Eisenhower Medical Center and Affiliates Years Ended June 30, 2015 and 2014 With Report of Independent Auditors

C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION Eisenhower Medical Center and Affiliates Years Ended June 30, 2015 and 2014 With Report of Independent Auditors Ernst & Young LLP

Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2015 and 2014 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations...4 Consolidated Statements of Changes in Net Assets...5 Consolidated Statements of Cash Flows...6 Notes to Consolidated Financial Statements...7 Supplementary Information Consolidating Balance Sheet...40 Consolidating Statement of Operations...42 1505-1529731

Ernst & Young LLP Suite 1700 18101 Von Karman Avenue Irvine, CA 92612 Tel: +1 949 794 2300 Fax: +1 949 437 0590 ey.com The Board of Directors Eisenhower Medical Center and Affiliates Report of Independent Auditors We have audited the accompanying consolidated financial statements of Eisenhower Medical Center and Affiliates, which comprise the consolidated balance sheets as of June 30, 2015 and 2014, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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 risk assessments, the auditor considers internal control relevant to the entity 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 entity 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. 1505-1529731 1 A member firm of Ernst & Young Global Limited

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eisenhower Medical Center and Affiliates at June 30, 2015 and 2014, and the consolidated results of their operations, changes in net assets and their consolidated cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating financial statements are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. October 27, 2015 ey 1505-1529731 2 A member firm of Ernst & Young Global Limited

Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents 131,810 June 30, 2015 2014 $ $ 107,248 Accounts receivable, less allowance for doubtful accounts of $14,372 in 2015 and $16,358 in 2014 91,638 81,251 Donations and bequests pledged, net 10,439 5,529 Prepaid expenses 5,119 7,889 Other 21,992 16,618 Total current assets 260,998 218,535 Assets limited to use: Board-designated 59,554 64,165 Held by trustee 8,029 8,027 Other 1,204 1,139 68,787 73,331 Charitable remainder trusts 17,308 18,387 Investments 73,460 63,720 Property and equipment, net 568,491 587,984 Donations and bequests pledged, net 30,485 28,585 Other 47,169 45,952 Total assets $ 1,066,698 $ 1,036,494 Liabilities and net assets Current liabilities: Accounts payable and accrued expenses $ 76,751 $ 75,392 Current maturities of long-term debt 6,530 23,148 Deferred revenue 7,880 8,430 Total current liabilities 91,161 106,970 Long-term debt, less current maturities 399,874 388,729 Liabilities to annuitants and other beneficiaries 8,275 8,980 Deferred revenue 2,500 2,700 Other long-term liabilities 92,846 62,997 Total liabilities 594,656 570,376 Net assets: Unrestricted 352,496 358,632 Temporarily restricted 93,574 81,253 Permanently restricted 25,972 26,233 Total net assets 472,042 466,118 Total liabilities and net assets $ 1,066,698 $ 1,036,494 See accompanying notes. 1505-1529731 3

Consolidated Statements of Operations Years Ended June 30, 2015 2014 Revenue: Patient service revenue $ 583,882 $ 512,401 Less provision for doubtful accounts (11,828) (19,112) Net patient service revenue, before California Hospital Quality Assurance (CHQA) supplemental revenue 572,054 493,289 CHQA supplemental revenue 13,881 2,526 Total net patient service revenue 585,935 495,815 Contributions 6,926 7,477 CHQA pledge contributions 25,022 4,250 Net assets released from restrictions used for operations 9,071 12,686 Investment income 2,141 5,831 Other 19,970 22,137 Total revenue 649,065 548,196 Expenses: Salaries and benefits 266,448 242,791 Supplies 109,991 97,196 Purchased services 120,797 113,460 Depreciation and amortization 46,228 53,477 Interest 20,847 20,927 CHQA fee 38,903 6,776 Other 28,110 23,582 Total expenses 631,324 558,209 Excess (deficiency) of revenue over expenses $ 17,741 $ (10,013) See accompanying notes. 1505-1529731 4

