The John T. Mather Memorial Hospital of Port Jefferson, New York, Inc.

The John T. Mather Memorial Hospital of Port Jefferson, New York, Inc. Consolidated Financial Statements

Table of Contents Page Independent Auditors Report 1 Financial Statements Consolidated Balance Sheet 3 Consolidated Statement of Operations 4 Consolidated Statement of Changes in Net Assets 5 Consolidated Statement of Cash Flows 6 7

Baker Tilly Virchow Krause, LLP 100 Walnut Ave, Ste 200 Clark, NJ 07066-1255 tel 732 388 5210 tel 800 267 9405 fax 888 264 9617 bakertilly.com Independent Auditors Report Board of Directors The John T. Mather Memorial Hospital of Port Jefferson, New York, Inc.: We have audited the accompanying consolidated financial statements of the John T. Mather Memorial Hospital of Port Jefferson, New York, Inc. (the Hospital ), which comprise the consolidated balance sheet as of, and the related consolidated statement of operations, change in net assets, and cash flow for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risks assessments, the auditor considers internal control relevant to the Hospital s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Hospital s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 An Affirmative Action Equal Opportunity Employer

Opinion In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of The John T. Mather Memorial Hospital of Port Jefferson, New York, Inc. as of, and the results of its operations, changes in net assets, and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. New York, New York May 1, 2015 2

Consolidated Balance Sheet Assets Current Assets Cash and cash equivalents $ 13,133,527 $ 10,186,160 Investments 31,444,081 34,014,203 Patient accounts receivable (net of estimated allowance for doubtful accounts of $17,040,000 in 2014 and $17,542,000 in 2013) 39,321,963 37,894,858 Inventory 7,888,417 6,246,769 Prepaid expenses and other current assets 4,111,085 3,750,106 Total current assets 95,899,073 92,092,096 Noncurrent Assets Assets whose use is limited 30,464,739 42,360,983 Property and equipment, net 88,801,619 75,423,732 Interest in net assets of JTM Health Facilities Foundation, Inc. 4,686,903 3,306,850 Insurance claims receivable 15,940,215 13,892,325 Other assets, net 4,371,930 4,313,576 Total assets $ 240,164,479 $ 231,389,562 Liabilities and Net Assets Current Liabilities Current portion of long-term debt $ 3,286,935 $ 2,069,821 Accounts payable 18,476,563 14,004,670 Accrued expenses and other liabilities 7,052,295 4,696,201 Accrued salaries, vacation, and other benefits 8,903,030 13,353,747 Accrued pension liabilities 6,969,569 - Estimated retroactive payables to third parties, net 2,725,415 4,605,376 Total current liabilities 47,413,807 38,729,815 Long-Term Debt Bonds payable, net of current portion 37,220,000 39,465,000 Capital leases, net of current portion 5,173,578 48,782 Notes payable, net of current portion 293,129 198,544 Line of credit 1,000,000 500,000 Other Liabilities Estimated malpractice liability 19,729,000 19,547,000 Accrued pension liabilities, net of current portion 53,851,653 31,663,759 Other 9,540,756 7,663,219 Total liabilities 174,221,923 137,816,119 Net Assets Unrestricted 59,390,512 88,219,290 Temporarily restricted 6,528,712 5,330,821 Permanently restricted 23,332 23,332 Total net assets 65,942,556 93,573,443 Total liabilities and net assets $ 240,164,479 $ 231,389,562 See notes to consolidated financial statements 3

Consolidated Statement of Operations Years Ended Operating Revenues Patient service revenue $ 290,074,890 $ 272,138,660 Provision for bad debts (3,694,345) (3,729,812) Net patient service revenue 286,380,545 268,408,848 Other revenue 5,959,363 8,291,161 Total operating revenues 292,339,908 276,700,009 Operating Expenses Salaries 145,039,289 140,495,454 Employee benefits 38,747,736 32,167,820 Supplies and other expenses 92,257,469 83,626,551 Depreciation and amortization 15,129,456 14,057,308 Interest (net of capitalized interest of $1,295,706 in 2014 and $228,200 in 2013) 786,894 702,250 Total operating expenses 291,960,844 271,049,383 Income from operations 379,064 5,650,626 Nonoperating Activities Investment income, net 258,354 290,436 Contributions, bequests, and grants 154,530 69,761 Loss from pension settlements (2,133,717) - Change in fair value of interest swap rate agreement (1,372,442) - Other 112,692 38,115 Net nonoperating activities (2,980,583) 398,312 (Deficiency) excess of revenues and gains over expenses (2,601,519) 6,048,938 Change in Net Unrealized Gains (Losses) on Investments on Other-Than-Trading Securities 440,527 (63,763) Change in Fair Value of Interest Rate Swap Agreement (239,745) 41,786 Net Assets Released from Restrictions for Capital Asset Acquisitions 212,818 119,401 Pension-Related Changes Other than Net Periodic Pension Cost (26,687,839) 51,699,989 Transfer from Affiliates 46,980 138,704 Change in unrestricted net assets $ (28,828,778) $ 57,985,055 See notes to consoldiated financial statements 4

