ROGER WILLIAMS MEDICAL CENTER, INC. AND AFFILIATES. Consolidated Financial Statements and Supplementary Consolidating Information

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1 Consolidated Financial Statements and Supplementary Consolidating Information (With Independent Auditors Report Thereon)

2 Table of Contents Page(s) Independent Auditors Report 1 Financial Statements: Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Changes in Net Assets 4 Consolidated Statements of Cash Flows Supplementary Consolidating Information Independent Auditors Report on Accompanying Consolidating Information 23 Consolidating Balance Sheets Consolidating Statements of Operations and Changes in Net Assets (Deficits) 28-29

3 KPMG LLP 50 Kennedy Plaza Providence, RI Independent Auditors Report The Board of Trustees Roger Williams Medical Center, Inc. and Affiliates: We have audited the accompanying consolidated balance sheet of Roger Williams Medical Center, Inc. and Affiliates (the Medical Center) as of September 30, 2006 and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Medical Center s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Medical Center as of and for the year ended September 30, 2005 were audited by other auditors, whose report thereon, dated March 28, 2006, expressed an unqualified opinion. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Medical Center s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Medical Center as of September 30, 2006, and the results of their operations, changes in their net assets and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. December 7, 2006 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

4 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents $ 12,519,839 13,376,245 Pooled investments (note 2) 1,566,150 1,498,147 Patient accounts receivable, less allowance for doubtful accounts of $5,411,275 in 2006 and $5,192,083 in ,552,011 14,528,011 Research grants receivable 12, ,719 Inventories 2,736,677 2,408,013 Prepaid expenses and other current assets 1,426,299 1,852,517 Current portion of funds held by trustee under bond indenture (notes 2 and 5) 76,731 5,265 Total current assets 33,889,757 33,863,917 Assets whose use is limited (note 2): Funds held by trustee under bond indenture (note 5) 1,793,331 1,890,235 Board-designated investments 7,215,821 6,750,550 Interest in perpetual trusts 3,517,930 3,328,209 Donor-restricted investments 14,090,626 13,511,874 Total assets whose use is limited 26,617,708 25,480,868 Property, plant and equipment, net (note 3) 44,174,924 41,596,938 Pledge receivable 1,085,000 Other assets 614,099 1,435,688 Total assets $ 105,296, ,462,411 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 20,238,549 19,900,005 Deferred prosecution agreement liability (note 14) 2,500,200 2,700,000 Current portion of long-term debt (note 5) 1,646,365 2,132,625 Estimated final settlements due to third-party payors (note 1) 11,422,353 8,719,692 Total current liabilities 35,807,467 33,452,322 Long-term debt, less current portion (note 5) 25,871,132 26,081,325 Asset retirement obligations (note 3) 1,162,667 Other 4,043,896 3,492,826 Total liabilities 66,885,162 63,026,473 Commitments and contingencies (notes 6, 7, 11, and 14) Net assets: Unrestricted 19,752,444 21,354,126 Temporarily restricted (note 12) 2,696,789 3,888,193 Permanently restricted (note 12) 15,962,093 15,193,619 Total net assets 38,411,326 40,435,938 Total liabilities and net assets $ 105,296, ,462,411 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Operations Years ended Operating revenues (note 1): Net patient service revenues (notes 1 and 8) $ 147,352, ,098,854 Net assets released from restrictions: Research 7,460,338 8,852,278 Free care 49,262 87,281 Other operating revenues (note 2) 6,909,765 6,113,172 Total operating revenues 161,771, ,151,585 Operating expenses (note 13): Employee compensation and benefits 81,103,432 77,902,840 Supplies and other 55,410,054 51,880,982 Deferred prosecution agreement expense (note 14) 2,700,000 Direct research expenses 7,460,349 8,852,278 License fee (note 9) 3,936,648 3,337,632 Depreciation 5,935,393 5,411,068 Interest 1,672,972 1,712,353 Provision for bad debts 7,483,899 5,453,183 Total operating expenses 163,002, ,250,336 Loss from operations (1,230,802) (3,098,751) Nonoperating gains (losses): Investment income (note 2) 220,074 1,203,530 Investment (loss) income on permanently restricted funds (5,569) 162,558 Expenditures for designated purposes, net (649,625) (787,632) Gain on sale of joint venture (note 4) 4,865,813 Nonoperating (losses) gains, net (435,120) 5,444,269 (Deficiency) excess of revenues over expenses (1,665,922) 2,345,518 Other changes in unrestricted net assets: Net unrealized gain on investments (note 2) 1,089, ,094 Cumulative effect of change in accounting principle (note 3) (1,025,011) (Decrease) increase in unrestricted net assets $ (1,601,682) 2,978,612 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Changes in Net Assets Years ended (Decrease) increase in unrestricted net assets $ (1,601,682) 2,978,612 Temporarily restricted net assets: Restricted income on endowment funds (note 2) 49,262 87,281 Gifts, grants and bequests, (net of uncollectible pledge of $1,085,000 in 2006) 6,268,934 10,071,485 Net assets released from restrictions (7,509,600) (8,939,559) (Decrease) increase in temporarily restricted net assets (1,191,404) 1,219,207 Permanently restricted net assets: Realized gains on sale of investments retained to maintain the purchasing power of the original dollar value of the funds (note 1) 578, ,078 Change in market value of perpetual trusts 189, ,052 Increase in permanently restricted net assets 768, ,130 (Decrease) increase in net assets (2,024,612) 4,792,949 Net assets at beginning of year (note 1) 40,435,938 35,642,989 Net assets at end of year $ 38,411,326 40,435,938 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: (Decrease) increase in net assets $ (2,024,612) 4,792,949 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 5,935,393 5,411,068 Provision for bad debts 7,483,899 5,453,183 Net realized and unrealized gains on sale of investments (1,089,251) (633,094) Equity gain in joint venture (210,480) Realized gains on sale of investments retained in permanently restricted investments (578,753) (341,078) Accretion of original issue discount and amortization of deferred financing costs 48,958 46,433 Cumulative effect of change in accounting principle 1,025,011 Change in market value of perpetual trusts (189,721) (254,052) Changes in operating assets and liabilities: Patient accounts receivable (8,507,899) (2,887,735) Pledge receivable 1,085,000 (1,085,000) Other current assets 1,074,052 (1,809,483) Accounts payable, accrued expenses and other liabilities 889,614 4,829,317 Deferred prosecution agreement liability (199,800) 2,700,000 Estimated final settlements due to third-party payors 2,702,661 2,879,469 Net cash provided by operating activities 7,654,552 18,891,497 Cash flows from investing activities: Additions to property, plant, and equipment (8,375,723) (7,971,246) Purchases of investments (3,639,322) (7,743,800) Sale of investments 3,917,018 8,104,977 Interest on investments (275,033) (810,496) Net cash used in investing activities (8,373,060) (8,420,565) Cash flows from financing activities: Additional debt 1,793, ,711 Repayment of long-term debt (2,510,368) (2,024,142) Repayment of line of credit (3,000,000) Realized gains on sale of investments retained in permanently restricted investments 578, ,078 Net cash used in financing activities (137,898) (3,882,353) Net change in cash and cash equivalents (856,406) 6,588,579 Cash and cash equivalents at beginning of year 13,376,245 6,787,666 Cash and cash equivalents at end of year $ 12,519,839 13,376,245 Supplemental disclosure: Equipment acquired through capital lease $ 1,793, ,711 See accompanying notes to consolidated financial statements. 5

