gritman medical center, inc. and subsidiariesgritman medical center, inc. (the medical center)...

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FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES


Table of Contents

Page

INDEPENDENT AUDITORS’ REPORT 1

FINANCIAL STATEMENTSConsolidated Balance Sheets 2Consolidated 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 Independent Auditors' Report on Other Supplementary Information 22

Consolidating Schedule - Balance Sheet Information 23 Consolidating Schedule - Statement of Operations Information 25 Comparative Ratios 26


877 W. Main St., Ste. 800 | Boise, ID 83702-5858 | T 208.344.7150 | F 208.344.7435 | EOE

1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors Gritman Medical Center, Inc. and Subsidiaries Moscow, Idaho

We have audited the accompanying consolidated balance sheets of Gritman Medical Center (a nonprofit organization) and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Organization’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Hospital’s internal control over financial reporting. Accordingly, we do not express such an opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gritman Medical Center, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the changes in their net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Boise, Idaho May 25, 2010

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2009 AND 2008

See Notes to Consolidated Financial Statements 2 2

2009 2008

ASSETS

CURRENT ASSETSCash and cash equivalents 2,425,910$ 873,286$Patient accounts receivable, net of allowance

of $3,216,134 in 2009 and $3,021,511 in 2008 7,386,849 6,859,614Estimated amounts due from third-party payers - 305,971Inventory 1,446,211 1,441,515Prepaid expenses 489,752 490,142Other receivables 900,956 900,887

12,649,678 10,871,415

ASSETS LIMITED AS TO USEInternally designated 14,487,322 12,059,466Internally designated for Friends of Hospice

of the Palouse 1,029,086 802,062Held by trustee- Bond Reserve 1,246,290 1,755,692

16,762,698 14,617,220

Total current assets 29,412,376 25,488,635

PROPERTY AND EQUIPMENT, AT COST 40,004,585 38,419,014

DEFERRED FINANCING COSTS 555,599 579,326

INVESTMENT IN JOINT VENTURES 359,648 135,000

70,332,208$ 64,621,975$

33

2009 2008

LIABILITIES AND NET ASSETS

CURRENT LIABILITIESAccounts payable 1,082,225$ 1,963,548$Accrued expenses 2,547,174 2,330,149Estimated amounts due to third party payors 1,993,774 - Short-term debt 1,100,000 740,000Current maturities of long-term debt 1,750,333 1,879,490

Total current liabilities 8,473,506 6,913,187

LONG-TERM DEBT, less current maturities 22,584,089 22,882,271

Total liabilities 31,057,595 29,795,458

MINORITY/PHYSICIAN MEMBER INTEREST IN SUBSIDIARIES 728,952 742,990

NET ASSETS Unrestricted 38,297,452 33,907,891

Temporarily restricted 248,209 175,636

Total net assets 38,545,661 34,083,527

70,332,208$ 64,621,975$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2009 AND 2008


2009 2008

UNRESTRICTED REVENUES, GAINS, AND OTHER SUPPORTNet patient service revenue 46,258,845$ 41,869,029$Other 1,137,174 1,787,526Net assets released from restrictions used for operations 48,150 55,605

Total revenues, gains, and other support 47,444,169 43,712,160

EXPENSESSalaries and wages 18,445,943 18,102,705Employee benefits 4,247,002 4,265,998Professional fees 2,435,604 2,175,222Supplies and other 5,775,324 5,547,738Other fees 1,987,413 2,052,121Repairs and maintenance 1,462,740 1,477,030Insurance 857,594 902,218Utilities 898,544 838,340Leases and Rentals 423,435 387,991Other fees 1,256,068 1,235,006Depreciation and amortization 2,992,899 3,061,540Interest 1,207,203 1,278,196Provision for uncollectible accounts 2,478,191 1,750,049

Total expenses 44,467,960 43,074,154

OPERATING INCOME 2,976,209 638,006

OTHER INCOME (EXPENSE)Investment income 489,905 160,829Contributions 85,353 8,206Rental income 187,790 67,196Depreciation expense (122,666) (58,701)Interest expense (111,603) - Net gain (loss) in joint ventures (596,154) 24,550Loss on sale of asset (406,421) (1,792)Other income (expense), net (151,120) (108,462)

Total other income (expense) (624,916) 91,826

EXCESS OF REVENUES OVER EXPENSES 2,351,293 729,832

Investment return - change in unrealized gains and losses 2,122,783 (4,205,750)Minority interest in earnings of subsidiaries (84,515) (144,840)

INCREASE (DECREASE) IN UNRESTRICTED NET ASSETS 4,389,561$ (3,620,758)$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2009 AND 2008


