2.13Notes to FS by fanzhongqing


									                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                                AUGUST 31, 2004


      Spindletop MHMR Services (the Center) is a community mental health and mental retardation center located
      in Southeast Texas. It provides a variety of behavioral health care services to people with mental illness,
      mental retardation, developmental delays and chemical dependency.

      Currently there are 42 community mental health and mental retardation centers in Texas. The community
      center system was established after the passage of the Texas Mental Health and Mental Retardation Act in
      1965. The purpose of community centers is to provide services to people with mental disabilities in an effort
      to allow them to live and work in the community.

      Spindletop MHMR Services was formed September 1, 2000 when Beaumont State Center and Life Resource
      merged. The Center provides services in Jefferson, Orange, Hardin and Chambers counties and serves
      approximately 9,000 consumers a year. The Center employs more than 500 full-time staff and is governed by
      a nine-member board of trustees appointed by the county commissioners’ courts in the four-county area. The
      Board of Trustees has decision-making authority, the power to designate management, the responsibility to
      significantly influence operations, and the primary accountability for fiscal matters.

      This report includes the financial statements of the Center and the funds for which the Center is considered to
      be financially accountable. The criteria used by the Center for including activities in preparing its financial
      statements are in conformity with Government Accounting Standards Board Statement 14, “The Financial
      Reporting Entity.” There are no component units or entities for which the Center is considered to be
      financially accountable.

      The accounting and reporting framework and the more significant accounting principles and practices are
      discussed in Note 3. The remainder of the Notes is organized to provide explanations, including required
      disclosures, of the Center’s financial activities for the fiscal year ended August 31, 2004.


      The government-wide financial statements (i.e., the statement of net assets and the statement of activities)
      report information on all of the non-fiduciary activities of the Center. For the most part, the effect of inter-
      fund activity has been removed from these statements. The Center only has governmental activities, which
      normally are supported by intergovernmental revenue. There are no business-type activities as the Center
      does not maintain an enterprise fund which is defined as predominantly supported by revenues from external

      The statement of activities demonstrates the degree to which the direct expenses of a given function or
      segment are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific
      function or segment. Program revenue includes 1) charges to clients or customers who purchase, use, or
      directly benefit from goods, services, or privileges provided by a given function or segment, and 2) grants and
      contributions that are restricted to meeting the operational or capital requirements of a particular function or
      segment. Other items not properly included among program revenue are reported instead as general revenue.

      Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds.

                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                                 AUGUST 31, 2004


      Measurement Focus, Basis of Accounting and Financial Statement Presentation

      The government-wide financial statements are reported using the economic resources measurement focus and
      the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Revenue
      is recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of
      related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements
      imposed by the provider have been met.

      Governmental fund financial statements are prepared using the current financial resources measurement
      focus and the modified accrual basis of accounting. Revenue is recognized as soon as it is both measurable
      and available. Revenue is considered to be available when it is collected within 60 days of the end of the
      current fiscal period or soon enough thereafter to be used to pay liabilities of the current period. Expenditures
      generally are recorded when a liability is incurred, as under accrual accounting. However, debt service
      expenditures, as well as expenditures related to compensated absences and claims and judgments are recorded
      only when cash is due.

      Grant revenue, patient fees and interest associated with the current fiscal period are all considered to be
      susceptible to accrual and thus have been recognized as revenue of the current fiscal year. All other revenue
      items are considered to be measurable and available only when cash is received by the Center.

      Amounts reported as program revenues include: (1) charges to clients or customers for goods, services or
      privileges provided, and (2) operating grants and contributions.

      Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues
      and expenses generally result from providing services in connection with a proprietary fund’s principal
      ongoing operations. The principal operating revenues of the Center’s internal service fund are fees charged to
      other funds for maintenance, food service and printing operations, and the use of capital assets associated
      with these activities. Operating expenses include cost of services and depreciation of capital assets. All
      revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The
      Center applies only those applicable FASB pronouncements issued prior to November 30, 1989 in accounting
      and reporting for its proprietary operations.

