Bay Area Medical Center, Inc. and Subsidiaries

Transcription

1 Bay Area Medical Center, Inc. and Subsidiaries Marinette, Wisconsin Consolidated Financial Statements and Supplementary Information Years Ended December 31,201 1 and 2010

2 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Financial Statements and Supplementary lnformation Years Ended December and Table of Contents Independent Auditor's Report... 1 Consolidated Financial Statements Consolidated Balance Sheets... 2 Consolidated Statements of Operations and Changes in Net Asset Consolidated Statements of Cash Flows... Notes to Consolidated Financial Statement Independent Auditor's Report on Supplementary Information Supplementary lnformation Supplementary Balance Sheet Supplementary Statement of Operations and Changes in Net Assets... 54

3 Independent Auditor's Report Board of Directors Bay Area Medical Center, Inc Marinette, Wisconsin We have audited the accompanying consolidated balance sheets of Bay Area Medical Center, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Bay Area Medical Center, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the results of their operations, changes in their net assets, and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Wipfli LLP March 6, Wausau, Wisconsin

4 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2011 and Assets '1 Current assets: Cash and cash equivalents $ 9,597,878 $ 13,842,948 - ' 1 Accounts receivable - Net 16,893,699 16,517,778 Unconditional promises to give - Net 2,371 2,982 l nventory 2,869,974 2,897, ,086 Prepaids and other 1,066,703 d Total current assets 30,430,625 34,100,053 I d Assets limited as to use 59,711,373 50,785,781 Property and equipment - Net 52,645,453 51,313,625 Other assets. - - Net Unconditional promises to give 1,176 3,781 Investments in unconsolidated affiliates 2,216,762 1,660,599 2,034,564 1,750,058 - Cash surrender value of life insurance Deferred financing costs - Net 372, ,596 Total other assets 4,624,853 3,801,034.A TOTAL ASSETS $ 147,412,304 $ 140,000,493 -

5 Liabilities and Net Assets Current liabilities: Current maturities of long-term liabilities: Bonds payable $ 1,145,000 $ 1,110,000 Capital lease obligation 66,493 16,806 Accounts payable: Trade 1,793,120 1,497,014 Property and equipment 403, ,685 Accrued liabilities: Salaries, wages, and benefits 7,322,490 7,073,252 Interest 101, ,253 Postretirement benefits 290, ,418 Other 90,671 79,898 Amounts payable to third-party reimbursement programs 782,794 1,946,845 Total current liabilities 1 1,995,579 12,632,171 Long-term liabilities: Bonds payable 36,745,000 37,890,000 Capital lease obligations 21 1,200 53,440 Postretirement benefits 3,488,766 4,503,826 Deferred compensation 819, ,085 Interest rate swap valuation 7,835,610 3,331,351 Total long-term liabilities 49,100,204 46,484,702 Total liabilities 61,095,783 59,116,873 Net assets: Unrestricted 86,128,289 80,576,431 Temporarily restricted 188, ,189 Total net assets 86,316,521 80,883,620 TOTAL LIABILITIES AND NET ASSETS $ 147,412,304 $ 140,000,493 See accompanying notes to consolidated financial statements.

6 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets Years Ended December 31,201 1 and Changes in unrestricted net assets: Revenue: Net patient service revenue $ 123,921,144 $ 118,916,396 Other operating revenue 1,121,254 1,080,017 Contributions 14, ,564 Total revenue 125,056, ,164,977 Expenses: Salaries and wages 46,470,258 43,936,349 Fringe benefits 17,195,926 19,230,149 Supplies and other 37,956,398 35,551,963 Professional fees 1,436,728 1,090,149 Provision for bad debts 5,950,774 5,394,840 Depreciation and amortization 6,269, ,536 Interest 1, ,301,259 Total expenses 1 17,229, ,818,245 Income from operations 7,827,180 6,346,732 Other income (loss): Investment income ,998 2,211,274 Interest rate swap valuation adjustment (4,542,904) (1,524,095) Loss on disposal of property and equipment (8,749) (1 94,938) Revenue in excess of expenses 4,894,525 6,838,973 Other changes in unrestricted net assets: Net unrealized gain (loss) on investments reported at fair value (561,495) 2,270,163 Reclassification of accumulated loss on dedesignated cash flow hedge 38,646 38,645 Changes in postretirement benefit plan obligation other than expense 506,179 Net assets released from restrictions for property and equipment - Satisfaction of program requirements 674, ,326 Increase in unrestricted net assets 5,551,858 9,260,107

7 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets (Continued) Years Ended December 31, and 2010 Changes in temporarily restricted net assets: Grants and contributions for purchase of property and equipment $ 804,713 $ 201,898 Investment income Net assets released from restrictions - Satisfaction of program requirements: For operations (249,706) (30,608) For property and equipment (674,003) (112,326) Increase (decrease) in temporarily restricted net assets (1 18,957) 58,976 Increase in net assets 5,432,901 9,319,083 Net assets at beginning 80,883,620 71,564,537 Net assets at end $ 86,316,521 $ 80,883,620 - See accompanying notes to consolidated financial statements.

