ST. JOSEPH HEALTH SERVICES OF RHODE ISLAND. Consolidated Financial Statements. September 30, 2011 and (With Independent Auditors Report Thereon)

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1 Consolidated Financial Statements (With Independent Auditors Report Thereon)

2 Consolidated Financial Statements Table of Contents Page(s) Independent Auditors Report 1 Consolidated Financial Statement: Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Changes in Net Assets (Deficit) 4 Consolidated Statements of Cash Flows

3 KPMG LLP 6th Floor, Suite A 100 Westminster Street Providence, RI Independent Auditors Report Board of Trustees St. Joseph Health Services of Rhode Island: We have audited the consolidated balance sheets of St. Joseph Health Services of Rhode Island (SJHSRI) as of, and the related consolidated statements of operations and changes in net assets (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of SJHSRI management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the SJHSRI 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, and 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 St. Joseph Health Services of Rhode Island as of September 30, 2011 and 2010 and the results of its operations, changes in net assets (deficit), and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. April 6, 2012 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents (restricted cash of $926,204 in 2011 and $996,532 in 2010) $ 5,765,741 7,744,323 Patient accounts receivable, less allowance for doubtful accounts of $9,050,100 in 2011 and $8,800,400 in ,292,230 16,420,022 Inventories 1,654,851 1,911,052 Prepaid expenses and other current assets 2,648,655 1,911,974 Current portion of funds held by trustee under bond indenture (note 3 and 5) 1,113,661 1,058,095 Current portion of third party receivable (note 2) 2,258,274 Amounts due from related parties (note 14) 14,170 Total current assets 27,475,138 31,317,910 Assets limited or restricted as to use (note 3, 5, 11 and 12): Funds held by trustee under bond indenture 1,584,471 1,625,446 Funds held by trustee for insurance 305, ,563 Restricted investments: Interest in perpetual trusts 5,460,375 5,662,526 By donor 1,249,311 1,215,910 By spending policy 181, ,072 Total assets limited or restricted as to use 8,780,787 9,062,517 Property, plant and equipment, net (note 4) 38,868,011 42,992,019 Amounts due from related parties (note 14) 340,161 Other assets 894, ,529 Total assets $ 76,358,356 84,129,975 Liabilities and Net Deficit Current liabilities: Accounts payable and accrued expenses $ 23,144,250 22,266,059 Amounts due to related parties (note 14) 186,267 Current obligations under capital lease (note 5) 1,338,199 1,215,977 Current portion of long-term debt (note 5) 543, ,720 Estimated final settlements due to third-party payors (note 2) 2,635,533 1,426,130 Total current liabilities 27,847,483 25,542,886 Capital lease obligations, less current portion (note 5) 324,852 1,256,973 Long-term debt, less current portion (note 5) 17,730,776 18,193,731 Pension liability (note 9) 72,228,987 51,004,155 Asset retirement obligations 3,115,622 3,029,795 Insurance and other liabilities 8,345,889 9,512,862 Total liabilities 129,593, ,540,402 Commitments and contingencies (notes 5, 6 and 15) Net assets (deficit): Unrestricted (61,101,763) (32,482,467) Temporarily restricted (notes 2 and 12) 1,107,496 1,193,604 Permanently restricted (notes 2 and 12) 6,759,014 6,878,436 Total net deficit (53,235,253) (24,410,427) Total liabilities and net deficit $ 76,358,356 84,129,975 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Operations Years ended Operating revenues: Net patient service revenues (notes 2 and 7) $ 152,076, ,358,486 Net assets released from restrictions for operations 357,636 1,764,763 Other operating revenues 4,854,293 6,531,515 Total operating revenues 157,288, ,654,764 Operating expenses (note 13): Employee compensation and benefits 97,918, ,895,335 Supplies and other 44,858,058 51,721,611 License fee (note 8) 8,377,921 7,932,934 Interest 1,141,164 1,229,306 Depreciation, amortization and accretion 6,065,460 6,036,714 Write-down of assets 1,387,282 Provision for bad debts 9,311,524 10,810,416 Total operating expenses 169,059, ,626,316 Deficiency of revenues over operating expenses (11,770,584) (19,971,552) Other changes in unrestricted net assets: Change in net unrealized losses on investments (6,385) Adjustment to pension liability (note 9) (17,367,763) 3,056,263 Funds released from temporarily restricted net assets for purchase of property, plant, and equipment 519,051 2,180,811 Decrease in unrestricted net assets $ (28,619,296) (14,740,863) See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Changes in Net Assets (Deficit) Years ended Decrease in unrestricted net assets $ (28,619,296) (14,740,863) Temporarily restricted net assets: Restricted income on endowment funds (note 3) 175 4,317 Unrealized losses on restricted assets (3,946) Gifts, grants and bequests 790,142 1,262,610 Earnings on temporarily restricted assets 262 Net assets released from restrictions (876,687) (3,945,574) Decrease in temporarily restricted net assets (86,108) (2,682,593) Permanently restricted net assets: Gifts, grants and bequests 122,948 12,957 Change in market value of perpetual trusts (242,370) 292,079 (Decrease) increase in permanently restricted net assets (119,422) 305,036 Decrease in net assets (28,824,826) (17,118,420) Net deficit at beginning of year (24,410,427) (7,292,007) Net deficit at end of year $ (53,235,253) (24,410,427) See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Decrease in net assets $ (28,865,045) (17,118,420) Adjustments to reconcile decrease in net assets to net cash provided by (used in) operating activities: Depreciation and amortization 5,935,530 5,850,914 Loss on disposal 35,933 Write-down of assets 1,387,282 Accretion for asset retirement obligation costs 93, ,799 Amortization of deferred financing costs 14,816 14,019 Accretion of original issue discount 19,898 19,898 Net realized and unrealized gains on investments (2,305) Change in market value of perpetual trusts 242,370 (292,079) Provision for bad debts 9,311,524 10,810,416 Adjustment to pension liability 17,367,763 (3,056,263) Changes in operating assets and liabilities: Patient accounts receivable (9,183,732) (6,310,467) Other current assets and other assets (632,027) 1,110,932 Accounts payable, accrued expenses and other liabilities 3,560,116 8,135,016 Estimated final settlements due to third-party payors 3,467,677 (2,206,300) Net cash provided by (used in) operating activities 2,756,101 (2,858,840) Cash flows from investing activities: Additions to property, plant and equipment (2,792,737) (2,724,763) Sales of investments 24,014 1,326,780 Advances to related parties (139,724) (14,170) Net cash used in investing activities (2,908,447) (1,412,153) Cash flows from financing activities: Repayment of long-term debt and capital leases (1,826,236) (2,115,313) Net cash used in financing activities (1,826,236) (2,115,313) Net change in cash and cash equivalents (1,978,582) (6,386,306) Cash and cash equivalents at beginning of year 7,744,323 14,130,629 Cash and cash equivalents at end of year $ 5,765,741 7,744,323 Supplemental disclosure: Capital expenditures financed through capital leases $ 442,000 Interest paid 1,156,545 1,229,057 See accompanying notes to consolidated financial statements. 5

