NEWPORT HEALTH CARE CORPORATION AND AFFILIATES. Consolidated Financial Statements and Supplementary Information. September 30, 2009 and 2008

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

2 Consolidated Financial Statements and Supplementary Information Table of Contents Page(s) Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Operations and Changes in Net Assets 3 Consolidated Statements of Cash Flows Independent Auditors Report on Supplementary Information 38 Supplementary Information: Consolidating Statements of Financial Position Consolidating Statements of Operations and Changes in Net Assets (Deficit) Consolidating Statements of Cash Flows 43 44

3 KPMG LLP 50 Kennedy Plaza Providence, RI Independent Auditors Report The Board of Trustees Newport Health Care Corporation: We have audited the accompanying consolidated statements of financial position of Newport Health Care Corporation and Affiliates (the Corporation) as of, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 Corporation 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Newport Health Care Corporation and Affiliates as of September 30, 2009 and 2008, and the results of their operations and changes in net assets, and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. As described in note 3 to the consolidated financial statements, in 2009 the Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic , Fair Value Measurements and Disclosures and ASC Subtopic , Classification of Donor-Restricted Endowment Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act. February 17, 2010 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

4 Consolidated Statements of Financial Position Assets Current assets: Cash and cash equivalents $ 3,487 $ 7,544 Patient accounts receivable 12,653 12,785 Less allowance for doubtful accounts (2,510) (2,255) Net patient accounts receivable 10,143 10,530 Other receivables Current portion of contributions receivable, net Total receivables 10,311 10,968 Assets limited as to use Inventories 1, Intercorporate financing 405 Prepaid expenses and other current assets Total current assets 16,813 19,946 Assets limited as to use 200, ,049 Less amount required to meet current obligations (497) (498) Noncurrent assets limited as to use 200, ,551 Property and equipment, net 74,800 79,009 Other assets: Contributions receivable, net Deferred charges and financing costs, net Other noncurrent assets ,006 Total other assets 1,397 10,601 Total assets $ 293,089 $ 317,107 Liabilities and Net Assets Current liabilities: Accounts payable $ 2,466 $ 2,854 Intercorporate financing 213 Accrued employee benefits and compensation 5,544 4,494 Other accrued expenses Current portion of long-term debt 720 1,690 Current portion of estimated third-party payor settlements 1,371 1,034 Estimated health care benefit self-insurance costs Total current liabilities 10,970 11,117 Long term debt, net of current portion 23,535 29,255 Estimated third-party payor settlements, net of current portion 4,689 4,634 Accrued pension liability 11,463 Other liabilities Total liabilities 51,285 45,611 Net assets: Unrestricted 187, ,002 Temporarily restricted 49,595 25,419 Permanently restricted 4,439 29,075 Total net assets 241, ,496 Total liabilities and net assets $ 293,089 $ 317,107 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Operations and Changes in Net Assets Years ended Unrestricted revenues and other support: Net patient service revenue $ 105,973 $ 102,777 Other revenue 2,649 2,402 Endowment earnings contributed toward community benefit Net assets released from restrictions used for operations 709 1,236 Total unrestricted revenues and other support 110, ,411 Operating expenses: Compensation and benefits 65,104 60,495 Supplies and other expenses 15,558 19,169 Purchased services 15,414 14,858 Provision for bad debts 5,567 4,391 Depreciation and amortization 7,139 6,806 Interest 1,337 1,492 License fees 4,796 2,982 Total operating expenses 114, ,193 Loss from operations (4,586) (2,782) Nonoperating gains and losses: Unrestricted gifts and bequests Unrestricted income from board-designated investments 1,919 3,445 Net realized (losses) gains on board-designated investments (5,823) 2,754 Grants to outside agencies (234) (127) Fundraising expenses (683) (703) Other nonoperating gains (losses), net 218 (177) Total nonoperating (losses) gains, net (4,450) 5,540 (Deficiency) excess of revenues over expenses (9,036) 2,758 Other changes in unrestricted net assets: Change in funded status of pension plan other than net periodic pension cost (21,654) (3,328) Effect of changing pension plan's measurement date pursuant to ASC Topic 715 (166) Net change in unrealized gains on investments 1,184 (38,820) Net assets released from restrictions used for purchase of property and equipment 440 4,445 Decrease in unrestricted net assets (29,232) (34,945) Temporarily restricted net assets: Reclassification from adoption of UPMIFA (note 3(j)) 24,687 Gifts, grants and bequests 852 1,147 Income from restricted endowment and other restricted investments Net assets released from restrictions (1,149) (5,681) Net realized and unrealized losses on investments (504) (6,160) Transfers from affiliates 6 56 Other decreases (90) (162) Increase (decrease) in temporarily restricted net assets 24,176 (10,140) Permanently restricted net assets: Reclassification from adoption of UPMIFA (note 3(j)) (24,687) Gifts and bequests 93 Net unrealized losses on investments held in perpetual trust by others (42) (306) Realized gains retained to maintain purchasing power 1,314 (Decrease) increase in permanently restricted net assets (24,636) 1,008 Decrease in net assets (29,692) (44,077) Net assets, beginning of year 271, ,573 Net assets, end of year $ 241,804 $ 271,496 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Decrease in net assets $ (29,692) $ (44,077) Adjustments to reconcile decrease in net assets to net cash provided by operating activities: Change in funded status of pension plan other than net periodic pension cost 21,654 3,328 Effect of changing pension plan's measurement date pursuant to ASC Topic Net realized and unrealized losses on investments 5,185 41,218 Depreciation and amortization 7,139 6,806 Provision for estimated health care benefit self-insurance costs 7,637 7,048 Decrease in liabilities for estimated health care benefit self-insurance costs resulting from claims paid (7,534) (7,001) Decrease (increase) in patient accounts receivable, net 387 (379) Decrease in contributions receivable, net Decrease in accounts payable (388) (67) Increase in accrued employee benefits and compensation 1, Increase in estimated third-party payor settlements Increase in all other current and noncurrent assets and liabilities, net (3,059) (1,360) Net cash provided by operating activities 3,275 7,462 Cash flows from investing activities: Purchase of property and equipment (2,930) (10,237) Other net decreases in assets limited as to use 2,288 1,261 Net cash used in investing activities (642) (8,976) Cash flows from financing activities: Payments on long-term debt (6,690) (1,660) Net cash used in financing activities (6,690) (1,660) Net decrease in cash and cash equivalents (4,057) (3,174) Cash and cash equivalents, beginning of year 7,544 10,718 Cash and cash equivalents, end of year $ 3,487 $ 7,544 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,357 $ 1,494 See accompanying notes to consolidated financial statements. 4

