Aurora Health Care, Inc. and Affiliates

Transcription

1 Aurora Health Care, Inc. and Affiliates Consolidated Financial Statements as of and for the Years Ended December 31, 2009 and 2008, and Independent Auditors Report

2 AURORA HEALTH CARE, INC. AND AFFILIATES TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008: Consolidated Balance Sheets 2 Consolidated Statements of Operations and Changes in Net Assets 3 4 Consolidated Statements of Cash Flows 5 6 Page Notes to Consolidated Financial Statements 7 34

3 INDEPENDENT AUDITORS REPORT To the Board of Directors of Aurora Health Care, Inc.: We have audited the accompanying consolidated balance sheets of Aurora Health Care, Inc. and Affiliates (the Corporation) as of December 31, 2009 and 2008, 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 Corporation 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 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, such consolidated financial statements present fairly, in all material respects, the financial position of Aurora Health Care, Inc. and Affiliates as of December 31, 2009 and 2008, 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 of America. April 30, 2010

4 AURORA HEALTH CARE, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 523,578 $ 328,592 Investments 268, ,711 Assets whose use is limited or restricted 1,646 1,520 Accounts receivable net of allowance for doubtful accounts of $233,241 and $222,816 (Note 4) 245, ,299 Inventories and other current assets 204, ,065 Total current assets 1,242, ,187 ASSETS WHOSE USE IS LIMITED OR RESTRICTED 228, ,127 PROPERTY, PLANT, AND EQUIPMENT Net 1,966,344 1,886,159 INTANGIBLE ASSETS Net 82,868 79,128 OTHER ASSETS 63,361 52,621 TOTAL ASSETS $ 3,583,951 $ 3,200,222 See notes to consolidated financial statements.

5 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Current installments of long-term debt $ 74,096 $ 96,038 Accounts payable 308, ,525 Estimated third-party payor settlements 74,392 75,594 Accrued expenses 299, ,159 Total current liabilities 755, ,316 LONG-TERM DEBT Less current installments 1,477,152 1,377,813 PENSION LIABILITY 392, ,837 OTHER NONCURRENT LIABILITIES 264, ,996 Total liabilities 2,889,724 2,691,962 NET ASSETS: Unrestricted 649, ,140 Temporarily restricted 27,430 19,412 Permanently restricted 17,771 17,708 Total net assets 694, ,260 TOTAL LIABILITIES AND NET ASSETS $ 3,583,951 $ 3,200,

6 AURORA HEALTH CARE, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (In thousands) REVENUE: Net patient service revenue $ 3,573,551 $ 3,125,420 Other revenue 453, ,361 Total revenue 4,027,127 3,577,781 EXPENSES: Salaries 1,767,201 1,573,107 Fringe benefits 306, ,233 Professional fees 72,505 91,602 Supplies 768, ,959 Depreciation and amortization 181, ,301 Interest 60,739 57,430 Provision for bad debts 161, ,972 Purchased services 99, ,499 Hospital tax assessment 109,360 Other expenses 341, ,262 Total expenses 3,869,656 3,481,365 OPERATING INCOME 157,471 96,416 MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED AFFILIATE (25,067) (15,753) OPERATING INCOME Net of minority interests 132,404 80,663 SWAP MARK TO MARKET (Notes 2 and 7) 49,273 (55,732) OTHER NONOPERATING INCOME Net 17,078 9,194 EXCESS OF REVENUE OVER EXPENSES 198,755 34,125 (Continued) - 3 -

7 AURORA HEALTH CARE, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (In thousands) UNRESTRICTED NET ASSETS: Excess of revenue over expenses $ 198,755 $ 34,125 Effects of changing pension plan measurement date pursuant to pension guidance (9,350) Pension-related changes other than net periodic pension cost (39,691) (264,981) Change in unrealized gains and losses on securities and investments 16,788 (9,652) Net assets released from restrictions for purchase of property and equipment 1,915 3,680 Distributions and other net Increase (decrease) in unrestricted net assets 177,886 (245,862) TEMPORARILY RESTRICTED NET ASSETS: Contributions and investment income 5,970 4,800 Change in unrealized gains and losses on securities and investments 5,995 (11,537) Change in beneficial interests in assets held by others and remainder trusts 245 (539) Net assets released from restrictions for operations (2,706) (11,237) Net assets released from restrictions for purchase of property and equipment (1,915) (3,680) Other 429 (1,059) Increase (decrease) in temporarily restricted net assets 8,018 (23,252) PERMANENTLY RESTRICTED NET ASSETS Contributions Increase in permanently restricted net assets TOTAL INCREASE (DECREASE) IN NET ASSETS 185,967 (269,068) NET ASSETS: Beginning of year 508, ,328 End of year $ 694,227 $ 508,260 See notes to consolidated financial statements. (Concluded) - 4 -