8 (1) Organization, Basis of Presentation and Subsequent Events (a) Organization St Joseph Health Services of Rhode Island (SJHSRI), Roger Williams Hospital and affiliates, and Elmhurst Extended Care Facilities, filed a joint application with the Rhode Island Department of Health and Attorney General s Office in The application called for the creation of a parent organization called CharterCARE Health Partners (CCHP). The affiliation was approved and on January 4, 2010 CCHP s began operations. Under the affiliation each hospital continues to operate under their own license while all administrative, strategic planning and financial operations and capital control is managed by CCHP. SJHSRI, a wholly owned subsidiary of CCHP, is a 359-bed acute care general hospital established to provide healthcare services in Rhode Island and surrounding communities. Additionally, SJHSRI operates a Center for Health and Human Services, an integrated network of primary care and specialty clinics serving the economically disadvantaged and minority population in Providence, Rhode Island. Core values, as defined by SJHSRI mission statement, are consistent with the healing ministry of the Catholic Church. SJHSRI also operates the St. Joseph School of Nursing and previously operated the St. Joseph Living Center (Living Center). The latter is an assisted-living facility, and served the emergent needs of the elderly population who desire residential living but require assistance with daily tasks. Effective January 4, 2011, the Living Center closed and the assets were written off during the year ended September 30, The SJHSRI consolidated financial statements consist of SJHSRI and St Joseph Health Services of Foundation, Inc. St. Joseph Health Services Foundation, Inc. (SJ Foundation) The SJ Foundation has been listed in the Official Catholic Directory and from that derives its notfor-profit status as an exempt organization whose mission is to raise funds for the specific purpose of SJHSRI. Effective August 22, 2011, SJ Foundation changed its name to CharterCARE Health Partners Foundation Inc (CCHP Foundation), amended the articles of incorporation and removed itself from the Official Catholic Directory. The CCHP Foundations is a subsidiary of CCHP and is a not-for-profit corporation whose mission is to raise funds for the benefit of CCHP and its affiliates. Effective with the change in name and mission, a petition for Cy Pres was filed in Rhode Island Superior Court to transfer the funds raised by the SJ Foundation for the benefit of SJHSRI to SJHSRI. The Cy Pres was approved December 13, The net assets of SJ Foundation totaling $306,233 were transferred to SJHSRI effective September 30, The SJ Foundation activity for 2011 and 2010 are included in the consolidated SJHSRI financial statements. 6 (Continued)