7 (1) Description of Organization Newport Health Care Corporation and Affiliates (the Corporation) includes Newport Health Care Corporation (NHCC), Newport Hospital (the Hospital), Newport Hospital Foundation, Inc. (the Foundation), NHCC Medical Associates, Inc. (Medical Associates), and Newport Health Property Management, Inc. (Property Management). NHCC is the sole corporate member of the Hospital, the Foundation and Medical Associates. NHCC is also the sole shareholder of Property Management. The Hospital is a 129-bed nonprofit acute care hospital which provides inpatient, outpatient and emergency care services for residents of southern Rhode Island. The Foundation manages fundraising activities of NHCC affiliates. Medical Associates was formed to employ physicians and other health care practitioners in developing integrated and comprehensive health care services. Property Management directs the operations of various health care properties. Effective June 2, 2006, the Hospital removed 19 sub-acute beds from service, temporarily reducing the Hospital s licensed beds from 148 to 129 based on a review of services and community need. This was completed in accordance with Rhode Island Department of Health regulations. Effective January 15, 1997, the Federal Trade Commission and the Health Services Council of the Rhode Island Department of Health approved NHCC s affiliation with Lifespan Corporation (Lifespan), a Rhode Island nonprofit corporation. The Corporation continues to maintain its own identity and Board of Trustees, its own campus and its own name. Lifespan has the responsibility for strategic planning and initiatives as well as capital and operating budgets, and overall governance of the consolidated organization. (2) Charity Care and Other Community Benefits The total net cost of charity care and other community benefits provided by the Corporation for the years ended is summarized in the following table: Charity care $ 2,949 $ 3,259 Subsidized health services 1,464 1,416 Community health improvement services and community benefit operations Total $ 5,371 $ 5,123 Charity Care The Corporation provides full charity care for individuals at or below twice the federal poverty level, with a sliding scale for individuals up to four times the poverty level. In addition, a substantial charity allowance is offered to all other uninsured patients. The Corporation maintains records to identify and monitor the level of charity care it provides. The total cost incurred by the Corporation to provide charity care 5 (Continued)

