Finance

OVERLAKE HOSPITAL MEDICAL CENTER

Consolidated Financial Statements

June 30, 2012 and 2011

(With Independent Auditors’ Report Thereon)

KPMG LLP Suite 2900 1918 Eighth Avenue Seattle, WA 98101

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Independent Auditors’ Report

The Board of Trustees Overlake Hospital Medical Center:

We have audited the accompanying consolidated balance sheets of Overlake Hospital Medical Center (the Hospital) (a Washington not-for-profit corporation) as of June 30, 2012 and 2011, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Hospital’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 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 express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Overlake Hospital Medical Center as of June 30, 2012 and 2011, and the results of operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

October 15, 2012

2 (Continued)

OVERLAKE HOSPITAL MEDICAL CENTER

Consolidated Balance Sheets

June 30, 2012 and 2011

(In thousands)

Assets 2012 2011

Current assets: Cash and cash equivalents $ 21,239 15,796 Hospital accounts receivable, net of allowance for bad debts

of $9,343 in 2012 and $11,396 in 2011 49,996 49,668 Clinic accounts receivable, net of allowance for bad debts

of $440 in 2012 and $354 in 2011 3,494 1,449 Current portion of pledges receivable 853 598 Current portion of assets whose use is limited 8,708 10,177 Supplies inventory, at cost 5,968 5,584 Prepaid expenses 5,116 4,203 Other current assets 7,504 10,243

Total current assets 102,878 97,718

Assets whose use is limited: Restricted by donors 5,568 5,089 Management designated 3,554 3,585 Funds held under bond indenture and collateral agreements 23,518 24,986 Less current portion (8,708) (10,177)

Total assets whose use is limited, net of current portion 23,932 23,483

Investments 249,611 236,251 Long-term portion of pledges receivable, net 71 94 Other long-term receivables, net 2,934 — Land, buildings, and equipment, net 193,752 188,254

Other assets: Investment in joint ventures 2,911 4,045 Deferred financing costs, net 4,815 5,252 Other assets 6,266 270

Total other assets 13,992 9,567 Total assets $ 587,170 555,367

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OVERLAKE HOSPITAL MEDICAL CENTER

Consolidated Balance Sheets

June 30, 2012 and 2011

(In thousands)

Liabilities and Net Assets 2012 2011

Current liabilities: Current portion of long-term debt $ 3,893 5,415 Current portion of capital leases 621 — Accounts payable 15,312 12,954 Accrued liabilities 36,849 32,769 Accrued interest payable 4,633 4,762 Payable to third-party agencies 2,618 3,091

Total current liabilities 63,926 58,991

Long-term debt, net of current portion 178,725 182,212 Long-term capital leases, net of current portion 141 — Other long-term liabilities 18,754 7,431

Total liabilities 261,546 248,634

Net assets: Unrestricted net assets 317,048 300,253 Temporarily restricted net assets 3,695 1,855 Permanently restricted net assets 4,881 4,625

Total net assets 325,624 306,733 Total liabilities and net assets $ 587,170 555,367

See accompanying notes to consolidated financial statements.

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OVERLAKE HOSPITAL MEDICAL CENTER

Consolidated Statements of Operations and Changes in Net Assets

Years ended June 30, 2012 and 2011

(In thousands)

2012 2011

Operating revenues (losses): Net patient service revenues $ 417,087 405,087 Other operating revenues 7,797 9,109 Contribution revenues 2,228 2,054 (Loss) gain on disposal of assets (54) 1,682

Net operating revenues 427,058 417,932

Operating expenses: Salaries 169,271 158,069 Registry 2,652 4,017 Employee benefits 41,347 39,168 Supplies 64,595 67,420 Purchased services 40,158 37,354 Interest 9,828 9,943 Depreciation and amortization 30,027 22,701 Provision for uncollectible accounts 14,010 18,639 Rent, leases, and utilities 13,147 10,195 Marketing, insurance, taxes, and other 23,890 23,601

Total operating expenses 408,925 391,107

Excess of revenues over expenses from operations 18,133 26,825

Nonoperating revenues, net: Investment income 11,340 7,968

Total nonoperating revenues, net 11,340 7,968

Excess of revenues over expenses 29,473 34,793

Other changes in unrestricted net assets: Net assets released for capital acquisitions 1,032 226 Change in pension liability (8,765) 4,692 Change in net unrealized (losses) gains on investments (7,902) 27,196 Appropriation of endowment assets for expenditure 165 98 Consolidation of joint venture 2,792 —

Increase in unrestricted net assets 16,795 67,005

Changes in temporarily restricted net assets: Contributions 4,139 1,894 Investment income 145 167 Change in net unrealized (losses) gains on investments (18) 675 Net assets released from restrictions (2,426) (1,559)

Increase in temporarily restricted net assets 1,840 1,177

Change in permanently restricted net assets: Contributions 256 20

Increase in permanently restricted net assets 256 20

Increase in net assets 18,891 68,202

Net assets, beginning of year 306,733 238,531 Net assets, end of year $ 325,624 306,733

See accompanying notes to consolidated financial statements.

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OVERLAKE HOSPITAL MEDICAL CENTER

Consolidated Statements of Cash Flows

Years ended June 30, 2012 and 2011

(In thousands)

2012 2011

Cash flows from operating activities: Change in net assets $ 18,891 68,202 Adjustments to reconcile change in net assets to net cash provided by

operating activities: Depreciation and amortization 30,027 22,701 Provision for uncollectible accounts 14,010 18,639 Loss (gain) on disposal of assets 54 (1,682) Restricted contributions received for capital and permanently restricted purposes (2,812) (513) Net realized and unrealized (gain) loss on investments 4,233 (28,017) Equity earnings in joint ventures, net of distributions (890) (2,982) Changes in operating assets and liabilities:

(Increase) decrease in: Hospital accounts receivable, net (13,663) (20,235) Clinic accounts receivable, net (2,720) (272) Pledges receivable, net (232) (289) Supplies inventory (384) (795) Prepaid expenses (913) (79) Other current assets 2,739 (5,495) Other long-term receivables (2,934) —

Increase (decrease) in: Accounts payable 2,493 1,938 Accrued liabilities 4,080 6,258 Accrued interest payable (129) 1,386 Payable to third-party agencies (473) (1,123) Other long-term liabilities 11,323 (5,816)

Net cash provided by operating activities 62,700 51,826

Cash flows from investing activities: Purchase of land, buildings, and equipment (32,384) (25,889) Proceeds from disposal of assets 52 1,823 Proceeds from sale of assets whose use is limited 15,160 22,832 Purchase of assets whose use is limited (14,175) (24,273) Proceeds from sale of investments 34,992 23,370 Purchase of investments (52,550) (53,319) Distributions from joint ventures 2,024 3,036 Purchase of other assets (7,800) (100)

Net cash used in investing activities (54,681) (52,520)

Cash flows from financing activities: Restricted contributions received for capital and permanently restricted purposes 2,812 513 Financing fees — (2) Assignment of debt from acquisition 917 — Principal payments on long-term debt (5,709) (5,180) Principal payments on capital lease obligations (596) —

Net cash used in by financing activities (2,576) (4,669)

Net increase (decrease) in cash and cash equivalents 5,443 (5,363)

Cash and cash equivalents, beginning of year 15,796 21,159 Cash and cash equivalents, end of year $ 21,239 15,796

Supplemental disclosures of cash flow information: Cash paid for interest $ 9,957 8,557 Purchase of land, building, and equipment included in accounts payable 1,443 1,578 Additions to capital leases 1,358 —

See accompanying notes to consolidated financial statements.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

6 (Continued)

(1) Description of Organization and Summary of Significant Accounting Policies

(a) Organization

Overlake Hospital Medical Center (the Hospital) is a 501(c)(3) not-for-profit corporation located in Bellevue, Washington. The Hospital is affiliated with other healthcare-related organizations. The Hospital’s primary service area is from Bothell to Renton and from the Cascade mountains to Lake Washington, including Mercer Island. The Hospital provides inpatient, outpatient, and emergency care services.