8 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31,201 1 and Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Cash received from patients, third-party payors, and contributors $ 11 8,872,939 $ 11 3,295,536 Cash paid to employees and suppliers (1 03,288,762) (99,246,690) Investment income received net of amount capitalized 1,365,217 1,634,391 Interest paid net of amount capitalized (2,030,069) (2,318,339) Net cash ~rovided by operating activities 14,919,325 13,364,898 Cash flows from investing activities: Payments for purchase of investments and assets limited as to use (9,753,235) (7,471,769) Proceeds from sale of investments and assets limited as to use 51 9,968 5,708,589 Payment for purchase of investments in unconsolidated affiliates (1,860,000) (1,164,000) Increase in cash surrender value of life insurance (284,506) (366,783) Capital expenditures (7,436,688) (4,987,296) Proceeds from disposal of property and equipment 9,838 3,054 Net cash used in investing activities (18,804,623) (8,278,205) Cash flows from financing activities: Payments on bonds payable (1,110,000) (1,337,403) Payments on capital lease obligation (54,485) (1,220) Grants and contributions received for purchase of property and equipment ,898 Net cash used in financing activities (359,772) (1,136,725) Net increase (decrease) in cash and cash equivalents (4,245,070) 3,949,968 Cash and cash equivalents at beginning 13,842,948 9,892,980 Cash and cash equivalents at end $ 9,597,878 $ 13,842,948

9 Bay Area Medical Center, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Years Ended December 31,201 1 and Reconciliation of increase in net assets to net cash provided by operating activities: Increase in net assets $ 5,432,901 $ 9,319,083 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Provision for bad debts 5,950,774 5,394,840 Depreciation and amortization 6,269,242 6,313,536 Interest rate swap valuation adjustments 4,542,904 1,524,095 Reclassification of accumulated loss on dedesignated cash flow hedge (38,646) (38,645) Loss on disposal of property and equipment 8, ,938 Net realized gain on sale of investments (280,015) (571,314) Net unrealized (gain) loss on investments reported at fair value 561,495 (2,270,163) Grants and contributions received for purchase of property and equipment Decrease in equity in investments in unconsolidated affiliates Increase in deferred compensation liability 113, ,311 (Increase) decrease in accrued interest receivable portion of assets limited as to use Changes in operating assets and liabilities: Accounts receivable - Net (6,326,695) (6,417,141) Unconditional promises to give 3,216 7,931 Inventory 27,285 (227,420) Prepaids and other (227,617) (86,320) Accounts payable 296,106 90,001 Accrued liabilities (775,187) 512,267 Amounts payable to third-party reimbursement programs (1,164,051) (1,397,292) Total adjustments 9,486,424 4,045,815 Net cash provided by operating activities $ 14,919,325 $ 13,364,898 Noncash investing and financing activities: Accounts payable related to fixed asset purchases totaled $403,478 and $496,685 as of December 31, 2011 and 2010, respectively. Equipment acquired under capital lease obligations totaled $261,932 in 2011 See accompanying notes to consolidated financial statements.

10 - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies Principal Business Activity Bay Area Medical Center, Inc. ("Bay Area") was formed as a private, not-for-profit corporation on October 1, Bay Area operates a medical facility offering inpatient and outpatient hospital services and multispecialty physician services. Bay Area provides health care services to patients primarily from northeast Wisconsin and the southern portion of Michigan's Upper Peninsula. Bay Area Medical Center Foundation, Inc. (the "Foundation") is operated exclusively for charitable, educational, medical, and scientific purposes by conducting and supporting activities for the benefit of Bay Area. North Shore Health Network, Inc. ("North Shore") is a taxable nonstock corporation of which Bay Area is the sole controlling member. North Shore's primary activity is negotiating managed care contracts for the benefit of Bay Area and other area health care providers. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Bay Area, the Foundation, and North Shore. The consolidated entity is referred to as the "Organization." All significant intercompany balances and transactions have been eliminated. Basis of Accounting The Organization follows accounting standards set by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The ASC is the single source of authoritative accounting principles generally accepted in the United States (GAAP) to be applied to nongovernmental entities in the preparation of financial statements in conformity with GAAP.