9 The following are other wholly owned subsidiaries of CCHP: Roger Williams Medical Center (RWMC) RWMC is a 220-bed acute care general hospital established to provide healthcare services in Providence, Rhode Island and surrounding communities. RWMC is a not-for-profit corporation. Elmhurst Extended Care Facilities, Inc. (Elmhurst) Elmhurst is a 192-bed skilled nursing home and intermediate care facility and provider of other elder care services. Elmhurst is a not-for-profit corporation. Roger Williams Realty Corporation (Realty) Realty holds and manages real estate assets for the benefit of CCHP, owns and leases land and buildings to Elmhurst, and leases clinical and research space to RWMC. Realty is a not-for-profit organization. Roger Williams Medical Associates, Inc. (RWMA) RWMA is a non-profit corporation established to arrange for the provision of medical services to patients of RWMC and SJHSRI and individuals in the communities served by RWMC and SJHSRI, to participate in educational programs for its staff and the community and otherwise to cooperate with RWMC and SJHSRI in meeting the medical needs of patients in the service area. Our Lady of Fatima Ancillary Services (Ancillary Services) Our Lady of Fatima Ancillary Services is a for-profit organization. Ancillary Services holds the licenses for the SJHSRI outreach laboratories and provides imaging services to area physicians and medical practices. Ancillary Services participates in two joint ventures with unrelated third parties known as Rhode Island PET Services, LLC and MRI Centers of N.E. which operates Northwest Rhode Island Imaging in Johnston, RI. Elmhurst Health Associates, Inc. (EHA) EHA is a for-profit organization. EHA holds the licenses for the RWMC outreach laboratories. SJ Energy, LLC A single member LLC established to purchase wholesale energy to support the operational needs of CCHP and its affiliates. Rosebank Corporation (Rosebank) Rosebank holds and manages real estate assets for the benefit of the CCHP. Rosebank owns several parking lots on the main campus of RWMC and several other properties adjacent to the main campus. Rosebank is a for-profit organization. 7 (Continued)

10 Physicians Office Building, Inc. (POB) POB owns and operates a physician office building located adjacent to RWMC s main campus, on space leased from Rosebank, for the benefit of CCHP s employed physicians. POB is a not-for-profit organization. (b) Basis of Statement Presentation These consolidated financial statements include the activities of SJHSRI and the activity of its wholly owned subsidiary SJ Foundation through August 22, The consolidated financial statements, which are presented on the accrual basis of accounting, have been prepared consistent with the American Institute of Certified Public Accountants Audit and Accounting Guide, Healthcare Organizations (Audit Guide). In accordance with provisions of the Audit Guide, net assets and revenue, expenses, gains, and losses are classified on the existence or absence of donor-imposed restrictions. SJHSRI s net assets and activities that increase or decrease net assets are classified as unrestricted, temporarily restricted, or permanently restricted. (2) Significant Accounting Policies (a) Use of Estimates The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, valuation of certain investments, estimated final settlements due third party payors, self-insurance liabilities and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. (b) Consolidated Statements of Operations All activities of the SJHSRI deemed by management to be ongoing, major, and central to the provision of healthcare services are reported as operating revenues and expenses. SJHSRI records net patient service revenues 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. Under the terms of various agreements, regulations, and statutes, certain elements of third-party reimbursement are subject to negotiation, audit and/or final determination by the third-party payors. As a result, there is at least a reasonable possibility that the recorded estimates will change by a material amount. Variances between preliminary estimates of net patient service revenues and final third-party settlements are included in net patient service revenues in the year in which the settlement or change in estimate occurs. Significant adjustments to prior year settlements with third-party payors increased net patient service revenue by approximately $856,000 and $1,809,000 for the years ended September 30, 2011 and 2010, respectively. 8 (Continued)

11 The consolidated statements of operations include the deficiency of revenues over expenses. Changes in unrestricted net assets which are excluded from the deficiency of revenues over expenses include changes in unrealized gains and losses on investments, changes in the minimum pension liability, transfers to/from affiliates, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets). (c) Net Patient Service Revenue SJHSRI maintains agreements with the Social Security Administration under the Medicare Program, Blue Cross and Blue Shield of Rhode Island, Inc. (Blue Cross), United Health Insurance (United), the State of Rhode Island under the Medicaid Program, and various commercial and managed care payors that govern payments to the Hospital for services rendered to patients covered by these agreements. The agreements generally provide for per case or per diem rates or payments based on allowable costs, subject to certain limitations, for inpatient care and discounted charges or fee schedules for outpatient care. Actual adjustments may be materially different from these estimates. Certain agreements with various third-party payors have provisions for retroactive settlements and dispute resolution related to issues such as allowable costs, utilization, and charge structure. Provisions have been made in the financial statements for prior and current years estimated settlements with the various third-party payors. (d) Charity Care and Allowance for Doubtful Accounts SJHSRI provides care to patients who meet certain criteria under the charity care policies without charge or at amounts less than the established rates. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue (see note 7). SJHSRI grants credit without collateral to patients, most of whom are local residents and are insured under third-party agreements. Additions to the allowance for bad debts are made by means of a provision for bad debts. Accounts written off as uncollectible are deducted from the allowance and subsequent recoveries are added. The amount of the provision for bad debts is based upon management s assessment of historical and expected net collections, trends in federal and other collection indicators. Services rendered to individuals when payment is expected and ultimately not received are written off to the allowance for doubtful accounts (bad debt). (e) (f) Cash and Cash Equivalents Cash equivalents represent highly liquid instruments with a maturity at the date of purchase of three months or less, excluding amounts whose use is limited by board designation, donor or other arrangements under trust agreements. Restricted cash as of September 30, 2011 includes a $380,000 letter of credit for the School of Nursing, and amounts designated primarily for grants and other purposes. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. 9 (Continued)