8 AURORA HEALTH CARE, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 185,967 $ (269,068) Adjustments to reconcile change in net assets to net cash provided by operating activities: Restricted contributions and investment income (2,096) (2,032) Minority interests in net income of consolidated affiliate 25,067 15,753 Effects of changing pension plan measurement date pursuant to pension guidance - 9,350 Pension-related changes other than net periodic pension cost 39, ,981 Realized gains and losses on securities and investments (3,307) - Change in unrealized gains and losses on securities and investments (22,783) 21,189 Gain on sale of property, plant, and equipment (2,106) - Gain on sale of assets and liabilities of certain business activities (15,661) - Loss on early extinguishment of debt 4,350 - Change in market value of interest rate swaps (49,273) 55,732 Amortization of deferred financing costs 1,763 - Amortization of deferred gain on sale leaseback transactions (2,169) (4,006) Depreciation and amortization 181, ,301 Provision for bad debts 161, ,972 Distribution to minority shareholders 10,893 7,859 Increase in accounts receivable (169,678) (146,182) Increase in accounts payable 56,774 46,885 Decrease in estimated third-party payor settlements (1,202) (24,587) Increase in accrued expenses and other noncurrent liabilities 25,323 45,831 Change in inventory, other current assets, and other net (20,676) (87,989) Net cash provided by operating activities 404, ,989 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (348,858) (379,614) Acquisition of affiliates (4,066) (51,110) Sales of assets and liabilities of certain business activities 25,201 - Sales of property, plant, and equipment 146,123 - Purchases of investments and assets whose use is limited or restricted (580,407) (1,557,225) Sales of investments and assets whose use is limited or restricted 520,163 1,657,290 Net cash used in investing activities (241,844) (330,659) (Continued) - 5 -

9 AURORA HEALTH CARE, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt and financing arrangements (Note 7) 480, ,082 Repayments of long-term debt, capital leases, and financing arrangements (Note 7) (436,644) (128,163) Distributions to minority shareholders (10,893) (7,859) Debt issuance costs (2,434) - Restricted contributions and investment income 2,096 2,032 Net cash provided by financing activities 32, ,092 NET INCREASE IN CASH AND CASH EQUIVALENTS 194, ,422 CASH AND CASH EQUIVALENTS: Beginning of year 328, ,170 End of year $ 523,578 $ 328,592 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest net of capitalized interest $ 60,605 $ 56,993 Cash paid for income taxes $ 15,720 $ 113 SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION: Capital expenditures funded through accounts payable $ 37,120 $ 41,242 Capital expenditures funded through assumption of long-term debt $ 20,707 $ - See notes to consolidated financial statements. (Concluded) - 6 -

10 AURORA HEALTH CARE, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND ORGANIZATION AND BASIS OF CONSOLIDATION Aurora Health Care, Inc. (Aurora) is a Wisconsin nonstock, not-for-profit corporation which operates to provide and deliver a variety of health care services and activities in Eastern Wisconsin and the surrounding areas, and to carry on such educational, philanthropic, and medical research activities as may be part of an integrated health care delivery system. The Aurora system comprises 12 acute-care hospital campuses, one psychiatric hospital, a network of 149 physician clinic facilities, home health services, 83 retail pharmacies, and other health care and related services. The consolidated financial statements include the accounts of Aurora and its affiliates (collectively, the Corporation). The following entities are nonstock, not-for-profit corporations of which Aurora is the sole corporate member: Aurora Health Care Metro, Inc. (d/b/a Aurora St. Luke s Medical Center and Aurora Sinai Medical Center) (St. Luke s and Sinai, respectively) West Allis Memorial Hospital, Inc. (d/b/a Aurora West Allis Medical Center) Aurora Medical Center of Washington County, Inc. (d/b/a Aurora Medical Center Hartford) Aurora Health Care Central, Inc. (d/b/a Aurora Medical Center of Sheboygan County) Aurora Medical Center of Manitowoc County, Inc. Aurora Medical Center of Oshkosh, Inc. Aurora Health Care Southern Lakes, Inc. (d/b/a Aurora Lakeland Medical Center, Aurora Memorial Hospital of Burlington, Aurora Medical Center Kenosha, and Aurora Medical Center Summit) (collectively, Southern Lakes) Aurora Psychiatric Hospital, Inc. and affiliate Aurora Medical Group, Inc. (Aurora Medical Group) Aurora Advanced Healthcare, Inc. Visiting Nurse Association of Wisconsin, Inc. Aurora UW Academic Medical Group, Inc. Aurora Family Service, Inc. Aurora Foundation, Inc. (Foundation) - 7 -