      When both restricted and unrestricted resources are available for use, it is the Center’s policy to use restricted
      resources first, and subsequently unrestricted resources as these are needed.

      Descriptions of Funds

      The accounts of the Center are organized on the basis of funds or account groups, each of which is considered
      to be a separate accounting entity. The operations of each fund are accounted for by providing a separate set
      of self-balancing accounts which are comprised of each fund’s assets, liabilities, fund equity, revenues and
      expenditures. Government resources are allocated to and for individual funds based upon the purposes for
      which they are to be spent and the means by which spending activities are controlled. The various funds and
      account groups maintained by the Center are as follows:

      Governmental Fund

      General Fund- This Fund is established to account for resources used to finance the fundamental operations of
      the Center. All revenues and expenditures not required to be accounted for in other funds are included here.

                               SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                AUGUST 31, 2004


      This is a budgeted fund and any fund balances are considered resources available for current operations. The
      fund balance may be appropriated by the Board of Trustees to implement its responsibilities. Special
      reporting treatments are also applied to governmental fund inventories and prepaid assets to indicate that they
      do not represent “available expendable resources,” even though they are a component of net current assets.
      Such amounts are offset by a fund balance reserve.

      The Governmental Fund is accounted for using a current financial resources measurement focus. As such,
      only current assets and current liabilities generally are included on the balance sheet. Operating statements of
      this fund present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and
      other financing uses) in net current assets.

      Proprietary Fund

      Internal Service Fund – This fund is used to account for financing of goods or services provided by one
      department to other departments of the Center on a cost reimbursement basis.

      The Proprietary Fund is used to account for the Center’s ongoing organizations and activities, which are
      similar to those found in the private sector. The measurement focus is upon capital maintenance and upon
      determination of net income, financial position and changes in financial position.

      Fiduciary Fund

      Pension Trust Fund – This fund is used to account for retirement funds held for employees in a trust capacity.
      The Pension Trust Fund is accounted for on the flow of economic resources measurement focus. Under this
      method, revenues are recorded when earned, and expenses are recorded at the time liabilities are incurred.

      Agency Fund – This fund is used to account for assets held by the Center in a trustee capacity for its clients.
      This fund is custodial in nature (assets equal liabilities) and does not involve measurement of results of

      Basis of Accounting

      The Center uses the modified accrual method of accounting for recording revenues and expenditures for all
      funds except for the Proprietary Fund and all Fiduciary Funds, i.e. Agency Fund and the Pension Trust Fund,
      which use the accrual method of accounting. Under modified accrual, revenues are recognized in the
      accounting period in which they become available and measurable. Expenditures are recognized in the
      accounting period in which the liability is incurred, except for principal and interest on long-term debt, which
      are recognized when due. Encumbrance accounting is not employed by the Center. Under accrual
      accounting, revenues are recognized when earned and expenditures when incurred.

      In applying the susceptible-to-accrual concept to intergovernmental revenue, there are essentially two types of
      revenues. In one, monies must be expended on the specific purpose or project before any amounts will be
      paid to the Center; therefore, revenue is recognized based upon the expenditures incurred. In the other,
      monies are virtually unrestricted and are usually revocable only for failure to comply with prescribed
      compliance requirements. These resources are reflected as revenue at the time of receipt or earlier if the
      susceptible-to-accrual criteria are met.

                              SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                               AUGUST 31, 2004


      Budget and Budgetary Accounting

      The Chief Executive Officer and the Chief Financial Officer are responsible for preparing the Center’s budget
      required by TDMHMR for the General Fund. An estimate of revenues and departmental expenditures by
      program category is prepared and submitted to the Board of Trustees. At a regularly scheduled board
      meeting, the Board of Trustees considers the recommendations and may revise the amounts submitted in the
      budget before approving it. Once the board’s approval is obtained, the budget is submitted to TDMHMR for
      approval. After a budget hearing, the budget is either approved by TDMHMR or the Center is directed to
      make necessary changes and resubmit the budget. The final budget is approved by TDMHMR generally
      before September 1.