Consolidated Statements of Changes in Net Assets Years Ended June 30, 2015 2014 Unrestricted net assets: Excess (deficiency) of revenue over expenses $ 17,741 $ (10,013) Net assets released from restrictions used for purchases of property and equipment 3,392 1,477 Pension-related changes other than net periodic pension costs (27,269) 2,536 Decrease in unrestricted net assets (6,136) (6,000) Temporarily restricted net assets: Net assets released from restrictions used for operations (9,071) (12,686) Net assets released from restrictions used for purchases of property and equipment (3,392) (1,477) Contributions 22,884 34,619 Investment income 1,883 4,199 Change in value of charitable remainder trusts 17 1,526 Increase in temporarily restricted net assets 12,321 26,181 Permanently restricted net assets: Contributions 3 Other (343) Investment income 82 137 (Decrease) increase in permanently restricted net assets (261) 140 Increase in net assets 5,924 20,321 Net assets, beginning of the year 466,118 445,797 Net assets, end of the year $ 472,042 $ 466,118 See accompanying notes. 1505-1529731 5

Consolidated Statements of Cash Flows Years Ended June 30, 2015 2014 Operating activities Changes in net assets $ 5,924 $ 20,321 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation and amortization 46,228 53,477 Provision for doubtful accounts 11,828 19,112 Pension-related changes other than net periodic pension cost 27,269 2,536 Loss (gain) on disposal of property and equipment 811 (63) Change in value of charitable remainder trusts 1,079 1,526 Restricted contributions (22,541) (34,622) Change in net unrealized losses (gains) on investments 3,816 (321) Restricted investment income (1,965) (4,336) Changes in operating assets and liabilities: Accounts receivable (22,215) (26,828) Investments designated as trading (9,012) (1,711) Prepaid expenses 2,770 (2,586) Other assets (13,401) (10,210) Accounts payable and accrued expenses (157) (5,995) Other liabilities 1,124 (4,492) Net cash provided by operating activities 31,558 5,808 Investing activities Purchases of property and equipment, net (26,029) (20,163) Acquisitions Net cash used in investing activities (26,029) (20,163) Financing activities Principal payments on long-term debt (5,569) (5,466) Issuance of debt 17,773 Repayment of debt (17,677) Restricted contributions 22,541 34,622 Restricted investment income 1,965 4,336 Net cash provided by financing activities 19,033 33,492 Net increase in cash and cash equivalents 24,562 19,137 Cash and cash equivalents, beginning of year 107,248 88,111 Cash and cash equivalents, end of year $ 131,810 $ 107,248 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 20,847 $ 21,333 See accompanying notes. 1505-1529731 6

Notes to Consolidated Financial Statements June 30, 2015 1. Summary of Significant Accounting Policies Organization and Basis of Consolidation The accompanying consolidated financial statements of Eisenhower Medical Center and Affiliates (the Medical Center) include the accounts of the following affiliated entities: Eisenhower Medical Center (EMC) is an acute health care provider located in Rancho Mirage, California. EMC is a not-for-profit public benefit corporation under the laws of the state of California. Barbara Sinatra Children s Center at Eisenhower (BSCC) is a child abuse prevention and treatment center located in Rancho Mirage, California. BSCC is a not-for-profit public benefit corporation under the laws of the state of California. Annenberg Center for Health Sciences at Eisenhower (ACHS) is a not-for-profit conference and communications facility located in Rancho Mirage, California. Eisenhower Properties, LLC (EP LLC) is a limited liability company whose sole member is EMC. EP LLC owns a medical office building located adjacent to the EMC campus and leases this property to affiliates and to non-affiliated entities. All intercompany accounts and transactions have been eliminated in consolidation. EMC is the sole member of an obligated group under a master trust indenture related to the issuance of long-term debt (see Note 7) and is referred to as the EMC Hospital Obligated Group (EMC Obligated Group). Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant items subject to such estimates include valuation allowances for receivables and liabilities for self-insured programs. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1505-1529731 7