11 Aurora also owns 100% of the stock of Aurora Health Care Ventures, Inc. and subsidiaries (Ventures), a for-profit stock corporation. The accounts of Ventures are included in the consolidated financial statements, and include the operations of retail pharmacies and a staffing agency. The Corporation has a majority interest in BayCare Aurora, LLC (d/b/a Aurora BayCare Medical Center) (Aurora BayCare), a Wisconsin limited liability company established for the purpose of owning and operating a hospital and other medical care facilities in Green Bay, Wisconsin. Under certain circumstances, the operating agreements of Aurora BayCare may require additional contributions from the members and permit distributions of their equity. The accounts of Aurora BayCare have been included in the consolidated financial statements. At December 31, 2009 and 2008, minority interests in Aurora BayCare totaled $50,651,000 and $36,937,000, respectively, and were included in other noncurrent liabilities. During 2009 and 2008, distributions totaling $8,343,000 and $7,859,000, respectively, were paid to such minority shareholders. The Corporation, through Ventures, has a majority voting interest in Lakeshore Medical Clinic, Ltd. (Lakeshore) and a 50% investment, as specified in the shareholder agreement. The Corporation is deemed to have a controlling financial interest in Lakeshore and, as a result of such, the consolidated financial statements include Lakeshore s accounts. The Corporation, through Ventures, has a 50% investment in The Surgery Center, LLC. (Surgery Center). The Corporation is deemed to have a controlling financial interest in Surgery Center and, as a result of such, the consolidated financial statements include Surgery Center s accounts. At December 31, 2009, minority interests in Surgery Center totaled $801,000, and were included in other noncurrent liabilities. During 2009, distributions totaling $2,550,000 were paid to such minority shareholders. Effective January 1, 2008, Ventures acquired Advanced Healthcare, Inc. via a stock purchase agreement. The acquisition was accounted for using the purchase method, and the results of operations of the acquired clinics are included in the consolidated financial statements. Advanced Healthcare, Inc. has equity interests in four surgery centers in the greater Milwaukee area. In addition to Ventures acquisition of Advanced Healthcare, Inc., the Corporation affiliated with seven other physician practice groups during During 2009, the Corporation affiliated with 14 physician practice groups. Aurora is the sole corporate member of Aurora Liability Assurance, Ltd. (ALA), a company incorporated under the laws of the Cayman Islands and established for the purpose of assuming the professional and general liability risks of the Corporation. The consolidated financial statements include the accounts of ALA. Aurora is the sole corporate member of Aurora Receivables SPE, LLC (QSPE), a Delaware limited liability company formed for the purpose of financing accounts receivable. The QSPE is a qualifying special-purpose entity, and the accounts of the QSPE are not included in the consolidated financial statements. During 2009 and 2008, management and administrative expenses comprised 10.2% and 11.7% of total expenses, respectively. Management and administrative expenses primarily include information technology, finance, purchasing, patient billing, and human resources. The remaining expenses relate to the provision of health care services. All significant intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and any contingency disclosures as of the date and period of the consolidated financial statements. Actual results could differ from those estimates. Significant accounting policies of the Corporation are as follows: Cash and Cash Equivalents Cash and cash equivalents includes highly liquid investments purchased with an original maturity or maturity at the date of purchase of three months or less, except for any cash, commercial paper, repurchase agreements, and money market funds included in investments or assets whose use is limited or restricted. Investments and Investment Income Investments in equity securities with readily determinable fair market values and all investments in debt securities are measured at fair value in the consolidated balance sheets. Certain equity and debt securities considered available to support current operations are classified within current assets in the accompanying consolidated balance sheets. Investments are categorized as unrestricted, donor-restricted, debt service reserve fund, and board-designated. Board-designated investments are restricted for expansion of facilities and other needs as determined by the Board. Investment income or loss (including realized gains and losses, other-than-temporary declines in fair value, interest income, and dividends) is included in other revenue, unless donor or law restricts the income or loss. Unrealized gains and losses on investments are excluded from the excess of revenue over expenses, unless such investments are classified as trading securities. The Corporation considers all of its investments to be other-than-trading securities. Management periodically assesses investments for impairment in cases where market value has been below cost for either an extended period of time or by a significant margin. Investments in Unconsolidated Affiliates Investments in unconsolidated affiliates, included in other noncurrent assets, are accounted for using the cost or equity method. The Corporation applies the equity method of accounting for joint ventures and for investments with ownership interests of 50% or less, if the Corporation has the ability to exercise significant influence, but not controlling financial interest, over the operations of the investee. All other investees are accounted for using the cost method. Income (loss) on unconsolidated affiliates is included in other nonoperating income, net. At December 31, 2009 and 2008, the investments in unconsolidated affiliates totaled $27,792,000 and $12,682,000, respectively, and primarily include the Corporation s 50.0% interests in several mobile magnetic resonance imaging companies, a commercial laboratory limited liability company, and a dialysis company; a 24.5% interest in two hemodialysis centers; a 20.0% interest in an ambulatory surgery center; and a 12.5% interest in a medical cyclotron company. The Corporation also held an 18.7% interest in a genomics company, which was dissolved effective December 31, Income from investments in unconsolidated affiliates was $4,225,000 and $6,049,000 for the years ended December 31, 2009 and 2008, respectively