8 (1) Organization and Summary of Significant Accounting Policies (a) Organization Roger Williams Medical Center, Inc. and Affiliates (the Medical Center), a not-for-profit corporation, functions as a parent company and is the sole member or shareholder of the following organizations, which together form the continuum of healthcare known as the Roger Williams Medical Center. Roger Williams Hospital (the Hospital) The Hospital is a 220-bed acute care general hospital established to provide healthcare services in Providence, Rhode Island and surrounding communities. Roger Williams Realty Corporation (Realty) Realty holds and manages real estate assets for the benefit of the Medical Center, owns and leasesland and buildings to Elmhurst, and leases clinical and research space to the Hospital. Realty is a not-for-profit organization. Roger Williams Medical Center Physicians Office Building, Inc. (POB) POB owns and operates a physician office building located adjacent to the Medical Center s main campus, on space leased from Rosebank, for the benefit of Hospital-employed physicians. POB is a not-for-profit organization. Rosebank Corporation (Rosebank) Rosebank holds and manages real estate assets for the benefit of the Medical Center. Rosebank owns several parking lots on the main campus of the Medical Center and several other properties adjacent to the main campus,including a guesthouse and the building housing the Hospital s finance department. Rosebank is a for-profit organization. Elmhurst Health Associates, Inc. (EHA) EHA operates a pharmacy located on the Elmhurst campus and provides extended outpatient lab services. EHA is a for-profit organization. During fiscal year 2002, the activities for EHA were terminated and now flow through the Hospital. EHA maintains an active bank account and an outstanding receivable from Elmhurst. The intercompany balances are eliminated on the consolidated financial statements. Elmhurst Extended Care Facilities, Inc. (Elmhurst) Elmhurst is a 192-bed skilled nursing home and immediate care facility and provider of other elder care services. Elmhurst is a not-for-profit corporation. 6 (Continued)