Consolidated Statement of Changes in Net Assets Years Ended Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Total Balance, December 31, 2012 $ 30,234,235 $ 2,747,536 $ 23,332 $ 33,005,103 Excess of revenues and gains over expenses 6,048,938 - - 6,048,938 Change in net unrealized losses on investments in other-than-trading securities (63,763) - - (63,763) Change in fair value of interest rate swap agreement 41,786 - - 41,786 Contributions - 98,929-98,929 Increase in interest in net assets of JTM Health Facilities Foundation, Inc. - 2,633,733-2,633,733 Net assets released from restrictions: Capital asset acquisitions 119,401 (119,401) - - Operations - (29,976) - (29,976) Pension-related changes other than net periodic pension cost 51,699,989 - - 51,699,989 Transfers from affiliates 138,704 - - 138,704 Total change in net assets 57,985,055 2,583,285-60,568,340 Balance, December 31, 2013 88,219,290 5,330,821 23,332 93,573,443 Deficiency of revenues and gains over expenses (2,601,519) - - (2,601,519) Change in net unrealized gains on investments in other-than-trading securities 440,527 - - 440,527 Change in fair value of interest rate swap agreement (239,745) - - (239,745) Contributions - 96,805-96,805 Increase in interest in net assets of JTM Health Facilities Foundation, Inc. - 1,380,053-1,380,053 Net assets released from restrictions: Capital asset acquisitions 212,818 (212,818) - - Operations - (66,149) - (66,149) Pension-related changes other than net periodic pension cost (26,687,839) - - (26,687,839) Transfers from affiliates 46,980 - - 46,980 Total change in net assets (28,828,778) 1,197,891 - (27,630,887) Balance, December 31, 2014 $ 59,390,512 $ 6,528,712 $ 23,332 $ 65,942,556 See notes to consolidated financial statements 5

Consolidated Statement of Cash Flows Years Ended Cash Flows from Operating Activities Total change in net assets $ (27,630,887) $ 60,568,340 Adjustments to reconcile total change in net assets to net cash provided by operating activities: Pension-related changes other than net periodic pension cost 26,687,839 (51,699,989) Depreciation and amortization 15,151,599 14,079,748 Net loss on disposal of fixed assets 57,545 - Provision for bad debts 3,694,345 3,729,812 Transfers from affiliates (46,980) (138,704) Net realized and unrealized gains and losses on investments (724,729) (1,189,946) Increase in interest in net assets of JTM Health Facilities Foundation, Inc. (1,380,053) (2,633,733) Contributions and grants restricted for capital (96,805) (98,929) Changes in assets and liabilities: Patient account receivable (5,121,450) (2,240,814) Inventory, prepaid expenses, and other current assets (2,002,627) 1,498,161 Insurance claims receivable (2,047,890) (1,328,325) Other assets, net (58,354) (976,830) Accounts payable, accrued expenses, and other liabilities 6,827,987 (4,097,889) Accrued salaries, vacation, and other benefits (4,450,717) 1,043,794 Accrued pension liabilities 2,469,624 (8,942,934) Estimated retroactive payable to third parties, net (1,879,961) (571,703) Other liabilities 1,877,537 6,885,412 Estimated malpractice liability 182,000 315,000 Net cash provided by operating activities 11,508,023 14,200,471 Cash Flows from Investing Activities Purchases of property, plant, and equipment (22,110,315) (13,942,596) Net proceeds (purchases) of investments and assets limited or restricted to use 15,191,095 (14,141,148) Net cash used in investing activities (6,919,220) (28,083,744) Cash Flows from Financing Activities Principal payments on bonds payable (1,845,000) (1,795,000) Principal proceeds on bonds payable - 23,000,000 Principal payments on notes payable (208,509) (121,330) Principal proceeds on notes payable 260,274 225,000 Principal payments on capital leases (491,986) (108,939) Proceeds from contributions and grants restricted for capital 96,805 98,929 Transfers from affiliates 46,980 138,704 Net proceeds (payments) on line of credit 500,000 (4,250,000) Net cash (used in) provided by financing activities (1,641,436) 17,187,364 Net increase in cash and cash equivalents 2,947,367 3,304,091 Cash and Cash Equivalents, Beginning 10,186,160 6,882,069 Cash and Cash Equivalents, Ending $ 13,133,527 $ 10,186,160 Supplemental Disclosure of Cash Flow Information Cash paid during year for interest $ 2,089,546 $ 889,150 Capital leases incurred $ 6,476,716 $ 33,370 See notes to consolidated financial statements 6