13 Accounts Receivable The Corporation has agreements with third-party payors that provide for payments to the Corporation at amounts different from its established rates. A summary of the payment arrangements with major third-party payors is as follows: Medicare Inpatient acute, most hospital outpatient services, and inpatient rehabilitation services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to patient classification systems that are based on clinical, diagnostic, and other factors. Certain inpatient non-acute and outpatient services, defined capital costs, medical education costs, select drugs, and devices related to Medicare beneficiaries are paid based on cost-reimbursement methodologies. The Corporation is reimbursed for cost-reimbursable items at a tentative rate, with final settlement determined after submission of annual cost reports by the Corporation and audits thereof by the Medicare fiscal intermediary. Medicaid Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed primarily based upon prospectively determined rates. Other Third-Party Payors Services rendered to patients insured by other third-party payors are reimbursed based on a discount from customary charges, prospectively determined rates per discharge, or negotiated fee schedules. At December 31, 2009 and 2008, approximately 9% and 10% of the Corporation s retained net accounts receivable were due from the Medicare and Medicaid programs, respectively. At December 31, 2009 and 2008, approximately 64% and 59%, respectively, were due from patients, and 27% and 31%, respectively, were due from managed care and other contracted payors. Under the terms of a securitization agreement (see Note 4), accounts receivable due from patients, as well as certain other aged accounts receivable due from third-party payors, are not eligible for sale or transfer to the QSPE and are retained by the Corporation. Risks of default and declines in creditworthiness are concentrated in such retained receivables and, accordingly, the estimated allowance for doubtful accounts reflects the risks of collection associated with these retained self-pay and aged receivables. Sale of Receivables The Corporation accounts for transfers of accounts receivable to the QSPE (Note 4) as sales, to the extent of cash consideration received, and continues to carry retained interests in the transferred assets in the consolidated balance sheets. Promissory notes from the QSPE to the Corporation and residual interests in the equity of the QSPE, received as consideration for the receivables transferred, are recorded in other current assets at fair value, based on the present value of the estimated future cash flows. Changes in fair value of the promissory notes and residual interests are included in the change in unrealized gains and losses on unrestricted securities and investments. For purposes of recognizing any gain or loss on sale, the Corporation allocates the previous carrying amount between assets sold and retained interests based on their relative fair values at the date of transfer. Expenses and losses of the securitization program are recognized as incurred and are included in other expenses. Inventories Medical supplies, durable medical equipment held-for-sale, and other inventories are stated at the lower of cost (primarily first-in, first-out) or market. Retail pharmaceutical inventories are stated at average wholesale price, which approximates cost. The Corporation s inventories totaled $64,207,000 and $59,077,000 at December 31, 2009 and 2008, respectively. Property, Plant, and Equipment Property, plant, and equipment acquisitions are recorded at cost. Donated property, plant, and equipment are recorded at fair market value at the date of donation, which is then treated as cost. Costs of computer software developed or obtained for internal use, including external direct costs of materials and services, payroll and payroll-related costs for employees directly

14 associated with internal-use software development projects, and interest costs incurred during the development period, are capitalized and included in property, plant, and equipment in the accompanying consolidated balance sheets and included in capital expenditures in the accompanying consolidated statements of cash flows. Property, plant, and equipment assets are depreciated on the straight-line method over their estimated useful lives ranging from three to forty-five years. Property, plant, and equipment capitalized under capital leases are recorded at the net present value of future minimum lease payments and are amortized on the straight-line method over the shorter of the related lease term or the estimated useful life of the asset. Amortization of property, plant, and equipment under capital leases is included in the accompanying consolidated financial statements in depreciation and amortization expense. The Corporation periodically assesses the impairment of long-lived assets (including property, plant, and equipment and intangibles) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Management considers such factors as current results, trends, and future prospects, in addition to other economic factors, in determining the impairment of an asset. No impairment adjustments were recorded in 2009 or Pledges Receivable Unconditional pledges receivable of cash and other assets to the Corporation are reported at fair value as contribution revenue at the date the pledge is received. Conditional pledges receivable and indications of intentions to give are reported as contribution revenue and receivables at fair value when the conditions are substantially met. Conditional pledge revenue is reflected as an increase in temporarily restricted contributions when the conditions are substantially met, and the related receivables are reported as other current or noncurrent assets based on the estimated time of collection. Deferred Financing Costs and Amortization of Bond Discount Long-term debt issuance costs are deferred and amortized over the term of the debt along with any original issue discount. Long-term debt issuance costs and original issue discounts are amortized using methods that approximate the interest-yield method. Capitalized Interest Interest expense incurred during the period of construction of significant capital projects is capitalized as a component of the cost of the asset. The amount capitalized is determined by applying an interest rate to the average amount of accumulated expenditures for the assets during the period until the assets are ready for their intended use. Intangible Assets At December 31, 2009 and 2008, net intangible assets totaled $80,064,000 (gross of $113,045,000, accumulated amortization of $32,981,000) and $76,186,000 (gross of $104,285,000, accumulated amortization of $28,099,000), respectively. Intangible assets primarily comprise patient and prescription lists with finite lives, workforce, and trade names. Impairment charges, if any, are recognized as an expense in the year incurred. Intangibles are amortized on a straight-line basis over periods ranging from eight to twenty years. There were no impairment adjustments recorded in 2009 or Excess purchase price over fair value of net assets acquired (goodwill) is amortized on a straight-line basis over periods ranging from five to twenty years. Goodwill is reviewed periodically for impairment. Impairment charges, if any, are recognized as an expense in the year incurred. As of December 31, 2009 and 2008, net goodwill totaled $2,804,000 (gross of $5,535,000, accumulated amortization of $2,731,000) and $2,942,000 (gross of $5,535,000, accumulated amortization of $2,593,000), respectively