8 amounted to $2,949 and $3,259 in 2009 and 2008, respectively. Charges forgone, based on established rates, amounted to $6,476 and $6,990 in 2009 and 2008, respectively. Certain restricted funds have been designated by donors to fund charity care. Transfers totaling $418 and $1,083, respectively, have been made from these restricted funds in support of charity care in 2009 and 2008, and are reflected as net assets released from restrictions used for operations in the accompanying consolidated statement of operations and changes in net assets. Subsidized Health Services The Corporation subsidizes various health services including Vanderbilt Rehab and occupational health. Community Health Improvement Services and Community Benefit Operations The Corporation also provides numerous other services to the community for which charges are not generated. These services include certain emergency services, community health screenings for cardiac health, prostate cancer and other diseases, smoking cessation and weight loss programs, diabetes education, patient advocacy, foreign language translation, physician referral services and charitable contributions. Nursing Education The Corporation has developed formal and informal nursing educational affiliations with the University of Rhode Island College of Nursing; the Community College of Rhode Island; Salve Regina University; University of Massachusetts-Dartmouth and Yale University, pursuant to which their nursing students obtain clinical training and experience at Newport Hospital, which does not receive any compensation from the various schools for providing a clinical setting for the student nurse training. (3) Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements include the accounts of NHCC and its affiliates after elimination of significant intercompany accounts and transactions. The Corporation considers events and transactions that occur after the statement of financial position date, but before the consolidated financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. These consolidated financial statements were issued on February 17, 2010 and subsequent events have been evaluated through that date. (b) 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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 6 (Continued)

9 (c) Accounting Pronouncements Adopted in 2009 On October 1, 2008 the Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic , Fair Value Measurements and Disclosures (ASC ). ASC establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. See note 5 for disclosures of fair value required by ASC Effective October 1, 2008, the Corporation adopted the provisions of FASB ASC Subtopic , Classification of Donor-Restricted Endowment Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (ASC ). ASC provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and also requires disclosures about endowment funds, both donor-restricted endowment funds and board-designated endowment funds. See note 5 for disclosures of endowment funds required by ASC Effective September 30, 2009, the Corporation adopted the provisions of FASB ASC Subtopic , Subsequent Events (ASC ). ASC defines subsequent events and transaction periods, those circumstances under which the events or transactions should be recognized, and disclosures regarding subsequent events or transactions. ASC is effective for annual periods ending after June 15, Although the adoption of ASC did not affect the Corporation s consolidated financial statements, additional disclosures are now included under Basis of Presentation above. In June 2009, the FASB issued Accounting Standards Update (ASU) (Codification). The Codification does not change U.S. generally accepted accounting principles, but combines all authoritative standards issued by organizations that are in levels A through D of the generally accepted accounting principles hierarchy, such as the FASB, American Institute of Certified Public Accountants, and Emerging Issues Task Force, into a comprehensive, topically organized online database. No accounting impact occurred since this is an accumulation of existing guidance. The Codification became effective for reporting periods that end after September 15, (Continued)

10 (d) (e) (f) Accounting Pronouncements Not Yet Adopted In December 2008, the FASB issued FASB ASC Sections and 55, Employers Disclosures about Postretirement Benefit Plan Assets, which require additional disclosures for employers pension and other postretirement benefit plan assets. The guidance requires employers to disclose information about fair value measurements of plan assets similar to the disclosures required under ASC Subtopic Those disclosures will include the investment policies and strategies for the major categories of plan assets, as well as significant concentrations of risk within plan assets. ASC Sections and 55 are effective for annual periods ending after December 15, The Corporation does not believe the adoption of ASC Sections and 55 will have a material impact on its consolidated financial position, results of operations or cash flows since their requirements are limited to additional disclosures. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with maturities of three months or less when purchased, excluding amounts limited as to use by board-designation or other arrangements under trust agreements. Investments and Investment Income As noted above, effective October 1, 2008, the Corporation adopted the recognition and disclosure provisions of ASC ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value represents the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants as of the measurement date. ASC establishes a fair value hierarchy that prioritizes inputs used to measure fair value into three levels: Level 1 quoted prices (unadjusted) in active markets that are accessible at the measurement date; Level 2 observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Corporation utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The adoption of ASC did not have an impact on the Corporation s consolidated financial position, changes in net assets, or cash flows, but did significantly expand fair value disclosures. Following is a description of the valuation methodologies used for investments measured at fair value: Cash and short-term investments: Valued at the net asset value (NAV) reported by the financial institution. 8 (Continued)