1. Organization and Summary of Significant Accounting Policies Organization The John T. Mather Memorial Hospital of Port Jefferson, New York, Inc. ( JTMMH ) is a notfor-profit acute care hospital that provides inpatient, ambulatory, psychiatric, preventive, and emergency medical care to the community. The Board of Directors (the "Board") of JTMMH is the same as that of JTMMH s parent organization, Mather Health System, Inc. The JTM Health Facilities Foundation, Inc. (the "Foundation") and Mather Management System, Inc. have separate and distinct boards of directors. Mather Health System, Inc. is the sole member of JTMMH and the Foundation. The Foundation is authorized by JTMMH to solicit contributions on its behalf. The Foundation may also solicit contributions for other not-for-profit organizations in its general appeal for contributions to support the community s providers of not-for-profit services within the community; however, it has historically raised funds primarily for JTMMH. In the absence of donor restrictions, the Foundation has discretionary control over the amounts, timing, and use of its contributions received. Effective April 2009, JTMMH created a subsidiary called Harbor View Medical Services, P.C ( Harbor View ). JTMMH is the sole member of Harbor View. The primary purpose of Harbor View is to engage in physician practice acquisition and employment activities. Effective May 2000, Mather Health System, Inc. became the sole member of the Island Nursing and Rehabilitation Center, Inc. (the "Nursing Home"), which became operational in November 2001. Effective January 2010, Mather Health System, Inc. became the sole member of the Jefferson Ferry Continuing Care Retirement Community ("Jefferson Ferry"). Principles of Consolidation The consolidated financial statements include the accounts of JTMMH and Harbor View (collectively, the Hospital ). All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of the 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 and liabilities, including estimated allowance for doubtful accounts, estimated retroactive payables to thirdparties, estimated worker's compensation liabilities and malpractice insurance liabilities, estimated medical and dental claims liability and accrued pension liability, and the fair value of the interest rate swap liability. Estimates also affect the reported amounts of revenue and expenses during the reporting period. There is at least a reasonable possibility that certain estimates will change by material amounts in the near term. Actual results could differ from those estimates. 7

Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with original maturity dates of less than three months from the date purchased. At, the Hospital had cash balances in financial institutions that exceeded federal depository insurance limits. Management believes that credit risk related to these deposits is minimal. Investments and Investment Income Investments consist of equities, corporate obligations, U.S. government obligations, certificates of deposits, and annuities with maturity dates of greater than three months from the date purchased. Investments in debt securities and equity securities with readily determinable fair values are reported at fair value. Donated investments are stated at fair value at the date of the gift. Investment income and gains and losses from some board-designated investments are reported as nonoperating gains, net. Unrealized gains and losses on investments are excluded from the (deficiency) excess of revenue and gains over expenses, unless the investments are trading securities. A decline in the fair value of any other-than-trading security below cost that is deemed to be other than temporary, results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. There were no impairments in 2014 and 2013. Assets Whose Use is Limited Assets whose use is limited include cash and investments set aside by the Board over which the Board retains control and may, at its discretion, subsequently use for other purposes and include assets held by trustees under bond indenture, self-insurance trust agreements, assets set aside for deferred compensation liabilities, and temporarily and permanently restricted assets. Patient Accounts Receivable/Allowance for Doubtful Accounts Patient accounts receivable are recorded at the reimbursed or contracted amount and do not bear interest. The allowance for doubtful accounts is the Hospital's best estimate of the amount of probable credit losses in the Hospital's existing accounts receivable. The Hospital determines the allowance based on historical write-off experience and other factors. The Hospital reviews its allowance for doubtful accounts periodically. Past-due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Hospital does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant write-offs from third-party payors. Inventory Inventories of supplies are stated at the lower of cost, determined on the first-in, first-out method, or market. 8

Property and Equipment Property and equipment are stated at cost, less accumulated depreciation, except for donated assets, which are recorded at fair value at the date of donation. Equipment under capitalized lease obligations is recorded at the present value at the inception of the lease and is amortized utilizing the straight-line method over the lesser of the lease term of the estimated useful life of the equipment. Depreciation of assets is computed using the straight-line method using the following estimated useful lives: Years Land improvements 5-25 Building and improvements 15-40 Major movable equipment 2-20 The Hospital continually evaluates whether any circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Hospital uses an estimate of the related discounted operating income over the remaining life of the long-lived asset in measuring whether the long-lived asset is recoverable. Interest in Net Assets of JTM Health Facilities Foundation, Inc. Accounting standards generally accepted in the United States of America establish guidelines for transactions in which an entity, the donor, makes a contribution by transferring assets to a not-for-profit organization or charitable trust, the recipient organization, that accepts the assets from the donor and agrees to use those assets on behalf of or transfer those assets, the return on those assets, or both, to another entity, the beneficiary, that is specified by the donor. The Hospital recognizes its interest in the net assets of the Foundation and recognizes periodic changes in such interest in its consolidated statement of changes in net assets, as appropriate. Estimated Workers Compensation Costs The Hospital is self-insured for workers' compensation costs. The provisions for estimated workers' compensation claims include estimates of the ultimate costs for both reported claims and claims incurred but not reported and are included in other liabilities in the accompanying consolidated balance sheet. Employee Medical and Dental Benefits The Hospital is self-insured for the majority portion of employee medical benefits and for all of the employee dental benefits. Medical insurance includes a stop-loss on the selfinsurance of $275,000 per employee. The provisions for estimated medical and dental claims include estimates for both reported claims and estimates of the ultimate cost of claims incurred but not reported. As of, the Hospital accrued approximately $1,405,000 and $1,249,000, respectively, which is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet. 9