15 Interest Rate Swap Agreements The Corporation has entered into various interest-rate swap arrangements to manage its interest costs and achieve other risk management objectives. The Corporation s existing swap agreements were not structured to qualify for hedge accounting. Accordingly, the swaps are marked to market on a periodic basis with the fair value recognized as an asset or liability and the changes in fair value recorded in nonoperating income, net. Collateral is reported as a separate asset, rather than as an offset to the fair value of the interest rate swaps, and is included in noncurrent assets whose use is limited or restricted in the accompanying consolidated balance sheets. Acquisition and Affiliations Acquisitions of other health care providers are accounted for under the purchase method if cash or other consideration is paid. In affiliations where Aurora becomes the sole corporate member of another entity, without an exchange of cash or other consideration, the assets and liabilities are recorded at their historical carrying amounts. Income Taxes Aurora and its affiliates, except for Ventures, Aurora BayCare, and ALA, are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code (the Code) and have been recognized as tax exempt on related income pursuant to Section 501(a) of the Code. The Corporation evaluates its uncertain tax positions on an annual basis. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. There have been no uncertain tax positions recorded in 2009 or Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Management assesses the realizability of the benefits associated with the deferred tax assets and liabilities on an annual basis and records an appropriate reserve. Aurora BayCare has elected to be treated as a partnership for income tax purposes. Income and losses of Aurora BayCare are passed through to its members. Aurora BayCare income passed through to the Corporation is not considered taxable income to the Corporation. ALA has elected to be treated as a disregarded entity for income tax purposes. Net Assets Restricted net assets are used to differentiate resources, the use of which is limited by the donor or grantor, from unrestricted net assets on which the donor or grantor places no restriction or which arise as a result of the operations of the Corporation. Restricted gifts and other restricted resources are recorded as additions to restricted net assets. Restricted net assets consist of specific purpose funds, which are temporarily restricted, and endowment funds, which are permanently restricted. Temporarily restricted net assets comprise donations restricted to various specific purposes by donors and investment earnings of temporarily and permanently restricted net assets. Permanently restricted net assets are used to account for the principal amounts of gifts and bequests accepted by the Corporation with donor stipulations that the principal remain intact in perpetuity and only the income from investment of the principal be expended. 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 either other revenue or as net assets released from restrictions used for the purchase of property and equipment. Unrestricted contributions and donor-restricted contributions for operating purposes whose restrictions are met in the same year as received are reported as other revenue

16 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 adjusted in future periods as final settlements are determined. Laws and regulations governing government and other payment programs are complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimated third-party settlements could change by a material amount. Changes in estimates relating to prior years increased net patient service revenue by approximately $2,707,000 in 2009 and $30,369,000 in In February 2009, the Wisconsin legislature enacted senate Bill 62, which assessed a fee or tax on the gross patient revenues of all Wisconsin hospitals retroactive to July 1, The revenues from this assessment will be used to increase payments made to hospitals for services provided to Medicaid and other medically-indigent patients. The Corporation s net patient service revenues reflect this increase in payment for services to Medicaid and other medically-indigent patients, and hospital tax assessment expense reflect the fees assessed by the State. Net patient service revenue includes $129,008,000 related to this program, and expenses include $109,360,000 of fees. Other Revenue/Expense Other revenue primarily comprises revenues from retail pharmacy sales, which are reported at the estimated net realizable amounts from third-party payors at the time the prescription is filled. Retail pharmacy sales were $308,056,000 and $331,781,000 for the years ended December 31, 2009 and 2008, respectively. Other expense primarily consists of occupancy, and maintenance and repairs expenses. Nonoperating Income, Net Revenues and expenses from delivering health care services and other activities that are consistent with the Corporation s ongoing major or central purposes are reported in operations. Income and losses that arise from transactions that are peripheral or incidental to the Corporation s main purpose, such as income and losses attributable to sale of property, plant, and equipment, and contributions made, are included in nonoperating income, net. Charity Care and Uninsured Care The Corporation provides care to patients who meet certain criteria under its Helping Hands program without charge or at amounts less than its established rates. Because the Corporation does not pursue collection of amounts determined to qualify under this program, they are not reported as revenue. Charges foregone relating to charity care were $65,332,000 in 2009 and $92,072,000 in At the end of 2008, a county-based health coverage program was dissolved and the clients referred to a state-based program. Charges forgone related to this program in 2008 were $40,759,000 and were included in the 2008 charity care figure. With the dissolution of the program, no comparable amount existed in Excess of Revenue Over Expenses The consolidated statements of operations and changes in net assets includes excess of revenue over expenses. Changes in unrestricted net assets which are excluded from excess of revenue over expenses, consistent with industry practice, include changes in unrealized gains and losses on securities and investments not restricted by donor or by law, permanent transfers of assets to and from affiliates for other than goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets), and other items (such as pension-related changes other than net periodic pension costs). Subsequent Events For the year ended December 31, 2009, the Corporation has evaluated subsequent events for potential recognition and disclosure through April 30, 2010, the date of financial statement issuance