      Budget expenditures for current operating funds cannot exceed the available cash balances in such funds at
      September 1 plus the estimate of revenue for the ensuing year. The Center may transfer existing surpluses
      between budget categories during the year and increase the budget according to budgeting and expenditure
      guidelines of TDMHMR for Community Mental Health and Mental Retardation Centers. Appropriations
      lapse at year-end.

      The budget for the General Fund is prepared on an accounting basis consistent with generally accepted
      accounting principles. Budgetary control is maintained at the sub function level as presented in the Statement
      of Revenues, Expenditures and Changes in Fund Balance – Budgeted and Actual – General Fund.


      In the General Fund, investments are reported at fair value, which is determined using selected bases. Mutual
      funds are valued at last reported sales price. Investments in money market funds, US Treasury reserves,
      investment pools, and agency obligations, with maturity of three months or less, are reported at amortized
      cost, which approximates fair value. Non-negotiable certificates of deposit are recorded at cost. Cash
      deposits are reported at carrying amount, which approximates fair value. Managed funds related to the
      Fiduciary Fund not listed on an established market are reported at estimated fair value as determined by the
      respective fund managers based on quoted sales prices of the underlying securities. All other investments in
      the Fiduciary Fund are stated at amortized cost, which approximates fair value. All investments of the Center
      are governed by the Public Funds Investment Act.

      Account Receivable from Clients

      Accounts receivable from patients and insurance carriers for services rendered are reduced by the amount of
      such billings deemed to be ultimately uncollectible using the reserve or allowance method based on past

                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                                AUGUST 31, 2004



      Inventory consists of expendable supplies held for consumption and electronic equipment not placed in
      service by issuance to a cost center and is valued at cost determined by the first-in, first-out method of
      accounting. The inventory is equally offset by a fund balance reserve which indicates that it does not
      constitute available, expendable resources even though it is a component of net current assets. The costs of
      inventories are recorded as expenditures when consumed rather than when purchased.

      Cash and Cash Equivalents

      For purposes of the statement of cash flows, the Center considers all demand deposit accounts and time
      deposits with an initial maturity of three months or less to be cash and cash equivalents.

      Prepaid Assets

      Payments made to vendors for services that will benefit periods beyond August 31, 2004, are recorded as
      prepaid assets. Prepaid assets are equally offset by a fund balance reserve in the fund financial statements
      which indicates that it does not constitute available, expendable resources even though it is a component of
      net current assets.

      Capital Assets

      Capital assets which include property, plant and equipment, are reported in the government-wide financial
      statements. All purchased property and equipment are valued at historical cost. Donated assets with an
      expected useful life of more than one year are valued at their fair market value at the time of receipt. Capital
      assets exceeding $1,000 with an estimated life in excess of two years are capitalized. Property, plant and
      equipment is depreciated on a straight-line basis, using guidelines issued by the American Hospital
      Association, although shorter lives are used when the Center’s experience shows the Association’s guidelines
      exceed actual Center usage. Useful lives of assets are estimated to be 2 – 10 years for furniture and
      equipment, 4 - 5 years for automobiles and 10 – 40 years for buildings and improvements. Expenses for
      maintenance and minor replacements are expensed when incurred.

      Long-term Obligations

      In the government-wide financial statements and proprietary fund types in the fund financial statements,
      long-term debt and other long-term obligations are reported as liabilities in the applicable governmental
      activities and/or proprietary fund type statement of net assets.