11 U.S. government/agency and corporate obligations: Valued using market quotations or prices obtained from independent pricing sources which may employ various pricing methods to value the investments. Corporate equity securities: Valued at the closing price reported by an active market in which the individual securities are traded. Collective investment funds: Valued using NAV as reported by the investment manager, which approximates the market values of the underlying investments within the fund or realizable value as estimated by the investment manager. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated statements of financial position. Investments in collective investment funds with monthly pricing and liquidity are measured based on the fair value of the underlying investments; otherwise, such investments are recorded at historical cost. Investments of less than 5% in limited partnerships are also recorded at historical cost. Investments of 5% or more in limited partnerships, limited liability corporations or similar investments are accounted for at fair value, with changes in fair value recorded as realized gains or losses in each net asset class using the equity method. Investments in derivative financial instruments are not material. The Corporation has applied the accounting guidance in Accounting Standards Update No , Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU ), which permits the use of NAV or its equivalent reported by each underlying alternative investment fund as a practical expedient to estimate the fair value of the investment. These investments are generally redeemable or may be liquidated at NAV under the original terms of the subscription agreements or operations of the underlying funds. However, it is possible that these redemption rights may be restricted by the funds in the future in accordance with the underlying fund agreements, as applicable. Changes in market conditions, the economic environment, or the funds liquidity provisions may significantly impact the NAV of the funds and, consequently, the fair value of the Corporation s interests in the funds. Although certain investments may be sold in a secondary market, the secondary market is not active and individual transactions are not necessarily observable. It is therefore reasonably possible that if the Corporation were to sell a fund in the secondary market, the sale could occur at an amount materially different than the reported value. Effective October 1, 2008, the Corporation reclassified $83,314 of its assets limited as to use from available-for-sale securities to trading securities. Investments designated by the Corporation as trading assets are reported at fair value, with gains or losses resulting from changes in fair value recognized in the consolidated statement of operations and changes in net assets as realized gains or losses on investments. 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. Unrealized gains and losses on investments other than those designated as trading assets or those accounted for using the equity method are excluded from the excess of revenues over expenses. 9 (Continued)

12 Realized gains (losses) on sales of investments are determined by the average cost method. Realized gains (losses) on unrestricted investments are recorded as nonoperating gains (losses); realized gains (losses) on restricted investments are recorded as an addition to (deduction from) the appropriate restricted net assets. A decline in the market value of an investment security below its cost that is designated to be other than temporary is recognized through an impairment charge classified as a realized loss and a new cost basis is established. Participation units in pooled investment funds held within unrestricted, temporarily restricted and permanently restricted net assets are determined monthly based on the market value of the underlying investments at the calculation date. Income earned on pooled investments is allocated to participating funds based on their respective unit shares of the pool. Investment income from funds held by trustees under bond indenture agreements is recorded as other revenue. Lifespan maintains a spending policy for certain board-designated funds of its patient care affiliates which provides that investment income from such funds is recorded within unrestricted revenues as endowment earnings contributed toward community benefit. Income from permanently restricted investments is recorded as nonoperating gains when unrestricted by donor and as an addition to the net assets of the appropriate temporarily restricted fund when restricted by donor. (g) (h) (i) Assets Limited as to Use Assets limited as to use primarily include designated assets set aside by the Corporation s Board for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes, and assets whose use by the Corporation has been permanently restricted by donors or limited by donors to a specific purpose, as well as assets held by trustees under bond indenture agreements and irrevocable trusts. Amounts required to meet current liabilities of the Corporation are reported in current assets in the consolidated statements of financial position. Property and Equipment Property and equipment acquisitions are recorded at cost. Depreciation is computed over the estimated useful life of each class of depreciable asset using the straight-line method. Buildings and improvements lives range from 5 to 40 years and equipment from 3 to 20 years. Net interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Deferred Financing Costs Deferred financing costs, which relate to the issuance of long-term bonds payable to the Rhode Island Health and Educational Building Corporation (RIHEBC), are being amortized ratably over the periods the bonds are outstanding. 10 (Continued)