Controlled Affiliates of the Hospital

The following entities are controlled affiliates of the Hospital and therefore included in these consolidated financial statements.

Overlake Medical Clinics, LLC (the Clinics) was formed to establish, own, and operate primary care clinics and other outpatient healthcare entities. The Hospital is the sole member of the Clinics.

Overlake Hospital Foundation (the Foundation) is a 501(c)(3) not-for-profit corporation. The purpose of the Foundation is to: (a) receive grants, bequests, donations, and contributions on behalf of; (b) provide fund-raising and other support to; and (c) make contributions to Overlake Hospital and its related tax-exempt corporations. The Hospital is the sole member of the Foundation.

Overlake Hospital Auxiliaries (the Auxiliaries) is a 501(c)(3) not-for-profit corporation. The purpose of the Auxiliaries is to promote, support, and advance the well-being of the Hospital through a variety of ways, including serving as goodwill ambassadors to the community, conducting fund-raising activities, maintaining membership strength, and providing services to the Hospital for the benefit of its patients and their families. The Auxiliaries are controlled by the Hospital.

Washington Imaging Services, LLC (WIS) was a joint venture that the Hospital had a 27% ownership interest of in 2011. On July 8, 2011, the Hospital purchased the remaining ownership interest from the other owners. On October 31, 2011, the Hospital dissolved WIS and incorporated the medical imaging operations into the Hospital.

Other Affiliates of the Hospital

The following entities are affiliates of the Hospital, but are not controlled and are therefore not included within these consolidated financial statements.

Overlake Hospital Association (the Association) is a 501(c)(3) not-for-profit corporation and is the sole member of the Hospital. The Association’s purpose is to promote and conduct health-related activities.

Overlake Medical Tower LLC (the Medical Tower) was formed to acquire, own, develop, and operate a medical office building and garage complex on the Hospital’s campus. The Association is the sole member of the Medical Tower.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

7 (Continued)

Overlake Issaquah Medical Services, LLC (OIMS) was formed to hold the real estate interests in Issaquah, and to coordinate and oversee the programs operated at that site. OIMS is expected to lease property in the Issaquah area. The Association is the sole member of OIMS.

(b) Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates include the provision for contractual allowances and uncollectible accounts, fair value of financial instruments, reserves for employee benefit obligations, and self-insurance reserves for professional liability and workers’ compensation.

(c) Basis of Presentation

The consolidated financial statements include the accounts of the Hospital and its controlled affiliates. All significant intercompany transactions between the Hospital and its controlled affiliates have been eliminated in consolidation.

(d) Cash and Cash Equivalents

Included in cash and cash equivalents are cash equivalents of approximately $2,100 and $1,100 as of June 30, 2012 and 2011, respectively, which are invested in money market savings and highly liquid debt instruments with original maturities of three months or less at the date of purchase.

The Hospital maintains cash and cash equivalents on deposit at financial institutions, which at times exceed the limits insured by the Federal Deposit Insurance Corporation. This exposes the Hospital to potential risk of loss in the event the financial institution becomes insolvent.

(e) Provision for Uncollectible Accounts

The Hospital and the Clinics provide an allowance for potential uncollectible patient accounts receivable whereby such receivables are reduced to their estimated net realizable value. The Hospital estimates this allowance based on the aging of accounts receivable, historical collection experience by payor, and other relevant factors. The Clinics estimates this allowance based on the historical collection experience by clinic and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, the increased burden of co-insurance, and deductibles to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

8 (Continued)

(f) Pledges Receivable

Pledges of financial support are recorded at fair value by the Foundation and Auxiliaries when a donor’s unconditional promise to give has sufficient definition with respect to the amount and planned timing of the donation. Conditional promises to give and intentions to give are reported at fair value at the earlier of when the contingency is met or the date the gift is received. An allowance for uncollectible pledges is recorded based on an estimated percentage of pledges that may not be collectible based on historical experience. The Foundation and Auxiliaries anticipate collection of net pledges receivable over the next one to five years. Significant pledges over $250,000, not scheduled to be collected within one year, are discounted.

(g) Assets Whose Use is Limited

Certain assets of the Hospital, the Foundation, and the Auxiliaries are held in trust under indenture agreements, are restricted by donor stipulations, or are management designated. Assets that have been management designated are subject to change in the future. These assets consist primarily of cash, accrued interest, money market funds, bond mutual funds, and equity mutual funds, and are recorded at fair value.

(h) Investments

Investments consist primarily of cash, money market funds, bond mutual funds, equity mutual funds, and an unregistered equity mutual fund, and are recorded at fair value.

(i) Other-than-Temporary Impairment

The Hospital reviews investments each period and assesses whether an other-than-temporary impairment has occurred. Each investment within the portfolio is evaluated individually. Major factors that are considered are: 1) fair value of the investment is below cost, 2) loss has been sustained over an extended period of time, and 3) whether the Hospital intends to sell or could be required to sell the investment security, or, if not, whether it has the ability to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to or beyond the cost of the investment. Additional factors that might be considered include, but are not limited to: 1) credit risk of the investment, 2) decline attributable to adverse conditions specifically related to the investment, its industry, or geography, 3) investment has been downgraded by a rating agency, 4) dividends have been reduced or eliminated or scheduled interest has not been paid, 5) changes in the value of the investment after the close of the period, 6) trading in the investment has been suspended, and 7) discussion with investment advisor.

A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to market value. The impairment is charged to earnings and a new cost basis for the security is established.

(j) Land, Buildings, and Equipment

Land, buildings, and equipment acquisitions over $3 and a useful life of at least two years are recorded at cost. Improvements and replacements of buildings and equipment are capitalized;

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

9 (Continued)

maintenance and repairs are expensed. The cost of land, buildings, and equipment sold or retired and the related accumulated depreciation are removed from the records and any resulting gain or loss is recorded. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets or lease term if shorter. Equipment under capital lease obligations is amortized on the straight-line method over the period of the lease term or the estimated useful life of the equipment, whichever is shorter. Such amortization is included in depreciation and amortization in the consolidated financial statements.

The fair value of a long-lived asset may change due to a number of factors such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner in which the asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a change in expected useful life due to changes regarding obsolescence, planned replacement, or disposal. When management becomes aware of a situation that could cause the fair value of a long-lived asset to be lower than the book value, the asset is reviewed to determine whether an impairment has occurred and records an impairment and revises the estimated useful life as needed.