                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                                AUGUST 31, 2004


      Compensated Absences

      As fringe benefits for its employees, the Center allows hours earned for personal leave to be accumulated and
      carried forward to future periods up to a maximum of six hundred (600) hours. Employees terminating from
      the service are paid up to a maximum of four hundred (400) accumulated hours. The resulting cash value of
      the benefits, based on the maximum 400 hours, is recorded as liabilities in the Internal Service Fund and in
      the Statement of Net Assets.

      Federal Income Taxes

      The Center is a political subdivision of the State of Texas and qualifies as an exempt organization under the
      Internal Revenue Code. Therefore, the Center is not subject to federal income taxation.

      Sources of Funds

      Some funds from federal and other state sources represent fee for service reimbursements, as well as program
      grants. The funds that are specifically for individual patient service reimbursements are reported as local
      funds under patient fees or insurance reimbursements identified by source as directed by TDMHMR.

      Risk Management

      The Center is exposed to various risks of loss related to tort; theft of, damage to and destruction of assets;
      errors and omissions; injuries to employees; physician’s malpractice; and natural disasters. During fiscal year
      2004, the Center was covered by insurance for these various risks at a cost it considered to be economically

      Reserves and Designations

      Portions of fund equity are segregated for future use and therefore are not available for future appropriation or
      expenditure. Amounts reserved for prepaid expenses have already been expended and represent a portion of
      the fund balance that is not available for future expenditures.

      Unreserved-designated fund balance represents the amount earmarked by management for capital outlay and
      other special projects.

      Unreserved-undesignated fund balance in governmental funds refers to fund balance the future use of which
      has not been determined or specified by management.

      Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenditures during the reporting period. Actual results could differ from those estimates.

                                 SPINDLETOP MHMR SERVICES
                             NOTES TO THE FINANCIAL STATEMENTS
                                                   AUGUST 31, 2004


        Comparative data for the prior year have been presented in the combining and individual fund and account
        group financial statements and schedules accompanying the basic financial statements in order to provide an
        understanding of the Center’s financial position and operations. However, comparative data (presentation of
        prior year amounts by fund type) has not been included in all of the statements since their inclusion would
        make the combined statements unduly complex and difficult to read. Some prior year balances have been
        reclassified to conform to the current year presentation.


        On August 31, 2004, the Center’s carrying amount for cash balance was $497,938 and the bank balance was
        $696,826. Deposits are entirely insured or collateralized with securities held by the Federal Reserve Bank of
        Dallas in the name of the Center. Total collateralization and insurance coverage is required by the Rules of
        the Commissioner of the Texas Department of Mental Health and Mental Retardation and the Board of
        Trustees of the Center.

        State statutes authorize the Center to invest in obligations of the United States or its agencies, direct
        obligations of the State of Texas or its agencies, prime domestic bankers acceptances, commercial paper, SEC
        registered no-load money market mutual funds, other obligations which are unconditionally guaranteed or
        insured by the State of Texas or the United States or its agencies and instrumentalities, and obligations of
        states, agencies, countries, cities and other political subdivisions having been rated as to investment quality
        by a nationally recognized investment rating firm and having received a rating of not less than A or its
        equivalent, certificates of deposit, and fully collateralized repurchase agreements. During the year ended
        August 31, 2004, the Center did not own any type of securities other than those permitted by statute.

        Investments are categorized into these three categories of credit risk:

               1.   Insured or registered, or securities held by the Center or its agent in the Center’s name.
               2.   Uninsured and unregistered, with securities held by the counterparty’s trust department or agent in
                    the Center’s name.
               3.   Uninsured and unregistered, with securities held by the counterparty, or by its trust department or
                    agent, but not in the Center’s name.
                                                                     Category                             Amount/
                                                         1                2                3             Fair Value

Certificates of Deposit                           $     195,000     $      -       $     -        $     195,000
Money Market Account                                     34,149                                          34,149
U.S. Government Securities                            2,340,951            -             -            2,340,951

      Total                                       $ 2,570,100       $      -       $     -

Investments not subject to categorization:

Mutual Funds                                                                                          4,712,501
State Comptroller's investment pool                                                                   3,337,855

      Total investments                                                                           $ 10,620,456


                              SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                               AUGUST 31, 2004


      The following is a summary of inter-fund receivables and payables:
                                        Due From                    Due To
      General Fund                 $          132,890          $           6,596
      Internal Service Fund                           -                  132,890
      Fiduciary Fund                             6,596                         -

            Total All Funds         $          139,486         $          139,486


      The following is a summary of inter-fund transfers:
                                         Transfer                   Transfer
                                            In                        Out
      General Fund                 $         1,673,524         $       1,763,293

      Internal Service Fund                  1,763,293                  1,673,524

            Total All Funds         $        3,436,817         $        3,436,817


      The Center has a defined contribution plan that works in conjunction with the deferred compensation plan
      (see Note 9 below), covering substantially all full-time eligible employees. Under this plan, the Center
      contributes an amount to match the employee’s contributions to the Employer’s Deferred Compensation plan.
      The amount will range from 3% to 8% of each participating employee’s compensation. Employees must
      contribute at least 3% to share in the employer’s contribution. Employer contributions and earnings vest
      based on a graduated schedule with full vesting after six years, attainment of the age of 65 or the 5th
      anniversary of joining the Plan, if later than the normal retirement age.

      The Plan is administered by ISC Group, Inc. of Dallas and is monitored by the Texas Council Retirement
      Program Oversight Committee.

      The Center’s total covered payroll for fiscal year 2004 was $14,866,742, while total payroll of the Center was
      $15,865,500. Total employee contributions were $815,533. Employer contributions of $715,003 have been
      recorded as fringe benefit expenditures during the fiscal year.


      The Center sponsors a deferred compensation plan created in accordance with Internal Revenue Code Section
      457. Employees are required to participate after they have been employed for six months. The plan enables
      eligible employees to save money for retirement through payroll deduction on a before-income-tax basis. The
      amount of the deduction will range from 3% to 8% of compensation. Deferred compensation is not available
      to employees until termination, retirement, death or unforeseeable emergency.

                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                                AUGUST 31, 2004


       The plan is administered by ISC Group, Inc. through an administrative service agreement. The Center’s
       administrative involvement is limited to transmitting amounts withheld from payroll to the plan administrator
       who performs investing functions.

       The Center approved plan amendments so that plan assets are held in trust for the benefit of the plan
       participants and their beneficiaries. The assets will not be diverted to any other purpose. Therefore, the
       financial activity of the Plan is not reported in the Center’s Agency Fund.


       Receivables from other governments are for reimbursement of expenditures and fees for services provided
       under various programs and grants and other amounts due in the ordinary course of business. All amounts are
       expected to be collected within the next year. A summary of these receivables follows:
        Local Funds
          Medicaid                                                                       $    654,206
          MR Workcenter Contracts                                                              27,733
          TRC                                                                                   4,888
          Medical Plan Administrators                                                         158,788
          Other                                                                                91,824

          Early Childhood Intervention                                                         51,676
          TDMHMR - Administrative Claiming                                                    230,342
          Texas Department of Transportation                                                  100,748
          Texas Department of Criminal Justice                                                 73,695
          Texas Correctional Office on Offenders w/ Medical or Mental Impairments             147,275
          Southeast Texas Regional Planning Commission                                          5,443
          Teas Department of Protective and Regulatory Services/CPS                               100

          Department of Housing and Urban Development                                          15,243
          Department of Agriculture                                                             7,149
          TDMHMR - Path Block Grant                                                            32,486
          Early Childhood Intervention                                                         91,868
          Southeast Texas Regional Planning Commission                                         53,599

              Total                                                                     $   1,747,063

                                SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                   AUGUST 31, 2004


       Changes in capital assets are as follows:

                                             August 31,        Additions &                            August 31,
                                               2003             Transfers       Retirements             2004
       Non-depreciable Asset:
       Land                              $      541,527        $          -     $          -      $      541,527

