leases. Lease rent under most of these leases includes the basic rent, with periodic rent escalation and reimbursement of certllin building operating costs. Approximately 8.6% of the leases in a physicians' office building are nonlransferable and generally have terms for the duration of the physicians' practice. The lease terms provide for a fixed rent, plus reimbun;ement of certllin operating costs. The. remaining leases in the physicians' office buildings are for a four-year period renewable at the physicians' option for two additional periods of rour years each.

At June 30, 20()9 and 2008, the cost basis of these buildings was approximately $104.207 and $104,484, respectively, and the related accumulated depreciation was approximately $43,799 and $4(),987, rC$pectively.

,29·

Future minimum rental income under noncancelable opemting leases at June 30, 2009, is as follows:

Years Ending June 30

2010 2011 20[2 2013 20]4 Thereafter

Total

$ 29,917 25,654 2],814 21,135 20,275

453,651

As Lessee .................... QHS leases office space, land, and equipment under operating leases expiring through 2042, Future minimul11 lease payments under noncancelable operating leases at JUllC lO, 2009, are as follows:


2010 2011 2012 2013 2014 111ereafter

Total

$ 2,974 2,558 2,242 1,447

869

.. .....1.21!1.

$17,604

QHS also pays additional amounts for cOlllmon area maintenance charges, real property taxes, and ccriain building operating COB(S. Rent expense dnring 2009 and 2008 under these leases was approximately $4,367 and $5,810, respectively,

10, COMPUTER OPERATIONS OUTSOURCING

QHS has a contract with Affilialed Computer Services. Inc, (ACS) to ontsource substantially all of its computer operations, which includes providing services to certain affiliates, as well as providing QHS with implementation services. hardware, software, and application support.. Under this agreement, ACS provides services as specil1cd in the contJ,'lCt and the payments to ACS arc expensed in purchased services, In fiscal year 2009, QHS and ACS entered into a new contract that expires in November 2011 with the option to renew for one tb.ree .. year term, Total expenses under the contract in 2009 and 2008 were $9,738 and $11,231, respectively. In addition, amollnts paid to AC'l of $720 and $809 in 2009 and 2008, respectively, were capitalized, The contract provides for termination of the entire contract or pOJ1ions of the contract under certain circumstances, Should QHS terminate the agreement, QHS may be liable for early termination charges as calculated in the contract.

Future payments at June 30, 2009 under the contract are as follows:


20W 2011 2012

Total

11. COMMITMENTS AND CONTING ENCIE.'l

$ 9,514 9,192

At June 30.2009. there were several legal actions pending against QHS that arose in the normal course of business. The ultimate resolution of such actions cannot presently he determined. There were also certain actions alleging malpractice, These actions were covered under QHS' self·insurance program for general and professional liability exposure (see Note 5),

In April ZOO\!, QMC entered into a settlement agreement with various govc'I11mcntal ageneies. As part of the settlement agreement, QMC and the Office of the Inspector General (010) of the U.s, Department of Health and Human Services (HHS) entered into a Corporate Integrity Agreement (CLA.) to promote compliance with the statutes, regulations. and written directives of Medicare. Medicaid, and all other Federal health care programs. The CIA imposes a number of obligations on QMC, including additional compliance training, auditing, and periodic reporting to the OIG. The term of the ClA is five years.

At Junc }O, 2;009, QHS had commitments for facilities construction and equipment purchases for approximately $18,906. QHS has a commitment to improve traffk congestion around the QMC facility based on conditions imposed by the City and County of Honolulu for their approval of the Plan Review Use and Special District Permits. As of JUlle 30,2009, QHS had an unused standby letter of credit in the amount of $2,220 that expires on September 10.2011 related to this obligation,

QHS also entered into additional standby letters of credit totaling $2;,200, which expire between January 2010 and June 2010,