(k) Deferred Financing Costs

The Hospital defers the costs of obtaining financing and amortizes these costs over the term of the related debt using the effective-interest method.

(l) Other Assets

In connection with the 2010 purchase of the Bellevue Heart and Vascular Center (renamed Outpatient Heart Center), there were payments of $739 for definite-lived assets and $258 for indefinite-lived assets. The Hospital originally amortized the definite-lived assets over the expected useful lives of two to seven years using the straight-line method. The Hospital tests the intangible asset and goodwill for impairment as of June 30 and also monitors for triggering events in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350. Due to declining volumes, the Hospital made a decision to close the Outpatient Heart Center in September 2011. As a result, the Hospital shortened the lives of the remaining intangible assets and recognized an intangible asset impairment of $72 and a goodwill impairment of $258 in 2011.

In connection with the July 2011 purchase of the remaining interest in WIS, there were payments of $7,760 for working capital, fixed assets net of long-term debt, intangible assets, and goodwill. The Hospital amortizes the definite-lived assets over the expected useful lives of one to six years using the straight-line method. The Hospital tests the intangible asset and goodwill for impairment as of June 30 and also monitors for triggering events in accordance with FASB ASC 350.

(m) Net Patient Service Revenues

A significant portion of the patient service charges of the Hospital, for the years ended June 30, 2012 and 2011, are derived from Medicare patients (28% and 29%, respectively), Medicaid patients (3%

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

10 (Continued)

and 3%, respectively), or patients covered under commercial insurance and other negotiated contracts (66% and 64%, respectively).

The Hospital is paid for services to Medicare inpatients under the Prospective Payment System, which provides for reimbursement based on diagnosis-related groupings (DRGs). Such DRG payments are prospectively established and may be greater or less than the Hospital’s actual charges for its services. The majority of Medicare outpatient services are reimbursed based on ambulatory payment classifications (APCs). APC payments are prospectively established and may be greater or less than the Hospital’s actual charges for its services. Payments for Medicare outpatient laboratory services and certain therapeutic services are based on a fee schedule. Capital payments are based on a federal rate.

The Hospital is paid for services provided to Medicaid inpatients under a DRG-based system. Payments for Medicaid outpatient services are reimbursed on a percentage of actual charges or a fee schedule.

The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors.

Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. The Hospital’s net patient service revenue increased by $698 and decreased by $163 during 2012 and 2011, respectively, as a result of retroactive adjustments under reimbursement agreements with third-party payors.

For services that are paid under cost-reimbursed contractual arrangements with Medicare, the Hospital is paid at an interim rate during the year. The difference between the interim rate and the actual reimbursement based on defined allowable costs results in a receivable from or a payable to third-party agencies.

The Medicare program’s administrative procedures preclude final determination of amounts receivable from or payable to the Medicare program until after the Hospital’s annual cost reports have been audited or otherwise reviewed and settled by Medicare. The estimated settlement receivable/payable for unsettled cost reports is included in the accompanying consolidated financial statements.

(n) Charity Care

The Hospital provides service to eligible patients at reduced or no cost based upon the individual patient’s financial resources. The Hospital’s policy provides for 100% charity to patients with income up to 200% of the federal poverty guidelines and from 30% to 98% charity to patients with income from 201% to 400% of the federal poverty guidelines. Records are kept to identify, approve,

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

11 (Continued)

and monitor those costs that are incurred under the charity care policy. Because the Hospital does not expect payment, estimated charges for charity care are not included in revenue. In addition to the approved charity care described above, the Hospital believes that other uncollected accounts would be approved under its charity care policy if information about the patient’s financial resources were shared with the Hospital. Such amounts are not considered charity care.

(o) Private Pay Discounts

The Hospital offers patients with no insurance prompt pay discounts for medically necessary services. A 30% prompt pay discount is granted for full payment within 30 days of the first billing statement and a 15% discount is granted for full payment within 60 days of the first billing statement. Prompt pay discounts are recorded as an adjustment to patient service charges.

(p) Donor-Restricted Gifts

Gifts received from or pledged by donors are reported as either temporarily or permanently restricted contributions if they are received with donor stipulations that limit the use of the donated assets or contain a time restriction. When a donor restriction expires, that is, when a stipulated time restriction ends or restricted purpose is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets.

(q) Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are those whose use by the Hospital has been limited by donors to a specific time period or purpose. Permanently restricted net assets are assets that have been restricted by donors to be maintained by the Hospital in perpetuity.

(r) Excess of Revenues over Expenses

The consolidated statements of operations and changes in net assets include excess of revenues over expenses. Changes in net assets that are excluded from excess of revenues over expenses include net assets released for capital acquisitions, change in pension liability, change in net unrealized losses or gains on investments that are other than trading, appropriation of endowment assets for expenditure, consolidation of joint venture, contributions to temporarily and permanently restricted net assets, investment income from donor-designated endowments, and net assets released from restrictions.

(s) Federal Income Taxes

The Hospital is an organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code (IRC) and is generally not subject to federal income taxes. However, the Hospital is subject to income taxes on any net income that is derived from a trade or business, regularly carried on, and not in furtherance of the purposes for which it was granted exemption.

(t) Recently Adopted Accounting Standards

In August 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-23, Health Care Entities (Topic 954): Measuring Charity Care for Disclosure (ASU 2010-23). ASU 2010¬23 is intended to reduce the diversity in practice regarding the measurement basis used in the disclosure of

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

12 (Continued)

charity care. ASU 2010-23 requires that cost be used as the measurement basis for charity care disclosure purposes and that cost be identified as the direct and indirect costs of providing the charity care, and requires disclosure of the method used to identify or determine such costs. This ASU became effective for the Hospital on July 1, 2011.

In August 2010, the FASB issued ASU No. 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. The amendments in the ASU clarify that a healthcare entity may not net insurance recoveries against related claim liabilities. In addition, the amount of the claim liability must be determined without consideration of insurance recoveries. This ASU became effective for the Hospital on July 1, 2011.

(2) Net Patient Service Revenues

The following are the components of net patient service revenues for the years ended June 30, 2012 and 2011:

2012 2011

Patient service charges: Inpatient $ 603,394 576,081 Outpatient 466,755 407,608

Total patient service charges 1,070,149 983,689

Adjustments to patient service charges: Unreimbursed Medicare charges (208,932) (200,690) Unreimbursed Medicaid charges (19,854) (19,474) Other unreimbursed charges (404,064) (342,991) Charity care (20,212) (15,447)

Total adjustments to patient service charges (653,062) (578,602) Net patient service revenues $ 417,087 405,087

The following is the mix of patient charges by payor for the years ended June 30, 2012 and 2011:

2012 2011

Medicare 28% 29% Medicaid 3 3 Group Health 17 16 Premera 16 15 Regence 8 9 Other third-party payors 25 24 Private pay 3 4

Total 100% 100%

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

13 (Continued)

(3) Hospital Safety Net Program

In April 2010, the Hospital Safety Net Assessment Act was passed by the Washington State legislature. This legislation used federal matching funds to increase hospital payments by almost $200,000 between 2009 and 2011 in order to mitigate severe budget cuts made to hospitals during the 2009 session of the state legislature. The legislation is scheduled to sunset by June 30, 2013.