12 (g) (h) Assets Limited or Restricted as to Use Assets limited or restricted as to use primarily include: (1) assets held by trustees under a bond indenture, (2) assets held in trust for both workers compensation and malpractice claims, (3) interest in perpetual trusts which represents SJHSRI s donated portion of the donors trusts, and (4) donor-restricted investments are funds donated to SJHSRI and are restricted as to time or purpose. Investment Valuation and Income Recognition Investments are reported at fair value. The fair value of a financial instrument is the amount that would be received to sell an asset, or the amount that would be paid to transfer a liability, in an orderly transaction between market participants at the measurement date. See note 3 for discussion of fair value measurements. Investment income or loss (including realized gains and losses on investments, interest and dividends) are included in the deficiency of revenues over expenses unless the income or loss is restricted by donor or law. Net unrealized gains and losses on investments is excluded from the deficiency of revenues over expenses. A decline in the market value of any available for sale security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, SJHSRI considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assignment includes the reserves for the impairment, the severity and duration of the impairment changes in value subsequent to year end, forecasted performance of the investor, and the general market conditions in the geographic area or industry the investor operates in. During the years ended, the SJHSRI did not record any other-than-temporary impairments to its portfolio. SJHSRI s management is responsible for the fair value measurements of investments reported in the consolidated financial statements. SJHSRI has implemented policies and procedures to assess the reasonableness of the fair values provided, and believes the reported fair values at the consolidated balance sheet dates are reasonable. (i) Fair Value of Financial Instruments Fair value represents the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants as of the measurement date. FASB ASC Subtopic establishes a fair value hierarchy that prioritizes inputs used to measure fair value into three levels: Level 1 quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; 10 (Continued)

13 Level 2 observable prices that are based on input not quoted in active markets, but corroborated by market data; and Level 3 unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest level of priority to Level 1 input and the lowest priority to Level 3 input. In determining fair value, SJHSRI utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable input to the extent possible. See notes 3 and 10. (j) Property, Plant, and Equipment Property, plant and equipment is reported on the basis of cost less accumulated depreciation and amortization. Donated items are recorded at fair market value at the date of contribution. The carrying value of property, plant and equipment is reviewed if the facts and circumstances suggest that it may be impaired. Depreciation of property, plant and equipment is calculated by use of the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. Facilities and equipment under capitalized leases are stated at the present value of minimum lease payments and are amortized using the straight-line method in a manner consistent with SJHSRI normal depreciation policy for owned assets. Such amortization is included in depreciation expense. (k) (l) Investments in Joint Ventures Investments in joint ventures in which SJHSRI has a 20% or less interest are accounted for utilizing the cost method. Investments in which SJHSRI has greater than a 20% and less than a 50% interest are accounted for utilizing the equity method. Asset Retirement Obligations SJHSRI recognizes the fair value of a liability for legal obligations associated with asset retirements in the period in which it is incurred, if a reasonable estimate of the fair value of the obligation can be made. Over time, the liability is accreted to its present value each period. Upon settlement of the obligation, any difference between the cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the consolidated statements of operations. Asset retirement obligations amounted to $3,115,622 and $3,029,795 as of September 30, 2011 and 2010, respectively. In 2011 and 2010, SJHSRI reduced the liability by $8,169 and $194,458, respectively, for work completed. Accretion expense amount to $93,996 and $185,799 for the years included, respectively. (m) Malpractice Insurance SJHSRI maintains medical malpractice insurance on a claims-made basis. For the period October 1, 1998 through October 1, 2001, SJHSRI was insured for professional liability loss contingencies by an insurance company that, on August 16, 2001, was placed into rehabilitation by the insurance commissioner of the Commonwealth of Pennsylvania. 11 (Continued)