2009 2008

UNRESTRICTED NET ASSETSRevenues in excess of expenses 2,351,293$ 729,832$Investment return - change in unrealized gains and losses 2,122,783 (4,205,750)Minority interest in losses (gains) of subsidiaries (84,515) (144,840)

(Decrease) increase in unrestricted net assets 4,389,561 (3,620,758)

TEMPORARILY RESTRICTED NET ASSETSContributions received 120,723 127,669Net assets released from restrictions (48,150) (55,605)

Increase in temporarily restricted net assets 72,573 72,064

CHANGE IN NET ASSETS 4,462,134 (3,548,694)

NET ASSETS, BEGINNING OF YEAR 34,083,527 37,632,221

NET ASSETS, END OF YEAR 38,545,661$ 34,083,527$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008


2009 2008

OPERATING ACTIVITIESChange in net assets 4,462,134$ (3,548,694)$Adjustments to reconcile change in net assets to net cash

provided by operating activitiesLoss on disposal of property and equipment 406,421 1,792Depreciation and amortization 3,115,565 3,120,241Minority interest in gains of subsidiaries 84,515 144,840Unrealized (gain) loss on investments (2,122,783) 4,205,750Realized (gain) loss on investments (11,217) 641,402Changes in

Patient accounts receivable, net (527,235) (484,367)Estimated amounts due from and to third-party payers 2,299,745 1,053,784Accounts payable and accrued expenses (1,520,506) (1,507,468)Other current assets and liabilities (4,375) 761,683

NET CASH PROVIDED BY OPERATING ACTIVITIES 6,182,264 4,388,963

INVESTING ACTIVITIESPurchase of investments (4,098,872) (2,231,737)Proceeds from disposition of investments 4,087,394 3,071,006Proceeds from sale of property and equipment 101,184 - Purchase of property and equipment (4,328,806) (3,627,048)Investment in joint venture 103,552 (135,000)

NET CASH USED BY INVESTING ACTIVITIES (4,135,548) (2,922,779)

FINANCING ACTIVITIESBorrowings on line-of-credit 2,292,000 380,003Proceeds from issuance of long-term debt 1,720,281 888,644Principal payment on long-term debt (4,079,620) (2,255,711)Distributions to minority investors, net (426,753) (17,509)

NET CASH USED BY FINANCING ACTIVITIES (494,092) (1,004,573)

INCREASE IN CASH 1,552,624 461,611

CASH, BEGINNING OF YEAR 873,286 411,675

CASH, END OF YEAR 2,425,910$ 873,286$

SUPPLEMENTAL CASH FLOW INFORMATIONCapital asset acquisitions included in accounts payable 856,208$ 251,446$Interest paid 1,280,520$ 1,224,695$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008

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NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Gritman Medical Center, Inc. (the Medical Center) primarily earns revenues by providing inpatient, outpatient and emergency care services to patients in Moscow, Idaho, and the surrounding area. It also operated a home health agency in the same geographic area which was sold in 2009.

The Medical Center's subsidiaries are Palouse Surgery Center, LLC (the Surgery Center) and Palouse Health Properties, LLC (Health Properties). The Surgery Center is a 60/40 joint venture between the Medical Center and a group of local physicians that began operations in May 2004. Health Properties is a 60/40 joint venture created to hold real estate that it leases to the Surgery Center. Health Properties also began operations in May 2004. Gritman Medical Center Foundation (the Foundation) is an affiliate established to provide fundraising assistance to the Medical Center.

Principles of Consolidation

The consolidated financial statements include the Medical Center, Surgery Center, Health Properties and Foundation. All significant inter entity accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the Statements of Cash Flows, the Medical Center considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. This excludes any amounts that are limited as to use. At times during the year, cash balances exceeded FDIC insured limits.

Fair Value Measurements

The Medical Center has determined the fair value of certain assets and liabilities in accordance with the provisions of ASC 820-10, Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles.

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820-10 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.

Investments and Investment Return

Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the Statements of Operations and Changes in Net Assets as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions.

Assets Limited as to Use

Assets limited as to use include (1) assets held by trustees and (2) assets set aside by the Board of Directors for future capital improvements over which the Board retains control and may at its discretion subsequently use for other purposes. Amounts required to meet current liabilities of the Medical Center are included in current assets.

Patient Accounts Receivable

The Medical Center and Surgery Center report patient accounts receivable for services rendered at net realizable amounts from third-party payers, patients and others. The Medical Center and Surgery Center provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. As a service to the patient, the Medical Center and Surgery Center bill third-party payers directly and bill the patient when the patient's liability is determined. Patient accounts receivable are due in full when billed. The receivables are non-interest bearing. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account.

Inventory

The Medical Center and Surgery Center state supply inventories at the lower of cost or market. Cost is determined using the first-in, first-out method.