11 - - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) Use of Estimates in Preparation of Financial Statements The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that directly 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 revenue and expenses during that period. Actual results may differ from these estimates. Cash Equivalents The Organization considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents, excluding amounts limited as to use or restricted. Accounts Receivable and Credit Policy Accounts receivable are uncollateralized patient obligations that are stated at the amount management expects to collect from outstanding balances. These obligations are primarily from local residents, most of whom are insured under third-party payor agreements. Bay Area bills third-party payors on the patients' behalf or, if a patient is uninsured, the patient is billed directly. Once claims are settled with the primary payor, any secondary insurance is billed, and patients are billed for copay and deductible amounts that are the patients' responsibility. Payments on accounts receivable are applied to the specific claim identified on the remittance advice or statement. Bay Area has a policy to charge interest on accounts which are being paid in accordance with a patient payment plan arrangement.

12 Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Accounts Receivable and Credit Policy (Continued) The carrying amounts of accounts receivable are reduced by allowances that reflect management's best estimate of the amounts that will not be collected. Management provides for contractual adjustments under terms of third-party reimbursement agreements through a charge to gross revenue and a credit to accounts receivable. In addition, management provides for probable uncollectible amounts, primarily from uninsured patients and amounts patients are personally responsible for through a charge to operations and a credit to a valuation allowance based on its assessment of historical collection likelihood and the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Accounts receivable are recorded in the accompanying consolidated balance sheets net of contractual adjustments and an allowance for doubtful accounts. Inventory Inventory is valued at the lower of cost determined on the first-in, first-out (FIFO) method, or market. Assets Limited as to Use and Investment Income Investments designated as assets limited as to use are measured at fair value in the accompanying consolidated balance sheets. Assets limited as to use represent amounts designated by the Board for capital improvements and deferred compensation, amounts designated by the Board for auxiliary member-designated patient care purposes, and amounts designated by donors for capital expenditures and other patient care related expenditures.

13 - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) Assets Limited as to Use and Investment Income (Continued) Investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in revenue in excess of expenses unless the income or loss is restricted by donor or law. Unrealized gains and losses are excluded from revenue in excess of expenses unless the investments are trading securities. Realized gains or losses are determined by specific identification. The Organization monitors the difference between the cost and fair value of its investments. A decline in market value of an individual investment security below cost that is deemed to be other-than-temporary results in an impairment, and the Organization reduces the investment's carrying value to fair value. A new cost basis is established for the investment, and any impairment loss is recorded as a realized loss on investment Income.

14 Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Fair Value Measurements The Organization measures fair value of its financial instruments using a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 lnputs to the valuation methodology are unadjusted quoted priced for identical assets or liabilities in active markets that the Organization has the ability to access. Level 2 lnputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets or liabilities in inactive markets. Inputs, other than quoted prices, that are observable for the asset or liability. lnputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified contractual term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 lnputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

15 . Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) Property and Equipment Property and equipment acquisitions are recorded at cost if purchased, at fair value at the date of donation if donated, or net book value if transferred from a related party. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Estimated useful lives range from 4 to 20 years for equipment and from 5 to 40 years for land improvements, buildings, and building improvements. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from revenue in excess of expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of longlived 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 restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Impairment The Organization reviews its property and equipment periodically to determine potential impairment by comparing the carrying value of the property and equipment with the estimated future net discounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Organization would recognize an impairment loss at that time. The Organization recognized no impairment losses in or 2010.

16 - - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) Asset Retirement Obligations FASB ASC 410, Accounting for CondifionalAsset Retirement Obligations, clarifies when an entity is required to recognize a liability for a conditional asset retirement obligation. Bay Area has considered ASC Topic 410, specifically as it relates to its legal obligation to perform asset retirement activities, such as asbestos removal, on its existing properties. Bay Area believes there is an indeterminate settlement date for the asset retirement obligations because the range of time over which Bay Area may settle the obligation is unknown and cannot be estimated. As a result, Bay Area cannot reasonably estimate the liability related to these asset retirement activities as of December 31, 2011 and Capitalized Interest Bay Area capitalizes interest costs on restricted tax-exempt borrowings, less any interest earned on the temporary investment of the proceeds of those borrowings, from the date of the borrowing until the specified qualifying assets acquired with those borrowings are ready for their intended use. For major capital additions that require a period of time to get them ready for their intended use but are not acquired with a specific tax-exempt borrowing, Bay Area capitalizes an allocation of interest cost incurred during the period required to complete the asset. Investments in Unconsolidated Affiliates Bay Area's investments in unconsolidated affiliates are recorded using the equity method. Deferred Financing Costs Costs relating to the issuance of long-term debt are amortized over the life of the related debt using the straight-line method.