14 SJHSRI maintains medical malpractice insurance on a claims-made basis. For the period October 1, 2010 through June 30, 2012, the SJHSRI has commercial insurance for the primary layer up to $2 million per claim and up to a $6 million annual aggregate. For the period October 1, 2001 through September 30, 2010 SJHSRI has commercial insurance for the primary layer up to $1 million per claim and up to a $2 million annual aggregate and retained a $1 million per claim and $3 million aggregate self-insured layer above the primary layer for malpractice claims in excess of $1 million. For claims in excess of $2 million SJHSRI maintained commercial excess coverage with another insurer. SJHSRI has established reserves to cover the professional liability exposure that may not be covered by current or prior insurance policies, including reserves for estimated claims incurred but not reported to the insurance company. Management is unaware of any claims that would cause the ultimate cost of malpractice claims to vary materially from amounts provided. (n) (o) Workers Compensation As of December 1, 1999, SJHSRI obtained claims made commercial insurance for its workers compensation liability. SJHSRI maintains a stop-loss insurance policy for workers compensation claims made prior to December 1, Accordingly, amounts up to the stop-loss limit are self-insured by SJHSRI through November 30, SJHSRI has accrued its gross estimate of the ultimate cost of both reported and incurred but not reported claims based upon an actuarial study. The actuary developed the estimate based on SJHSRI actual paid claims and insurance industry data. The estimated losses were discounted using a rate of 2.5% in 2011 and 4.5% in SJHSRI has a total workers compensation liability of $417,000 and reinsurance receivable of $91,975 as of September 30, Gifts and Grants Unconditional promises to give cash and other assets to SJHSRI are reported at fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. For the year ended September 30, 2011, there were permanently restricted pledge receivables of $49,330. All of these pledges are multi-year pledges to be fully paid by No reserve has been recorded. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as additions to temporarily restricted net assets if the gifts are not expended or placed in service during the year. (p) Classification of Net Assets SJHSRI adopted the provisions of FASB ASC Subtopic , Classification of Donor-Restricted Endowment Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (ASC ). ASC provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and 12 (Continued)

15 also requires disclosures about endowment funds, including donor-restricted endowment funds and board-designated endowment funds. Under Rhode Island UPMIFA laws, assets of a donor-restricted endowment fund may be appropriated for expenditure by the SJHSRI in accordance with the standard of prudence prescribed by UPMIFA. As such, SJHSRI has classified under ASC , net assets as of September 30, 2011 and 2010 as follows: Permanently restricted net assets contain donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of SJHSRI and primarily consist of their historic dollar value of contributions to establish or add to donor-restricted endowment funds. Temporarily restricted net assets contain donor-imposed stipulations as to the timing of their availability or use for a particular purpose. These net assets are released from restrictions when the specified time elapses or actions have been taken to meet the restrictions. Net assets of donor-restricted endowment funds in excess of their historical dollar value are classified as temporarily restricted net assets until appropriated by SJHSRI and spent in accordance with the standard of prudence imposed by UPMIFA. Unrestricted net assets contain no donor-imposed restrictions and are available for the general operations of SJHSRI. Such net assets may be designated by SJHSRI for specific purposes, including to function as endowment funds. (q) Income Taxes SJHSRI is a not-for-profit corporation as described in the Section 501(c) (3) of the Internal Revenue Code and is generally exempt from income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. SJHSRI recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition in measurement are reflected in the period in which the change in judgment occurs. SJHSRI did not recognize the effect of any income tax portion in either 2011 or (r) Reclassifications Certain prior year amounts have been reclassified in the accompanying consolidated financial statement to conform to the 2011 presentation. (3) Investments, Assets Limited or Restricted as to Use and Fair Value Measurement SJHSRI holds investments in money market funds and fixed income funds. SJHSRI is also the beneficiary of perpetual trusts which hold investments in marketable equity securities, fixed income securities and money market funds. The fair value of fixed income securities may be determined based on yields currently available on comparable securities of issuers with similar credit ratings, dealer supplied prices or by discounting future 13 (Continued)

16 principal and interest payments at prevailing interest rates. SJHSRI interest in perpetual trusts are valued based on the funds net asset value (NAV) as supplied by the fund administrator or trustee. The composition of investments and assets limited or restricted as to use are reported in the accompanying consolidated balance sheets as follows at September 30. The following tables summarize SJHSRI investments and other assets by major category accounted for at fair value on a recurring basis as of : September 30, 2011 Level 1 Level 2 Level 3 Total Cash equivalents $ 1,667,144 1,667,144 Money market funds 2,503,820 2,503,820 Fixed income: U.S. Treasuries 263, ,109 Perpetual trusts (1) 5,460,375 5,460,375 $ 4,434,073 5,460,375 9,894,448 September 30, 2010 Level 1 Level 2 Level 3 Total Cash equivalents $ 100, ,072 Money market funds 4,096,523 4,096,523 Fixed income: U.S. Treasuries 261, ,491 Perpetual trusts (1) 5,662,526 5,662,526 $ 4,458,086 5,662,526 10,120,612 (1) Two illiquid perpetual trusts, which SJHSRI has partial noncontrolling ownership in. The amounts reported in the table above exclude assets invested in SJHSRI defined benefit pension plan (see note 9). 14 (Continued)