Property and Equipment

Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset. The Medical Center generally capitalizes fixed assets with acquisition prices in excess of $500.Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives. The estimated useful lives of property and equipment are as follows:

Buildings and improvements 5-40 years Equipment 2-20 years

Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service.

Deferred Financing Costs

Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. Such costs are being amortized over the term of the respective debt using the straight-line method.

Temporarily Restricted Net Assets

The Medical Center reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets.

Net Patient Service Revenue

The Medical Center and Surgery Center have agreements with third-party payers that provide for payments at amounts different from their established rates. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered and include estimated retroactive revenue adjustments. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered; such estimated amounts are revised in future periods as adjustments become known.

Charity Care

The Medical Center provides care to patients meeting certain criteria under its charity care policy. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue.

Charges excluded from revenue under the Medical Center's charity care policy were $1,092,822 and $682,727 for 2009 and 2008, respectively.


(continued on next page) 10 10

Contributions

Gifts received with donor stipulations are reported as either temporarily or permanently restricted support. When a donor restriction expires, that is, when a time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified and reported as an increase in unrestricted net assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions.

Estimated Malpractice Costs

An annual estimated provision is accrued for the self-insured portion of medical malpractice claims and includes an estimate of the ultimate costs for both reported claims and claims incurred but not reported.

Income Taxes

The Medical Center a has been recognized as exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the Medical Center is subject to federal income tax on any unrelated business taxable income. The Surgery Center and Health Properties are taxed as partnerships under provision of the Internal Revenue Code and a similar section of the Idaho income tax law. Therefore, taxable income or loss is reported to the individual partners for inclusion in their respective tax returns and no provision for federal and state income taxes is included in these statements.

The Medical Center has adopted the provisions of FASB Accounting Standards Codification Topic ASC 740-10 (previously Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes), on January 1, 2009. The implementation of this standard had no impact on the financial statements. As of both the date of adoption, and as of December 31, 2009, the unrecognized tax benefit accrual was zero.

The Medical Center will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. The Medical Center is no longer subject to Federal tax examinations by tax authorities for years before 2006 and state examinations for years before 2006.

Excess of Revenues Over Expenses

The Statements of Operations include excess of revenues over expenses. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers to and from affiliates for other than goods and services and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purpose of acquiring such assets).

Reclassification

Certain 2008 account balances have been reclassified to conform to the 2009 presentation.

Subsequent Events

The Medical Center has evaluated subsequent events through May 25, 2010, the date which the financial statements were available to be issued.



NOTE 2 - NET PATIENT SERVICE REVENUE

The Medical Center has agreements with third-party payers that provide for payments to the Medical Center at amounts different from its established rates. Theses payment arrangements include:

Medicare: Effective November 1, 2004, the Medical Center became certified as a critical access hospital (CAH) under the Medicare program. As a CAH, substantially all inpatient and outpatient services are reimbursed based on reasonable costs. CAH certification imposes limitations on the Medical Center, including an average annual length of stay limitation of 96 hours and a limitation of 25 inpatient beds. The Medical Center is reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the Medicare fiscal intermediary.

Medicaid: Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed under a cost reimbursement methodology for certain services and at prospectively determined rates for all other services. The Medical Center is reimbursed for cost reimbursable services at tentative rates with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by the Medicaid fiscal intermediary.

Substantially all services rendered to Medicare and Medicaid program beneficiaries by the Surgery Center are reimbursed on the basis of prospectively determined rates per procedure.

Approximately 30% and 32% of net patient service revenue are from participation in the Medicare and state-sponsored Medicaid programs for the years ended December 31, 2009 and 2008, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term.

The Medical Center and Surgery Center have also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates.

Net patient service revenue is as follows:

2009 2008Total charges at standard rates

Inpatient 25,917,631$ 22,019,128$Outpatient 42,256,524 35,558,232Less charity care (1,092,822) (682,727)

Gross patient service revenue 67,081,333 56,894,633

Contractual adjustmentsMedicare 8,942,164 6,646,945Medicaid 3,038,692 1,932,799Other 8,841,632 6,445,860

Net patient service revenue 46,258,845$ 41,869,029$



NOTE 3 - CONCENTRATION OF CREDIT RISK

The Medical Center and Surgery Center grant credit without collateral to their patients, most of who are area residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers at December 31, 2009 and 2008, is:

2009 2008

Medicare 12% 15%Medicaid 7% 10%Other third-party payers 51% 51%Patients 30% 24%

100% 100%

NOTE 4 - INVESTMENTS, FAIR VALUE MEASUREMENTS AND INVESTMENT RETURN

Assets limited as to use include:

2009 2008Internally designated for capital acquisition

Cash and cash equivalents 1,421,964$ 1,570,864$Mutual funds 3,557,393 11,283,249Fixed income 10,535,257 - Interest receivable 1,794 7,415

15,516,408 12,861,528Held by trustee

Cash and cash equivalents - 502,529Treasury bills 44,189 51,611Government bonds 1,202,101 1,201,552

1,246,290 1,755,692

16,762,698$ 14,617,220$

The related fair values of investments at December 31, 2009 and 2008 are determined as follows:

Level 1 Level 2 Level 3 Total

Mutual funds -$ 3,557,393$ -$ 3,557,393$Fixed income - 10,535,257 - 10,535,257Bonds - 1,202,101 - 1,202,101Treasury bills 44,189 - - 44,189

44,189 15,294,751 - 15,338,940

December 31, 2009



Level 1 Level 2 Level 3 Total

Mutual funds -$ 11,283,249$ -$ 11,283,249$Bonds - 1,201,552 - 1,201,552Treasury Bills 51,611 - - 51,611

51,611$ 12,484,801$ -$ 12,536,412$

December 31, 2008

Total investment return is comprised of the following:

2009 2008

Interest and dividend income 478,688$ 802,231$Unrealized gains (losses) 2,122,783 (4,205,750)Realized gains (losses) 11,217 (641,402)

2,612,688$ (4,044,921)$

Total investment return is reflected in the Statements of Operations as follows:

2009 2008

Unrestricted Net AssetsOther nonoperating investment income 489,905$ 160,829$Change in unrealized gains and losses on other than

trading securities 2,122,783 (4,205,750)

2,612,688$ (4,044,921)$



NOTE 5 - PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2009 and 2008, follows:

2009 2008Used in health care services

Land and improvements 4,711,858$ 4,496,185$Buildings and improvements 32,817,282 31,960,392Equipment 27,428,983 26,136,018

64,958,123 62,592,595

Not used in health care servicesLand and improvements 1,982,626 1,363,111Buildings and improvements 6,221,830 1,453,847Equipment 25,457 25,457

8,229,913 2,842,415

Construction in progress 202,168 3,766,688

Total cost 73,390,204 69,201,698

Less accumulated depreciation 33,385,619 30,782,684

Net property and equipment 40,004,585$ 38,419,014$

Construction in progress at December 31, 2009 and 2008 represents costs to construct medical office buildings I and II and renovations to the Gritman Community Wellness Center. Estimated costs to complete the medical office building II at December 31, 2009, are approximately $827,000.

Depreciation expense for property and equipment used in operating and non-operating activities as of December 31, 2009 and 2008 are as follows:

2009 2008

Used in health care services 2,992,899$ 3,061,540$Not used in health care services 122,666 58,701

3,115,565$ 3,120,241$

NOTE 6 - INVESTMENT IN JOINT VENTURES

Palouse Surgeons, LLC was established to engage the services of locum tenens surgeons and help recruit and bring additional surgeons into the area. In 2008 The Medical Center had an initial good faith investment in Palouse Surgeons, LLC of $60,000, which represents a 40% ownership in the joint venture. The ownership interest was purchased for the expansion of the general surgery practice on the Palouse. The investment is accounted for using the equity method. Distributions of $0 were paid by Palouse Surgeons, LLC to the Medical Center for the years ended December 31, 2009 and 2008.



The following is summarized financial information of Palouse Surgeons, LLC as of December 31, 2009 and 2008:

2009 2008

Total assets 346,967$ 242,707$Total liabilities 109,826 25,355Total equity 237,141 217,352Total net income (loss) (1,339,987) 4,378

Rent expense for Palouse Surgeons, LLC as of December 31, 2009 totaled $32,910 paid to the Medical Center.

Inland Northwest Renal Care Group, LLC was created to provide dialysis opportunities to the local community. The Medical Center had an initial investment of $75,000 in Inland Northwest Renal Care Group, LLC which represents a 30% ownership in the joint venture. The investment is accounted for using the equity method. Distributions of $0 were paid by Inland Northwest Renal Care Group, LLC to the Medical Center for the years ended December 31, 2009 and 2008.

The following is summarized financial information of Palouse Dialysis, LLC as of December 31, 2009 and 2008:

2009 2008

Total assets 539,628$ 246,719$Total liabilities 84,024 7,806Total equity 455,604 238,913Total net loss (203,309) (11,087)

Rent expense for Palouse Dialysis, LLC as of December 31, 2009 totaled $50,840 paid to the Medical Center.