17 New Accounting Pronouncements In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP) (Codification). The Codification is the single official source of authoritative U.S. accounting and reporting standards applicable for all non-governmental entities. The Codification did not change GAAP, but organized it into an online research system sorted by individual accounting topics, which are further divided into subtopics. The FASB now issues new standards in the form of Accounting Standards Updates (ASUs). The Codification is effective for financial statements issued for periods ending after September 15, The Corporation adopted this guidance for the year ended December 31, The adoption did not have an impact on the consolidated financial statements. In April 2009, the FASB issued Accounting Standards Codification (ASC) , Business Combinations, which establishes principles and requirements for how a not-for-profit entity determines whether a combination is a merger or acquisition; applies the carryover method in accounting for a merger; applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a merger or acquisition. The guidance will be applicable for the Corporation s reporting periods beginning on or after December 15, The Corporation will adopt this statement for combinations consummated after its effective date. Upon adoption of this guidance, the Corporation will record its noncontrolling interest in consolidated entities as part of net assets on the consolidated balance sheet. This adoption is not expected to have a material effect on the consolidated financial statements. In June 2009, the FASB issued ASC , Accounting for Transfers of Financial Assets. The objective in issuing this guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor s continuing involvement, if any, in transferred assets. The guidance will be applicable for the Corporation s reporting periods beginning on or after November 15, Management is in the process of evaluating the impact of this guidance on its accounting for sales to the QSPE. FASB issued FASB Accounting Standards Update (ASU) , Fair Value Measurements and Disclosures, in January ASU expands disclosures related to fair value measurements by requiring disclosure of the transfers in and out of Level 1, Level 2, and Level 3 with a description of the reasons for the transfers. Level 3 rollforward disclosure will also present separately (rather than a net number) any purchases, sales, issuances, and settlements. ASU is effective for periods beginning after December 15, 2009, except for the rollforward of Level 3 activity which is effective for periods beginning after December 15, The adoption of FASB ASU will result in additional disclosures in the fair value measurements footnote; however, it will not have a material impact on the Corporation s consolidated financial statements. Reclassifications - In 2009, the Corporation has presented intangible assets separately in the consolidated balance sheet and disaggregated the presentation of certain adjustments to reconcile the change in net assets to net cash provided by operating activities in the consolidated statement of cash flows. The corresponding 2008 amounts have been reclassified to conform to the 2009 presentation

18 3. CASH, INVESTMENTS, AND ASSETS WHOSE USE IS LIMITED OR RESTRICTED The Corporation held its cash, investments, and assets whose use is limited or restricted in the following instruments, which were measured at fair value, as of December 31, 2009 and 2008 (in thousands): Cash, commercial paper, repurchase agreement, and money market funds $ 546,315 $ 430,865 U.S. Government and agency obligations 191, ,985 Corporate bonds and bond funds 155,715 57,760 Corporate stocks and stock funds 113,208 75,933 Other 15,610 21,407 Total $ 1,022,270 $ 740,950 Included in corporate stocks and stock funds, U.S. Government and agency obligations and other investments are asset-backed securities with a fair value of $29,284,000 and $11,241,000 at December 31, 2009 and 2008, respectively. The composition of cash, investments, and assets whose use is limited or restricted by fund type at December 31, 2009 and 2008, was as follows (in thousands): Unrestricted funds $ 827,792 $ 603,973 Contractually-restricted funds 75,040 55,976 Board-designated funds 61,933 48,128 Donor-restricted funds 36,216 27,174 Debt service reserve fund 21,289 5,699 Total $ 1,022,270 $ 740,950 Contractually-restricted funds include funds invested for professional liability claims and an employee benefit plan. The fair value of financial assets and liabilities measured on a recurring basis, including cash, investments, and assets whose use is limited or restricted. were classified in the consolidated balance sheets at December 31, 2009 and 2008, as follows (in thousands): Cash and cash equivalents $ 523,578 $ 328,592 Investments 268, ,711 Assets whose use is limited or restricted current 1,646 1,520 Assets whose use is limited or restricted noncurrent 228, ,127 Total $ 1,022,270 $ 740,