17 Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Interest Rate Swap Agreements Bay Area uses an interest rate swap to manage its risk related to interest rate movements. Bay Area's risk management strategy is to stabilize cash flow variability on its variable rate debt with an interest rate swap. At the inception of the agreement, Bay Area documented its risk management strategy and assessed the interest rate swap's effectiveness at producing offsetting cash flows. The interest rate swap was deemed to be effective in achieving this objective through June 30, 2009 and was designated as a cash flow hedge through that date. Under a cash flow hedge, the change in fair value of the derivative related to the effective portion of the hedge was recorded as a change in unrestricted net assets. The ineffective portion was reported as other income or expense. Effective July 1, 2009, the ineffectiveness of the hedge exceeded certain prescribed levels, and, as a result, hedge accounting was discontinued. As a result, all future changes in fair value of the derivative are reported in other income or loss in the consolidated statements of operations and changes in net assets, and the cumulative change in fair value that was recorded in net assets from the inception of the interest rate swap agreement through the date hedge accounting was discontinued will be amortized into earnings over the remaining life of the related debt. In the event the interest rate swap is terminated, the amount remaining in net assets would be reclassified into earnings. Net Assets Unrestricted net assets consist of investments and otherwise unrestricted amounts that are available for use in carrying out the mission of the Organization and include those expendable resources which have been designated for special use by the Organization's Board of Directors. Temporarily restricted net assets are those whose use by the Organization has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Organization in perpetuity. For the periods presented, the Organization has no permanently restricted net assets.

18 Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Revenue in Excess of Expenses The consolidated statements of operations and changes in net assets include the classification revenue in excess of expenses, which is considered the operating indicator. Changes in net assets, which are excluded from revenue in excess of expenses, include unrealized gains and losses on investments other than trading securities, the reclassification of accumulated loss on dedesignated cash flow hedge, changes in postretirement plan obligation recognized as other than expense, permanent transfer of assets to and from affiliates for other than goods and services, and contributions of longlived assets, including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets. Net Patient Service Revenue 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 third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted in future periods as final settlements are determined.

19 * Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Hospital Assessment The Wisconsin state legislature enacted legislation under which eligible hospitals, including Bay Area, are required to pay the state an annual assessment. The assessment is based on each hospital's gross revenues, as defined. The revenue generated from the assessment is to be used, in part, to increase overall reimbursement under the Wisconsin Medicaid program. Bay Area's assessment expense was approximately $3,142,000 and $3,064,000 for the years ended December 31,201 1 and 2010, respectively, and is included in general and administrative services expense in the accompanying consolidated statements of operations and changes in net assets. The increases in reimbursement from Medicaid are included in net patient service revenue. Community Care Bay Area provides health care to patients who meet certain criteria under its community care policy without charge or at amounts less than its established rates. The Organization maintains records to identify the amount of charges forgone for services and supplies furnished under the community care policy. Because Bay Area does not pursue collection of amounts determined to qualify as community care, they are not reported as net patient service revenue.

20 - - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) Donor-Restricted Gifts Contributions are considered available for unrestricted use unless specifically restricted by the donor. Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received, less an allowance for promises estimated to be uncollectible and adjustments to present value. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. 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. When a donor restriction expires, that is, when a stipulated time restriction ends or 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. Donor-restricted contributions that have the restrictions met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Advertising The Organization charges advertising costs to operations as incurred. Advertising expense totaled $1 68,607 and $21 5,198 in and 201 0, respectively. Unemployment compensation The Organization has elected reimbursement financing under provisions of the Wisconsin unemployment compensation laws. Unemployment claims are paid to the State of Wisconsin as incurred. The Organization has obtained a letter of credit in the amount of $372,000 to meet state funding requirements.