9 Roger Williams Medical Associates, Inc. (RWMA) RWMA is a nonprofit corporation established to arrange for the provision of medical services to patients of the Medical Center and individuals in the communities served by the Medical Center, Inc. to participate in educational programs for its staff and the community and otherwise to cooperate with Roger Williams Medical Center in meeting the medical needs of patients in the service area. (b) (c) (d) (e) Basis of Statement Presentation The accompanying consolidated financial statements, which are presented on the accrual basis of accounting, have been prepared consistent with the American Institute of Certified Public Accountants Audit and Accounting Guide, Healthcare Organizations (the Audit Guide). In accordance with provisions of the Audit Guide, net assets and revenue, expenses, gains, and losses are classified on the existence or absence of donor-imposed restrictions. Accordingly, unrestricted net assets are amounts not subject to donor-imposed stipulations and are available for operations. Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained in perpetuity. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made in the areas of patient accounts receivable, accruals for settlements with third-party payors, insurance reserves, and accrued compensation and benefits. Principles of Consolidation The consolidated financial statements include the accounts of the Medical Center and its affiliates. Significant intercompany accounts and transactions have been eliminated in consolidation. Statement of Operations All activities of the Medical Center deemed by management to be ongoing, major and central to the provision of healthcare services are reported as operating revenues and expenses. Other activities deemed to be nonoperating include unrestricted gifts, certain investment income (including realized gains and losses not recorded as permanently restricted net assets) and expenditures for designated purposes consisting primarily of physician- and research-related expenses. 7 (Continued)

10 The Medical Center recognizes changes in accounting estimates for net patient service revenue, third-party payor settlements and certain operating expenses as new events occur, as more experience is acquired or as additional information is obtained. Significant adjustments to operations related to prior years consist primarily of favorable (unfavorable) adjustments to prior year estimates for settlements with third-party payors and patient accounts receivable and amounted to approximately $949,000 and $854,000 for the years ended, respectively. The consolidated statement of operations includes the excess of revenues over expenses. Changes in unrestricted net assets which are excluded from the excess of revenues over expenses include changes in unrealized gains and losses on investments, transfers to/from affiliates and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). (f) Net Patient Service Revenue The Medical Center maintains agreements with the Social Security Administration under the Medicare Program, Blue Cross and Blue Shield of Rhode Island, Inc. (Blue Cross), United Healthcare Insurance (United) and The State of Rhode Island under the Medicaid Program and various commercial and managed care payors that govern payments to the Medical Center for services rendered to patients covered by these agreements. The agreements generally provide for per case or per diem rates or payments based on allowable costs, subject to certain limitations, for inpatient care and discounted charges or fee schedules for outpatient care. Actual adjustments may be materially different from these estimates. Certain agreements with various third-party payors have provisions for retroactive settlements and dispute resolution related to issues such as allowable costs, utilization, and charge structure. Provisions have been made in the financial statements for prior and current years estimated settlements with the various third-party payors. The difference between the amount provided and the actual final or revised settlement is recorded as an adjustment to income from operations in the year the revised or final settlement is determined. (g) Charity Care The Medical Center provides either full or partial charity care to patients who cannot afford to pay for their medical services based on income and family size. Charity care is not reported as net patient service revenue (note 8). The Medical Center grants credit without collateral to patients, most of whom are local residents and are insured under third party agreements. Additions to the allowance for uncollectible accounts are made by means of a provision for uncollectible accounts. Accounts written off as uncollectible are deducted from the allowance and subsequent recoveries are added. The amount of the provision for uncollectible accounts is based upon management s assessment of historical and expected net collections, trends in federal and other collection indicators. Services rendered to individuals when payment is expected and ultimately not received are written off to the allowance for uncollectible accounts. 8 (Continued)