13 (j) Classification of Net Assets As noted above, effective October 1, 2008, the Corporation adopted the provisions of ASC , which provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and also requires disclosures about endowment funds, including donor-restricted endowment funds and board-designated endowment funds. The Corporation is incorporated in and subject to the laws of Rhode Island, which adopted UPMIFA effective as of June 30, Under UPMIFA, the assets of a donor-restricted endowment fund may be appropriated for expenditure by the Corporation in accordance with the standard of prudence prescribed by UPMIFA. As a result of this new law and the adoption of ASC , the Corporation has classified its September 30, 2009 net assets as follows: Permanently restricted net assets contain donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the Corporation and primarily consist of the historic dollar value of contributions to establish or add to donorrestricted endowment funds. Temporarily restricted net assets contain donor-imposed stipulations as to the timing of their availability or use for a particular purpose. These net assets are released from restrictions when the specified time elapses or when actions have been taken to meet the restrictions. Net assets of donor-restricted endowment funds in excess of their historic dollar value are classified as temporarily restricted net assets until appropriated by the Corporation and spent in accordance with the standard of prudence imposed by UPMIFA. Unrestricted net assets contain no donor-imposed restrictions and are available for the general operations of the Corporation. Such net assets may be designated by the Corporation for specific purposes, including to function as endowment funds. Prior to 2009, the Corporation was subject to the Rhode Island Uniform Management of Institutional Funds Act (UMIFA), as amended. Rhode Island s enacted version of UMIFA required the Corporation to maintain the purchasing power of the historic dollar value of its donor-restricted endowment funds and, as a result, the Corporation annually added a portion of the funds return to permanently restricted net assets to account for inflation. This requirement was eliminated by the enactment of UPMIFA and, accordingly, in 2009 the Corporation reclassified the $24,687 cumulative amount of such additions from permanently restricted net assets to temporarily restricted net assets. See note 5 for more information about the Corporation s endowment. 11 (Continued)

14 (k) (l) Excess of Revenues over Expenses The consolidated statements of operations and changes in net assets include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include the change in the funded status of pension plan other than net periodic pension cost, the effect of changing pension plan s measurement date pursuant to ASC Topic 715, unrealized gains and losses on investments, and net assets released from restrictions used for purchase of property and equipment. Net Patient Service Revenue The Corporation provides care to patients under Medicare, Medicaid, managed care and commercial insurance contractual arrangements. The Corporation has agreements with many third-party payors that provide for payments to the Corporation at amounts less than its established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with some third-party payors. Medicare utilizes a prospective payment system for most inpatient hospital services rendered to Medicare program beneficiaries based on the classification of each case into a diagnostic-related group (DRG). Medicare outpatient hospital services are also paid using an ambulatory payment classification system. Most hospital services to Rhode Island Medicaid patients are reimbursed based on negotiated costs under a prospective cost arrangement. The tentative hospital reimbursement rates are determined by certain negotiated budgeted expenditures and budgeted volume. Variances from budgeted volume are reimbursable at rates which may differ from the budgeted rate. The majority of payments from managed care and commercial insurance companies are based upon negotiated fixed pricing arrangements, whereby a combination of per diem rates and specific case rates are utilized for inpatient services, along with fixed fees applicable to outpatient services. Settlements and adjustments arising under reimbursement arrangements with some third-party payors, primarily Medicare, Medicaid and Blue Cross, are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. The Corporation has classified a portion of accrued estimated third-party payor settlements as long-term because such amounts, by their nature or by virtue of regulation or legislation, will not be paid within one year. Changes in the Medicare and Medicaid programs, such as the reduction of reimbursement, could have an adverse impact on the Corporation. 12 (Continued)

15 (m) (n) (o) (p) (q) (r) Provision for Bad Debts The Corporation grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor arrangements. Additions to the allowance for doubtful accounts are made by means of the provision for bad debts. Accounts deemed uncollectible are deducted from the allowance and subsequent recoveries are added. The amount of the provision for bad debts is based upon management s assessment of historical and expected net collections, business and economic conditions, trends in federal and state governmental health care coverage and other collection indicators. Charity Care The Corporation provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. Donor-Restricted Gifts Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using risk-free interest rates applicable to the years in which the promises are received. Amounts received that are restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. When a donor restriction expires, that is, when a stipulated purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets released from restrictions. Inventories Inventories, consisting primarily of medical/surgical supplies and pharmaceuticals, are stated at the lower of cost or market. Estimated Self-Insurance Costs The Corporation participates in Lifespan self-insurance programs with other Lifespan affiliates for losses arising from medical malpractice claims, health benefits to its employees, and losses arising from workers compensation claims. The Corporation has recorded provisions for estimated claims, which are based on Lifespan s own experience. The provisions for these self-insured losses include estimates of the ultimate costs for both reported claims and claims incurred but not reported. Fair Value of Financial Instruments The carrying amounts recorded in the consolidated statements of financial position for cash and cash equivalents, patient accounts receivable, contributions receivable, assets limited as to use, accounts payable, intercorporate financing, accrued expenses, estimated third-party payor settlements, and 13 (Continued)