1. Summary of Significant Accounting Policies (continued) Net Patient Service Revenue The Medical Center has agreements with third-party payors that provide for payments at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported on the accrual basis in the period in which services are provided, net of third-party reductions related to contractual allowances for Medicare, Medi-Cal, managed care, and other programs. Contractual allowances include differences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas and contracts in effect. The administrative procedures related to the cost reimbursement programs in effect generally preclude final determination of amounts due to, or payable by, the Medical Center until cost reports are audited or otherwise reviewed and settled upon by the applicable administrative agencies. Normal estimation differences between final settlements and amounts accrued in previous years are reported as adjustments of the current year s net patient service revenue. The Medical Center is reimbursed for services provided to patients under certain programs administered by governmental agencies. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory actions including fines, penalties, and exclusion from the Medicare and Medi-Cal programs. The Medical Center believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. The Medical Center is reimbursed by Medicare and Medi-Cal at a tentative rate with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the fiscal intermediary. Estimated net third-party settlement receivable of $3,669,000 and $4,268,000 at June 30, 2015 and 2014, respectively, are included in other non-current assets in the consolidated balance sheets. Net patient service revenue increased by $2,200,000 and decreased by $177,000 in 2015 and 2014, respectively, as a result of cost report settlements and changes in estimates relating to open cost reports. In the Tax Relief and Health Care Act of 2006, Congress authorized the expansion of a recovery audit contractor (RAC) program to all 50 states by 2010 in an effort to identify overpayments and underpayments and to recoup overpayments made under Part A and Part B of Medicare. The Medical Center has established accruals considered to be adequate to address the exposure of 1505-1529731 8

1. Summary of Significant Accounting Policies (continued) future RAC findings with respect to claims for dates of service through June 30, 2015. Management believes that any difference between amounts accrued and the ultimate liability that could arise from the RAC audits would not materiality affect the Medical Center s consolidated financial position, results of operations or cash flows. During the year ended June 30, 2015, the Centers for Medicare and Medicaid Services (CMS) offered hospitals an opportunity to settle certain Medicare inpatient claims in the appeals process or within the timeframe to request an appeal. Generally, the one-time settlement offer applies to payment denials for inpatient services on the basis that the services were reasonable and necessary, but treatment as an inpatient was not. The Medical Center has accepted the settlement offer for eligible claims. The estimated cash value of the settlement is approximately $7,197,000 and is recorded within patient service revenue. Allowances for Doubtful Accounts Patient service revenue is reduced by the provision for doubtful accounts and accounts receivable are reduced by an allowance for doubtful accounts. These amounts are based on management s assessment of historical and expected net collections for each major payor source, considering business and economic conditions, trends in health care coverage, and other collection indicators. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. On the basis of historical experience, a significant portion of the Medical Center s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Medical Center records a significant provision for doubtful accounts in the period services are provided related to self-pay patients, including both uninsured patients and patients with deductible and copayment balances due for which third-party coverage exists for a portion of their balance. For receivables associated with patients who have third-party coverage, the Medical Center analyzes contractually due amounts and provides an allowance for doubtful accounts, if necessary. Accounts receivable are written off after collection efforts have been followed in accordance with the Medical Center s policies. Because the Medical Center recognizes significant amounts of patient service revenue at the time the services are rendered even though it does not assess the patient s ability to pay, the Medical Center presents the provision for doubtful accounts as a reduction to net patient service revenue. The Medical Center s allowance for doubtful accounts covered approximately 46% and 45% of self-pay patient accounts receivable as of June 30, 2015 and 2014, respectively. The Medical Center has not changed its charity care or uninsured discount policies during fiscal years 2015 or 2014. 1505-1529731 9