Under this program, Washington State nongovernmental hospitals are assessed a fee on all non Medicare patient days. This fee is collected by the state and the state uses these funds to obtain new federal Medicaid matching funds. Hospitals receive increased Medicaid rates to cover the assessments paid and to restore a portion of the cuts enacted during the 2009 legislative session.

The portion of the program related to Medicaid fee for service had been implemented retroactive to July 2009. The portion of the program related to Medicaid managed care was approved by the Centers for Medicare & Medicaid Services in April 2011 retroactive to July 2009, but has only been partially implemented. As a result, the Hospital recorded an expense for assessments in the amount of $10,224 with a resulting payable due of $4,222 and revenue of $3,313 with a receivable for increased Medicaid payments of $982 as of June 30, 2011. The amounts recorded related to this program are an estimate, and actual results could differ from those estimates.

Certain hospitals entered into a separate agreement with the Washington State Hospital Association for a secondary redistribution to insure that all hospitals that are a part of the agreement recover at least the amount of the tax assessment plus 30% of the estimated Medicaid cuts that would have occurred had the Hospital Safety Net Assessment Act been implemented. The Hospital recorded additional reimbursement and a corresponding receivable of $6,684 related to this agreement as of June 30, 2011. The Hospital received interim payments of $5,914 in 2012 and has a receivable of $566 as of June 30, 2012.

In May 2011, the Washington State legislature passed legislation that reduced the amount of funds that would be available for federal matching funds and reduced Medicaid payments to hospitals effective July 1, 2011. The Washington State Hospital Association has filed two court cases to challenge the legislation. If successful, the result could either be restoration of the Medicaid funding cuts that went into effect on July 1, 2011 or to retroactively terminate the Hospital Safety Net program from July 1, 2011.

The Hospital recorded an expense for assessments in the amount of $8,828 in 2012 and a payable due of $2,943 as of June 30, 2012. The Hospital has a receivable for increased Medicaid payments of $171 from the program’s first biennium as of June 30, 2012.

Due to changes to the program effective July 1, 2011, it was no longer possible for all hospitals to recover at least the amount of the tax assessment. There has been agreement among certain hospitals and the Washington State Hospital Association for a secondary redistribution of a more limited scope than originally designed. The Hospital recorded additional reimbursement and a corresponding receivable of $2,000 related to this agreement as of June 30, 2012.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

14 (Continued)

(4) Charity Care and Community Benefit

The Hospital provides care without charge or at reduced rates to patients who qualify for charity care according to the Hospital’s policy. The Hospital determines the cost of charity care using a cost to charge ratio following the regulatory guidelines. Total expenses are reduced by bad debt, other operating revenues, the hospital safety net assessment, and community benefit expense and patient charges are reduced by community benefit revenue in determining the cost to charge ratio. The ratio is then applied to the charges that were written off for charity to determine the cost of charity. For the years ended June 30, 2012 and 2011, the cost of providing charity was estimated at approximately $7,032 and $5,561 respectively.

The Hospital provides care to Medicaid patients at rates below the cost of providing services. For the years ended June 30, 2012 and 2011, payments were less than estimated cost by approximately $9,711 and $6,427, respectively.

The Hospital is also involved in an array of activities that benefit the broader community. Community education classes are offered in a wide range of health-related topics including preparing for childbirth, positive parenting, infant and child safety, adult first aid, CPR, women’s health, smoking cessation, weight loss, diabetes, balance, dementia, living wills, long-term care insurance, cholesterol, caregiver support, dealing with cancer, and depression. In addition to classes, the Hospital has a cancer resource center that coordinates support groups, counseling, and provides access to the latest information on cancer at no cost. The Hospital provides cholesterol, diabetes, and bone density screenings at various community events. Education is part of the Hospital’s mission and is evidenced by the Hospital’s participation in several residency programs or by providing a clinical setting for college-based programs including nursing, pharmacy technicians, medical imaging technicians, physical, occupational, and respiratory therapists, dietetic interns, emergency medical technicians, physician assistants, midwives, and nurse practitioners. The Hospital also has an integrated senior care program to assist seniors with general health, diet, exercise, therapeutic, and referral needs. The Hospital operates senior care clinics at a loss for the benefit of the community. As a community member, the Hospital participates and helps sponsor many community events in the area it serves. The Hospital provides support to physician offices to implement electronic medical records upon request. The estimated net unreimbursed expenditures on community benefit programs were $4,924 and $5,012 in 2012 and 2011, respectively.

The Hospital works in partnership with a number of community agencies and provides volunteer support for programs and events that benefit the community. It is the Hospital’s belief that giving back to the community is an integral part of its mission.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

15 (Continued)

(5) Concentrations of Credit Risk

The Hospital grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors at June 30 was as follows:

2012 2011

Medicare 21% 22% Medicaid 3 3 Group Health 19 19 Premera 13 12 Regence 8 7 Other third-party payors 23 23 Private pay 13 14

Total 100% 100%

(6) Assets Whose Use is Limited and Investments

Assets whose use is limited and investments, which are stated at fair value based primarily on quoted market prices, consist of the following as of June 30, 2012 and 2011:

2012 2011

Assets whose use is limited: Cash and accrued interest receivable $ 9 6 Money market funds 24,115 25,060 Bond mutual funds 3,469 3,363 Equity mutual funds 5,047 5,231 Less current portion (8,708) (10,177)

Assets whose use is limited, net $ 23,932 23,483

Investments: Money market funds $ 23 15 Bond mutual funds 123,029 110,605 Equity mutual funds 126,559 125,631

Total investments $ 249,611 236,251

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

16 (Continued)

Components of investment income (which is included in other nonoperating revenues, net) for the years ended June 30, 2012 and 2011 are as follows:

2012 2011

Interest and dividends $ 7,652 7,861 Net realized gains on investments 3,688 107

Total investment income $ 11,340 7,968

The following tables summarize the composition of the Hospital’s assets whose use is limited and investments with unrealized losses as of June 30, 2012 and 2011:

2012 Unrealized losses existing

Less than 12 months 12 Months or longer Total Unrealized Unrealized Unrealized

Description of securities Fair value loss Fair value loss Fair value loss

Bond mutual funds $ 3,234 (22) 3,094 (57) 6,328 (79) Equity mutual funds 19,789 (2,262) 194 (56) 19,983 (2,318)

$ 23,023 (2,284) 3,288 (113) 26,311 (2,397)

2011

Unrealized losses existing Less than 12 months 12 Months or longer Total

Unrealized Unrealized Unrealized Description of securities Fair value loss Fair value loss Fair value loss

Bond mutual funds $ 19,116 (285) — — 19,116 (285) Equity mutual funds 972 (6) — — 972 (6)

$ 20,088 (291) — — 20,088 (291)

No other-than-temporary impairment charge was recorded in the accompanying consolidated financial statements during 2012 and 2011.

The majority of the Hospital investments and assets whose use is limited are in bond and equity mutual funds. Unrealized losses on these investments and assets whose use is limited are due to the economic environment.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

17 (Continued)

(7) Disclosure about Fair Value of Financial Instruments

ASC 820-10-50 established a framework for measuring fair value that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820-10-50 are described below:

• Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. At June 30, 2012 and 2011, Level 1 securities include primarily overnight repurchase agreements, money market funds, and mutual funds.