11 (h) (i) (j) (k) Cash and Cash Equivalents Cash equivalents represent highly liquid debt instruments with a maturity at the date of purchase of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market value. Assets Whose Use Is Limited Assets whose use is limited primarily include: (1) assets held by trustees under a bond indenture, (2) designated assets set aside by the board of trustees for funded depreciation, over which the Board retains control and may at their discretion subsequently use for other purposes, (3) interest in perpetual trusts which represents the Medical Center s donated portion of the donor s trust and (4) donor restricted investments are funds donated to the Medical Center and are permanently restricted. Pursuant to Rhode Island General Law permanently restricted funds also include investment earnings retained to maintain the purchasing power of the original dollar value of the funds. Investments Investments in equity and debt securities are measured at fair value primarily based on quoted market prices. Investments in the pooled investments are accounted for on a unit-share basis. Investments classified as current are based on the availability of funds for current operations. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in the excess of revenues over expenses unless the income or loss is restricted by donor or law. The change in net unrealized gains and losses on investments is excluded from the excess of revenues over expenses. The Medical Center reviews its portfolio of investments to determine if those securities whose market value is below the original cost of the security is impaired for a period of time which is considered other than temporary. The Medical Center utilizes the provisions of SFAS 124, Accounting for Certain Investments in Debt and Equity Securities, to make this determination. During the years ended, the Medical Center did not record any other-than-temporary impairments to its portfolio. Nonmarketable securities include alternative investments such as private equity, venture capital, and real estate, which are valued using current estimates of fair value obtained from the investment manager in the absence of readily determinable public market values. Such valuations generally reflect discounts for liquidity and consider variables such as financial performance of investments, including comparison of comparable companies earning multiples, cash flow analysis, recent sales prices of investments, and other pertinent information. The estimated fair value of these investments is based on the most recent valuations provided by the external investment managers. Because of the inherent uncertainty of valuation for these investments, the investment manager s estimate may differ from the values that would have been used had a ready market existed. The Medical Center s 9 (Continued)

12 management is responsible for the fair measurements of investments reported in the consolidated financial statements. The Medical Center has implemented policies and procedures to assess the reasonableness of the fair values provided and believes that reported fair values at the consolidated balance sheet dates are reasonable. (l) (m) (n) (o) Property, Plant and Equipment Property, plant and equipment is reported on the basis of cost less accumulated depreciation and amortization. Donated items are recorded at fair market value at the date of contribution. The carrying value of property, plant and equipment is reviewed if the facts and circumstances suggest that it may be impaired. Depreciation of property, plant and equipment is calculated by use of the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. Asset Retirement Obligations The Medical Center recognizes the fair value of a liability for legal obligations associated with asset retirements in the period in which it is incurred, in accordance with SFAS No.143, Accounting for Asset Retirement Obligations (SFAS 143) and Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), if a reasonable estimate of the fair value of the obligation can be made. When the liability is initially recorded, the Medical Center capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost associated with the retirement obligation is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the consolidated statement of operations. Pledge Receivable Unconditional promises to donate to the Medical Center in the future are recorded as pledges receivable at the present value of expected cash flow, net of allowances for uncollectible pledges. As of September 30, 2006 there were no pledge receivables. Due to uncertainties with regard to their collectability and valuation, bequest intentions and other conditional promises are not estimated by management and are recognized as assets only if and when the conditions upon which they depend are met. Investments in Joint Ventures Investments in joint ventures in which the Medical Center has a 50% or less interest are accounted for utilizing the equity method. 10 (Continued)

13 (p) (q) Deferred Financing Costs Deferred financing costs (included in other assets) are amortized over the terms of the related obligations. Amortization expense for the years ended was $28,758 and $25,823, respectively. Insurance The Medical Center maintains medical malpractice insurance on a claims-made basis. Management is unaware of any claims that would cause the ultimate cost of malpractice claims to vary materially from amounts provided. Management intends to renew its coverage on a claims-made basis and has no reason to believe that it will be prevented from such renewal. The Medical Center is self-insured for workers compensation. Management has included in accrued expenses an estimate of the ultimate cost of both reported and incurred but not reported claims. (r) Gifts and Grants Unconditional promises to give cash and other assets to the Medical Center are reported at fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as additions to temporarily restricted net assets if the gifts are not expended or placed in service during the year. (s) Net Assets Permanently restricted net assets include the historical dollar amounts of gifts, which are required by donors to be permanently retained. Pursuant to Rhode Island General Law permanently restricted funds also include investment earnings retained to maintain the purchasing power of the original dollar value of the funds. Temporarily restricted net assets include gifts, and income and gains which can be expended but for which restrictions have not yet been met. Such restrictions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds) or by interpretations of law. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Unrestricted net assets include all the remaining net assets of the Medical Center. Realized gains and losses are classified as unrestricted net assets unless they are restricted by the donor or the law. See note 12 for further information on the composition of restricted net assets. 11 (Continued)