NOTE 7 - MEDICAL MALPRACTICE CLAIMS

The Medical Center has joined together with other providers of health care services to form Yellowstone Insurance Exchange, RRG (Yellowstone), currently operating as a common risk management and insurance program for its members. The Medical Center has issued a standby letter of credit in the amount of $951,718 as its capital contribution to Yellowstone. In 2009, Yellowstone experienced positive cash flows and voted to lower the letters of credit requirement for charter members by 33.33% per year for the next three years. As of December 31, 2009, the aggregate amount outstanding was $634,510. The letters of credit represent the maximum exposure in the investment in Yellowstone. The letters of credit are secured by CD’s that are carried at the balance of the letters of credit. The CD’s are included as assets limited as to use.

The Medical Center purchases medical malpractice insurance from Yellowstone under a claims-made policy. The Medical Center pays an annual premium to Yellowstone for its torts insurance coverage. Yellowstone's governing agreement specifies that Yellowstone will be self-sustaining though member premiums and will reinsure through commercial carriers for claims in excess of stop-loss amounts. Accounting principles generally accepted in the United States of America require a health care provider to accrue the expense of its share of malpractice claim costs, if any, during the year by estimating the probable ultimate costs of the incidents. The Medical Center has accrued $100,000, the annual deductible, as estimated expenses due to malpractice claims. It is reasonably possible that this estimate could change materially in the near term.



NOTE 8 – DEBT

2009 2008

Series 2003 Revenue bonds (A) 16,985,000$ 17,390,000$Note Payable (B) 650,942 404,000Note Payable (C) 1,138,494 1,459,049Note Payable (D) 134,449 435,318Note Payable (E) 166,219 281,259Note Payable (F) 1,841,824 2,404,976Note Payable (G) 157,483 - Note Payable (H) 581,525 - Note Payable (I) 546,144 - Note Payable (J) - 218,530Note Payable (K) - 5,962Note Payable (L) 2,061,503 2,136,574Note Payable (M) - 26,093Note Payable (N) 70,839 -

24,334,422 24,761,761Less current maturities 1,750,333 1,879,490

22,584,089$ 22,882,271$

(A) Health Facilities Revenue bonds in the original amount of $18,545,000 dated June 1, 2003, which bear interest at 2.90% to 5.20%. The bonds are payable in annual installments from June 1, 2008, through June 1, 2033.

(B) Note payable is a construction note for use in the construction of MOB I. The total note is $1,080,000. $650,942 has been drawn on the note to date with the remainder to be drawn in 2010. The note payable is due in monthly installments of $1,633 including interest through February 2019. The note bears interest of 5.63% adjusting to the five year fixed rate of the Federal Home Loan Bank plus 1.5% and is secured by the MOB 1 building.

(C) Note payable due in annual installments of $218,952 including interest through December 2015. The note bears interest at 4.25% and is secured by certain equipment of the Medical Center and physical therapy revenues.

(D) Note payable due in monthly installments of $26,133 including interest through May 2010. The note bears interest at 4.34% and is secured by certain equipment of the Medical Center.

(E) Note payable due in monthly installments of $11,002 including interest through April 2011. The note bears interest at 5.75% and is secured by certain equipment of the Surgery Center.

(F) Note payable due in annual installments of $668,491 including interest through August 1, 2012. The note bears interest at 4.38% and is collateralized with the Phase One improvements.

(G) Note Payable due in monthly installments of $3,618 including interest through January 2014. The note bears interest at 5.70% and is secured by certain equipment of the Medical Center.



(H) Note Payable due in monthly installments of $6,602 including interest through July 2019. The note bears interest at 5.77% and is secured by certain equipment of the Medical Center.

(I) Note Payable due in monthly installments of $11,405 including interest through July 2014. The note bears interest at 5.98% and is secured by certain equipment of the Medical Center.

(J) Note payable due in monthly installments of $28,037 including interest through August 2009. The note bears interest at 6.0% and is secured by certain equipment of the Surgery Center. Note paid in full in 2009.

(K) Note payable due in monthly installments of $626 including interest through September 2009. The note bears interest at 4.75%, is secured by certain equipment of the Surgery Center and is guaranteed by the Medical Center. Note paid in full in 2009.

(L) Note payable due in monthly installments of $19,390 including interest at a rate of 7.39% through April 1, 2011 and adjusting to Libor + 2.4% thereafter, with a final balloon payment on September 1, 2014. The note is secured by a deed of trust on Health Properties building.

(M) Note payable due in monthly installments of $1,288 including interest through August 2011. The note bears interest at 8.0% and is secured by certain equipment of the Surgery Center. Note paid in full in 2009.

(N) Note payable due in monthly installments of $2,388 including interest through August 2012. The note bears interest at 5.5% and is secured by certain equipment of the Surgery Center and is guaranteed by the Medical Center.