Estimated Malpractice Costs The Hospital's policy is to accrue as of the end of each year an undiscounted estimate of the ultimate cost of malpractice claims incurred but not reported under claims-made insurance policy and potential liability for its self-insured layer of excess coverage. The Hospital recognizes an insurance receivable at the same time that it recognizes the liability, measured on the same basis as the liability, subject to the need for a valuation allowance for uncollectible amounts. Net Assets Temporarily restricted net assets are those whose use by the Hospital, have been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Hospital in perpetuity, the income from which is expendable in accordance with the donor's restriction, if any. Resources arising from the results of operations or assets set aside by the Board are considered to be unrestricted. Revenue Recognition Net operating revenue is recognized in the period services are performed and consists primarily of net patient service revenue that is reported at estimated net realizable amounts from patients, third-party payors, and others for services rendered and include estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Charity Care As a matter of policy, the Hospital provides a significant amount of partially or totally uncompensated patient care to patients who are unable to compensate the Hospital for their treatment either through third-party coverage or their own resources. Patients who meet certain criteria under the Hospital's charity care policy are provided care without charge or at amounts less than established rates. Because charity care amounts are not expected to be paid, they are not reported as revenue. Performance Indicator For purposes of display, transactions deemed by management to be ongoing, major, or central to the provision of healthcare services are reported as revenue and expenses within income from operations. Peripheral or incidental transactions are reported as nonoperating activities. The performance indicator is the (deficiency) excess of revenues and gains over expenses and includes nonoperating activities. Changes in unrestricted net assets that are excluded from (deficiency) excess of revenues and gains over expenses, consistent with industry practice, include changes in unrealized (losses) gains on investments in other-than-trading securities, pension-related changes other than net periodic pension costs, permanent transfers of assets to and from affiliates for other than goods and services, contributions of long-lived assets (including assets acquired using contributions that by donor restriction were to be used for the purposes of acquiring such assets), and changes in fair value of interest rate swap agreement. 10

Income Taxes JTMMH qualifies as a tax-exempt organization under Internal Revenue Code Section 501(c)(3), and its income is not subject to federal or state income taxes. Harbor View qualifies as a tax-exempt organization under Internal Revenue Code Section 509(a)(3), and its income is not subject to federal or state income taxes. There are certain transactions that could be deemed "Unrelated Business Income" and would result in a tax liability. The Hospital recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Management has reviewed the transactions to estimate potential tax liabilities. It is management's estimation that there are no material tax liabilities which need to be recorded. Management annually reviews its tax provisions and has determined that there are no material uncertain tax positions that require recognition in the consolidated financial statements. JTMMH s federal returns for fiscal years after 2010 remain subject to examination by the Internal Revenue Service. Harbor View does not perform any activities that would be subject to unrelated business income tax; therefore, it has not filed Form 990-T, Exempt Organization Business Tax Return. Reclassifications Certain reclassifications have been made to the 2013 consolidated financial statements in order to conform to the 2014 presentation. New Accounting Pronouncement In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ( ASU ) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supercedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Under the requirements of ASU No. 2014-09, the core principle is that entities should recognize revenue to depict the transfer of promised goods or services to customers (patients) in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Hospital will be required to retrospectively adopt the guidance in ASU No. 2014-09 for years beginning after December 15, 2017. The Hospital has not yet determined the impact of adoption of ASU No. 2014-09 on its consolidated financial statements. 11