• Level 2 – Valuation is based upon 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. At June 30, 2012, Level 2 securities include an unregistered mutual fund. There were no Level 2 securities at June 30, 2011.

• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Hospital’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques. There were no Level 3 securities at June 30, 2012 and 2011.

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Hospital maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. Fair value measurements for assets and liabilities where there is limited or no observable market data and, therefore, are based primarily upon estimates calculated by the Hospital, are based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized upon an actual settlement of the asset or liability. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of the current or future values.

Following is a description of valuation methods and assumptions used for assets recorded at fair value and for estimating fair value for financial instruments not recorded at fair value but required to be disclosed:

(a) Cash

The carrying amounts, at cost, equal fair value.

(b) Long-Term Debt

Long-term debt is carried at amortized cost; however, accounting standards require the Hospital to disclose the fair value. The fair value of the Hospital’s long-term debt is estimated based on the future cash flows at the discounted current rates available to the Hospital for debt of similar type and

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

18 (Continued)

maturity, which are Level 2 inputs. Any call provisions that apply are taken into account when valuing the debt. The carrying value of the long-term debt was $182,618 and $187,627 as of June 30, 2012 and 2011, respectively. The fair value of the long-term debt was $194,185 and $180,310 as of June 30, 2012 and 2011, respectively.

(c) Marketable Securities and Interest Rate Swaps

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and 2011:

2012 Investments at estimated fair value

Valuation Quoted techniques prices in Valuation incorporating

active techniques information markets based on other than

for identical observable observable assets market data market data

Assets (Level 1) (Level 2) (Level 3) Total

Overnight repurchase agreements $ 2,100 — — 2,100

Total cash equivalents $ 2,100 — — 2,100

Cash and accrued interest $ 9 — — 9 Money market funds 24,115 — — 24,115 Bond mutual funds 3,469 — — 3,469 Equity mutual funds 5,047 — — 5,047

Total assets whose use is limited $ 32,640 — — 32,640

Money market funds $ 23 — — 23 Bond mutual funds 123,029 — — 123,029 Equity mutual funds 118,984 7,575 — 126,559

Total investments $ 242,036 7,575 — 249,611

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

19 (Continued)

2011 Investments at estimated fair value

Valuation Quoted techniques prices in Valuation incorporating

active techniques information markets based on other than

for identical observable observable assets market data market data

Assets (Level 1) (Level 2) (Level 3) Total

Overnight repurchase agreements $ 1,100 — — 1,100

Total cash equivalents $ 1,100 — — 1,100

Cash and accrued interest $ 6 — — 6 Money market funds 25,060 — — 25,060 Bond mutual funds 3,363 — — 3,363 Equity mutual funds 5,231 — — 5,231

Total assets whose use is limited $ 33,660 — — 33,660

Money market funds $ 15 — — 15 Bond mutual funds 110,605 — — 110,605 Equity mutual funds 125,631 — — 125,631

Total investments $ 236,251 — — 236,251

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

20 (Continued)

(8) Land, Buildings, and Equipment

The Hospital’s land, buildings, and equipment accounts, and related accumulated depreciation accounts, as of June 30, 2012 and 2011 are set forth below:

2012 2011

Assets: Land $ 2,151 2,151 Land improvements 4,931 5,460 Buildings and improvements 193,517 184,937 Equipment:

Fixed 38,980 37,767 Movable 141,344 120,238

Construction in progress 1,693 1,590

Total land, buildings, and equipment 382,616 352,143

Accumulated depreciation: Land improvements 3,986 4,460 Buildings and improvements 73,102 66,933 Equipment:

Fixed 26,841 23,615 Movable 84,935 68,881

Total accumulated depreciation 188,864 163,889 Total land, buildings, and equipment, net $ 193,752 188,254

The Hospital recorded $28,003 and $21,830 of depreciation expense in 2012 and 2011, respectively. The following is a summary of asset lives used for calculating depreciation:

Asset lives

Land improvements 5 – 40 years Buildings 3 – 40 years Fixed equipment 3 – 30 years Movable equipment 3 – 20 years

Interest on borrowed funds during construction is a component of the cost of assets. The amount capitalized represents interest on funds expended for construction. Capitalization of interest ceases when the asset is placed in service. No interest was capitalized in 2012 and 2011.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

21 (Continued)

(9) Investments in Joint Ventures

The Hospital participates in various joint ventures. The Hospital accounts for each of these activities on either the cost basis or the equity method of accounting, depending upon the level of ownership and operational influence.

The Hospital has a 43% ownership interest in Overlake Surgery Center, LLC (OSC), a provider of surgical services, which is accounted for using the equity method. The balance of this investment at June 30, 2012 and 2011 was $1,286 and $1,392, respectively. The Hospital’s share of earnings from this joint venture was $14 and $184 in 2012 and 2011, respectively, which is included in other operating revenues in the accompanying consolidated statements of operations and changes in net assets.

The Hospital had a 27% ownership interest in Washington Imaging Services, LLC, a provider of outpatient medical imaging services, which was accounted for using the equity method through July 7, 2011. On July 8, 2011, the Hospital purchased the remaining ownership interest from the other owners of Washington Imaging Services, LLC for approximately $7,760. The purchase included working capital, fixed assets net of long-term debt, and intangible assets. The balance of this investment at June 30, 2012 and 2011 was $0 and $1,109, respectively. The Hospital’s share of (losses) earnings from this joint venture was $(66) and $227 in 2012 and 2011, respectively, which is included in other operating revenues in the accompanying consolidated statements of operations and changes in net assets.

The Hospital has an 8% ownership interest in First Choice Health Network, Inc., which provides preferred provider organization services and is accounted for at cost. The balance of this investment at June 30, 2012 and 2011 was $1,500 and $1,500, respectively. Distributions from this joint venture were $300 and $450 in 2012 and 2011, respectively, which is included in other operating revenues in the accompanying consolidated statements of operations and changes in net assets.

The Hospital has an 8% ownership interest in PacLab, LLC, a provider of laboratory services, which is accounted for at cost. The balance of this investment at June 30, 2012 and 2011 was $124 and $45, respectively. Distributions from this joint venture were $1,684 and $2,119 in 2012 and 2011, respectively, which is included in other operating revenues in the accompanying consolidated statements of operations and changes in net assets.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

22 (Continued)

The following represents unaudited summary financial information of the joint ventures as of and for the year ended June 30, 2012:

Overlake Washington First Choice Surgery Imaging Health

Center, LLC Services, LLC Network, Inc. PacLab, Inc.