QMC has collective bargaining agreements with the Hawaii Nurses Association and the Teamsters Un.ion which expire-in November 2011 and June 2010, respectively, MGl{ has collective bargaining agreements with the Hawaii Numes Association and the United Public Workers that expire in Dece,mber 20 II and May 2012:, respectively,

* * * :1: * Jk

, 31 '

SUPPLEMENTAL SCHEDULES

-32-

MEMBERS OF THE QUEEN'S HEALTH SYSTEMS OBLIGATED GROUP

COMBINED BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008 (In thousands)

ASSETS

CURRENT ASSETS: Cash and cash equivalents Receivables - Jlet Due from government reimbursement progrmTIs Due from affiliates Inventories Investments - current Assets whose use is limited or restricted - cuo'ent Deferred income tax asset - curren! Prepaid expenses and other ""sets

Tota 1 current assets

INVESTMENTS - Less CUlTent portion

ASSETS WHOSE USE IS LIMITED OR RESTRICTED - Less current portion

LAND, BUILDINGS, AND EQUIPMENT - Net

INVESTMENTS IN AFFlLIA TES

GOODWILL

DEFERRED FlNANCING FEES - Net

DEFERRED INCOME TAX ASSET - Less current pOltion

OTHER ASSETS

TOTAL

2009 2008

$ 53,061 $ 36,889 91,050 92,464

1,454 4,1 18 2,921 9,291 8,447

285,018 354,284 9,274 8,958 1,423 1,396 9,534

462,769 516,317

71,881 59,699

26,331 66;666

314,815 324,804

14,839 14,422

7,643 7,657

7,328 8,294

12,917 11,476

2,061 2,091

$920,584 $ 1,011,426

(Continued)

Effective April 1,2009, MOB withdrew from the Obligated Group. The effect of excluding MGH from the 2009 Combined Balance Sheet was a reduction in net assets of $17,442.

- 33 -


COMBINED BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008

LIABILITIES AND NET ASSETS

CURRENT LIABrLITlr~'3: Accounts payable and other accrued liabilities Other curren! I iabi lities Due to government reimbursement programs - cun'ent Long-term debl- Cllrrent Due to affiliates

Total cUlTenl liabilities

DUE TO GOVERNMENT REIMBURSEMENT PROGRAMS - Less ctln'cnt portion

LONG-TERM DEBT - Less current portion

PENSION AND POSTRETIREMENT LlABlLlTIES

OTHER LONG-TERM LlABlLITIES

Total liabilities

NET ASSETS: U nres!ric led Temporarily restricted Permanently restricted

Totalnct assets

TOTAL

2009 2008

$ 79,311 $ 79,512 7,940 7,065 2,824

10,222 9,525

~~S~ 8,738

109,323 104,840

6,670 3,936

365,202 375,581

103,879 40,335

30,159 16,956

.Ji15,,~,1~ 541,648

284,964 444,330 15,287 21,057 5,[00

305,351 469,778

~9~Q!284 $1,011,426

(Concluded)

E1Te<:tive April 1,2009, MGB withdrew from tbe Obligated Group, The effect of <"eluding MGH from ttle 2009 Comhined Balance Sheet was a reduction in net assets of $ 17,442,

- 34 -


COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008

(In thousands)

UNRESTRICTED OPERATING REVENUES: Net patienl s{',rvice rcveuUL':S RenL'i and royalties Oiller

Tota! ol)1'csIJ'ict<xl operating reve.nues

NET ASSETS RELEASED FROM RESTRICTIONS

Tota! operating revenues and other support

UNRESTRICTED OPERATING EXPENSES: Salaries, wages, nnd employee bt..mefil.S Supplies Purchased s.ervices Depreciation and amortization Professional fees Provision for bad debts Renl and utilities lute-Test Taxes -, uther than income taxes Otber

Tutu! unrestricted ope-raung expenses

OPERATING INCOME

NONOPERATING ll'lCOME (EXPENSE): ttlvcslmeni (loss) income - net Income lax (expense) benefit Loss on inleres! rate swap Net assets released h'om mstrlcticms Other expense