2. Accounts Receivable for Services and Net Patient Service Revenue Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under the provisions of case payment, cost reimbursement and other formulas. Fees for patient services not covered by payor reimbursement and insurance programs are recorded at the Hospital's established charges, or on a sliding scale dependent on the individual's ability to pay. Retroactive adjustments are accrued on an estimated basis in the period the related services are provided and adjusted in future periods as final settlements are determined. Patient service revenue, net of contractual allowance and discounts, but before the provision for bad debts, recognized in major payor sources is approximately as follows for the years ended : Third-party payor $ 281,108,000 $ 262,716,000 Self-pay 8,967,000 9,423,000 Reimbursement Total $ 290,075,000 $ 272,139,000 The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Medicare Under the Medicare program, the Hospital receives reimbursement under a prospective payment system ("PPS") for inpatient services. Under the Hospital inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient's assigned diagnosis-related group ("DRG"). When the estimated cost of treatment for certain patients is higher than the average, providers typically will receive additional "outlier" payments. Under the outpatient PPS, services are paid based on service groups called ambulatory payment classifications. The Hospital has recorded revenue related to Medicare outliers of approximately 1.69% and 1.72% of net patient service revenue for the years ended, respectively. Final settlements have been received for rate years through December 31, 2012. 12

Medicaid and Other Third-Party Payors The New York Health Care Reform Act of 1996 (the Act ), as periodically updated, governs payments to hospitals in New York State. The Act is subject to periodic renewal and is currently effective through March 31, 2017. Under the Act, Medicaid, workers' compensation, and no-fault payors pay rates are promulgated by the New York State Department of Health. Fixed payment amounts per inpatient discharge are established based on the patient's assigned case mix intensity, similar to a Medicare DRG. All other third-party payors, principally Blue Cross, other private insurance companies, Health Maintenance Organizations ( HMOs ), Preferred Provider Organizations ( PPOs ), and other managed care plans, negotiate payment rates directly with Long Island Health Network (note 16) on behalf of the Hospital. Such arrangements include DRG-based payment systems, per diems, case rates, and percentage of billed charges. If such rates are not negotiated, then the payors are billed at the Hospital's established charges. New York State regulations provide for the distribution of funds from an indigent care pool, which is intended to partially offset the cost of services provided to the uninsured. The funds are distributed to the hospitals based on each hospital's level of bad debts and charity care in relation to all other hospitals. For the years ended, the Hospital received distributions approximating $2,433,000 and $2,600,000, respectively, from the indigent care pool. Both federal and New York State regulations provide for certain adjustments to current and prior years' payment rates and indigent care pool distributions based on industry-wide and hospital-specific data. The Hospital has established estimates based on information presently available of the amounts due to or from Medicare, Medicaid, workers' compensation, and no-fault payors, and amounts due from the indigent care pool for such adjustments. Net patient service revenue for the years ended increased approximately $849,000 and $269,000, respectively, for settlements related to prior years and changes in estimates to reflect the most recent information available. Revenue from Medicare and Medicaid programs accounted for approximately 40% and 5%, respectively, of the Hospital's net patient service revenue for the year ended December 31, 2014 and 41% and 4%, respectively, for the year ended December 31, 2013. The federal government and many states have aggressively increased enforcement under Medicare and Medicaid antifraud and abuse legislation. Recent federal initiatives have prompted a national review of federally funded healthcare programs. The Hospital has a compliance program to monitor conformance with applicable laws and regulations, but the possibility of future government review and interpretation exists. The Hospital believes that it is in compliance, in all material respects, with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. Noncompliance with such laws and regulations could result in repayments of amounts improperly reimbursed, substantial monetary fines, civil and criminal penalties, and exclusion from the Medicare and Medicaid programs. 13

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the Health Reform Law ), which was signed into law on March 23, 2010, will change how healthcare services are covered, delivered, and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital ( DSH ) payments, and the establishment of programs in which reimbursement is tied to quality and patient satisfaction. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains certain provisions intended to strengthen fraud and abuse enforcement. Because of the many variables involved with the Health Reform Law, the Hospital is unable to predict the net effect on the Hospital of the expected increases in insured individuals using its facilities, the reduction in Medicare spending and reductions in Medicare and Medicaid DSH funding, and numerous other provisions in the law that may affect the Hospital. The American Recovery and Reinvestment Act of 2009 included provisions for implementing health information technology under the Health Information Technology for Economic and Clinical Health Act ( HITECH ). These provisions were designed to increase the use of electronic health records ( EHR ) technology and establish the requirements for a Medicare and Medicaid incentive payments program beginning in 2012 for eligible hospitals and providers that adopt and meaningfully use certified EHR technology. Eligibility for annual Medicare incentive payments is dependent on providers demonstrating meaningful use of EHR technology in each period over a four-year period. Initial incentive payments are available to providers that adopt, implement, or upgrade certified EHR technology; but providers must demonstrate meaningful use of such technology in subsequent years to qualify for additional incentive payments. The Hospital received payments of approximately $1,264,000 and $2,117,000 in Medicare incentive payments for meeting the meaningful use criteria which are included as other revenue in the accompanying consolidated statement of operations for the years ended, respectively. The Hospital expects to meet the meaningful use criteria again in 2015 and will receive additional Medicare incentive payments, however, will not recognize additional revenue until the criteria have been met in 2015. There are various proposals at the federal and New York State levels that could, among other things, reduce reimbursement rates, modify reimbursement methods, and increase managed care penetration, including Medicare and Medicaid. The ultimate outcome and effect on reimbursement of these proposals and other market changes cannot presently be determined. 14