16 estimated health care benefit self-insurance costs approximate their respective fair values. The estimated fair values of the Corporation s assets limited as to use and long-term debt are disclosed in notes 5 and 10, respectively. (s) Reclassifications Certain 2008 amounts have been reclassified to conform with the 2009 reporting format. (4) Disproportionate Share The Hospital is a participant in the State of Rhode Island s Disproportionate Share Program, established in 1995 to assist hospitals which provide a disproportionate amount of uncompensated care. Under the program, Rhode Island hospitals, including the Hospital, receive federal and state Medicaid funds as additional reimbursement for treating a disproportionate share of low income patients. Total payments to the Hospital under the Disproportionate Share Program aggregated $4,076 and $3,310 in 2009 and 2008, respectively, and are reflected as part of net patient service revenue in the accompanying consolidated statements of operations and changes in net assets. The State of Rhode Island has assessed a license fee to all Rhode Island hospitals, based on each hospital s 2007 net patient service revenue as defined. The Hospital s license fee expense was $4,796 and $2,982 in 2009 and 2008, respectively. The hospitals in the State of Rhode Island accepted the fee as part of an agreement with the State s Department of Health and Human Services in return for an equitable distribution of funds to those hospitals meeting certain criteria in providing services to the Medicaid population. For periods beyond 2009, the federal government could change the level of federal matching funds for the Disproportionate Share Program. Accordingly, it may be necessary for the State of Rhode Island to modify the program and the reimbursement to Rhode Island hospitals under the program. At this time, the scope of such modifications or their effect on the Hospital cannot be reasonably determined. 14 (Continued)

17 (5) Investments The composition of assets limited as to use at is set forth in the following table. Unrestricted board-designated funds: Cash and short-term investments $ 728 $ U.S. government and agency obligations 11,942 6,277 Corporate equity securities 16,747 35,062 Corporate obligations 9,611 9,187 Collective investment funds 106, ,583 Other investments , ,464 Held by trustee under bond indenture agreement: Cash and short-term investments Temporarily restricted funds: Cash and short-term investments U.S. government and agency obligations 4,032 1,004 Corporate equity securities 5,654 5,609 Corporate obligations 3,245 1,470 Collective investment funds 35,990 16,410 Other investments ,759 25,012 Permanently restricted funds: Cash and short-term investments U.S. government and agency obligations 628 1,464 Corporate equity securities 1,120 7,138 Corporate obligations 220 1,666 Collective investment funds 2,438 18,603 Other investments ,439 29,075 Total $ 200,576 $ 208, (Continued)

18 Trading Securities Effective October 1, 2008, the Corporation reclassified certain of its assets limited as to use from availablefor-sale securities to trading securities. The gains recognized as a result of this transfer amounted to $8,039. Assets limited as to use at September 30 are classified as follows: Available-for-sale $ 127,832 $ 208,049 Trading 72,744 Total $ 200,576 $ 208,049 Fair Value The following table summarizes the Corporation s investments and assets held in trust in the ASC fair value hierarchy as of September 30, 2009: Level 1 Level 2 Level 3 Total Investments: Cash and short-term investments $ 5,394 $ $ $ 5,394 U.S. government and agency obligations 5,146 5,146 Corporate equity securities 22,523 22,523 Corporate obligations 20,088 20,088 Collective investment funds 27,513 92, ,678 60, , ,829 Assets held in trust 1,095 1,095 Total $ 60,576 $ 112,253 $ 1,095 $ 173,924 Investments in collective funds which do not have monthly pricing and liquidity are recorded at historical cost. Investments of less than 5% in limited partnerships are also recorded at historical cost. The aggregate historical cost of these investments, which approximates market value as reported by investment managers, amounted to $26,652 at September 30, During 2009 and 2008 there were no declines in market values of any of these investments below their cost which were designated to be other than temporary. Most investments classified in Level 2 consist of shares or units in investment funds as opposed to direct interests in the funds underlying holdings, which may be marketable. Because the NAV reported by each 16 (Continued)