Total n()nop(~'aling expense

(DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES PRIOR TO BOND REFUNDING ACTIVITIES (Forward)

2009 2008

$ 652,270 $609,835 14,771 13,252 34,120 }7L8~?,

701,161 660,9B}

11,996

,,In,15? 673.534

349,156 313,428 119,366 J 11,459 63,840 59,692 45,478 45,803 27,689 25,708 26,380 30 f058 19,871 19,600 15,323 15,731 5,406 4,748

, 28,978 ,_30,521

701,487 656,748

.,,~L97(), 16,786

(GO,OlE) 9,175 (1,986) 4,317

(12,154) (13,180) 6[)0 606

,,(1,835)

(281'86) (917)

(67,016) 15.869

(Continued)

Effective April 1,2009, MGH withdrew from the Obligated Group, The 2009 amounts include MGH', operations from July I, 200S to March 3],2009. The effect of excluding MOIl' 5 opc"nltions from April 1,2009 to June 30, 2009 was not significant.


COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS

FOR THE YEARS ENDED JUNE 30, 2009 AND 2008

2009 2008

(DEFICIENCY) EXCESS OF REVENUES OVER EXPENSES PIUOR TO BOND REFUNDING ACTIVITIES (l~lrward"dl $ (67,016) $ 15,869

LOSS ON BOND REFUNDfNG

(DEFICIENCY) EXCESS OF REVENUES OVER EXPHNSES

OTHER CHANGES: Penston n21al'(!-,,j changes other Ihan net pCTiudk p~nsion eos!

Net unre.a! ized \OS5e,S on i nvestmen!.s Withdrawalol'MGH Ne! assets released (rom restrictions for capital expcndi tutes; Transfers from affiliates - net

Tota'i other cJHlnges

(Decrcal1c) increase in unrestricwd net assets

TEMPORARILY RESTRICTED NET ASSETS: Gills and grants Investment toss --- net Net assets released from restrictions used for operaling expenses Transfers from affiliares -"-,,'- net Net assets released from restrictions used for nonoperating and capital

expenditures

Decrease -in temporarily restrk:lcd 11tH assets

PERMANENTLY RESTRICTED NET ASSETS - R",stritled giflS

DECREASE IN NET ASSETS

NET ASSETS ""'"- Beginnjng of year

NET ASSETS - End of year

(69,095) 15,869

(59,703) ( 12,065) (19.440) ( 15,529) (17,442)

972 3,028 5,342 9,489

_(90,27 I) ( 15,077)

(159,366) 792

4,555 7,347 (4,703) (507)

(I 1,996) (12,551) 7,946 7,851

(1,572) ~934)

(5,770) ~_!{~94)

709 ---_._-

(164,427) (702)

470,480

$469,77£

(Concluded)

Effective April J, 2009, MGH withdrew frorn the Obligated Group. The 2009 amounts include MGR's operations from July 1,2008 to March 31,2009, The effect of excluding MGH's operations from April 1, 2009 to June 3(), 2()()9 was not significant

- 36 -

Financial Information

(I)

(2)

(3)


The Queen's Health Systems Obligated Group Sources of Revenue

For Year Ended June 30, 2009

Net Patient Service Revenue (1)

Medicare HMSA (2)

Medicaid I QUEST Commercial Insurance, Self-Paying and

Other (3)

Subtotal

Other Revenue Other unrestricted revenue Net assets released from restriction

Subtotal

Total revenue

Percent of

Total Revenue

28.4% 32.1%

9.9%

19.6%

90.0%

8.4% 1.6%

10.0%

100.0%

For financial statement reporting purposes, patient service revenue is reported net of contractual allowances.

Hawaii's Blue CrosslBlue Shield Plan.

Revenue includes net patient service revenue from health maintenance organizations (HMOs) and preferred provider organizations (PPOs), Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), Veterans Health Administration (VHA), workers' compensation, automobile no-fault insurance, commercial payors, and other institutions.