14 (t) (u) Income Taxes The Medical Center (except for EHA and Rosebank which are for-profit corporations) and its affiliates qualify as tax-exempt, not-for-profit organizations as described in Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. Accordingly, no provision for income taxes is required for these entities. The for-profit corporations file separate federal and state income tax returns. Federal and state income taxes charged to operations in 2006 and 2005 were not significant. Reclassifications Certain prior-year amounts have been reclassified on the accompanying consolidated financial statements to conform to the 2006 presentation. (2) Investments and Assets Whose Use Is Limited The composition of investments and assets whose use is limited is as follows: September Cash equivalents $ 2,205,799 2,237,707 Fixed income corporate 5,542,159 6,077,599 Fixed income government 1,949,577 1,684,643 Equity 15,483,395 14,096,446 Limited partnerships 1,109, ,375 Collective funds 1,970,357 1,888,510 Total investments $ 28,260,589 26,984, (Continued)

15 Investments and assets whose use is limited are recorded as follows: September Current assets: Pooled investments $ 1,566,150 1,498,147 Current portion of assets whose use is limited 76,731 5,265 1,642,881 1,503,412 Assets whose use is limited (noncurrent): Held by Trustee under bond indenture 1,793,331 1,890,235 Board designated investments 7,215,821 6,750,550 Interest in perpetual trusts 3,517,930 3,328,209 Donor-restricted investments 14,090,626 13,511,874 26,617,708 25,480,868 Total assets whose use is limited $ 28,260,589 26,984,280 Investment income on investments and assets whose use is limited are comprised of the following: September Unrestricted: Dividends and interest income $ 692, ,854 Net realized (losses) gains on sale of investments (143,443) 704,817 Total investment income included in excess of revenues over expenses 549,376 1,654,671 Change in net unrealized gains of investments 1,089, ,094 Temporarily restricted: Dividends and interest income 49,262 87,281 49,262 87,281 Permanently restricted: Net realized gains on sale of investments retained to maintain the purchasing power of the original value of the funds 578, ,078 Change in market value of perpetual trusts 189, , , ,130 $ 2,456,363 2,970, (Continued)

16 Investment income included in other operating revenue for the years ended was $334,871 and $288,583, respectively. (3) Property, Plant and Equipment The following is a summary of land, building, equipment and construction in progress as of September 30: Useful September 30 lives Land and land improvements 8-15 years $ 1,705,532 1,646,557 Buildings and building improvements 5-20 years 54,011,694 48,654,703 Equipment 5-20 years 36,579,943 31,349,868 Construction in progress 1,798,922 3,736,077 94,096,091 85,387,205 Accumulated depreciation 49,921,167 43,790,267 Property, plant and equipment, net $ 44,174,924 41,596,938 Depreciation expense on property, plant and equipment for the years ended were $5,935,393 and $5,411,068, respectively. Change in Accounting Principle In 2005, the FASB issued FIN 47, Accounting for the Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No This interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity, however, the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. SFAS 143 requires the fair value of a liability for a legal obligation associated with an asset retirement be recorded in the period in which the obligation is incurred. When the liability is initially recorded, the cost of the asset retirement is capitalized. The Medical Center adopted FIN 47 effective September 30, 2006 and recorded a liability of $1,162,667. Substantially all of the impact of adopting FIN 47, as described above, related to estimated costs to remove asbestos that is contained within the Medical Center s facilities. 14 (Continued)

17 (4) Investment in Joint Venture In 1996, Realty entered into a joint venture with an unrelated third party to construct and operate an 84-unit assisted-living project known as the Village at Elmhurst, LLC (Village). Realty contributed 8.5 acres of vacant land with a net book value of $402,000 to the joint venture. Realty had a 50% equity share in the joint venture and accounts for its investment under the equity method of accounting. The project began operations in fiscal year Construction of 40 additional units was completed in February In 1998, the joint venture obtained $12.1 million of debt for the purpose of refinancing its construction loan, and to fund a replacement reserve. Excess proceeds of approximately $5.6 million were used to make equity distributions to the joint venture partners, of which Realty received approximately $2.8 million. This amount has been deferred on the balance sheet as of September 30, In December 2004, the Village at Elmhurst was sold to a third party. Upon completion of the sale, all accounts were settled and Realty received its portion of the gain from the sale. A certain amount of the funds were to be kept in escrow for one year from the date of the sale. These funds were released in December Realty s portion of these funds was estimated to be $377,000 and is included in other current assets. The gain recognized by Realty from the sale was $4,865,813. The proceeds were used to pay off the outstanding line of credit of $3,000,000. As of September 30, 2006, there are no balances related to the joint venture. (5) Long-Term Obligations Long-term obligations consist of the following: September Rhode Island Health and Educational Building Corporation (RIHEBC) Tax Exempt Revenue Bonds Series 1998 (Series 1998 Bonds) (a) $ 16,715,000 17,105, RIHEBC Loan agreement (b) 1,290, RIHEBC Loan agreement ( c) 615,820 1,000, Mortgage note payable (d) 7,533,837 7,680, Mortgage note payable (e) 669, ,033 Phillips Master Lease agreement (f) 1,282,823 LABarrington 542, ,554 Other debt 421,279 Less original issue discount on RIHEBC tax exempt revenue bonds (263,334) (283,534) 27,517,497 28,213,950 Less current portion 1,646,365 2,132,625 $ 25,871,132 26,081, (Continued)