19 fund is used as a practical expedient to estimate the fair value of the Corporation s interest therein, its classification in Level 2 is based on the Corporation s ability to redeem its interest at or near the date of the consolidated statement of financial position. The classification of investments in the fair value hierarchy is not necessarily an indication of the risks, liquidity, or degree of difficulty in estimating the fair value of each investment s underlying assets and liabilities. The following table presents the Corporation s activity for the fiscal year ended September 30, 2009 for investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC : Assets held in trust Fair value at October 1, 2008 $ 1,137 Net realized and unrealized losses (42) Fair value at September 30, 2009 $ 1, (Continued)

20 Investment Income, Gains and Losses Investment income, gains and losses for cash equivalents and assets limited as to use are comprised of the following for the years ended September 30: Endowment earnings contributed toward community benefit: Dividend and interest income $ 998 $ 996 Nonoperating gains and losses: Unrestricted income from board-designated investments $ 1,919 $ 3,445 Net realized (losses) gains on board-designated investments (5,823) 2,754 $ (3,904) $ 6,199 Other changes in unrestricted net assets: Net change in unrealized gains on investments $ 1,184 $ (38,820) Changes in temporarily restricted net assets: Income from restricted endowment and other restricted investments $ 374 $ 660 Net realized and unrealized losses on investments (504) (6,160) $ (130) $ (5,500) Changes in permanently restricted net assets: Net realized and unrealized (losses) gains on permanently restricted investments $ (42) $ 1,008 Liquidity Investments as of September 30, 2009 are summarized below based on when they may be redeemed or sold: Investment redemption or sale period: Daily $ 125,986 Monthly 21,984 Quarterly 24,362 One-to-five years 497 Total $ 172, (Continued)

21 Commitments Energy, venture capital, private equity and certain real asset investments are generally made through limited partnerships. Under the terms of these agreements, the Corporation is obligated to remit additional funding periodically as capital or liquidity calls are exercised by the manager. These partnerships have a limited existence, generally ten years, and such agreements may provide for annual extensions for the purpose of disposing portfolio positions and returning capital to investors. However, depending on market conditions, the inability to execute the fund s strategy, and other factors, a manager may extend the terms of a fund beyond its originally anticipated existence or may wind the fund down prematurely. The Corporation cannot anticipate such changes because they are based on unforeseen events, but should they occur they may result in less liquidity or return from the investment than originally anticipated. As a result, the timing and amount of future capital or liquidity calls expected to be exercised in any particular future year is uncertain. The aggregate amount of unfunded commitments associated with the above noted investment categories as of September 30, 2009 was $4,284. Investments With Unrealized Losses Information regarding investments with unrealized losses at is presented below, segregated between those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months: Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses September 30, 2009: Internally board-designated, temporarily restricted and permanently restricted funds: Collective investment funds $ $ $ 14,013 $ 2,559 $ 14,013 $ 2,559 Total temporarily impaired securities $ $ 14,013 $ 2,559 $ 14,013 $ 2,559 Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses September 30, 2008: Internally board-designated, temporarily restricted and permanently restricted funds: Collective investment funds $ 63,426 $ 10,372 $ $ $ 63,426 $ 10,372 Total temporarily impaired securities $ 63,426 $ 10,372 $ $ 63,426 $ 10,372 In the evaluation of whether an impairment is other than temporary, the Corporation considers the reasons for the impairment, its ability and intent to hold the investment until the market price recovers, the severity 19 (Continued)

22 and duration of the impairment, and expected future performance. Based on this evaluation, no impairment was considered to be other than temporary. Securities Lending The Corporation participates in a securities lending program in which it lends a portion of its investments to pre-approved third party borrowers that meet certain criteria through a lending agent. All securities on loan are fully collateralized by cash or debt instruments in amounts greater than the market value of the securities on loan. The lending agent is responsible for ensuring the creditworthiness of the borrowers and investing collateral assets in high quality securities. These investments consist primarily of U.S. dollar-denominated fixed income adjustable rate securities and U.S. government securities with short maturities. Endowments The Corporation s endowment consists of approximately 56 individual funds established for a variety of purposes, including both donor-restricted endowment funds and funds designated by the Corporation to function as endowments. Investments associated with endowment funds, including funds designated by the Corporation to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Endowment funds consist of the following at September 30, 2009: Unrestricted Temporarily Permanently board-designated restricted restricted Total Donor-restricted endowment funds $ $ 49,759 $ 4,439 $ 54,198 Internally board-designated endowment funds 145, ,881 Total endowment funds $ 145,881 $ 49,759 $ 4,439 $ 200, (Continued)