Annual Report - 9

The Queen's Health Systems Obligated Group Capitalization (I)

Capital Lease and Other Obligations

2003 Series A Bonds

2003 Series B Bonds

2006 Series A Bonds

2006 Series B Bonds

2009 Series A Bonds

2009 Series B Bonds

Commercial Paper

As of June 30, 2009 (dollars in thousands)

Less Current Portion of Long-Ternl Debt

Long-Term Debt (including Commercial Paper)

Net Assets and Other Liabilities

Total Capitalization

Percent Long-Term Debt to Capitalization (2)


$ 5,449

39,275

38,550

54,550

83,800

39,335

39,335

75,130

(10,222)

365,202

555,382

$920,584

39.67%

(I) Refer to Note 4 to The Queen's Health Systems and Subsidiaries Consolidated Financial Statements as of and for the Years Ended June 30, 2009 and 2008, Obligated Group Schedules as of and for the Years Ended June 30, 2009 and 2008 and Independent Auditors' Report for a description of the outstanding long-term debt of the Obligated Group.

(2) The calculation of the Long-Term Debt to Capitalization Ratio is defmed in the Revolving Loan and Reimbursement Agreement dated January 24,2008, section 1.01.

Annual Report - 10

Consolidation

The Queen's Health Systems Management's Discussion of Finance Performance

For the Year ended June 30, 2009


The consolidated financial statements of The Queen's Health Systems ("QHS") include the results of The Queen's Medical Center ("QMC"), Molokai General Hospital ("MGH"), Queen Emma Land Company ("QEL"), Queen's Development Corporation ("QDC"), Queen's Insurance Exchange ("QIE") and The Queen's Health Systems (parent holding company).

Results of Operations

Net Operating Income for the fiscal year ended June 30, 2009 was $24.5 million and the Operating Margin was 3.3%. This compared to Net Operating Income of $31.4 million and an Operating Margin of 4.4% in the prior year.

Total revenues were $748.5 million in FY2009, an increase of$42.9 million, or 6.1 %, over the prior year. Net patient service revenues increased $45.0 million, or 7.4%, over the prior year, primarily due to volume increases at QMC. Acute admissions at QMC of21,668 were 1.5 % higher than the prior year. Factoring in the outpatient activity, adjusted admissions of 34,916 were 3.1 % higher than the prior year. Surgical cases for FY2009 at QMC of21,563 were 7.8% higher than the prior year. Also contributing to the increase in net patient service revenues was higher accession volume (3.9%) and net price per accession (1.1 %) at Diagnostic Laboratory Services (DLS), a subsidiary of QDC.

Total operating expenses were $724.0 million in FY2009, an increase of$49.7 million, or 7.4%, over the prior year. Salary-related costs increased $37.1 million, or 11.8%, primarily due to contractual salary increases and increases in pension and post retirement costs and medical benefits. Supplies increased $8.2 million, or 7.4%, largely related to the increase in admissions and procedures performed at QMC. Purchased services increased $3.5 million, or 5.9%, primarily due to repair and maintenance costs and residency program expenses at QMC. The provision for bad debts decreased by $3.8 million in FY2009, however, this decrease was offset by a $4.5 million increase in charity care expenses which were included in net patient service revenues - in effect, more of the patient write-offs were deemed to be charity care versus bad debt in FY2009.

The Deficiency of Revenues over Expenses was $78.2 million in FY2009, compared to an Excess of Revenues Over Expenses of$34.4 million in the prior year. This change of$112.6 million, was largely due to the economic conditions that existed during FY2009 and the related volatility of the financial and investment markets.

Alillual Report - 11


QHS experienced a net investment loss of$83.1 million in FY2009, which was $97.7 million lower than in the prior year. The majority of this loss related to unrealized depreciation of investment values due to the market volatility that existed this year. QHS's investment portfolio experienced a negative return of approximately 20.6% during FY2009 compared to a negative return of 1.8% in FY2008.