18 (a) RIHEBC Revenue Bonds In December 1998, the Medical Center entered into an agreement with RIHEBC, whereby RIHEBC authorized the issuance of tax-exempt hospital financing revenue bonds in the amount of $19,115,000. The proceeds of the Series 1998 bonds were used to defease (extinguished in fiscal year 2000) $18,779,000 of previously issued tax-exempt revenue bonds, to fund a debt service reserve fund and pay associated issuance costs. The Series 1998 Bonds bear interest at rates ranging from 4.70% to 5.50% per year, due in annual installments through July A portion of the Series 1998 Bonds require the establishment of a sinking fund for the purpose of mandatory redemption of the Series 1998 Bonds. In addition, the sinking fund will be used to redeem the remaining bonds at various maturity dates. The Series 1998 Bonds are collateralized by a first mortgage on the Medical Center s real estate and certain tangible personal property. The bond agreements provide, among other things, that the Medical Center s deposit funds with a designated trustee to provide for future payments of interest and principal. The Medical Center is also required to establish a property reserve fund with the trustee to assure that adequate funds are on hand to maintain the condition of the Medical Center s property. The Series 1998 Bonds Master Trust Indenture provides for, among other requirements, the maintenance of a minimum debt service coverage ratio (DSC) of 1.10 and limitations on additional indebtedness. (b) (c) 2002 RIHEBC Loan Agreement On December 17, 2001, the Hospital entered into a Master Lease and Loan Security Agreement with Fleet Capital Leasing Healthcare Finance and RIHBEC. The loan is treated as a tax-exempt financing transaction on behalf of RIHBEC and is structured as a general obligation of the Hospital collateralized by the equipment financed. The loan was used to refinance the 1999 RIHBEC loan agreement and purchase medical equipment. The proceeds of the loan of $4,750,000 were deposited in an account at Citizens Bank of Rhode Island acting as escrow agent. The term of the loan is five years at a rate of 4.55% with principal and interest payments due semiannually. As of September 30, 2006, there is no outstanding loan balance and no funds remaining in the account with the escrow agent RIHEBC Loan Agreement On October 13, 2000, the Hospital entered into a Master Lease and Loan and Security Agreement with Bank of America Leasing & Capital, LLC and RIHEBC. The loan is treated as a tax-exempt financing transaction on behalf of RIHEBC and is structured as a general obligation of the Hospital collateralized by the equipment financed. The loan was used to purchase technological equipment and upgrades, software and medical equipment. The proceeds of the loan of $2,480,000 were deposited in an account at Citizens Bank of Rhode Island acting as escrow agent. The term of the loan is seven years at a rate of 5.33% with principal and interest payments due semiannually. There are no funds remaining in the amount with the escrow agent at September 30, (Continued)

19 (d) (e) 1989 Mortgage Note Payable The 1989 mortgage note payable is collateralized by Realty s rental property, and is insured by the United States Secretary of Housing and Urban Development, acting through the Federal Housing Authority (FHA). The note, which requires monthly principal and interest payments of $52,177 through 2029 at 6.3%, has been pledged as collateral for certain tax-exempt revenue bonds issued in November 1999 by RIHEBC. The FHA insurance agreement provides that, in the event of default on the mortgage note, FHA will repay 99% of the principal amount of the mortgage outstanding plus interest accruing thirty days after the date of default Mortgage Note Payable The 1994 mortgage note consists of a loan, originally in the amount of $923,000, with interest at 8-1/4% and requiring monthly payments of principal and interest in the amount of $7,228 through the year This note is insured by FHA and is evidenced by a supplemental mortgage subject to the conditions of the original 1989 mortgage note. Realty is required to make monthly payments of $7,955 to a reserve fund maintained by the mortgagee s servicing agent. These funds, which are included in funds held by trustee and invested in money market accounts, amounted to $425,034 and $521,953 at, respectively, and are available to Realty upon approval from the FHA for major structural repairs. (f) Phillips Master Lease Agreement On October 27, 2005, the Hospital entered into a Master Lease Agreement with Phillips Medical Capital, LLC. The lease-purchase was for Radiology equipment. The amount of the lease was $1,372,438. The term of the agreement is for 5 years from the equipment installation date at an average rate of 6.9%. At the end of the lease, the Hospital may purchase the equipment for one dollar. Accordingly, this lease has been recorded as a capital lease. Aggregate maturities and payments of long-term obligations during the next five years are as follows: Amount Year: ,007, , , , , (Continued)