Current assets $ 2,044 — 17,321 2,216 Noncurrent assets 2,717 — 10,470 3,789

Total assets $ 4,761 — 27,791 6,005

Current liabilities $ 545 — 5,875 65 Long-term liabilities 1,268 — 94 — Equity 2,948 — 21,822 5,940

Total liabilities and equity $ 4,761 — 27,791 6,005

Revenues $ 8,443 212 40,104 92 Expenses (8,531) (461) (34,597) (1,763)

Net income (loss) $ (88) (249) 5,507 (1,671)

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

23 (Continued)

(10) Financing

(a) Long-Term Debt

Long-term debt, as of June 30, 2012 and 2011, is as follows:

2012 2011

Revenue bonds, Series 2003, 2.00% to 5.00%, due in annual principal installments beginning July 1, 2005 ranging from $550 to $2,535, until 2019, net of premium of $162 and $204 for 2012 and 2011, respectively, callable on or after July 2013 $ 5,167 7,744

Revenue bonds, Series 2005, 3.30% to 5.00%, due in annual principal installments beginning July 1, 2009 ranging from $1,535 to $4,375, until 2038, net of premium of $836 and $1,022 for 2012 and 2011, respectively, callable on or after July 2015 77,576 80,641

Revenue bonds, Series 2010, 3.00% to 5.70%, due in annual principal installments beginning July 1, 2013 ranging from $1,305 to $5,700, until 2038, net of discount of $163 and $173 for 2012 and 2011, respectively, callable on or after July 2020 99,252 99,242

Note payable to a financial institution, 4.75% due in monthly installments of $13 until January 2015 381 —

Note payable to a financial institution, 5.25% due in monthly installments of $7 until January 2014 138 —

Note payable to a financial institution, 6.31% due in monthly installments of $8 until August 2013 104 —

Total long-term debt 182,618 187,627

Less current portion (3,893) (5,415) Long-term debt, net of current portion $ 178,725 182,212

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

24 (Continued)

The principal amounts due by year are as follows:

Fiscal year: 2013 $ 3,893 2014 5,271 2015 5,319 2016 5,425 2017 5,625 Thereafter 156,250

181,783

Add unamortized bond premiums 835

$ 182,618

The Series 2005 revenue bonds comprise two subseries. Series 2005A is $25,000, 3.30% to 5.00%, due in annual principal installments from July 1, 2009 to July 1, 2016, ranging from $2,635 to $3,685. Series 2005B is $60,000, 4.65% to 5.00%, due in annual principal installments from July 1, 2017 to July 1, 2038, ranging from $1,535 to $4,375.

As security for the payment of the Series 2003, Series 2005, and Series 2010 revenue bonds (the bonds), the Hospital has granted the Trustee a security interest in the Hospital’s gross revenues and liens against the Hospital’s equipment and the monies in the trust funds as described below. The bonds are also secured by a deed of trust on the Hospital’s land and buildings. The Hospital obtained municipal bond insurance for the Series 2003 bonds from National Public Finance Guarantee Corporation (formerly, MBIA Insurance Corporation) and for the Series 2005 bonds from Assured Guaranty Corp. and ACA Financial Guaranty Corporation, which insures the payment of principal and interest. A trust fund has been established for the regular deposit of interest and principal payments of the bonds. In addition, the Hospital is required to maintain a debt reserve fund of approximately $14,809 as of June 30, 2012 and 2011. Both funds are reflected within assets whose use is limited on the accompanying consolidated financial statements.

Under the terms of the loan agreements, the Hospital has agreed to maintain certain financial ratios and comply with certain other covenants. Management believes it is in compliance with these financial covenants and ratios as of June 30, 2012.

(b) Capital Lease Obligations

The Hospital leases certain medical equipment, which are accounted for as capital leases in the accompanying financial statements. The capital lease obligations are collateralized by leased equipment and have varying rates of interest from 4.37% to 4.52%.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

25 (Continued)

The following is a schedule of future minimum lease payments in thousands as of June 30, 2012:

Fiscal year: 2013 $ 642 2014 142

Total minimum lease payments 784

Less amount representing interest (22)

762

Less current portion (621) Capital lease obligations, net of current portion $ 141

(c) Line of Credit and Other Debt Obligations

The Hospital had an unsecured line of credit in the amount of $5,000 through December 15, 2010 at which time the Hospital decided not to renew the line of credit. There were no borrowings during fiscal 2012 and 2011.

The Hospital has access to letters of credit up to $2,500. There was a $1,780 letter of credit available as of June 30, 2012 and 2011, respectively. Interest rates are based on 100 basis points times the outstanding amount. The letter of credit expires on September 30, 2012 with automatic six month renewals.

Overlake Medical Tower, LLC, an affiliate, borrowed $14,000 in October 2002 related to the construction of a medical office building. The note payable has a variable rate of interest and a variable to fixed interest rate swap approximating 6.27% as of June 30, 2012. The note payable was guaranteed by the Hospital and the balance outstanding as of June 30, 2012 is $8,430. The loan was refinanced in July 2012 at which time the guarantee by the Hospital was removed.

(11) Retirement Program

The Hospital’s retirement program consists of a Cash Account Plan (the Plan), a Voluntary Employee Tax Deferred Plan 403(b), and a Contribution Plan 401(a).

(a) The Plan

The Plan is a defined benefit, noncontributory plan with a defined contribution feature. The Plan covers all qualified employees hired prior to September 1, 2008, including employees of the Hospital’s controlled affiliates, complies with the Employee Retirement Income Security Act of 1974, and is accounted for in accordance with ASC 715-20-50. The measurement date of the Plan is June 30.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

26 (Continued)

Employees hired prior to September 1, 2008 automatically became participants in the Plan on the first day of employment. Employees become vested in the Plan according to a step schedule with full vesting at three years.

(b) Changes to the Plan and Overlake Hospital Medical Center Contribution Plan 401(a)

Effective January 1, 2009, the Board of Trustees approved the following changes impacting the Plan and the Overlake Hospital Medical Center Matching Contributions Program (the Matching Program), renamed the Overlake Hospital Medical Center Contribution Plan 401(a) (the Contribution Plan):

Employees hired on or after September 1, 2008 or under the age of 41 as of December 31, 2008 will participate in the new retirement program (Service Plus Program). Under the terms of the Service Plus Program, participants:

• Receive a base contribution to the Contribution Plan of 2% of the participant’s eligible compensation;

• Receive a matching contribution to the Contribution Plan of 100% of the participant’s contributions to the Overlake Hospital Medical Center Voluntary Employee Tax Deferred Program up to a maximum of 4% or 6% for employees with less than five years of service or more than five years of service, respectively, subject to certain limitations imposed under the IRC; and

• Are no longer eligible for participation in the Plan, with any existing benefits frozen except for interest as of December 31, 2008.

Employees hired prior to September 1, 2008 and reaching the age of 41 or older as of December 31, 2008 were given the choice to continue to accrue benefits under the Plan and the existing provisions of the Matching Program, or participate in the Service Plus Program.