21 Bay Area Medical Center, Inc. and Subsidiaries Note 1 Summary of Significant Accounting Policies (Continued) Income Taxes Bay Area and the Foundation are nonprofit corporations as described in Section 501 (c)(3) of the Internal Revenue Code (the "Code") and are exempt from federal income tax on related income pursuant to Section 501 (a) of the Code. Bay Area and the Foundation are also exempt from state income tax on related income. North Shore is a taxable nonstock corporation. To account for any uncertain tax positions, the Organization assesses whether it is more likely than not that a tax position will be sustained upon examination of the technical merits of the position, assuming the taxing authority has full knowledge of all information. If the tax position does not meet the more-likely-than-not recognition threshold, the benefit of the tax position is not recognized in the financial statements. Management does not believe Bay Area has any material uncertain tax positions or unrecognized tax benefits. Bay Area and the Foundation are also engaged, to a limited extent, in activities that the Internal Revenue Service (IRS) considers unrelated to its exempt purpose and, therefore, taxable. These activities, however, annually result in net operating losses for income tax purposes. The Organization does not presently anticipate that a tax benefit from these net operating losses will be realized in the future. Any potential deferred tax asset resulting from the availability of net operating loss carryforwards is offset by a valuation allowance of equal amount. Due to the nature of its transactions, income taxes for North Shore are not significant. Accordingly, the accompanying financial statements do not include a provision for income taxes. No deferred tax assets and liabilities have been recognized since no other differences exist between the financial tax basis of reporting the Organization's assets and liabilities. Bay Area and the Foundation's federal tax returns for tax years 2008 and beyond, and North Shore's federal tax returns for tax years 2001 and beyond remain subject to examination by the Internal Revenue Service. The expiration of the statutes of limitations related to the various state income tax returns that the Organization files vary by state. Generally, Bay Area and the Foundation's various state income tax returns for tax years 2007 and beyond, and North Shore's various state income tax returns for 2001 and beyond, remain subject to examination by various state taxing authorities.

22 - - Bay Area Medical Center, Inc. and Subsidiaries - Note 1 Summary of Significant Accounting Policies (Continued) New Accounting Pronouncement In August 2010, the FASB issued ASU No , Measuring Charik Care for Disclosure. This ASU amends ASC Topic 954 and requires entities to use cost as the measurement basis for charity care disclosures, including both direct and indirect costs. Entities are also required to disclose the method used to determine these costs, such as directly from a costing system or through an estimation process. The Organization adopted this ASU for the year ending December 31, In July 201 1, the FASB issued ASU No , Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and Allowance for Doubtful Accounts for Certain Health Care Entities. This ASU amends ASC Topic 954 and requires health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue. Entities are also required to enhance disclosures about their policies for recognizing revenue and assessing bad debts. In addition, this guidance requires disclosure of qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance in this ASU is effective for the Organization's year ending December 31, Subsequent Events Subsequent events have been evaluated through March 6, 2012, which is the date the financial statements were issued.

23 - - Bay Area Medical Center, Inc. and Subsidiaries - Note 2 Reimbursement Arrangements With Third-Party Payors Bay Area has agreements with third-party payors that provide for reimbursement at amounts which vary from its established rates. A summary of the basis of reimbursement with major third-party payors follows: Medicare Inpatient hospital acute care services rendered to Medicare program beneficiaries and defined capital costs are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Outpatient services provided to Medicare beneficiaries are reimbursed on a prospective payment methodology, also based on a patient classification system. Physician services provided to Medicare program beneficiaries are paid on established fee schedules. Medicaid lnpatient services rendered to Medicaid program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system based on clinical, diagnostic, and other factors similar to the Medicare system. Outpatient services provided to Medicaid program beneficiaries are paid based on a prospectively determined rate per occasion of service. Physician services provided to Medicaid program beneficiaries are paid based on established fee schedules.

24 Bay Area Medical Center, Inc. and Subsidiaries Note 2 Reimbursement Arrangements With Third-Party Payors (Continued) Other Payors Bay Area has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to Bay Area under these agreements includes established fee schedules and discounts from established charges. Accounting for Contractual Arrangements Bay Area is paid for inpatient services at an interim rate, with final settlements determined after audit of Bay Area's related annual cost reports by the respective Medicare and Medicaid fiscal intermediaries. Estimated provisions to approximate the final expected settlements after review by the Medicare and Medicaid intermediaries are included in the accompanying consolidated financial statements. Bay Area's cost reports have been audited by the Medicare and Medicaid fiscal intermediaries through December 31, 2008 and December 31,2001, respectively. Compliance The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations, particularly those relating to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Violations of these laws and regulations could result in the imposition of fines and penalties as well as repayments of previously billed and collected revenue from patient services. Management believes the Organization is in substantial compliance with current laws and regulations.