1. Summary of Significant Accounting Policies (continued) A summary of the Medical Center s allowance for doubtful accounts activity during the years ended June 30, 2015 and 2014, is as follows: 2015 2014 Beginning balance $ 16,358 $ 19,510 Provision for doubtful accounts 11,828 19,112 Bad debt write-offs, net of recoveries (13,814) (22,264) Ending balance $ 14,372 $ 16,358 The Medical Center serves certain patients whose medical care costs are not paid at established rates. These patients include those sponsored under government programs such as Medicare and Medi-Cal, those sponsored under private contractual agreements, charity patients, and other uninsured patients who have limited ability to pay. Patient service revenue is reported at estimated net realizable amounts for services rendered. The Medical Center recognizes patient service revenue associated with patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients who do not qualify for charity care, revenue is recognized on the basis of discounted rates in accordance with the Medical Center s policy. Patient service revenues, net of contractual allowances and discounts and before the provision for doubtful accounts and the California Hospital Quality Assurance Supplemental revenue recognized from major payor sources for the years ended June 30, 2015 and 2014, are as follows: 2015 2014 Government $ 260,572 $ 178,326 Non-government 323,310 334,075 Net patient service revenue before provision for doubtful accounts 583,882 512,401 Provision for doubtful accounts (11,828) (19,112) California Hospital Quality Assurance supplemental revenue 13,881 2,526 Total net patient service revenue $ 585,935 $ 495,815 1505-1529731 10

1. Summary of Significant Accounting Policies (continued) Charity Care and Community Services The Medical Center is committed to rendering care regardless of the patient s ability to pay. The Medical Center participates in various public programs and performs numerous other community services. Charity care is provided to patients who qualify for services based on the Medical Center s charity care policy. 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. The methodology for calculating the cost of charity care services provided is based on the Medicare allowable cost-to-charge ratio and the Medical Center s resulting cost-to-charge ratio. The Medical Center incurred charity care costs of $15,697,000 and $35,079,000 for the fiscal years ended June 30, 2015 and 2014, respectively. A summary of charity care for the year ended June 30 follows (unaudited): 2015 2014 (Unaudited) Medicare $ 50,246 $ 72,084 Medi-Cal 1,082 1,392 Indigent programs 40 1,785 Other charity care 2,523 3,552 Total uncompensated cost of care $ 53,891 $ 78,813 Other community benefits (at cost) $ 631 $ 913 Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. The carrying amount approximates fair value because of the short maturity of the investments. Charitable Remainder Trusts Charitable remainder trusts are arrangements in which a donor establishes and funds a trust with specified distributions to be made to a designated beneficiary or beneficiaries over the trust term. The Medical Center serves as trustee for most of these arrangements and recognizes the 1505-1529731 11

1. Summary of Significant Accounting Policies (continued) contribution in the period in which the trust is established. The assets are recorded at fair value when received and the liability to the designated beneficiary is recorded at the net present value of the estimated future payments to be distributed over the expected life of the beneficiary using the risk-free rate associated with the estimated trust term and marked to fair value at each reporting period. For 2015 and 2014, a range of discount rates of 1% to 3% was used. The fair values of charitable remainder trust assets are approximately $17,308,000 and $18,387,000 at June 30, 2015 and 2014, respectively. The net present values of the related liabilities are $8,275,000 and $8,980,000 at June 30, 2015 and 2014, respectively. Investments All debt securities and marketable equity securities have been measured at fair value based upon quoted market prices and are classified as trading securities. Realized gains and losses, the change in net unrealized gains and losses, and interest and dividends on marketable securities are reported as investment income unless the income or loss is restricted by donor or law. Investments in common collective trusts are stated at fair value based on the net asset value (NAV) as the practical expedient times the number of units owned by the Medical Center. The common collective trust is a short-term investment fund with the objective of seeking a competitive rate of return as well as a high-level of stability of principal and liquidity. The Medical Center may purchase or redeem units of the investment daily based on the NAV determined on the respective date of the transaction. There are no redemption restrictions on the common collective trust and no future commitments to purchase additional units. Assets Limited as to Use Assets limited as to use include designated assets set aside by the Medical Center s Board of Trustees (the Board) for future capital improvements or specific operating purposes over which the Board retains control and may, at its discretion, subsequently use for other purposes. Assets limited as to use also include assets restricted under terms of debt indenture agreements. Assets limited as to use have been invested in cash and cash equivalents, mutual funds, debt securities, and equity securities which are stated at fair value. 1505-1529731 12