Under the Loan Agreement for the Series 2003 Revenue bonds, the Medical Center is required to maintain certain funds with the Trustee, meet certain requirements before the issuance of additional debt and maintain certain financial ratios, including historical debt service coverage of 1.25 to 1, at least 60 days cash on hand and no more than 80 days net revenue in accounts receivable.



Aggregate annual maturities of long-term debt at December 31, 2009, are:

Long - Term Debt

1,750,333$1,601,0201,619,8671,005,239

935,585Thereafter 17,422,378

Total 24,334,422$

2009

2013201220112010

The Medical Center has a bank line-of-credit agreement that provides for maximum borrowing of $1,250,000 at 3.25% as of December 31, 2008 and 2009. In 2009, the Medical Center obtained a line-of-credit agreement that allowed for maximum borrowing of $5,000,000 at the one month Libor + 1.25%; the rate at December 31, 2009 was 1.48%. Amounts outstanding under line-of-credit agreements were $1,100,000 and $740,000 as of December 31, 2009 and 2008, respectively.

The fair value of long-term debt is estimated using discounted cash flows based on the Medical Center’s incremental borrowing rates for similar types of borrowings. The carrying amount and estimated fair value of the Medical Center’s debt is $25,434,422 and $25,620,788, respectively, as of December 31, 2009, and $25,501,761 and $25,519,981, respectively, as of December 31, 2008.

NOTE 9 – MINORITY/PHYSICIAN MEMBER INTEREST IN SUBSIDIARIES

The Medical Center's subsidiaries are Palouse Surgery Center, LLC (Surgery Center) and Palouse Health Properties, LLC (Health Properties). The Surgery Center is a 60/40 joint venture between the Medical Center and a group of local physicians that began operations in May 2004. Health Properties is a 60/40 joint venture created to hold real estate that it leases to the Surgery Center. Health Properties also began operations in May 2004.

The minority interest in subsidiaries in the balance sheets reflects the investments made by the minority owners in these consolidated subsidiaries, along with their proportional share of the gains and losses in these subsidiaries. Minority interest in gains and losses of subsidiaries in the Statements of Operations represents the minority owners' share of the gains and losses of the consolidated subsidiaries. For specific line item details on the consolidated financial statements, see pages 23-25 in the supplementary information.

Minority/physician member interest in subsidiaries is calculated below:

2009 2008Ending equity balance of joint venture

Surgery Center 1,223,529$ 1,219,927$Health Properties 598,852 637,548

1,822,381 1,857,475

Minority ownership percentage 40% 40%

Minority interest in subsidiaries 728,952$ 742,990$



Majority/Gritman Medical Center interest in subsidiaries is calculated below:

2009 2008Ending equity balance of joint venture

Surgery Center 1,223,529$ 1,219,927$Health Properties 598,852 637,548

1,822,381 1,857,475

Majority ownership percentage 60% 60%

Majority interest in subsidiaries 1,093,429$ 1,114,485$

NOTE 10 - TEMPORARILY RESTRICTED NET ASSETS

Temporarily restricted net assets are available for the following purpose or periods:

2009 2008

Foundation scholarships 229,067$ 154,740$Other 19,142 20,896

248,209$ 175,636$

During 2009 and 2008, net assets were released from donor restrictions by incurring expenses, satisfying the restricted purposes in the amount of $48,150 and $55,605, respectively.

NOTE 11 - LEASING ACTIVITIES

The Medical Center leases building space to other medical operations under operating leases. Book value of building space under operating leases was $4,780,506 and $330,211 at December 31, 2009 and 2008, respectively, and is included in buildings and improvements not used in health care services in note 5 and in net property and equipment, at cost in the accompanying statement of financial position. Accumulated depreciation on equipment under operating leases was $211,304 and $26,416 at December 31, 2009 and 2008, respectively. Minimum future rentals on noncancelable operating leases with original terms of one year or longer total $327,723 at December 31, 2009. These amounts are receivable as follows:

OperatingLeases

327,723$329,669312,964311,892317,499

Thereafter 1,551,843

Total 3,151,590$

20102011201220132014



NOTE 12 - FUNCTIONAL EXPENSES

The Medical Center and subsidiaries provide health care service primarily to residents within the geographic area. Expenses related to providing these services are as follows:

2009 2008

Health care services 36,926,073$ 35,331,799$General and administrative 7,431,946 7,584,035Fundraising 109,941 158,320

44,467,960$ 43,074,154$

NOTE 13 - PENSION PLAN

The Medical Center has a defined contribution pension plan covering substantially all employees. The Board of Directors annually determines the amount, if any, of the Medical Center's contributions to the plan. Pension expense was $463,827 and $407,433 for 2009 and 2008, respectively.