25 - - Bay Area Medical Center, Inc. and Subsidiaries Note 2 Reimbursement Arrangements With Third-Party Payors (Continued) Compliance (Continued) The Centers for Medicare and Medicaid Services (CMS) uses recovery audit contractors (RACs) to search for potentially inaccurate Medicare payments that may have been made to health care providers and that were not detected through existing CMS program integrity efforts. Once the RAC identifies a claim it believes is inaccurate, the RAC makes a deduction from or addition to the provider's Medicare reimbursement in an amount estimated to equal the overpayment or underpayment. As of December 31, 2011, the Organization has not been notified by the RAC of any potential significant reimbursement adjustments. Note 3 Accounts Receivable - Net Accounts receivable consisted of the following at December 31: Patient accounts receivable $ 37,700,823 $ 36,053,554 Less: Contractual adjustments 15,637,127 14,668,858 Allowance for doubtful accounts 5,169,997 5,096,119 Net patient accounts receivable 16,893,699 16,288,577 Other accounts receivable 229,201 Accounts receivable - Net $ 16,893,699 $ 16,517,778

26 Bay Area Medical Center, Inc. and Subsidiaries Note 4 Net Patient Service Revenue Net patient service revenue consisted of the following: Gross patient service revenue: Inpatient services $ 89,881,314 $ 77,855,261 Outpatient services 141,748, ,299,049 Clinic services 40,709,532 40,632,912 Totals 272,339, ,787,222 Less - Contractual adjustments 148,418, ,870,826 Net patient service revenue $ 123,921,144 $1 18,916,396 Approximately 52% of Bay Area's patient service revenue was for services provided to Medicare program beneficiaries in and Approximately 11 % of Bay Area's patient service revenue was for services provided to Medicaid program beneficiaries in and

27 Bay Area Medical Center, Inc. and Subsidiaries Note 5 Community Benefit and Community Care Bay Area has a policy of providing health care services, without charge or at amounts less than established rates, to those unable to pay a portion of their charges and who meet certain eligibility criteria established in Bay Area's community care policy. Because Bay Area does not pursue collection of amounts determined to qualify as community care, they are not reported as net patient service revenue. Bay Area is a provider under the Wisconsin and Michigan Medical Assistance programs. Under these programs, Bay Area is legally bound to accept the amount determined by the states as payment in full for each patient's charges. Accordingly, services provided under these programs are reported as net patient service revenue. Bay Area maintains records and monitors the level of unreimbursed and partially reimbursed care it provides. Bay Area provides health care services and other financial support through various programs that are designed to enhance the health of the community including the health of low-income patients.

28 - - Bay Area Medical Center, Inc. and Subsidiaries Note 5 Community Benefit and Community Care (Continued) Bay Area actively provided or participated in the following community-based activities and programs during and 201 0: Promoted general health education services such as health fairs, cancer education, and healthy heart education. Offered health information on Bay Area's website and through health-related publications distributed at no charge. Offered blood pressure screenings, cholesterol testing, and glucose testing. Provided prostate screenings, skin cancer screenings, and free mammograms. Provided advance directives and living will assistance. Provided guidance, referral, and enrollment assistance for public medical programs and other family support assistance. Provided space and free lab testing and diagnostic services to support a free community physician clinic. Provided an annual drug collection and disposal program. Provided emergency cab fare for patients with transportation needs related to their health care services. Promoted participation in blood drives by employees and the general public. Contributed to the education of student nurses and other health care professionals. Sponsored and organized the BAMC Menominee River Century Bike Ride which attracts over 1,000 riders. Sponsored and supported Chamber of Commerce and educational leadership programs.

29 Bay Area Medical Center, Inc. and Subsidiaries Note 5 Community Benefit and Community Care (Continued) Bay Area also made cash contributions to support community events. Management estimates the annual cost to Bay Area to be approximately $87,000 and $100,000 for community-based activities and programs in and 2010, respectively. Consistent with the mission of Bay Area, care is provided to patients regardless of their ability to pay, including providing services to those persons who cannot afford health insurance because of inadequate resources or who are underinsured. Bay Area provides discounts from established charges to self-pay patients without regard to ability to pay and considers these discounts a part of their community benefit. Health care services to patients under government programs, such as Medicaid, are also considered part of Bay Area's benefit provided to the community since a substantial portion of such services are reimbursed at amounts less than the costs of providing care. Patients who meet certain criteria for charity care, generally based on federal poverty guidelines, are provided care without charge or at a reduced rate, determined based on qualifying criteria as defined in Bay Area's charity care policy and from applications completed by patients and their families. The estimated cost of providing care to patients under Bay Area's community care policy was approximately $1,821,000 and $1,986,000 in 2011 and 2010, respectively, calculated by multiplying the ratio of cost to gross charges by the gross uncompensated charges associated with providing community care. In addition, Bay Area's shortfall in 2011 and 2010 under the Medicaid program (the difference between program reimbursement and costs to provide services) was approximately $1,406,400 and $1,966,700, respectively.