17 The following table presents additional information about investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended September 30, 2011 and 2010: Perpetual trusts Fair value at October 1, 2009 $ 5,370,447 Net realized and unrealized gains 292,079 Fair value at September 30, 2010 $ 5,662,526 Fair value at October 1, 2010 $ 5,662,526 Contributions 40,219 Net realized and unrealized losses (242,370) Fair value at September 30, 2011 $ 5,460,375 SJHSRI invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and those changes could materially affect the amounts reported in the consolidated financial statements. Investment income on investments and assets limited or restricted as to use are comprised of the following: September Unrestricted: Dividends and interest income $ 380, ,348 Total investment income included in deficiency of revenues over expenses $ 380, ,348 Change in net unrealized losses on investments $ (6,385) Temporarily restricted: Dividends and interest income $ 437 4,317 Change in net unrealized losses on investments (3,946) Total income included in temporarily restricted net assets $ Permanently restricted: Change in market value of perpetual trusts $ (242,370) 292,079 Investment income is included in other operating revenues for the years ended September 30, 2011 and (Continued)

18 SJHSRI has funds held by trust relating to the Tax Exempt Revenue Bonds Series 1999 (see note 5), donor established perpetual trusts and funds SJHSRI has deposited into trusts for both workers compensation and malpractice liability. SJHSRI receives a specific portion of the return on the underlying assets of the perpetual trusts. (4) Property, Plant and Equipment The following is a summary of land, building, equipment and construction in progress as of September 30: September 30 Useful lives Land and land improvements 3 20 $ 1,715,324 1,685,039 Buildings and building improvements ,979,715 70,788,619 Equipment ,172,969 64,506, ,868, ,979,727 Accumulated depreciation and amortization (99,103,122) (94,559,646) Construction in progress 103, ,938 Property, plant and equipment, net $ 38,868,011 42,992,019 Depreciation expense on property, plant and equipment for the years ended was $4,444,027 and $4,245,523, respectively. Amortization expense on capital lease facilities and equipment for years ended was $1,527,437 and $1,605,391 respectively, and is included in depreciation and amortization expenses in the consolidated statements of operations and change in net assets. During fiscal year 2011, there were disposals of fixed assets totaling $35,933 which were fully depreciated. There were no disposals for the year ended September 30, Additionally, during fiscal 2011, there was a write-down of building improvements related to the closure of the Living Center. Additionally, SHJSRI converted its information systems to a common CCHP platform resulting in a write down assets. The total net book value of the write downs totaled $1,387,282 with accumulated depreciation of $1,392,055. The net book value of equipment and facilities under capital leases as of amortized to $2,813,940 and $3,899,377, respectively. 16 (Continued)

19 (5) Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations consist of the following: September Rhode Island Health and Educational Building Corporation (RIHEBC) Tax Exempt Revenue Bonds Series 1999 (Series 1999 Bonds) (a) $ 18,350,000 18,885,000 Note payable (b) 622, ,026 Capital lease obligations (c ) 1,663,051 2,472,950 Other debt 1,691 20,570 Less original issue discount on RIHEBC tax exempt revenue bonds (700,247) (720,145) 19,937,061 21,301,401 Less current portion, long-term debt and capital lease obligations 1,881,433 1,850,697 $ 18,055,628 19,450,704 (a) RIHEBC Revenue Bonds During 1999, SJHSRI entered into an agreement with RIHEBC, whereby RIHEBC authorized the issuance of tax-exempt hospital financing revenue bonds in the amount of $23,145,000. These proceeds were used to refinance all of SJHSRI then outstanding long-term debt and capital leases of $9,025,000, and provide $14,120,000 to be used for capital projects. The Series 1999 Bonds bear interest at rates ranging from 5.50% to 5.75% per year, due in semi-annual installments on April 1, and October 1 of each year through July A portion of the Series 1999 Bonds require the establishment of a sinking fund for the purpose of mandatory redemption of the Series 1999 Bonds. In addition, the sinking fund will be used to redeem the remaining bonds at various maturity dates. The Series 1999 Bonds are collateralized by a pledge of SJHSRI gross receipts and real estate. The bond agreements provide, among other things, that SJHSRI deposit funds with a designated trustee to provide for future payments of interest and principal. SJHSRI is also required to establish a property reserve fund with the trustee to assure that adequate funds are on hand to maintain the condition of the SJHSRI s property. The Series 1999 Bonds Master Trust Indenture provides for, among other requirements, the maintenance of a minimum debt service coverage ratio (DSC) of 1.10 and limitations on additional indebtedness. For the years ended, SJHSRI was not in compliance with the minimum debt service coverage ratio. In October 2010, as required by the Master Trust Indenture, SJHSRI retained an independent consultant to make recommendations regarding rates, fees, charges, management, composition of the 17 (Continued)