(c) Contributions to the Plan

Employees that chose to continue accruing benefits under the Plan are eligible for a contribution at the end of each calendar year in which 1,000 hours of work has been credited. The contribution is based on an employee’s gross salary and age.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

27 (Continued)

A summary of the components of net periodic benefit cost for the years ended June 30, 2012 and 2011 is as follows:

2012 2011

Service cost $ 3,195 3,350 Interest cost 2,170 2,121 Expected return on plan assets (2,876) (2,450) Amortization of prior service cost 13 13 Amortization of loss 315 889

Net periodic benefit cost $ 2,817 3,923

Weighted average assumptions used to determine net benefit cost for the years ended June 30, 2012 and 2011 were as follows:

2012 2011

Discount rate 5.05% 5.08% Rate of compensation increase 5.75 5.75 Long-term rate of return on assets 7.01 7.38

To develop the expected long-term rate of return on assets assumption, the Hospital considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 7.01% and 7.38% long-term rate of return on assets assumption for the years ended June 30, 2012 and 2011, respectively, which reflects a lower return expectation than the Plan has experienced historically, in recognition that future returns may not be as strong as past returns.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

28 (Continued)

A summary of the change in benefit obligation and change in plan assets for the years ended June 30, 2012 and 2011 is as follows:

2012 2011

Benefit obligation at beginning of year $ 45,369 44,005 Service cost 3,195 3,350 Interest cost 2,170 2,121 Actuarial loss 6,365 490 Benefits paid (2,276) (4,273) Expenses paid (202) (324)

Benefit obligation at end of year 54,621 45,369

Fair value of plan assets at beginning of year 40,852 33,759 Actual return on plan assets 148 6,730 Employer contribution 4,905 4,960 Benefits paid (2,276) (4,273) Expenses paid (202) (324)

Fair value of plan assets at end of year 43,427 40,852

Funded status (11,194) (4,517)

Employer contribution — —

Net amount recognized in the consolidated balance sheet $ (11,194) (4,517)

Amounts recognized in unrestricted net assets consist of: Prior service cost $ (37) (50) Accumulated loss (16,048) (7,270)

Net actuarial loss $ (16,085) (7,320)

The net amount recognized in the consolidated balance sheets is reflected within other long-term liabilities in the accompanying consolidated financial statements. The estimated prior service cost and net loss that will be amortized into net periodic benefit cost over the next fiscal year is $13 and $1,222, respectively.

Weighted average assumptions used to determine benefit obligations at June 30, 2012 and 2011 were as follows:

2012 2011

Discount rate 3.47% 5.05% Rate of compensation increase 5.75 5.75 Measurement date June 30, 2012 June 30, 2011

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

29 (Continued)

The accumulated benefit obligation as of June 30, 2012 and 2011 is $54,621 and $45,369, respectively. The expected employer contribution for the year ending June 30, 2013 is $4,140,000.

Benefit payments expected to be paid over the next 10 years ending June 30 are as follows:

2013 $ 5,400 2014 3,400 2015 3,100 2016 3,200 2017 3,300 2018 – 2022 17,500

$ 35,900

The objectives of the Plan’s investment policy is to fully fund the actuarial accrued liability of the Plan, secondarily to maximize return within reasonable and prudent levels of risk in order to minimize contributions, and to maintain sufficient liquidity to meet benefit payment obligations on a timely basis. The Plan’s investment policy states that the plan assets have a target allocation of 40% debt securities and 60% equity securities with a range of plus or minus 5%. The equity portion of the portfolio is further diversified across U.S. and non-U.S. equities as well as growth, value, small and large capitalizations. The asset allocation of the Plan will be maintained as close to the target allocation as reasonably possible. Investment risk and returns are reviewed on an ongoing basis through quarterly investment portfolio reviews. The Plan’s asset allocations as of the measurement date by asset category are as follows:

2012 2011

Asset category: Equity securities 59% 61% Debt securities 40 38 Cash equivalents 1 1

Total 100% 100%

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

30 (Continued)

The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of June 30, 2012:

Investments at estimated fair value Investments

at fair Valuation as value techniques

determined Valuation incorporating by quoted techniques information prices in based on other than

active observable observable markets market data market data (Level 1) (Level 2) (Level 3) Total

Mutual funds: Fixed income funds $ 17,433 — — 17,433 Domestic equity funds 18,735 — — 18,735 International equity funds 7,067 — — 7,067 Money market funds 192 — — 192

Total mutual funds $ 43,427 — — 43,427

The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of June 30, 2011:

Investments at estimated fair value Investments

at fair Valuation as value techniques

determined Valuation incorporating by quoted techniques information prices in based on other than

active observable observable markets market data market data (Level 1) (Level 2) (Level 3) Total

Mutual funds: Fixed income funds $ 15,350 — — 15,350 Domestic equity funds 17,080 — — 17,080 International equity funds 8,028 — — 8,028 Money market funds 394 — — 394

Total mutual funds $ 40,852 — — 40,852

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

31 (Continued)

The Voluntary Employee Tax Deferred Program is a 403(b) plan. The program is entirely employee funded. All employees may participate in the program and have a choice of investments with varying levels of risk and return. New employees are automatically enrolled in the program.

The Contribution Plan was established by the Hospital in January 1996. Employees, including employees of the Hospital’s controlled affiliates, must be credited a minimum of 1,000 hours in a calendar year to be eligible for a contribution for the year. For employees that were given the choice and did not elect to participate in the Service Plus Program, the Hospital matches 50% of an employee’s contribution to their 403(b) retirement account up to a maximum of 3% of the employee’s compensation. For employees in the Service Plus Program, the Hospital contributes a base contribution to the Contribution Plan of 2% of the participant’s eligible compensation and the Hospital matches 100% of the participant’s contributions to the Overlake Hospital Medical Center Voluntary Employee Tax Deferred Program up to a maximum of 4% for employees with less than five years of service or a maximum of 6% for employees with more than five years of service, respectively. The Hospital contributed approximately $7,008 and $6,154 for the years ended June 30, 2012 and 2011, respectively, and is reflected in employee benefits in the consolidated statements of operations and changes in net assets.

(12) Commitments

The Hospital and its controlled affiliates lease certain equipment and office space that are accounted for as operating leases. Total rental expenses for all operating leases for the years ended June 30, 2012 and 2011 were approximately $9,506 and $6,863, respectively, of which approximately $4,502 and $3,557, respectively, relate to operating lease payments made to the Association, the Medical Tower, and OIMS. The following is a schedule of future noncancelable operating lease payments as of June 30, 2012:

Fiscal year: 2013 $ 6,947 2014 5,508 2015 5,398 2016 3,576 2017 2,926 Thereafter 11,884

Operating lease obligations $ 36,239

The Hospital has outstanding construction contracts of $3,059 and $1,997 as of June 30, 2012 and 2011, respectively.

(13) Professional Liability Insurance, Workers’ Compensation, and Health Benefits

The Hospital maintains claims-made professional liability insurance coverage through a commercial carrier. The policy for the years ended June 30, 2012 and 2011 has a $100 deductible per occurrence.

Based upon an actuarial valuation, the Hospital has recorded an estimated liability (undiscounted) for its deductible portion of claims incurred but not reported as well as the deductible portion of claims reported

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

32 (Continued)

and not paid of $7,505 and a receivable of $4,270 as of June 30, 2012. The Hospital’s net professional liability was estimated at approximately $2,835 as of June 30, 2011.

In 2005, the Hospital started a retrospective premium risk sharing agreement with an insurer related to the professional liability policy. As of June 30, 2012 and 2011, management estimates a receivable of approximately $1,507 and $752, respectively, related to this risk sharing agreement.

The Hospital is self-insured for workers’ compensation. The accrued liabilities for the self-insured components of this plan include the unpaid portion of claims that have been reported and estimates for claims that have been incurred but not reported. The Hospital also carries an excess coverage policy for its workers’ compensation program. The Hospital has recorded an undiscounted liability for workers’ compensation claims based on an actuarial estimate of approximately $2,718 and a receivable of $330 as of June 30, 2012. The Hospital recorded a net liability of $2,489 as of June 30, 2011.