20 Aggregate maturities and payments of capital lease obligations during the next four years are as follows: Amount Year: , , , , ,369 Interest paid on all obligations was $1,668,712 and $1,708,094 for the years ended September 30, 2006 and 2005, respectively. (6) Line of Credit Borrowings As of September 30, 2006, the Hospital had a collateralized line of credit with a maximum borrowing line of $10,000,000. The line of credit is collateralized by gross receipts, accounts receivable, insurance policies, insurance proceeds and other instruments evidencing an interest now owned or acquired by borrower. There was no outstanding balance against the line as of September 30, As of September 30, 2005, the Hospital did not have a line of credit. The Hospital was in the process of establishing a new collateralized line of credit agreement. Realty had a line of credit available with a bank of $3,000,000, requiring interest payments monthly at the 30-day LIBOR rate plus 200 basis points. Realty borrowed the funds to loan to the Village, a joint venture owned 50% by Realty and 50% by an unrelated third party, for an addition to the facility. The line of credit was collateralized by a priority interest in Realty s ownership interest in the Village. The loan agreement relating to the line of credit contained covenants pertaining to maintenance of consolidated tangible net worth (Realty and the Medical Center), incurrence of additional debt and a minimum debt service coverage. This line of credit was closed in December 2004 after Realty sold its interest in the Village at Elmhurst. As of September 30, 2006, there are no other active lines of credit agreements. 18 (Continued)

21 (7) Commitments The Medical Center leases various equipment under noncancelable lease agreements. Future minimum payments by year and in the aggregate, under noncancelable operating leases with terms of one year or more consist of the following: Amount Year: , , , , Rental expense, including rentals under leases with terms of less than one year, for the years ended were $1,089,726 and $1,226,925, respectively. The Medical Center has additional lease commitments that are based on procedures performed. They are noncancelable agreements but the future dollar commitments of the Medical Center are not quantifiable as they are volume driven. (8) Disproportionate Share Program and Charity Care The Hospital is a participant in the State of Rhode Island s Disproportionate Share Program, which was established in 1995 to assist hospitals that provide a disproportionate amount of uncompensated care. Under the program, Rhode Island hospitals, including the Medical Center, receive federal and state Medicaid funds as additional reimbursement for treating a disproportionate share of low-income patients. Payments to the Medical Center under the Disproportionate Share Program of $7,095,545 and $6,191,645 for the years ended, respectively, are included in net patient service revenues in the accompanying consolidated statements of operations. Charity care is measured using established charge rates and represented approximately $4,304,000 and $4,308,000 in charges foregone for the years ended, respectively. Uncompensated care (free care write-offs and bad debt) totaled $11,787,900 and $9,761,000 for the years ended, respectively. (9) License Fee The State of Rhode Island assessed a license fee to all Rhode Island hospitals based on each hospital s 1995 gross patient service revenue. The Medical Center s license fee expense was $3,936,648 and $3,337,632 for the years ended, respectively. 19 (Continued)

22 (10) Pension Plans The Medical Center has a defined contribution pension plan (the Plan) which covers substantially all employees of the Hospital, Elmhurst, and EHA. Employees are fully vested immediately upon becoming eligible to participate in the Plan. The amount of each contribution is discretionary and determined by the board of trustees. As of, accrued expenses include pension plan contributions payable of $1,575,567 and $1,070,870, respectively. Pension expense was $1,147,152 and $1,047,710 for the years ended, respectively. (11) Concentration of Credit Risk Financial instruments that potentially subject the Medical Center to concentration of credit risk consist of patient accounts receivable and certain investments. Investments, which include government and agency securities, stocks, and corporate bonds, are not concentrated in any corporation or industry or with any single counterparty. The Medical Center receives a significant portion of its payments for services rendered from a limited number of government and commercial third-party payors, including Medicare, Medicaid, Blue Cross, and United. (12) Restricted Net Assets Restricted net assets are available for the following purposes: September Temporarily restricted: Research $ 2,696,789 2,273,501 General healthcare services 1,614,692 $ 2,696,789 3,888,193 Permanently restricted: General $ 9,013,010 8,643,086 Free bed 3,431,153 3,222,324 Interest in perpetual trusts 3,517,930 3,328,209 $ 15,962,093 15,193,619 (13) Functional Expenses Total operating expenses for the Medical Center by function are as follows for the years ended: September Healthcare services $ 131,146, ,563,803 General and administrative 31,856,521 29,686,533 $ 163,002, ,250, (Continued)