Designed by New York State to seek a federal waiver for the expenditure of Medicaid funds, the Delivery System Reform Incentive Program ( DSRIP ) will allocate $6.42 billion dollars to health care providers in New York State to undertake system reform, clinical projects, and population health management. The purpose of DSRIP is to fundamentally restructure the health care delivery system by reinvesting in the Medicaid program, with the primary goal of reducing avoidable hospital use by 25% over five years. Incentive payments will be calculated based upon the progress of process milestones/metrics and outcome milestones/metrics over a five year period. In order to participate in DSRIP, providers are required to form collaborations called Performing Provider Systems ( PPS ) to execute DSRIP projects. The Hospital met the qualifications of a vital access provider and is currently participating in a Collaborative PPS. In December 2014, several PPSs submitted applications to the New York State Department of Health ( NYSDOH ) for participation in the State s DSRIP. The ultimate amount of funding cannot be determined at this time since it is dependent on certain regulatory approvals as well as the ability of the Hospital to meet certain program benchmarks and metrics over the life of the program. 3. Property and Equipment Property and equipment, at cost, and accumulated depreciation and amortization as of December 31 are as follows: Land $ 72,838 $ 72,838 Buildings and fixed equipment 134,242,511 132,981,363 Movable equipment 120,540,525 109,025,894 Leasehold improvements 3,133,071 528,676 Total 257,988,945 242,608,771 Less accumulated depreciation and amortization (183,433,185) (170,326,026) Total 74,555,760 72,282,745 Construction in progress 14,245,859 3,140,987 Total $ 88,801,619 $ 75,423,732 Construction in progress, at December 31, 2014, is primarily related to the 35 private bed project, which will be placed into service in 2015. Construction in progress at December 31, 2013, was primarily related to the campus expansion initiative that was put to use during 2014. 15

The Hospital is obligated under capital leases covering equipment that expire at various dates. At, the gross amounts of equipment and related accumulated amortization that are included in the above property and equipment amounts are recorded under capital leases as follows: Equipment $ 7,973,578 $ 332,638 Less accumulated amortization (818,508) (292,683) Total $ 7,155,070 $ 39,955 4. Line of Credit The Hospital has a line of credit with a financial institution for $5,000,000, of which $1,000,000 and $500,000 was outstanding at, respectively. The line of credit bears interest at the one month LIBOR plus 2.25% and expires in November 2016. 5. Long-Term Debt 2012A Series Bonds Payable $ 16,465,000 $ 18,310,000 2013B Series Bonds Payable 23,000,000 23,000,000 Capital lease obligations 6,134,633 149,903 Notes payable 374,009 322,244 Total 45,973,642 41,782,147 Less current maturities 3,286,935 2,069,821 Total $ 42,686,707 $ 39,712,326 2012A Series Bonds Payable On November 30, 2012, the Hospital issued $20,105,000 Town of Brookhaven Local Development Corporation, Revenue Bonds, Series 2012A ( Series 2012A Bonds ). The Series 2012A Bonds were not sold as part of a public offering. The Local Development Corporation ( LDC ) agreed to place all of the bonds only with a financial institution. The proceeds were used to redeem the balance of outstanding 1996 Series Insured Revenue Bonds issued by DASNY, payoff the remaining balances of two capitalized lease agreements, and pay certain costs of issuance. The Series 2012A Bonds bear interest at a variable rate (calculated at 68% of LIBOR plus 2.25%) and are due serially through December 1, 2022. The bonds, which are subject to various optional and mandatory redemption provisions, are secured by the Hospital's property, except for the Medical Arts Building. The loan agreement also provides for the maintenance of a debt service coverage ratio, a liquidity test and other restrictions. 16