NOTE 14 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following:

Allowance For Net Patient Service Revenue Adjustments

Estimates of allowances for adjustments included in net patient service revenue are described in Notes 1 and 2.

Malpractice Claims

Estimates related to the accrual for medical malpractice claims are described in Notes 1 and 7.

Admitting Physicians

The Medical Center is served by three physician groups whose patients comprise approximately 49% of the Medical Center's net patient service revenue.

Estimated Liability for Employee Health Care

The Medical Center is self-insured for employee health care. The Medical Center maintains a reinsurance policy which attaches to individual claims above a specific threshold. The policy also computes an aggregate attachment point based on plan members, which provides additional reimbursement for claims above that point. The Medical Center accrued a liability for employee health care by charging the statement of operations for certain known claims and reasonable estimates for incurred but not reported claims based on prior claims experience. Events could occur that would change this estimate materially in the near term.


21 21

Litigation

In the normal course of business, the Medical Center is, from time to time, subject to allegations that may or do result in litigation. Some of these allegations are in areas not covered by commercial insurance; for example, allegations regarding employment practices or performance of contracts. The Medical Center evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Event could occur that would cause the estimate of ultimate loss to differ materially in the near term.

NOTE 15 – LOSS DUE TO FLOOD

During 2007, a flood damaged a significant piece of the Medical Center including the Emergency Department. The Medical Center is covered by flood insurance and is in negotiations with the insurance coverage as to the reimbursement of the costs to repair the flood damage. The Medical Center has not been able to fully recover the reconstruction costs through insurance proceeds to date. Insurance proceeds received for reconstruction of the new building will be recorded net of the costs of reconstruction. The Medical Center will receive insurance proceeds to recuperate lost income from 2007. Management has estimated this amount to be $809,000. Additionally, the Medical Center has spent $923,000 to date in reconstruction costs. The Medical Center has received $848,000 in insurance proceeds to date. The remaining amount outstanding is included as a receivable until all insurance proceeds have been received. At this point management is unable to determine if the future insurance proceeds would be sufficient to cover the reconstruction costs, therefore no gain or loss on the insurance proceeds from the flood has be recognized.


SUPPLEMENTARY INFORMATION


877 W. Main St., Ste. 800 | Boise, ID 83702-5858 | T 208.344.7150 | F 208.344.7435 | EOE

22

INDEPENDENT AUDITORS’ REPORT ON OTHER SUPPLEMENTARY INFORMATION

The Board of Directors Gritman Medical Center, Inc. and Subsidiaries Moscow, Idaho

Our report on our audit of the financial statements of Gritman Medical Center, Inc. and Subsidiaries for 2009 appears on page 1. We conducted our audit in accordance with auditing standards generally accepted in the United States of America for the purpose of forming an opinion on the financial statements taken as a whole. The other supplemental information is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

Boise, Idaho May 25, 2010

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION DECEMBER 31, 2009

23

Medical Center Foundation Surgery Center

Health Properties Total

ASSETSCURRENT ASSETS

Cash 1,818,376$ 162,659$ 365,309$ 79,566$ -$ 2,425,910$ Patient accounts

receivable, net 7,150,315 - 236,534 - - 7,386,849 Inventory 1,293,498 - 152,713 - - 1,446,211 Prepaid expenses

and other 440,650 - 19,650 29,452 - 489,752 Other receivables 900,956 - - - - 900,956

11,603,795 162,659 774,206 109,018 - 12,649,678 Assets Limited As To Use

Internally designated 14,125,342 361,980 - - - 14,487,322 Internally designated for Friends

of Hospice of the Palouse - 1,029,086 - - - 1,029,086 Held by trustee- Bond Reserve 1,246,290 - - - - 1,246,290

15,371,632 1,391,066 - - - 16,762,698 Total current assets 26,975,427 1,553,725 774,206 109,018 - 29,412,376

PROPERTY AND EQUIPMENTat cost 36,784,860 - 668,388 2,551,337 - 40,004,585

Deferred Financing costs, net 555,599 - - - - 555,599

Investment in subsidiaries 1,093,429 - - - (1,093,429) - Investment in joint venture 359,648 - - - - 359,648