23 (14) Contingencies The Medical Center is subject to complaints, claims, and litigation that have arisen in the normal course of business. In addition, the Medical Center is subject to investigations by various federal and state government agencies to assure compliance with applicable laws, some of which are subject to different interpretations. Recently, governmental review of compliance with these laws and regulations has increased, resulting in fines and penalties for noncompliance by particular healthcare providers. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Medical Center believes that it is in compliance with these laws and regulations. The Medical Center entered into a corporate integrity agreement with the Office of Inspector General in The agreement expired on September 19, 2005 and the Medical Center believes that it is in compliance with the terms of the agreement. Federal Investigation In the early part of 2004, the federal government began investigating the various employment relationships that a former Rhode Island State Senator had with various corporate entities between 1998 and This investigation included a review of the relationship the former State Senator had with Roger Williams Medical Center and its various affiliated entities. In particular, the United States Attorney s office for the District of Rhode Island (USAO-RI) notified the Medical Center that it was making the Medical Center s CEO and former Vice President targets of the investigation and the Medical Center was a subject of the investigation. On June 23, 2005, the former State Senator entered into a plea agreement with USAO-RI, pleading guilty to three counts of mail fraud. On November 17, 2005, the USAO-RI notified the Medical Center that it was being elevated from a subject to a target of the investigation. On December 6, 2005, the Medical Center placed its CEO on administrative leave. On January 5, 2006, a federal grand jury issued indictments against the Medical Center, its CEO, and a former Vice President on multiple counts of mail fraud. In essence, the USAO-RI alleged in the indictments that the Medical Center, its CEO, and a former Vice President deprived the citizens of Rhode Island of the former State Senator s honest services. On January 14, 2006, the board of trustees for the Hospital terminated its CEO based on, among other things, evidence that was made available to the Medical Center s outside counsel subsequent to the indictments being issued. On January 26, 2006, the Medical Center entered into a deferred prosecution agreement with the USAO-RI. In this agreement, the Medical Center accepted the responsibility for the criminal misconduct of its former executives and agreed to continue its cooperation with the federal government. This agreement also required the Medical Center to revise its ethics program and to provide an additional $4 million worth of free and uncompensated care over the next two years on a cost basis. This $4 million of free and uncompensated care must be in addition to the Medical Center s standard level of care of free and uncompensated care (defined in the Deferred Prosecution Agreement as the average of the last five years). 21 (Continued)

24 The Medical Center estimates that the $4 million will include a portion of fixed costs and variable (direct and incremental) costs. The amount of direct and incremental costs was estimated to be $2.7 million and was accrued for in the consolidated financial statements of the Medical Center as of September 30, The deferred prosecution agreement obligation was transferred from Roger Williams Medical Center to Roger Williams Hospital as of September 30, 2006 through net assets. As of September 30, 2006, the Medical Center has fulfilled $287,000 of the obligation. Of the $287,000, an estimated $200,000 was incremental and was offset against the liability. On April 7, 2006, the indictment against the Medical Center was dismissed by the Federal District Court for the District Court of Rhode Island. The dismissal of the indictment did not effect the deferred prosecution agreement obligations. On October 25, 2006, counsel for the executive of the joint venture affiliate notified the Medical Center of their request for indemnification for legal expenses and costs related to the honest services mail fraud action. The Medical Center maintains and will continue to maintain the position that these claims are baseless. The Medical Center intends to vigorously defend this claim should it proceed further. 22

25 SUPPLEMENTARY CONSOLIDATING INFORMATION

26 KPMG LLP 50 Kennedy Plaza Providence, RI Independent Auditors Report on Accompanying Consolidating Information The Board of Trustees Roger Williams Medical Center, Inc. and Affiliates: We have audited and reported separately herein on the consolidated financial statements of Roger Williams Medical Center, Inc. and Affiliates as of and for the year ended September 30, The consolidated financial statements of the Medical Center as of and for the year ended September 30, 2005 were audited by other auditors, whose report thereon, dated March 28, 2006, expressed an unqualified opinion. Our audit was made for the purpose of forming an opinion on the consolidated financial statements of Roger Williams Medical Center, Inc. and Affiliates taken as a whole. The consolidating information for the year ended September 30, 2006 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, based on our audit is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole for the year ended September 30, The report of the other auditors referred to above, dated March 28, 2006, stated that the consolidating information for the year ended September 30, 2005 was subjected to auditing procedures applied in their audit of the 2005 consolidated financial statements and, in their opinion, was fairly stated in all material respects in relation to the consolidated for the year ended September 30, 2005, taken as a whole. December 7, KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.