In connection with the issuance of the Series 2012A Bonds, the Hospital entered into an interest rate swap agreement with a notional amount of $20,105,000 to mitigate the risk of increases in interest rates associated with the series 2012A Bonds. Under the terms of the agreement, the Hospital pays a fixed rate of 2.43% determined at inception, and receives 68% of the one month LIBOR plus 168 basis points on the notional principal amount. The fair value of the interest rate swap was an asset of $154,451 and $394,196, respectively and is included in other liabilities in the accompanying consolidated balance sheet at, respectively. Management has determined that the swap qualifies as an effective hedge; therefore, the change in fair value of the interest rate swap is included in other changes to unrestricted net assets in the accompanying consolidated statement of operations. 2013B Series Bonds Payable On August 1, 2013, the Hospital issued $23,000,000 Town of Brookhaven Local Development Corporation, Revenue Bonds, Series 2013B ( Series 2013B Bonds ). The Series 2013B Bonds were not sold as part of a public offering. The LDC agreed to place all of the bonds only with a financial institution. The proceeds were used to construct and equip a new two-story addition to house a new 35-bed medical/surgical unit, to renovate and expand administrative and conference room space to support the establishment of a new residency program, to fund improvements to the Hospital s heating, cooling, and energy infrastructure, and pay certain costs of issuance. The Series 2013B Bonds bear interest at a variable rate (calculated at 68% of LIBOR plus 2.25%) and are due serially through August 1, 2043. The bonds, which are subject to various optional and mandatory redemption provisions, are secured by the Hospital's property, except for the Medical Arts Building. The loan agreement also provides for the maintenance of a debt service coverage ratio, a liquidity test, and other restrictions. In connection with the issuance of the Series 2013B Bonds, the Hospital entered into an interest rate swap agreement with a notional amount of $23,000,000 to mitigate the risk of increases in interest rates associated with the Series 2013B Bonds. Under the terms of the agreement, the Hospital pays a fixed rate of 4.276% determined at inception, and receives 68% of the one month LIBOR plus 168 basis points on the notional principal amount. The fair value of the interest rate swap was a liability of $1,737,337 in 2014 and $364,895 in 2013 and is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2014. Management has determined that the swap does not qualify as an effective hedge; therefore, the change in fair value of the interest rate swap is included in nonoperating activities in the accompanying consolidated statement of operations. Other Long-Term Debt The Hospital has entered into four capital lease agreements and three notes payable for various equipment, which are collateralized under the agreements. Payments under the capital lease and note payable agreements are payable in monthly installments through the term of the respective agreement. 17

The following is a schedule of the scheduled principal payments for the Series 2012A Bonds, Series 2013B Bonds, and notes payable due during the next five years ending December 31 and thereafter: Year ending December 31: 2015 $ 2,325,880 2016 2,450,565 2017 2,471,753 2018 2,539,766 2019 2,616,424 Thereafter 27,434,621 Total $ 39,839,009 The following is a schedule of the future minimum lease payments under the capital lease agreements due during the next five years ending December 31 and thereafter: Year ending December 31: 2015 $ 1,149,957 2016 1,113,777 2017 1,113,777 2018 1,113,777 2019 1,120,961 Thereafter 1,184,231 Total payments 6,796,480 Less interest 661,847 Net minimum lease payments $ 6,134,633 6. Operating Leases Rent and equipment lease expense amounted to approximately $3,577,000 and $2,893,000 for the years ended, respectively. The following is a schedule of future minimum lease payments for rent and equipment under non-cancelable operating leases as December 31: Year ending December 31: 2015 $ 3,565,123 2016 3,448,158 2017 ` 2,745,839 2018 2,260,795 2019 2,084,030 Thereafter 4,825,815 Total $ 18,929,760 18

7. Assets Whose Use is Limited Assets whose use is limited and investments are stated at fair value and consist of the following at : Investments Internally Designated and Other Construction Bond Proceeds Workers' Comp Assets 2014 Malpractice Insurance Assets Deferred Compensation Assets Permanently Restricted Assets Total Cash and cash equivalents $ 4,992,840 $ 5,283,067 $ 3,222,016 $ 22,595 $ 2,599 $ 23,445 $ 13,546,562 U.S. Treasury notes and bills 3,787,779-137,124 447,017 - - 4,371,920 U.S. Government - obligations 5,439,394 101,352 682,289 - - 6,223,035 Corporate bonds 12,107,196-59,619 1,897,996 372,526-14,437,337 Corporate stocks 9,491,417 - - 2,808,091 605,941-12,905,449 Certificates of - deposit 1,181,981 5,296,640 - - - 6,478,621 $ 37,000,607 $ 5,283,067 $ 8,816,751 $ 5,857,988 $ 981,066 $ 23,445 57,962,924 Less amounts reported as current investments 27,498,185 $ 30,464,739 Investments Internally Designated and Other Construction Bond Proceeds Workers' Comp Assets 2013 Malpractice Insurance Assets Deferred Compensation Assets Permanently Restricted Assets Total Cash and cash equivalents $ 4,868,324 $ 17,269,060 $ 2,387,848 $ 15,901 $ 3,016 $ 23,423 $ 24,567,572 U.S. Treasury notes and bills 5,277,517-131,621 433,308 - - 5,842,446 U.S. Government obligations 6,017,154-97,285 917,593 - - 7,032,032 Corporate bonds 11,021,540-57,227 1,992,318 360,885-13,431,970 Corporate stocks 9,786,260 - - 3,160,888 590,781-13,537,929 Certificates of deposit 1,680,704-4,725,027 - - - 6,405,731 $ 38,651,499 $ 17,269,060 $ 7,399,008 $ 6,520,008 $ 954,682 $ 23,423 70,817,680 Less amounts reported as current investments 28,456,697 $ 42,360,983 19