30 Bay Area Medical Center, Inc. and Subsidiaries Note 6 Assets Limited as to Use Investments designated as assets limited as to use are classified as available for sale and stated at fair value. Assets limited as to use consisted of the following at December 31: By Board for capital improvements: Cash and cash equivalents $ 1,566,763 $ 1,587,492 Taxable bonds 5,672,884 6,467,557 Mortgage and asset-backed securities 6,391,042 6,065,745 Equity securities 20,532,857 15,879,072 Mutual funds 7,189,574 5,757,202 Government obligations 14,873,381 11,692,548 Alternative investments 2,196,737 2,194,295 Accrued interest 136, ,131 Total by Board for capital improvements 58,560,174 49,807,042 By Board for deferred compensation - Mutual funds 793, ,123 By Board for auxilliary purposes: Cash and cash equivalents 143, ,104 Certificates of deposit 10,000 10,000 Total by Board for auxilliary purposes 153, ,104 By donors for patient care - Cash and cash equivalents 203, ,512 Total assets limited as to use $ 59,711,373 $ 50,785,781

31 Bay Area Medical Center, Inc. and Subsidiaries Note 6 Assets Limited as to Use (Continued) Investments classified as assets limited as to use, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible that changes in the values of certain investments will occur in the near term and that such changes could affect the amounts reported in the consolidated financial statements. Management assesses individual investment securities as to whether declines in market value are other-than-temporary and result in impairment. For equity securities, including mutual funds, the Organization considers whether it has the ability and intent to hold the investment until a market price recovery. Evidence considered in this includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, the issuer's financial condition, and the general market condition in the geographic area or industry in which the investee operates. For debt securities, if the Organization has made a decision to sell the security, or if it is more likely than not the Organization will sell the security before the recovery of the security's cost basis, an other-than-temporary impairment is considered to have occurred. If the Organization has not made a decision or does not have an intent to sell the debt security, but the debt security is not expected to recover its value due to a credit loss, an other-than-temporary impairment is considered to have occurred. Because the Organization has the intent and the ability to hold investment securities until a market price recovery or maturity, investment securities at December 31, 2011 and 2010 are not considered other-than-temporarily impaired. No impairment losses were recognized by the Organization during 2011 and 2010.

32 Bay Area Medical Center, Inc. and Subsidiaries Note 6 Assets Limited as to Use (Continued) At December 31, the fair value and unrealized losses of the investments for which fair value is less than cost, aggregated by security type, are as follows: 2011 Less Than 12 Months MoreThan 12Months Total Description of Unrealized Unrealized Unrealized Securities Fair Value Losses Fair Value Losses Fair Value Losses Taxable bonds $3,942,783 $ (17,343) $ $ (22,991) $ 4,734,543 5 (40,334) Mortgage and assetbacked edseities (3,859) 879,513 (26,482) 1,715,642 (30,341) Equity securities 3,227,980 (503,562) 1,098,846 (289,531) 4,326,826 (793,093) Mutual funds 1,012,852 (1 4,107) 3,637,457 (248,947) 4,650,309 ( ) Government obligations 175,270 (388) 167,247 (1.791) 342,517 (2.179) Alternative investments 296,340 (3,660) 1,900,397 (299,603) 2,196,737 (303,263) Totals $9,491,354 $ ( ) $8,475,220 $ (889,345) $17,966,574 $ (1,432,264) 2010 Less Tnan 12 Months More Than 12 Months Tota. Description of Unrealized Unrealized Unrealized Securltiea Fair Value Losses Fair Value Losses Fair Value Losses Taxable bonds $3,647,366 $ (34,656) $ - $ - $ 3,647,366 $ (34.656) Mortgage and awtbacked securities 1,447,202 (1 3,794) 1,335,148 ( ) 2,782,350 (30,831 ) Equity securities 472,496 (38,148) 1,505,598 (471,823) 1,978,094 (509,971) Mutual funds - 3,497,102 (281,197) 3,497,102 (281,197) Government obligations 2, (62,998) 2,045,688 (62.998) Alternative investments 98,829 (1,172) 988,287 ( ) 1,087,116 (1 2,890) Totals $7.71 1,581 $(150,768) $ $ (781,775) $15,037,716 $ (932,543)