19 Investment income and losses from cash and cash equivalents, investments, and assets whose use is limited or restricted consisted of the following for the years ended December 31, 2009 and 2008 (in thousands): Investment income and losses: Interest income and dividends $ 19,189 $ 13,321 Net realized gains (losses) on securities 2,569 (17,410) Total $ 21,758 $ (4,089) Other changes in unrestricted net assets: Changes in unrealized gains (losses) on securities $ 16,788 $ (9,652) Other changes in temporarily restricted net assets: Interest income and dividends $ 488 $ 539 Net realized gains (losses) on securities 738 (4,007) Changes in unrealized gains (losses) on securities 5,995 (11,537) Total $ 7,221 $ (15,005) Unrealized gains on unrestricted and temporarily restricted securities in the tables above are reported net of aggregate unrealized losses of $3,802,000 and $11,898,000 at December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, such aggregate unrealized losses and related fair values for the Corporation s investments were as follows (in thousands): 2009 Aggregate Aggregate Unrealized Fair Unrealized Fair Losses Value Losses Value Investments in an unrealized loss position: Total less than twelve months: U.S. Government and agency obligations $ 331 $ 29,902 $ 23 $ 3,338 Corporate bonds and bond funds 64 9,433 3,350 46,941 Corporate stocks and stock funds 545 5,047 5,138 26,295 Other 32 2, ,976 Total less than twelve months $ 972 $ 46,626 $ 8,593 $ 78, Total more than twelve months: U.S. Government and agency obligations $ 10 $ 1,700 $ 31 $ 1,880 Corporate bonds and bond funds 641 4, ,519 Corporate stocks and stock funds 2,177 19,428 2,682 8,341 Other Total more than twelve months $ 2,830 $ 26,152 $ 3,305 $ 16,

20 At December 31, 2009 and 2008, management believes that the unrealized losses on the Corporation s investments, which relate primarily to equity securities, are temporary in nature. The Corporation conducts a review to identify and evaluate investments that have indications of possible impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other than temporary. Criteria considered in determining whether an unrealized loss is other than temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; interest rate volatility; and the Corporation s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. Impairment losses considered other than temporary of $257,000 and $20,555,000 were recorded in 2009 and 2008, respectively. The Corporation entered into a repurchase agreement with a bank, whereby the Corporation authorized the bank to transfer excess deposits for the purpose of purchasing certain U.S. Government obligations. The Corporation simultaneously agreed to re-sell, and the bank agreed to repurchase, such securities on a daily basis in amounts sufficient to maintain a minimum cash balance. As consideration for the arrangement, the Corporation received a return equal to a percent of the purchase price of the related securities. The agreement can be terminated at any time without penalty to the Corporation, and was terminated during At December 31, 2008, amounts receivable under the repurchase agreement totaled $1,972,000, included in investments. Amounts transferred to purchase securities are not deposits and therefore are not insured by the Federal Deposit Insurance Corporation. 4. SALE OF RECEIVABLES The Corporation sells or transfers certain patient accounts receivable to the QSPE, in a revolving period securitization transaction expected to span a long-term period. The QSPE has outstanding debt with third-party investors through bonds sold by an intermediary. The bonds are collateralized by the receivables. The Corporation has no rights or obligations to reacquire receivables sold or transferred to the QSPE, except that the Corporation may be required to repurchase receivables in the event of a breach of certain representations and warranties made by the Corporation at the time of sale. Receivables eligible for sale include certain government (i.e., Medicare and Medicaid) and commercially insured receivables that have been outstanding less than 180 days. The QSPE purchases eligible receivables at an amount equal to the aggregate outstanding balance multiplied by a discount factor. The discount factor provides for interest and other costs, including risks of collections, performance, and default. In consideration for the receivables sold, the Corporation receives cash, subordinated promissory notes, and additional membership interests in the QSPE. The Corporation continues to service receivables sold or transferred to the QSPE. As compensation for servicing these receivables, the Corporation receives a pre-determined fee, which is approximately equal to servicing costs incurred plus a normal profit. During 2009 and 2008, the Corporation received cash from collections reinvested in revolving period securitizations of $1,639,000,000 and $1,506,190,000, respectively. At December 31, 2009 and 2008, the estimated fair value of the Corporation s retained interests in the QSPE totaling $63,647,000 and $64,466,000, respectively, are included in other current assets. These are considered a Level 3 financial instruments in the fair value hierarchy due to the lack of market activity. At December 31, 2009 and 2008, the reported fair value of such retained interests reflects estimated reserve rates for contractual and bad debt allowances on receivables sold or transferred to the QSPE of 55.6% and 52.7%, respectively, and an expected discount rate of 0.48% in 2009 and 0.42% in At December 31, 2009, management estimates that adverse changes of 10% and 20% in the reserve rate would reduce the fair value of the Corporation s retained interest in the QSPE by $22,801,000 and $45,602,000, respectively