20 Board of the Governing Body or methods of operations to increase the debt service coverage ratio. The report of the independent consultant was filed with the Bond Trustee within one hundred and thirty-five days following the fiscal year-end as required by the trust indenture. In December 2011, SJHSRI requested the Bond Trustee forbear the independent consultant requirement for the year end September 30, An extension to the 135 day financial statement filing requirement for the September 30, 2011 financial statements was granted to SJHSRI to March 26, On March 23, 2012 SJHSRI was granted the forbearance subject to specific terms (see note 17). (b) (c) Note Payable In 2007, SJHSRI entered into a subordinated loan agreement with the Inter-Parish Loan Fund, Inc. in the amount of $850,000. The loan was to pay for fire code renovations at the St. Joseph Living Center. The ten-year loan payable carries an interest rate of 4.5%. In 2011, SJHSRI closed the Living Center and was granted a deferment of the principal and interest payments for five years. Capital Lease Obligations In 2005, SJHSRI entered into a lease agreement with Bank of America Leasing and Capital, LLC for the information system conversion to Meditech. The amount of the lease was $8,000,000. The term of the lease is seven years with an interest rate of 3.34%. In 2011, SJHSRI entered into a lease agreement with Ventana for histology equipment. The amount of the lease was $328,000. The term of the lease is five years with an interest rate of 4.55%. In 2011, SJHSRI entered into a lease agreement with IRIS for urinalysis equipment. The amount of the lease was $114,000. The term of the lease is five years with an interest rate of 7.35%. Aggregate maturities and payments of long-term debt obligations during the next five years thereafter are as follows: Amount Year: 2012 $ 543, , , , ,967 Thereafter 15,157, (Continued)

21 Aggregate maturities and payments of capital lease obligations during the next five years thereafter are as follows: Amount Year: 2012 $ 1,338, , , , ,968 (6) Commitments Interest paid on long-term debt and capital lease obligations was $1,156,545 and $1,229,057 for the years ended, respectively. Debt obligations are reported in the consolidated balance sheet at principal value less unamortized discount, which totaled $17,649,753 at September 30, The fair value of these obligations at September 30, 2011, as estimated based on quoted market prices for related bonds totaled $15,489,868. SJHSRI has entered into noncancelable operating lease agreements with several vendors for the lease of certain computer, radiology and other equipment expiring through Future minimum payments by year under non cancelable operating leases with terms of one year or more consists of the following: Amount Year: 2012 $ 1,222, , , , ,001 Total rental expense amounted to $2,367,072 and $2,407,598 for the years ended September 30, 2011 and 2010, respectively. (7) Disproportionate Share Program and Charity Care SJHSRI is a participant in the State of Rhode Island s Disproportionate Share Program, which was established in 1995 to assist hospitals that provide a disproportionate amount of uncompensated care. Under the program, Rhode Island hospitals, including SJHSRI, receive federal and state Medicaid funds as additional reimbursement for treating a disproportionate share of low-income patients. Payments to SJHSRI under the Disproportionate Share Program of approximately $5,429,000 and $6,437,000 for the years ended, respectively, are included in net patient service revenues in the accompanying consolidated statements of operations. 19 (Continued)

22 Charity care is measured using established charge rates and represented approximately $11,116,000 and $7,438,000 in charges foregone for the years ended, respectively. Uncompensated care (charity care and bad debt) totaled approximately $20,428,000 and $18,249,000 for the years ended, respectively. (8) License Fee The State of Rhode Island assesses a license fee to all Rhode Island hospitals based on each Hospital s gross patient service revenue. The 2011 fee is based on 2009 gross patient service revenue. The 2010 fee is based on 2008 gross patient revenue. SJHSRI s license fee expense was $8,377,921 and $7,932,934 for each of the years ended. (9) Pension Plan SJHSRI has a defined benefit pension plan which covers substantially all of the SJHSRI s employees. The Plan is a nonelecting church plan under the Internal Revenue Service and is not subject to the participation, vesting, and provisions of the Internal Revenue Service code. Plan participants benefits are computed as a percentage of final average earnings (five highest consecutive rates of annual earnings over the last ten years of employment) less a percentage of Social Security benefits, proportionately reduced for services less than 30 years. Effective October 1, 2007, SJHSRI froze participation in the defined benefit pension plan for all new Non-Union and Federation of Nurses and Healthcare Professionals (FNHP) Bargaining Unit employees. In addition on October 1, 2008, SJHSRI froze participation for all new hires in the United Nurses and Allied Health Professionals (UNAP) Bargaining Unit. These new employees will be eligible to participate in a 403(b) defined contribution plan once certain requirements are met. All nonunion employees will be eligible to participate in a 403(b) defined contribution pension plan that carries a matching formula if certain criteria are met. Effective September 30, 2009, benefits for nonunion participants were frozen. Lastly, benefits for union participants who are covered under the collective bargaining agreement with the Federation of Nurses and Health Professionals were frozen effective September 30, The components of the net periodic benefit cost for the plan for the years ended September 30, 2011 and 2010 are as follows: Service cost $ 1,821,091 1,813,071 Interest cost 6,996,676 7,062,618 Expected return on plan assets (7,105,472) (7,278,451) Prior service cost amortization 219, ,477 Amortization of actuarial loss 1,925,295 1,372,631 Net periodic cost $ 3,857,067 3,189, (Continued)