1. Summary of Significant Accounting Policies (continued) Concentrations of Credit Risk Financial instruments which potentially subject the Medical Center to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and accounts receivable. The investment portfolio is managed by the Medical Center within the guidelines established by the Board which, as a matter of policy, limits the amounts which may be invested in any one issue. Concentrations of credit risk with respect to accounts receivable are limited, except with respect to programs under contract with the federal and state governments, due to the large number of payors comprising the Medical Center s patient base. Donor-Restricted Gifts Unconditional promises to give cash and other assets to the Medical Center are reported at fair value at the date the promise is received. The Medical Center uses present value techniques to measure the fair value of the unconditional promises to give at initial measurement of the promise to give. Subsequent to the receipt of the promise to give, the donations and pledges receivable are recorded at estimated net realizable value until the related asset is received or the donation receivable is written off. The Medical Center believes that certain donations and bequests may not be collected based on specific identification and has provided an allowance for uncollectible amounts. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the Medical Center s consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Inventories Inventories, consisting principally of supplies, are stated at cost (first-in, first-out method), which is not in excess of market value. 1505-1529731 13

1. Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment acquisitions are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful life of each class of depreciable asset, generally 3 to 50 years. Amortization of leasehold improvements is computed using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter, and is included in depreciation expense. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted contributions, and are excluded from the performance indicator, unless explicit donor stipulations specify how the donated assets must be used. 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 temporarily restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service and classified as property and equipment. Long-Lived Assets The Medical Center accounts for the impairment and disposition of long-lived assets in accordance with Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment. In accordance with ASC 360, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Medical Center determined that no assets were impaired at June 30, 2015. Deferred Financing Costs Costs incurred in obtaining long-term financing are deferred and amortized over the terms of the related obligations using the straight-line method, which approximates the effective interest method. Unamortized costs in the amount of approximately $3,206,000 and $3,362,000 were recorded within other assets in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. 1505-1529731 14

1. Summary of Significant Accounting Policies (continued) Goodwill and Other Intangibles Goodwill consists of costs in excess of the fair value of tangible assets of acquired entities. Goodwill and other intangibles in the amount of $29,453,000 and $29,542,000 were recorded within other assets in the consolidated balance sheets as of June 30, 2015 and 2014, respectively. The Medical Center has elected an annual measurement date of April 1 and upon completion of the annual impairment assessment, the Medical Center determined that no impairment was indicated in 2015 and 2014, and no significant indicators of impairment exist for its goodwill that would require additional analysis before its next annual evaluation. Other intangibles relating to covenants not to compete have been recorded in the amount of $226,000 and $315,000 as of June 30, 2015 and 2014, respectively. These intangibles are amortized using the straight-line method over the life of the covenants not to compete. Annual amortization expense of $89,000 was recorded in 2015. Annual amortization expense is approximately $89,000 per year for the remaining life of 3 years. At June 30, 2015, the Medical Center s goodwill balance of $29,185,000 includes $130,000 recognized in conjunction with an acquisition completed during 2014. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Medical Center has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Medical Center in perpetuity. Performance Indicator The accompanying consolidated statements of operations include excess (deficiency) of revenue over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenue over expenses include net assets released from restrictions used for purchases of property and equipment, and pension-related changes other than periodic pension cost. 1505-1529731 15