Current Investments Current investments are stated at fair value except for annuities, which are stated at values reported by the trustee, and comprise the following at December 31: Non-pooled investments: Cash and equivalents $ 28,207 $ 26,070 U.S. Treasury notes and bills 1,033,581 1,222,602 U.S. Government obligations 696,684 1,152,878 Corporate bonds 1,054,602 1,502,360 Annuities 1,132,822 1,099,826 Certificate of deposit - 553,770 Total 3,945,896 5,557,506 Pooled investments reported as current 27,498,185 28,456,697 Total current investments $ 31,444,081 $ 34,014,203 Investment returns are included in the accompanying consolidated statements of operations and changes in net assets for the years ended December 31 as follows: Investment income included in other revenue $ 1,173,669 $ 2,390,547 Non-operating investment income, net 258,354 290,436 Other changes in net assets 440,527 (63,763) Total $ 1,872,550 $ 2,617,220 Interest and dividends 1,147,821 1,427,274 Unrealized gains (losses) 440,527 (63,763) Realized gains 284,202 1,253,709 Total $ 1,872,550 $ 2,617,220 20

8. Fair Value Measurement Assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 - Defined as observable inputs such as quoted prices in active markets. Level 2 - Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 Would be defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following discussion describes the valuation methodologies used for financial assets measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used. Care should be exercised in deriving conclusions about the Hospital's business, its value, or financial position based on the fair value information assets presented below. Fair value estimates are made at a specific point in time, determined by the Hospital, based on available market information and judgments about the financial asset, including estimates of timing, and the credit standing of the issuer. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less at date of purchase. The carrying amount approximates fair value due to the short-term nature of these investments. Certificates of deposit, government mortgage-backed securities, U.S Treasury notes and bills, and corporate bonds are valued based on quoted market prices, if available, or estimated using quoted market prices of similar securities. Mutual funds are valued at the net asset value ( NAV ) of shares held by the Hospital at year end. Corporate stocks are valued based on quoted market prices. 21

The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Long-Term Debt The fair value of the Hospital's bonds payable as of is approximately $39,465,000 and $41,310,000, respectively, and is estimated based on quoted market prices of similar securities. The fair value of the Hospital's other long-term debt approximate the carrying amount. Interest Rate Swaps The fair value of the Hospital's interest rate swaps as of relating to the interest rate swap in connection with the issuance of the Series 2012A Bonds is an asset of $154,451 and $394,196, respectively, and relating to the interest rate swap in connection with the issuance of the Series 2013B Bonds is a liability of $1,737,337 and $364,895, respectively, and is estimated based on a model utilizing current interest rates and other factors that would be considered Level 3 inputs in the fair value hierarchy. Changes to the interest rate swaps in 2014 and 2013 are as follows: Beginning balance $ 29,301 $ (12,485) Change in fair value of interest rate swap agreement (1,612,187) 41,786 Ending balance $ (1,582,886) $ 29,301 22

The following tables present the Hospital's fair value hierarchy for assets measured at fair value on recurring basis as of. At, there were no Level 3 assets in the Hospital's total investment portfolio measured at fair value. 23 2014 Level 1 Level 2 Total Assets: Cash and cash equivalents $ 13,133,527 $ - $ 13,133,527 Investments and assets whose use is limited: Cash and cash equivalents 13,574,769-13,574,769 U.S. Treasury notes and bills 5,405,501-5,405,501 Certificates of deposits - 6,478,621 6,478,621 Corporate stocks 605,941-605,941 Mutual funds - corporate stocks 12,299,508-12,299,508 Mutual funds - corporate bonds 13,976,698-13,976,698 Mutual funds - government mortgage-backed securities 5,818,738-5,818,738 Annuities - 1,132,822 1,132,822 Corporate bonds - 1,515,241 1,515,241 Government mortgage-backed securities 1,100,981-1,100,981 Total investments and assets whose use is limited $ 52,782,136 $ 9,126,684 $ 61,908,820 2013 Level 1 Level 2 Total Assets: Cash and cash equivalents $ 10,186,160 $ - $ 10,186,160 Investments and assets whose use is limited: Cash and cash equivalents 24,576,819-24,576,819 U.S. Treasury notes and bills 7,065,047-7,065,047 Certificates of deposits - 6,959,501 6,959,501 Corporate stocks 590,781-590,781 Mutual funds - corporate stocks 12,947,148-12,947,148 Mutual funds - corporate bonds 12,375,460-12,375,460 Mutual funds - government mortgage-backed securities 6,398,113-6,398,113 Annuities - 1,099,826 1,099,826 Corporate bonds - 2,558,870 2,558,870 Government mortgage-backed securities Other 1,786,798 16,823 - - 1,786,798 16,823 Total investments and assets whose use is limited $ 65,756,989 $ 10,618,197 $ 76,375,186