       Depreciable Assets:
       Buildings & Improvements          $  8,010,377          $      2,381     $       -         $  8,012,758
       Furniture and Equipment              2,009,797               149,812         (14,071)         2,145,538
       Automobiles                          1,840,041               296,378         (27,218)         2,109,201
           Sub-total                     $ 11,860,215          $    448,571     $   (41,289)      $ 12,267,497

            Total                        $ 12,401,742          $    448,571     $   (41,289)      $ 12,809,024

        Depreciation and amortization expense for the year ended August 31, 2004 totaled $707,460 in the
       government-wide financial statements. Depreciation expensed in the Internal Service Fund totaled $124,612
       and was charged to the function/programs in the government-wide statement of activities as part of the excess
       expenses allocated to the said function/programs. The remaining depreciation and amortization expense was
       charged to the government-wide statement of activities as follows:

                                                               Depreciation &

         Governmental activities:
            Mental Retardation                                 $    181,902
            Mental Health Adult                                     175,993
            Mental Health Child and Adolescents                      75,112
            Early Childhood Intervention                             10,695
            Substance Abuse                                          50,858
            Other                                                    32,517
            Administration                                           55,771

                    Total                                      $    582,848

                                SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                  AUGUST 31, 2004


       The following is a summary of accumulated depreciation for each major class of Capital Assets:

                                            August 31,    Additions &                         August 31,
                                              2003         Transfers         Retirements        2004
        Buildings & Improvements           $ 3,434,006    $ 287,787          $         -     $ 3,721,793
        Furniture and Equipment              1,174,116       211,475             (11,706)      1,373,885
        Automobiles                          1,680,430       186,401             (27,217)      1,839,614
             Total                         $ 6,288,552    $ 685,663          $ (38,923)      $ 6,935,292

       Intangible assets amounted to $130,782 on the government-wide statement of net assets and pertain to an
       inter-local agreement with the Burke Center for an ICF/MR license of a residential facility in Silsbee, Texas.
       The net present value of the license was $217,971 at the inception of the agreement in September, 2000 and
       the total amortization as of August 31, 2004 was $87,189. Amortization expense for fiscal year 2004
       amounted to $21,797 in the government-wide financial statements.


       The Center operates a medical self-insurance program managed by Greentree Administrators. In accordance
       with state statute, the Center was protected against unanticipated catastrophic individual or aggregate loss by
       stop-loss coverage carried through Mutual of Omaha Life Insurance Company, a commercial insurer licensed
       or eligible to do business in Texas in accordance with the Texas Insurance Code. Stop-loss coverage was in
       effect for individual claims exceeding $100,000 and for aggregate losses exceeding 125% of expected claims
       liability, which as of August 31, 2004 stood at $2,155,113. The purpose of this coverage is to pay medical
       insurance claims of employees and their covered dependents and minimize the total costs of annual insurance
       to the Center. Dependent coverage is partly funded by the Center.

       Total premiums, claims and administrative fees paid for the program for the year ended August 31, 2004 was
       $2,386,428. For the same period, management recorded a $350,000 liability in the general fund financial
       statements for claims incurred but not reported and/or approved as of that date. This amount is based on
       claims submissions during the 60-day period immediately following the close of the fiscal year. The contract
       between the Center and the third-party administrator is renewable September 1, 2005. Terms of coverage and
       contribution costs are included in contractual provisions.

       The Center does not provide any post-retirement health benefits to its employees.