1. Summary of Significant Accounting Policies (continued) Income Taxes The principal operations of the Medical Center are exempt from federal and state income tax under Internal Revenue Code Section 501(a) as an organization described in Section 501(c)(3) and applicable California provisions. Accordingly, no income tax expense is included in the accompanying consolidated financial statements. ASC 740, Income Taxes, clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, disclosure, and transition. The guidance is applicable to pass-through entities and tax-exempt organizations. No significant tax liability for tax benefits, interest, or penalties was accrued at June 30, 2015 or 2014. Workers Compensation The Medical Center is self-insured for workers compensation claims up to $1,000,000 per claim in 2015 and 2014, subject to certain limitations. Liabilities, discounted at 1.0%, of approximately $9,619,000 and $9,441,000 at June 30, 2015 and 2014, respectively, have been accrued within accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets, and include an estimate for claims incurred but not reported. The receivables that relate to self-insured compensation claims totaled approximately $1,557,000 and $1,289,000 at June 30, 2015 and 2014, respectively, and have been recorded within other current and non-current assets in the accompanying consolidated balance sheets. In management s opinion, these accruals are adequate to cover ultimate claims expenses. Medical Malpractice and General Liability The Medical Center is self-insured for malpractice and general liability claims up to $1,000,000 per claim, subject to certain limitations. Estimated losses from asserted and unasserted claims are accrued based on actuarial estimates that incorporate the Medical Center s past experience, as well as other considerations. Excess insurance policies have been negotiated for losses in excess of $1,000,000 per claim. Liabilities, discounted at 1.0%, of approximately $6,471,000 and $6,432,000 at June 30, 2015 and 2014, respectively, have been accrued within accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets, and include an estimate for claims incurred but not reported to the Medical Center. The receivables that relate to 1505-1529731 16

1. Summary of Significant Accounting Policies (continued) self-insured medical malpractice claims totaled approximately $317,000 and $355,000 at June 30, 2015 and 2014, respectively, and have been recorded within other current and noncurrent assets in the accompanying consolidated balance sheets. In management s opinion, these accruals are adequate to cover ultimate claims expenses. Fair Value of Financial Instruments The Medical Center s consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, accounts receivable, donations and bequests pledged, accounts payable and accrued liabilities, and long-term obligations. Investments are stated at fair value based on quoted market prices. Donations and bequests pledged are stated at their estimated net realizable and net present value at the time of the pledged gift. The Medical Center considers the carrying amounts of all other current assets and liabilities in the consolidated balance sheets to approximate their fair value because of the relatively short period of time between origination of the instruments and their expected realization. The fair value of tax-exempt bonds was approximately $421,906,000 and $418,048,000 at June 30, 2015 and 2014, respectively. Fair value is estimated using a discounted cash flow analysis, based on current market interest rates for similar types of borrowing arrangements (Level 2 within the fair value hierarchy as defined in Note 2). Adoption of New Accounting Pronouncement In October 2012, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-05 Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, including an amendment to ASC 230, Statement of Cash Flows. The amendment requires, with certain exception, a not-for-profit entity to classify in the statement of cash flows cash received from donated financial assets as an operating activity if those donated financial instruments were directed without any imposed limitations for sale and were converted nearly immediately into cash. The adoption of this pronouncement had no impact on the Medical Center s consolidated financial statements. 1505-1529731 17

1. Summary of Significant Accounting Policies (continued) New Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for the Medical Center in the year ended June 30, 2019; early adoption is permitted. The ASU allows for either full retrospective or modified retrospective adoption. The Medical Center is evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on the Medical Center s consolidated financial statements. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The amendments in ASU 2014-15 are intended to define management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern and to provide related footnote disclosure. Under U.S. GAAP, financial statements are prepared under the presumption that the reporting entity will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management s responsibility to evaluate whether there is substantial doubt about the entity s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an entity s management with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by entities today in the financial statement footnotes. ASU 2014-15 is effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 is not expected to have a significant impact on the consolidated financial statements. In April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The 1505-1529731 18

1. Summary of Significant Accounting Policies (continued) guidance is effective for annual periods beginning after December 15, 2015. The guidance is applied retrospectively and early adoption is permitted. The adoption of ASU 2015-03 is not expected to have a significant impact on the Medical Center s consolidated financial statements. In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which requires that investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient no longer be included in the fair value hierarchy. Investments that calculate net asset value per share (or its equivalent) but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. When ASU 2015-07 is adopted, these investments will not be included in the fair value hierarchy disclosures, but instead will be disclosed as a reconciling item between fair value investments and total investments on the balance sheet. ASU 2015-07 amendments are effective for the Medical Center for fiscal years beginning after December 15, 2016. Implementation of ASU 2015-07 will have no impact on the consolidated balance sheets, statements of operations, or statements of changes in net assets. 2. Fair Value Measurements Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Medical Center utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 Pricing is based on observable inputs such as quoted prices in active markets. Financial assets and liabilities in Level 1 primarily include cash equivalents and listed equities and mutual funds held by the Medical Center. Level 2 Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial assets and liabilities included in Level 2 primarily include U.S. government securities, fixed income debt securities, including municipal bonds and other debt securities. 1505-1529731 19