23 The weighted average assumptions used to determine net periodic benefit cost as of September 30, 2011 and 2010, are as follows: Discount rates 5.00% 5.58% Rates of increase in future compensation levels Expected long-term rate of return on plan assets A reconciliation of the changes in SJHSRI Retirement Plan projected benefit obligations and the fair value of assets for the years ended, and a statement of funded status of the Plans as of September 30 for both years, follows: Changes in benefit obligations: Projected benefit obligations at beginning of year $ 139,818, ,905,485 Service cost 1,821,091 1,813,071 Interest cost 6,996,676 7,062,618 Benefits paid (5,982,156) (5,663,447) Actuarial loss (gain) 12,076,607 (299,137) Projected benefit obligation at end of year $ 154,730, ,818, Changes in plan assets: Fair value of plan assets at beginning of year $ 88,814,435 86,034,413 Actual return on plan assets (330,458) 8,443,469 Benefits paid (5,982,156) (5,663,447) Fair value of plan assets at end of year $ 82,501,821 88,814,435 Funded status: Funded status of the plan $ (72,228,987) (51,004,155) Accumulated benefit obligation $ 151,947, ,640,856 The weighted average assumptions used to determine the pension benefit obligation at September 30, 2011 and 2010 are as follows: Discount rates 4.54% 5.00% Rates of increase in future compensation levels Expected long-term rate of return on plan assets (Continued)

24 Included in unrestricted net assets at, respectively, are the following amounts that have not yet been recognized in net periodic pension cost: prior service cost of $609,531 and $829,010 and unrecognized actuarial losses of $52,767,900 and $35,180,658. The prior service cost and actuarial loss included in unrestricted net assets and expected to be recognized in net periodic pension cost during the year ending September 30, 2012, are $219,477 and $3,070,000 respectively. (a) Plan Assets The primary investment objective of SJHSRI defined benefit pension plan is to provide pension benefits for its members and their beneficiaries by ensuring a sufficient pool of assets to meet the Plan s current and future benefit obligations. These funds are managed as permanent funds with disciplined longer-term investment objectives and strategies designed to meet cash flow requirements of the plan. Management of the assets is designed to maximize total return while preserving the capital values of the fund, protecting the fund from inflation, and provide liquidity as needed for plan benefits. The objective is to provide a rate of return that meets inflation, plus 5.0%, over a long-term horizon. The Plan aims to diversify its holdings among sectors, industries and companies. A periodic review is performed of the Plan s investment in various asset classes. The current asset allocation target is 26% U.S. stocks, 24% international stocks, 3% emerging markets, 21% fixed income, 20% hedge funds, and 6% real assets. Plan asset allocations at, by asset category are as follows: Plan assets at September U.S. stocks 26% 36% International stocks Emerging markets 16 Fixed income Hedge funds 21 Real assets 6 Total 100% 100% 22 (Continued)

25 The following tables summarize SJHSRI investments in the Plan by major category in the fair value hierarchy as of, as well as related strategy, liquidity and funding commitments: September 30, 2011 Redemption or liquidation Level 1 Level 2 Level 3 Total Period Days notice Cash and cash equivalents $ 103, ,481 Daily None Money market funds 545, ,449 Daily None Mutual funds: Domestic equities 11,969,151 11,969,151 Daily None Domestic equities 2,067,376 2,067,376 Daily 2 Domestic equities 6,912,470 6,912,470 Quarterly 60 Emerging market debt 2,627,951 2,627,951 Daily None Emerging market equities 3,105,740 3,105,740 Monthly 15 (2) Fixed income 15,715,259 15,715,259 Daily None Fixed income 2,419,057 2,419,057 Daily 10 (1) International equities 19,070,190 19,070,190 Daily None Hedge funds: Multi-strategy hedge funds 4,432,568 4,432,568 Quarterly 90 Multi-strategy hedge funds 6,815,849 6,815,849 Quarterly (3) 100 Multi-strategy hedge funds 6,717,280 6,717,280 Illiquid (4) 95 Total $ 50,031,481 14,504,643 17,965,697 82,501,821 (1) Days notice is 10 business days (2) Days notice is by the 15th of the prior month (3) Redemptions may be limited to 25% of the fund s net assets or shares in each series or class (4) Illiquid; Annually after initial two-year lock-ups end on September 30, 2012, June 30, 2013, and September 30, (Continued)