       Changes in the medical claims liability amounts are represented below:

                                         Fiscal-Year          Changes in              Claim                 Fiscal-Year
                                          Liability           Estimates              Payments                Liability

       2002 - Medical and dental     $       181,727      $      2,120,621       $      2,063,548       $       238,800
       2003 - Medical and dental             238,800             2,777,784              2,782,863               233,721
       2004 - Medical and dental             233,721             2,502,707              2,386,428               350,000

                                SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                  AUGUST 31, 2004


       The Center has participated in a number of Federal and State assisted grant programs. These programs are
       subject to financial and compliance audits by the grantors or their representatives and regulatory authorities.
       The purpose of the audits is to ensure compliance with conditions relating to the granting of funds and other
       reimbursement regulations. The Center’s management believes that any liability for reimbursement which
       may arise as the result of these audits will not be material to the financial position of Spindletop MHMR

       The Center is a party to various actual and threatened legal actions. These litigations are covered by liability
       insurance through an outside carrier. The Center intends to vigorously defend these actions. Potential losses
       in excess of insurance coverage that are determinable at this time are immaterial to the financial statements
       and have not been accrued.

       The Center has entered into an agreement with Texas Council Risk Management Fund to pay workers’
       compensation contributions relative to its own loss experience based on a six-year look back period. Based
       on its experience, the Center’s effective rate can be retroactively reduced to 60% of standard or increased to
       15% above standard through 2001 and 10% above standard for 2002 through 2004. The Center paid
       $352,784 as premium for this purpose during the year ended August 31, 2004.

       The Center is covered under a self-funded insurance pool managed by the Texas Council Risk Management
       Fund. The pool was formed for the purpose of providing property, casualty, and liability coverage, to provide
       claims administration and develop a comprehensive loss control program. The premiums paid by the Center
       are based upon a three-year historical loss average. Premiums are adjusted annually. The maximum amounts
       eligible to be paid by the pool are as follows: general and vehicle liability - $1,000,000; professional liability
       and errors and omissions - $1,000,000; sexual misconduct endorsement - $100,000; expanded employment
       practices endorsement - $50,000; property coverage - $29,296,844; automobile physical damage – actual cash
       value. Total amounts paid by the Center representing premiums to the Fund for the year ended August 31,
       2004, were $397,771. The Center is responsible for all claims exceeding the maximum amounts to be paid
       by the pool. There were no significant reductions in coverage in the past fiscal year, and no claims exceeded
       the maximum paid by the Fund for the last three years.

       Flood coverage in total amounts of $610,000 for buildings and $71,000 on contents is provided through
       Fidelity and First Commercial Insurance Companies. Windstorm and hail coverage in the amount of
       $11,884,319 is provided through AXA Corporate Solutions Lloyds Insurance Company of Texas and
       windstorm and hail coverage in the amount of $75,472 provided through Texas Windstorm Insurance
       Association. No claims have been filed for the year ended August 31, 2004, and no claims exceeded the
       maximum coverage for each of the past three fiscal years.


       A substantial portion of the Center’s revenue is in the form of a performance contract from the Texas
       Department of Mental Health and Mental Retardation. As a result, the Center’s overall exposure to credit risk
       is contingent upon future funding by the Department. Historically, the Center’s uncollectible accounts
       receivable have been immaterial. The Center does not require collateral for its accounts receivable.

                                SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                 AUGUST 31, 2004


       Management has assessed its working capital and capital improvement requirements for the upcoming fiscal
       year. Accordingly, the Board of Trustees has designated $700,000 of its General Fund equity for various
       capital improvement projects, major repairs, personnel compensation, training issues and other cash flow
       requirements. These amounts are not legally restricted.


       The Center is obligated under operating leases (non-capitalized) for building and office space and equipment.
       For the year ended August 31, 2004, lease expenditures of $212,315 were made from the General Fund. The
       following is a schedule of minimum lease payments under non-cancelable operating leases as of August 31,

                             Year Ending                                 Minimum
                              August 31,                               Lease Payments
                                2005                                   $       92,328
                                2006                                           81,988
                                2007                                           10,262
                                2008                                            6,084

                            Total                                      $      190,662


       The Center entered into an inter-local agreement with the Burke Center effective September 1, 2000 and
       extending through August 31, 2008. The agreement involves an ICF/MR license, residential facility and real
       property for an ICF/MR operation in Silsbee, Texas and requires monthly payments of $5,000. This inter-
       local agreement qualifies as a capital lease for accounting purposes and therefore has been recorded at the
       present value of the future minimum lease payments as of the inception date.