2. Fair Value Measurements (continued) Level 3 Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including, but not limited to, private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates. Financial liabilities included in this category are charitable remainder trust liabilities. Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows: (a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. (b) Cost approach. Amount that would be required to replace the service capacity of an asset (replacement cost). (c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing, and excess earnings models). The Medical Center s investments in partnerships, limited liability companies, and similarly structured entities amounting to approximately $4,944,000 and $4,221,000 as of June 30, 2015 and 2014, respectively, are accounted for using the equity method of accounting, which is not a fair value measurement, and are classified in other noncurrent assets in the accompanying consolidated balance sheets. 1505-1529731 20

2. Fair Value Measurements (continued) The following tables provide the composition of certain investment assets as of June 30, 2015 and 2014. Only assets and liabilities measured at fair value are shown in the three-tier fair value hierarchy. June 30, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique (a,b,c) Current assets: Cash and cash equivalents $ 131,810 $ 131,810 $ $ a Assets limited as to use: Board designated: Cash and cash equivalents $ 14,793 $ 14,793 $ $ a Mutual funds: Equity 35,091 35,091 a Fixed income 5,153 5,153 a Foreign bonds securities 421 421 a Other 173 173 173 a Municipal bonds 597 597 a U.S. government securities 3,324 3,324 a Interest receivable 2 2 a $ 59,554 $ 14,795 $ 44,759 $ 1505-1529731 21

2. Fair Value Measurements (continued) June 30, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique (a,b,c) Held by trustee: Cash and cash equivalents $ 8,029 $ 8,029 $ $ a Other: Cash and cash equivalents $ 407 $ 407 $ $ a Mutual Funds: Equity 797 797 a $ 1,204 $ 1,204 $ $ Charitable remainder trusts: Cash and cash equivalents $ 789 $ 789 $ $ a U.S. government securities 2,156 2,156 a Fixed income (municipal) 2,851 2,851 a,b Mutual funds: Equity 5,952 5,952 a Fixed income 1,390 1,390 a Foreign bonds 1,227 1,227 a Real estate (REIT) 588 588 a Other 2,354 2,354 a Interest receivable 1 1 $ 17,308 $ 790 $ 16,518 $ Investments: Cash and cash equivalents $ 21,250 $ 21,250 $ $ a U.S. government securities 4,158 4,158 a Fixed income (corporate bonds) 2,641 2,641 a Foreign bonds 213 213 a Municipal bonds 303 303 a,b Other 89 89 a Mutual funds: Equity 44,801 44,801 a Interest receivable 5 5 a $ 73,460 $ 66,056 $ 7,404 $ Liabilities: Charitable remainder trust liabilities $ 8,275 $ $ $ 8,275 c 1505-1529731 22

2. Fair Value Measurements (continued) Charitable Remainder Trust Liabilities Balance, beginning of year $ 8,980 Payments, settlements and other, net (500) Change in present value (205) Balance, end of year $ 8,275 Fair value of the charitable remainder trust liabilities has been determined using present value techniques based on mortality tables and discount rates that are consistent with treasury rates. June 30, 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique (a,b,c) Current assets: Cash and cash equivalents $ 107,248 $ 107,248 $ $ a Assets limited as to use: Board designated: Cash and cash equivalents $ 48,587 $ 48,587 $ $ a Mutual funds: Equity 9,117 9,117 a Fixed income 3,078 3,078 a Foreign bonds securities 560 560 a Other 162 162 a Municipal bonds 438 438 a,b U.S. government securities 2,142 2,142 a Real estate (REIT) 78 78 a Interest receivable 3 3 a $ 64,165 $ 60,863 $ 3,302 $ Held by trustee: Cash and cash equivalents $ 8,027 $ 8,027 $ $ a 1505-1529731 23