In addition, the financial results included the effect of some accounting changes. In FY2009, QHS adopted the equity method to account for its investments in limited liability entities. This resulted in recording $53.7 million of equity in losses of limited liability entities. Also in FY2009, QHS transferred its investments in debt and equity securities that are managed in "separate accounts" by fund managers from available-for-sale ("AFS") to trading securities. The transfer resulted in the reclassification of $41.2 million of unrealized gains from other changes in net assets to nonoperating income.

In May 2009, the Obligated Group issued $78.7 million of State of Hawaii Special Purpose Revenue Bonds, Series 2009 A and Series 2009 B Bonds. Proceeds of the Series 2009 Bonds were used to refund Series 2003 C and Series 2006 C Bonds. The cost of refunding was approximately $2.1 million, which was primarily related to the write-off of unamortized bond issuance costs of the refunded bonds.

Balance Sheet

The balance sheet remained solid and liquidity remained strong.

Cash Days cash on hand as of June 30, 2009 was approximately 314 days compared to 383 days in the prior year. Although days cash on hand decreased from prior year, it was well above Moody's 170 days median and S&P's 185 days median for an AlIA+ credit, respectively.

Positive cash flow was experienced in both FY2009 and FY2008. In FY2009, cash and cash equivalents increased $35.1 million.

Accounts Receivable Net days in accounts receivable was 52 days at June 30, 2009, a decrease of 4 days from June 30, 2008.

Investments The investment portfolio (both current and non-current portions) totaled $496.5 million at June 30,2009 compared to $588.1 million a year earlier, a decline of 15.5%.

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The Queen's Health Systems Obligated Group

The primary difference between the Consolidated results and the results ofthe Obligated Group is the exclusion of Queen Emma Land Company from the Obligated Group. In addition, effective Aprill, 2009, MGH withdrew from the Obligated Group. The FY 09 Combined Statement of Operations for the Obligated Group included MGH' s operations from July I, 2008 to March 31, 2009. The impact of excluding MGH's operations from April I, 2009 to June 30, 2009 was not significant.

The Obligated Group had a $69.1 million Deficiency of Revenues Over Expenses for the year ended June 30, 2009, a decrease of$85.0 million from the prior year. This decrease was due to the same factors that were described above for the consolidated results, including a $77.8 million decrease in nonoperating income that was due to the decrease in investment income.

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Operating Data

The Queen's Health Systems Obligated Group* Operating Data

For the Year Ended June 30, 2009

The Queen's Medical Center:

Staffed acute beds

Acute admissions

Acute patient days

Average acute length of stay (days)

Licensed beds:

Acute (Acute 485, residential psychiatric 20)

Long-term care I subacute

Total


421

21,668

132,195

6.10

505

28

533

'Note: Effective April 1, 2009, Molokai General Hospital withdrew from the Obligated Group. Thus, data on its licensed beds are not reported

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Employees

The Queen's Health Systems Obligated Group Operating Data (Continued)

For the Year Ended June 30, 2009


As of June 30, 2009, entities that compose the Obligated Group employed approximately 4,600 persons. Of such entities, only QMC has employees who are members of collective bargaining units. The Hawaii Nurses Association (RNA) covers approximately 1,200 staff nurses at QMC under a contract that will expire November 30, 2011. RNA also represents thirteen Radiation Therapists under an agreement that expires on October 31, 2012. The Hawaii Teamsters and Allied Workers, Local 996, International Brotherhood of Teamsters (Teamsters), covers licensed practical nurses, nursing assistants, psychiatric assistants, and other service workers at QMC. The Teamsters represent approximately 640 employees at QMC under a contract that expires on June 30, 2010. Management believes that relations with employees covered by collective bargaining agreements are satisfactory.

Annual Report - 15

Documents

THE QUEEN'S HEALTH SYSTEMS