       The assets acquired through the capital lease are as follows:

          Land                                                               $   4,423
          Buildings                                                            144,344
          Less: Accumulated Depreciation                                       (23,095)
               Total Fixed Assets                                            $ 125,672

           Intangible Assets                                                 $ 217,971
           Less: Accumulated Amortization                                      (87,189)
                 Total Intangible Assets                                     $ 130,782

                              Total Assets acquired through capital lease    $ 256,454

                                SPINDLETOP MHMR SERVICES
                            NOTES TO THE FINANCIAL STATEMENTS
                                                   AUGUST 31, 2004

(17)   CAPITAL LEASES (continued)

       The future minimum lease obligations and the net present value of these minimum lease payments as of
       August 31, 2004 are as follows:

                  Year Ending                                                    Minimum
                   August 31,                                                  Lease Payments
                      2005                                                     $       60,000
                      2006                                                             60,000
                      2007                                                             60,000
                      2008                                                             60,000
                  Total minimum lease payments                                 $      240,000
                  Less: amount representing interest                                  (31,199)
                  Present value of minimum lease payments                      $      208,801

       Of the total capital lease payable of $208,801 as of August 31, 2004, $46,869 will be due and payable within
       a period of one year.


       Related to the capital lease, the Center incurred interest expense in the amount of $16,291 during the year.
       This amount was charged to the Mental Retardation Program which uses the license and facility for its
       ICF/MR project in Silsbee, Texas.


       A summary of changes in compensated absences follows:

                                           September 1,                                              August 31,
                                              2003                Additions     Retirements            2004
       Compensated absences                $ 1,231,627           $ 2,007,324   $ 2,141,574       $     1,097,377

       Of the General Fund’s compensated absences payable of $1,097,377 as of August 31, 2004, $119,616 is
       expected to be due and payable within a period of one year.


       Prior Period Adjustment consists of three components. The prior year fund balance was reduced by an
       understatement of the account Incurred but not Reported Healthcare Claims (IBNR) in FY 2003 by $146,436.
       This represents an under-accrual of healthcare-related fringe benefits during the previous year.

       The prior year balance was increased by an additional allocation of $84,709 for New Generation Medications
       for FY 2002 but was declared and paid by TDMHMR in FY 2004.

       This year, it was determined that public assistance and sample medications should not be carried in the books
       as inventory as these are technically “owned” by the physician-employees. As such, the carrying value of
       such inventory in FY 2003 in the amount of $595,225 was written-off.

                               SPINDLETOP MHMR SERVICES
                           NOTES TO THE FINANCIAL STATEMENTS
                                               AUGUST 31, 2004


       Actual expenditures for salaries exceeded budgeted expenditures in the General Fund as the Board approved
       the issuance of a 3% performance award to staff. Also exceeding the budget were meal costs for consumers,
       training, office supplies and other consumables, telephone and other minor expenses.

       The Net Asset deficit in the Internal Service Fund will be eliminated through General Fund subsidies and/or
       increased charges for services.


       Management is not aware of any event occurring after August 31, 2004 which will materially alter the
       financial data and other information presented in this report.


       In fiscal year 2003, the Center implemented the Government Accounting Standards Board Statement No. 34,
       Basic Financial Statements- and Management’s Discussion and Analysis- for State and Local Governments,
       issued on June 1999, and the related Statement No. 37, Basic Financial Statements- and Management’s
       Discussion and Analysis- for State and Local Governments: Omnibus, issued on June 2001 and Statement
       No. 38, Certain Financial Statement Note Disclosures. This current comprehensive annual financial report
       continue to conform with these GASB statements.


To top