21 Adverse changes of 10% and 20% in the discount rate would not have a material affect on the valuation of retained interests. At December 31, 2009 and 2008, the Corporation held a note receivable from the QSPE of $46,215,000 and $47,776,000, respectively, included in the Corporation s retained interest in the QSPE described above. In 2009 and 2008, the Corporation earned servicing fees totaling $15,556,000 and $15,649,000, respectively, included in other revenue. Expenses (including servicing, interest, and other costs) and losses related to the securitization program totaling $18,513,000 in 2009 and $22,655,000 in 2008 are included in other expenses. 5. PROPERTY, PLANT, AND EQUIPMENT The components of property, plant, and equipment at December 31, 2009 and 2008, were summarized as follows (in thousands): Land and improvements $ 109,011 $ 121,175 Buildings and fixed equipment 1,865,058 1,905,880 Movable equipment 1,188,594 1,120,234 Computer software 218, ,021 Construction in progress 398, ,081 3,780,312 3,561,391 Accumulated depreciation and amortization (1,813,968) (1,675,232) Property, plant, and equipment net $ 1,966,344 $ 1,886,159 Property, plant, and equipment includes net assets under capitalized leases and other financing arrangements totaling $175,552,000 (gross of $236,126,000, accumulated amortization of $60,574,000) and $120,956,000 (gross of $189,407,000, accumulated amortization of $68,452,000) at December 31, 2009 and 2008, respectively. Construction in progress at December 31, 2009 and 2008 primarily consists of costs incurred for two new hospitals and several new clinics, and various hospital and clinic renovation projects. The Corporation capitalized interest on various construction projects in the amount of $14,026,000 and $7,374,000 in 2009 and 2008, respectively, reflected as a reduction of interest expense and an increase in property, plant, and equipment in the accompanying financial statements. Effective March 2010, the Corporation has entered into two master leases with third parties for medical equipment to be located at one of its newly constructed hospitals. The leases range in term from 3 to 5 years, and encompass approximately $50,000,000 in equipment cost. 6. INCOME TAXES Ventures combined net federal and state income tax expense was a credit of $4,357,000 and an expense of $915,000 for the years ended December 31, 2009 and 2008, respectively, and is reflected in other expense on the consolidated statements of operations and changes in net assets. The credit to expense in 2009 included an adjustment to the deferred tax asset reserve. A deferred tax asset of $10,807,000 and

22 $6,048,000 was recorded in other non-current assets as of December 31, 2009 and 2008, respectively. A current net tax receivable of $1,673,000 was recorded in other current assets as of December 31, A current tax liability of $10,898,000 was recorded in accrued liabilities as of December 31, At December 31, 2009 and 2008, federal net operating loss carryforwards for Ventures totaled $6,038,000 and $33,187,000, respectively, and state net operating loss carryforwards totaled $28,786,000 and $56,695,000, respectively, excluding amounts related to separate return loss year rules (aka, SRLY). Net operating loss carryforwards are available to offset future taxable income through LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt at December 31, 2009 and 2008, was summarized as follows (in thousands): Wisconsin Health and Educational Facilities Authority bonds net of unamortized discount of $6,421 and $9,084 $ 1,152,538 $ 1,146,716 City of West Allis (City) general obligation bonds and promissory notes net of unamortized discount of $40 and $52 6,205 8,418 Senior secured term notes Capital lease obligations and financing arrangements 55, ,421 55, ,403 Real estate and equipment notes 15,835 16,663 Line of credit 30,000 30,000 Notes payable 8,249 53,651 1,551,248 1,473,851 Current installments (74,096) (96,038) Long-term debt less current installments $ 1,477,152 $ 1,377,813 Under terms of a Master Trust Indenture (the Aurora Indenture), the Corporation s Obligated Group (comprising Aurora, St. Luke s, Sinai, Aurora Medical Center of Sheboygan County, Aurora Medical Center Hartford, Aurora Medical Group, Southern Lakes, Aurora Medical Center of Manitowoc County, and Aurora Medical Center Oshkosh) has issued revenue bonds through Wisconsin Health and Educational Facilities Authority (WHEFA). All outstanding debt under the Aurora Indenture represents general, unsecured, joint, and several obligations of the members of the Obligated Group. During 2008, the Corporation issued $160,000,000 of Series 2008 WHEFA bonds to reimburse the Corporation for a portion of the costs of construction of a new hospital facility, as well as to fund various other capital items. During 2009, the Corporation issued $160,000,000 of Series 2009 WHEFA bonds to refund $138,040,000 of the Series 1997 WHEFA bonds, as well as to reimburse the Corporation for a portion of the costs of construction of new hospital facilities and to fund various other capital items. The refunding of the Series 1997 WHEFA bonds resulted in a loss on extinguishment of debt of $3,922,000 and is included in nonoperating income, net in the accompanying consolidated statements of operations and changes in net assets