2. Fair Value Measurements (continued) June 30 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique (a,b,c) Other: Cash and cash equivalents $ 1,139 $ 1,139 $ $ a $ 1,139 $ 1,139 $ $ Charitable remainder trusts: Cash and cash equivalents $ 1,054 $ 1,054 $ $ a U.S. government securities 2,211 2,211 a Fixed income (municipal) 346 346 a,b Mutual funds: a Equity 2,891 2,891 a Fixed income 2,421 2,421 a Fixed income (debt securities) 2,409 2,409 a Real estate (REIT) 6,427 6,427 a Other 628 628 a $ 18,387 $ 12,793 $ 5,594 $ Investments: Cash and cash equivalents $ 21,375 $ 21,375 $ $ a U.S. government securities 2,474 2,474 a U.S. Treasury bond 156 156 a U.S. agency fixed income 845 845 a Fixed income (corporate bonds) 1,672 1,672 a Floating rate & adj rate notes 151 151 a Foreign bonds securities 302 302 a Municipal bonds 236 236 a Other 91 91 a Mutual funds: a Equity 35,664 35,664 a Real estate (REIT) 730 730 a Interest receivable 24 24 a $ 63,720 $ 57,793 $ 5,927 $ Liabilities: Charitable remainder trust liabilities $ 8,980 $ $ $ 8,980 c 1505-1529731 24

3. Investment Income Unrestricted investment income is comprised of the following for the years ended June 30: 2015 2014 Interest income $ 1,276 $ 667 Realized gains on investments 2,642 4,843 Change in net unrealized gains on investments (1,777) 321 $ 2,141 $ 5,831 4. Endowments The Medical Center s endowments consist of 16 individual funds established for a variety of purposes. Its endowments only include donor-restricted endowment funds. Net assets associated with the endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. On September 30, 2008, California Senate Bill No. 1329 was signed into law which enacted the Universal Prudent Management of Institutional Funds Act (UPMIFA) for California. California also adopted one of the optional provisions of the act, creating a rebuttable presumption of imprudence for spending more than 7% of the value of an endowment fund in one year (based on a three-year rolling average). The Board has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Medical Center classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Medical Center in a manner consistent with the standard of prudence described by UPMIFA. In accordance with UPMIFA, the Medical Center considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the fund, (2) the purposes of the Medical 1505-1529731 25

4. Endowments (continued) Center and the donor-restricted endowment fund, (3) general economic conditions, (4) the possible effect of inflation and deflation, (5) the expected total return from income and the appreciation of investments, (6) other resources of the Medical Center, and (7) the investment policies of the Medical Center. Endowment Spending and Investment Policies The Medical Center s return objectives related to its endowments are to maintain or enhance the purchasing power of the endowment over a five-year cycle. The Medical Center s risk tolerances are moderate to aggressive, as measured by no more than 125% of the volatility of the Russell 1000 Index (Equities) and Merrill Lynch 1-3 Year Treasury Index (Fixed). The Medical Center targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The Medical Center s spending policy is to annually appropriate for distribution no more than 7% per year of each endowment fund s average fair value (based on a three-year rolling average). Temporarily Restricted Permanently Restricted Total Endowment net assets, June 30, 2013 $ 5,736 $ 26,093 $ 31,829 Investment return: Investment income 407 407 Net appreciation (realized and unrealized) 3,297 137 3,434 Total investment return 3,704 137 3,841 Contributions 3 3 Appropriation of endowment asset for expenditure (988) (988) Endowment net assets, June 30, 2014 8,452 26,233 34,685 Investment return: Investment income 556 556 Net appreciation (realized and unrealized) 856 82 938 Total investment return 1,412 82 1,494 Other (343) (343) Appropriation of endowment asset for expenditure (1,196) (1,196) Endowment net assets, June 30, 2015 $ 8,668 $ 25,972 $ 34,640 1505-1529731 26