65,768,963$ 1,553,725$ 1,442,594$ 2,660,355$ (1,093,429)$ 70,332,208$

Eliminations

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION DECEMBER 31, 2009

24

Medical Center Foundation

Surgery Center

Health Properties Eliminations Total

LIABILITIES AND NET ASSETSCURRENT LIABILITIES

Accounts payable 987,590$ -$ 94,635$ -$ -$ 1,082,225$Accrued expenses 2,493,583 - 53,591 - - 2,547,174Estimated amount due to

third party payors 1,993,774 - - - - 1,993,774Short-term debt 1,100,000 - - - - 1,100,000Current maturities of

long-term debt 1,641,061 - 25,350 83,922 - 1,750,333

Total current liabilities 8,216,008 - 173,576 83,922 - 8,473,506

Long-Term Debt 20,561,019 - 45,489 1,977,581 - 22,584,089

Total liabilities 28,777,027 - 219,065 2,061,503 - 31,057,595

Minority/physician member interest in subsidiaries - - - - 728,952 728,952

NET ASSETSUnrestricted 36,972,794 1,324,658 1,223,529 598,852 (1,822,381) 38,297,452Temporarily restricted 19,142 229,067 - - - 248,209

Total net assets 36,991,936 1,553,725 1,223,529 598,852 (1,822,381) 38,545,661

65,768,963$ 1,553,725$ 1,442,594$ 2,660,355$ (1,093,429)$ 70,332,208$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES CONSOLIDATING SCHEDULE – STATEMENT OF OPERATING INFORMATION YEAR ENDED DECEMBER 31, 2009

25

Medical Surgery Health Center Foundation Center Properties Eliminations Total

Unrestricted Revenues, Gains and Other SupportNet patient service revenue 43,922,238$ -$ 2,336,607$ -$ -$ 46,258,845$Other 1,137,174 103,882 - 260,608 (364,490) 1,137,174Income from subsidiaries 126,770 - - - (126,770) - Net assets released from

restrictions used foroperations 42,091 6,059 - - - 48,150 Total unrestricted revenues, gains and other support 45,228,273 109,941 2,336,607 260,608 (491,260) 47,444,169

Expenses and LossesSalaries and wages 17,745,416 86,920 613,607 - - 18,445,943Employee benefits 4,247,002 - - - - 4,247,002Professional fees 2,435,604 - - - - 2,435,604Supplies and other 5,172,177 1,379 601,768 - - 5,775,324Other fees 1,915,028 5,917 64,768 1,700 - 1,987,413Repairs and maintenance 1,400,093 1,399 61,248 - - 1,462,740Insurance 826,985 - 30,609 - - 857,594Utilities 850,625 - 47,919 - - 898,544Leases and Rentals 422,133 - 261,910 - (260,608) 423,435Other 1,186,444 14,326 154,350 4,830 (103,882) 1,256,068Depreciation and amortization 2,700,120 - 205,511 87,268 - 2,992,899Interest 1,039,214 - 8,862 159,127 - 1,207,203Provision for uncollectible

accounts 2,395,738 - 82,453 - - 2,478,191Total expenses and losses 42,336,579 109,941 2,133,005 252,925 (364,490) 44,467,960

Operating Income 2,891,694 - 203,602 7,683 (126,770) 2,976,209

Other Income (Expense)Investment return 489,358 547 - - - 489,905Contributions 85,353 - - - - 85,353 Rental income 187,790 - - - - 187,790Depreciation expense (122,666) - - - - (122,666)Interest expense (111,603) - - - - (111,603)Net gain (loss) in joint ventures (596,154) - - - - (596,154)Loss on sale of asset (406,421) - - - - (406,421)Other income (expense), net (151,120) - - - - (151,120)Transfer- Friends of Hospice

of the Palouse (1,029,086) 1,029,086 - Total other income (expense) (1,654,549) 1,029,633 - - - (624,916)

Excess of revenuesover expenses 1,237,145 1,029,633 203,602 7,683 (126,770) 2,351,293

Investment return - change in unrealized gains and losseson trading securities 2,084,282 38,501 - - - 2,122,783

Minority interest in (gains)losses of subsidiaries - - - - (84,515) (84,515)

Dividends paid (200,000) (46,378) 246,378 - Increase in Unrestricted

Net Assets 3,321,427$ 1,068,134$ 3,602$ (38,695)$ 35,093$ 4,389,561$

GRITMAN MEDICAL CENTER, INC. AND SUBSIDIARIES COMPARATIVE RATIOS YEAR ENDED DECEMBER 31, 2009

26

2009 2008 Idaho U.S.

Operating RatiosTotal margin 5.0% 1.7% 5.6% 3.6%Return on equity 6.1% 2.1% 11.7% 8.0%Deduction percent 35.8% 30.3% 27.2% 34.0%Salaries to total expenses 41.5% 42.0% 45.0% 44.4%

Balance Sheet RatiosDays cash on hand 169 141 59 59 Days in accounts receivable 57 60 66 59 Average age of plant 11.2 10.1 9.6 10.3 Long-term debt/capitalization

percent 36.9% 40.2% 21.2% 26.2%

*Obtained from Flex Monitoring Team, October 2009, unaudited.

Gritman CAH Median*

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