The Hospital is self-insured for medical, dental, vision, and prescription drugs. The accrued liabilities for the self-insured components of this plan include the unpaid portion of claims that have been reported and estimates for claims that have been incurred but not reported. The Hospital also carries an excess coverage policy for its medical, dental, vision, and prescription program. The Hospital has recorded an undiscounted liability for medical, dental, vision, and prescription drugs claims based on an actuarial estimate of approximately $1,108 and a receivable of $36 as of June 30, 2012. The Hospital had a net liability of $1,363 as of June 30, 2011.

(14) Litigation and Compliance with Laws and Regulations

The Hospital is involved in litigation and regulatory investigations arising in its normal course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Hospital’s future financial position or results from operations.

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Governmental activity includes investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs, together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Hospital is in compliance with the fraud and abuse regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

33 (Continued)

(15) Functional Expenses

The Hospital provides healthcare services to residents within its geographic service area. Expenses related to providing these services for the years ended June 30, 2012 and 2011 are as follows:

2012 2011

Healthcare services $ 339,079 326,328 General and administrative 68,536 63,471 Fund-raising 1,310 1,308

Total operating expenses $ 408,925 391,107

(16) Transactions with Other Affiliates (in thousands)

The Hospital conducts various transactions with its other affiliates, which it does not control. These include leasing office space from its affiliates. The lease expense for office space leased from its affiliates was approximately $4,502 and $3,557 for the years ended June 30, 2012 and 2011, respectively. Other transactions with its affiliates include making payment of certain expenses on behalf of its affiliates and then being reimbursed. The Hospital has included a receivable of $1,050 and $1,408 from the Association at June 30, 2012 and 2011, respectively, and a receivable from the Medical Tower of $67 and $45 at June 30, 2012 and 2011, respectively.

(17) Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are available for the following purposes as of June 30, 2012 and 2011:

2012 2011

Health care services $ 995 1,072 Purchase of building improvements and equipment 2,590 637 Health education 55 85 Indigent care 55 61

Total temporarily restricted net assets $ 3,695 1,855

Permanently restricted net assets as of June 30, 2012 and 2011 are assets that have been restricted by donors to be held in perpetuity, the income from which is expendable to support healthcare services, health education, and indigent care.

(18) Endowments

In August 2008, the FASB issued ASC 958-205-50, Not-for-Profit Entities Presentation of Financial Statements, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds. The pronouncement provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

34 (Continued)

enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). UPMIFA is a model act approved by the Uniform Law Commission (ULC; formerly known as the National Conference of Commissioners on Uniform State Laws) that serves as a guideline for states to use in enacting legislation. This pronouncement also improves disclosures about an organization’s endowment funds (both donor-restricted endowment funds and board-designated endowment funds), whether or not the organization is subject to UPMIFA. The Foundation adopted the disclosure provisions of this pronouncement in 2009. In 2009, the State of Washington enacted a version of UPMIFA, therefore new guidelines regarding investment gains and losses as well as expenditures of donor restricted endowment funds in the absence of explicit donor stipulations were adopted in 2009.

The Foundation’s endowments consist of 18 individual funds established for a variety of purposes including both donor-restricted endowment funds and funds designated by management to function as endowments. Quasi endowment net assets associated with endowment funds, including funds designated by management, are classified and reported based on the existence or absence of donor-imposed restrictions.

Interpretation of Relevant Law

The Foundation has interpreted the Washington Uniform Prudent Management of Institutional Funds Act (WUPMIFA) 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. The Foundation has adopted WUPMIFA as of June 30, 2009. As a result of the interpretation, the Foundation 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 organization in a manner consistent with the standard of prudence prescribed by WUPMIFA. In accordance with WUPMIFA, the Foundation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

• The duration and preservation of the fund

• The purposes of the Hospital and the donor-restricted endowment fund

• General economic conditions

• The possible effect of inflation and deflation

• The expected total return from income and the appreciation of investments

• Other resources of the Hospital

• The investment policies of the Foundation

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

35 (Continued)

Endowment net assets consist of the following at June 30, 2012:

Temporarily Permanently Unrestricted restricted restricted Total

Donor-restricted endowment funds $ — 1,042 4,819 5,861 Management designated

endowment funds 2,513 — — 2,513

Total endowment net assets $ 2,513 1,042 4,819 8,374

Endowment net assets consist of the following at June 30, 2011:

Temporarily Permanently Unrestricted restricted restricted Total

Donor-restricted endowment funds $ — 1,071 4,625 5,696 Management designated

endowment funds 2,523 — — 2,523

Total endowment net assets $ 2,523 1,071 4,625 8,219

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

36 (Continued)

Changes in endowment net assets for the year ended June 30, 2012 and 2011 are as follows:

Temporarily Permanently Unrestricted restricted restricted Total

Endowment net assets, July 1, 2010 $ 2,146 325 4,605 7,076

Investment return: Investment income 58 129 — 187 Net appreciation 373 714 — 1,087

Total investment return 431 843 — 1,274

Contributions 30 — 20 50 Appropriation of endowment

assets for expenditure (84) (97) — (181)

Endowment net assets, June 30, 2011 2,523 1,071 4,625 8,219

Investment return: Investment income 63 145 — 208 Net appreciation (10) (17) — (27)

Total investment return 53 128 — 181

Contributions 5 — 194 199 Appropriation of endowment

assets for expenditure (68) (157) — (225)

Endowment net assets, June 30, 2012 $ 2,513 1,042 4,819 8,374

(a) Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or WUPMIFA requires the Foundation to retain as a fund of perpetual duration. These deficiencies result from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by management. There were no deficiencies as of June 30, 2012 and 2011.

OVERLAKE HOSPITAL MEDICAL CENTER

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(In thousands)

37

Included in unrestricted investment return for the year ended June 30, 2011 are $37 of investment gains representing the restoration of losses absorbed by unrestricted net assets for prior year endowment funds below corpus.

(b) Return Objectives and Risk Parameters

The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity as well as management-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of 40% of the Barclays Capital Aggregate Bond Index, 32% of the S&P 500 Index, 9% of the Russell 2000 Index, and 19% of the MSCI All Country World Ex-US Index while assuming a moderate level of investment risk. The Foundation expects its endowment funds, over time, to provide an average rate of return of approximately 5% annually. Actual returns in any given year may vary from this amount.

(c) Strategies Employed for Achieving Objectives

To satisfy its long-term rate-of-return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Foundation targets a diversified asset allocation of 60% equity mutual funds and 40% bond mutual funds to achieve its long-term return objectives within prudent risk constraints.

(d) Spending Policy and How the Investment Objectives Relate to Spending Policy

The Foundation has a policy appropriating for distribution each year the lesser of 5% of its endowment fund value as of December 31 of the preceding fiscal year in which the distribution is planned or the difference between market value and corpus as of December 31 of the preceding fiscal year in which the distribution is planned. In establishing this policy, the Foundation considered the long-term expected return on its endowment. Accordingly, over the long term, the Foundation expects the current spending policy to allow its endowment to maintain its purchasing power by growing at a rate equal to planned payouts. Additional real growth will be provided through new gifts and any excess investment return.

(19) Subsequent Events

The Hospital has performed an evaluation of subsequent events through October 15, 2012, which is the date these consolidated financial statements were issued.