33 Bay Area Medical Center, Inc. and Subsidiaries Note 7 Investment Income Investment income consisted of the following: Interest and dividend income $ 1,339,022 $ 1,639,972 Net realized gain on sale of investments 280, ,314 Total investment income $ 1,619,037 $ 2,211,286 Note 8 Property and Equipment - Net Property and equipment consisted of the following at December 31: Land and land improvements $ 3,163,752 $ 2,781,589 Buildings and building improvements 72,703,274 69,064,162 Equipment 37,849,663 33,799,509 Total property and equipment 113,716, ,645,260 Less - Accumulated depreciation 61,388,142 56,222,820 Net depreciated value 52,328,547 49,422,440 Construction in progress 316,906 1,891,185 Property and equipment - Net $ 52,645,453 $ 51,313,625

34 Bay Area Medical Center, Inc. and Subsidiaries Note 9 Investments in Unconsolidated Affiliates Bay Area entered into a joint venture, Wisconsin-Upper Peninsula Oncology Management Services, Inc. (WUPOMS), with another hospital to provide radiation oncology services in the Marinette and Menominee service area. Bay Area owns 50% of WUPOMS. Bay Area entered into a joint venture with a hospital to create NorthReach Healthcare LLC ("NorthReach") to provide primary care physician services in the Bay Area service area. Bay Area owns 50% of NorthReach. Bay Area made capital contributions to NorthReach totaling $1,860,000 and $1,164,000 in 2011 and 2010, respectively. The operating results of these investments are reported in the consolidated statements of operations and changes in net assets in other operating revenue. Bay Area accounts for these investments under the equity method. Detail by investment as of and for the years ended December 31 follows: Gain (Loss) Gain (Loss) on Equity on Equity lnvestments lnvestments lnvestments lnvestments WUPOMS $ 1,041,983 $ 601,862 $ 440,119 $ 159,411 3 NorthReach 1,174,779 (1,905,700) 1,220,480 (1,127,083) Totals $ 2,216,762 $(1,303,838) $ 1,660,599 $ (967,670)

35 Bay Area Medical Center, Inc. and Subsidiaries Note 9 Investments in Unconsolidated Affiliates (Continued) The following is a summary of the financial position of WUPOMS and NorthReach as of December 31 : Assets $ 9,362,377 $ 8,363,954 Liabilities $ 4,191,875 $ 4,321,473 Equity $ 5,170,502 $ 4,042,481 Note 10 Bonds Payable In February 2008, the Wisconsin Health and Educational Facilities Authority (the "Authority") issued, for Bay Area's benefit, $40 million of variable rate demand revenue bonds ("Series 2008 Bonds"). Proceeds from the Series 2008 variable rate demand revenue bonds were used to purchase the hospital buildings and related assets from Marinette County, repay a significant portion of the Marinette County General Obligation Refunding Bonds dated June 2000, finance certain other capital expenditures, and pay debt issuance costs. The Series 2008 Bonds are payable solely from loan payments to be made by Bay Area pursuant to the loan agreement between the Authority and Bay Area. The Series 2008 Bonds can be tendered by the bondholders on a daily basis. Bay Area has a remarketing agreement with an underwriter that provides for its "best efforts" to solicit offers to purchase bonds tendered. Bay Area has provided a letter of credit in the maximum amount of $38,242,900 in favor of the bond trustee to secure the bonds. Any amounts drawn under the letter of credit are due 24 months following the drawing date. The letter of credit expires on February 20, 2018.

36 Bay Area Medical Center, Inc. and Subsidiaries Note 10 Bonds Payable (Continued) Bonds payable consisted of the following at December 31: Wisconsin Health and Educational Facilities Adjustable Demand Revenue Bonds Series 2008, dated February 28, 2008, due in varying amounts from $1,145,000 in 2012 to $2,065,000 in 2038, interest rate of 0.10% and 2.25% as of December 31, 2011 and 2010, respectively $ 37,890,000 $ 39,000,000 Less - Current maturities 1,145,000 1,110,000 Lonq-term portion $36,745,000 $ 37,890,000 The Series 2008 Bond agreements and the letter of credit also provide for various restrictive covenants, including limitations on the incurrence of additional borrowings and certain financial performance measures as long as the bonds are outstanding. Management believes Bay Area is in compliance with all covenants at December 31, 2011 and The carrying value of revenue bonds approximates the fair value of these liabilities. Required payments of principal for the bonds, including current maturities, are as follows: 2012 $ 1,145, ,175, ,225, ,230, ,250,000 Thereafter 31,865,000 Total $ 37,890,000