23 Endowments (continued) Endowment funds consist of the following at September 30, 2008: Unrestricted Temporarily Permanently board-designated restricted restricted Total Donor-restricted endowment funds $ $ 25,012 $ 29,075 $ 54,087 Internally board-designated endowment funds 153, ,464 Total endowment funds $ 153,464 $ 25,012 $ 29,075 $ 207,551 Changes in endowment funds for the year ended September 30, 2009 are as follows: Unrestricted Temporarily Permanently board-designated restricted restricted Total Endowment funds, October 1, 2008 $ 153,464 $ 25,012 $ 29,075 $ 207,551 Reclassification from adoption of UPMIFA 24,687 (24,687) Interest and dividend income 1, ,293 Net realized and unrealized losses (4,639) (504) (42) (5,185) Cash gifts, grants and bequests 153 1, ,675 Net assets released from restrictions (1,149) (1,149) Withdrawals (5,016) (5,016) Other decreases (90) (90) Endowment funds, September 30, 2009 $ 145,881 $ 49,759 $ 4,439 $ 200, (Continued)

24 Endowments (continued) Changes in endowment funds for the year ended September 30, 2008 are as follows: Unrestricted Temporarily Permanently board-designated restricted restricted Total Endowment funds, October 1, 2007 $ 188,037 $ 33,926 $ 28,067 $ 250,030 Interest and dividend income 3, ,105 Net realized and unrealized (losses) gains (36,066) (6,160) 1,008 (41,218) Cash gifts, grants and bequests 348 2,429 2,777 Net assets released from restrictions (5,681) (5,681) Deposits 2,108 2,108 Withdrawals (4,408) (4,408) Other decreases (162) (162) Endowment funds, September 30, 2008 $ 153,464 $ 25,012 $ 29,075 $ 207,551 (a) Interpretation of Relevant Law The portion of donor-restricted endowment funds that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Corporation in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Corporation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the Corporation and donor-restricted endowment funds General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Corporation The investment policies of Lifespan 22 (Continued)

25 Endowments (continued) (b) Return Objectives and Risk Parameters Lifespan has adopted investment policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets, including both donor-restricted funds and unrestricted boarddesignated funds. Under this policy, as approved by Lifespan, the endowment assets are invested in a manner that is intended to produce results that exceed the total benchmark return while assuming a moderate level of investment risk. The Corporation expects its endowment funds, over a full market cycle, to provide an average annual real rate of return of approximately 5.5% plus inflation annually. Actual returns in any given year or period of years may vary from this amount. (c) Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objectives, Lifespan relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). Lifespan targets a diversified asset allocation that places emphasis on investments in public equity, marketable alternatives, real assets and fixed income to achieve its long-term return objectives within prudent risk constraints. (d) Spending Policy As noted, the Corporation invests its endowment funds in accordance with the total return concept. Applicable endowments include unrestricted board-designated endowment funds and donorrestricted endowment funds. The Corporation s governing board will be formalizing an endowment spending rate determination in 2010 based on all of the above factors. This spending rate will be applied to the average fair value of the applicable endowments for the immediately preceding three years. Trustees Accounts Under the terms of the will of the late George N. Buckhout, the Trustees of the Hospital (Trustees) were appointed trustees of a fund established for the benefit of persons requiring financial aid for any type of medical or surgical care. Applications for assistance from the Buckhout fund are to be submitted to a committee of three physicians. Upon approval by this committee, disbursements are made from the fund. The investments of this fund, which are included in assets limited as to use and temporarily restricted net assets in the accompanying consolidated statements of financial position, amounted to $4,522 and $4,557 at, respectively. Under the terms of the will of the late Harold W. Brooks, the Trustees were appointed trustees of a fund established to purchase or rent diagnostic or therapeutic equipment to be used at the Hospital. Applications for disbursements from the Brooks fund are to be submitted to a group of physicians for approval. Upon approval from the Brooks committee, disbursements are made from the fund. The investments of this fund, which are included in assets limited as to use and temporarily restricted net assets in the accompanying consolidated statements of financial position, amounted to $12,886 and $12,987 at September 30, 2009 and 2008, respectively. 23 (Continued)