United Hospital District

PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER 17, 2016 NEW ISSUE -- BOOK-ENTRY ONLY RATING: Series 2016A Notes: Moody’s MIG-1 Series 2016B Notes: Moody’s MIG-1 See “RATINGS” herein In the opinion of the Bond Counsel, according to laws, regulations, rulings and decisions in effect on the date of delivery of the Series 2016 Notes, interest on the Series 2016 Notes is not includable in gross income for federal income tax purposes or in taxable net income of individuals, estates or trusts for State of Minnesota income tax purposes. Interest on the Series 2016 Notes is not an item of tax preference for purposes of determining the federal alternative minimum tax imposed on individuals or for purposes of determining the Minnesota alternative minimum tax imposed on individuals, estates or trusts. Interest on the Series 2016 Notes is subject to the Minnesota franchise tax imposed on corporations and financial institutions and is includable in adjusted current earnings for purposes of the federal and Minnesota alternative minimum taxes imposed on corporations. See “TAX EXEMPTION AND RELATED CONSIDERATIONS” herein.

$22,090,000* $22,085,000* UNITED HOSPITAL DISTRICT UNITED HOSPITAL DISTRICT TODD, MORRISON, CASS AND WADENA COUNTIES, TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA MINNESOTA Health Care Facilities General Obligation Health Care Facilities Revenue Bond Anticipation Notes Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A (Lakewood Health System), Series 2016B CUSIP # ______CUSIP # ______Interest Rate ____% Interest Rate ____% Price ____% Price ____% The $22,090,000* Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A (the “Series 2016A Notes”) and the $22,085,000* General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016B (the “Series 2016B Notes” and, together with the Series 2016A Notes, the “Series 2016 Notes”) are issuable only as fully registered notes without coupons, and when issued will be registered in the name of Cede & Co., as Noteholder and nominee for The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Series 2016 Notes. Purchases of the Series 2016 Notes will be made in book entry form, in the denominations of $100,000 or integral multiples of $5,000 in excess thereof. Purchasers of the Series 2016 Notes will not receive certificates representing their interest in the Series 2016 Notes purchased. See “THE SERIES 2016 NOTES -- Book- Entry Only System herein.” Principal of, premium, if any, and interest on the Series 2016 Notes will be paid by The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee under the Indenture of Trust dated as November 1, 2016 (the “Indenture”) between the Trustee and United Hospital District (the “District”). So long as DTC or its mstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an nominee, Cede & Co., is the Noteholder, such payments will be made directly to such Noteholder, and disbursal of such payments to the Beneficial Owners is the responsibility of the DTC Participants as more fully described herein. Neither the District nor the Trustee will have any responsibility or obligation to such DTC Participants, indirect participants or the persons for whom they act as nominee with respect to the Series 2016 Notes. Interest on the Series 2016 Notes will be payable on June 1, 2017* and semiannually thereafter on each June 1 and December 1, in each case until the respective maturity or earlier redemption thereof at the applicable rates be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. set forth above. THE SERIES 2016 NOTES INVOLVE RISK, INCLUDING, AMONG OTHERS, THOSE DESCRIBED UNDER THE HEADING “NOTEHOLDERS’ RISKS” HEREIN. NO PROSPECTIVE PURCHASER OF THE SERIES 2016 NOTES SHOULD MAKE A DECISION TO PURCHASE ANY SERIES 2016 NOTES WITHOUT FIRST READING AND CONSIDERING THE ENTIRE OFFICIAL STATEMENT, INCLUDING WITHOUT LIMITATION THE SECTION ENTITIED “NOTEHOLDERS’ RISKS” HEREIN. THE SERIES 2016A NOTES ARE SPECIAL LIMITED OBLIGATIONS OF THE DISTRICT, PAYABLE FROM USDA DIRECT LOAN PROCEEDS (DEFINED HEREIN), FROM THE PLEDGED FUNDS AND ACCOUNTS (OTHER THAN THE REBATE FUND AND THE SERIES 2016B TAX LEVY ACCOUNT) ESTABLISHED UNDER THE INDENTURE, FROM NET REVENUES (DEFINED HEREIN) AND FROM OTHER MORTGAGED PROPERTY AND COLLATERAL (AS EACH IS DEFINED HEREIN) ON A PARITY WITH THE OTHER PARITY OBLIGATIONS (DEFINED HEREIN), ALL AS FURTHER DESCRIBED HEREIN. THE SERIES 2016A NOTES ARE NOT PAYABLE IN ANY MANNER BY TAXATION, DO NOT CONSTITUTE A GENERAL OR MORAL OBLIGATION OF THE DISTRICT AND ARE NOT PAYABLE FROM OR SECURED BY ANY OTHER FUNDS OR PROPERTY OF THE DISTRICT. THE SERIES 2016B NOTES ARE GENERAL OBLIGATIONS OF THE DISTRICT PAYABLE PRIMARILY FROM USDA DIRECT LOAN PROCEEDS, NET REVENUES ON A SUBORDINATE BASIS TO THE NET REVENUES PLEDGED TO THE PARITY OBLIGATIONS BUT ON A PARITY WITH THE PLEDGE OF NET REVENUES TO THE SERIES 2016 BONDS AND ANY OTHER SUBORDINATE OBLIGATIONS (AS EACH IS DEFINED HEREIN) AND CERTAIN PLEDGED FUNDS AND ACCOUNTS HELD BY THE TRUSTEE UNDER THE INDENTURE, AND, IF NECESSARY, THE PROCEEDS OF FUTURE GENERAL OBLIGATION BONDS OR NOTES PAYABLE FROM AD VALOREM TAXES LEVIED UPON ALL TAXABLE PROPERTY OF THE DISTRICT WITHOUT LIMITATION AS TO RATE OR AMOUNT. See “SECURITY FOR THE SERIES 2016 NOTES” herein for additional information. The Series 2016 Notes are subject to optional redemption prior to maturity. See “DESCRIPTION OF THE SERIES 2016 NOTES” herein for additional information. The Series 2016 Notes are offered when, as and if issued by the District and received by Raymond James & Associates, Inc. (the “Underwriter”), subject to prior sale, to withdrawal or modification of the offer without any notice and subject to the approval of legality of the Series 2016 Notes by Faegre Baker Daniels LLP, Minneapolis, Minnesota, Bond Counsel. Certain legal matters will be passed on for the Underwriter by its counsel, Dorsey & Whitney LLP, Des Moines, Iowa and for the District and Lakewood Health System by their counsel, Fredrikson & Byron, P.A., Minneapolis, Minnesota. The Underwriter intends, but is not obligated, to make a market in the Series 2016 Notes. No assurance can be given that a secondary market will develop for the Series 2016 Notes. For details of the Underwriter’s compensation, see “UNDERWRITING” herein. It is expected that the Series 2016 Notes in definitive form will be available for delivery through the facilities of DTC in New York, New York, on or about November 15, 2016. RAYMOND JAMES This Official Statement dated ______, 2016. offer to buy nor shall there be any sale of the securities in any jurisdiction in which such offer, solicitation or sale would would or sale such offer, solicitation in which in jurisdiction any of be any the sale there securities nor shall offer to buy This Preliminary Official Statement and the information contained herein are subject to completion or amendment. Under no circu no Under or amendment. to completion are subject herein contained information the and Statement Official This Preliminary

* Preliminary, subject to change.

No dealer, broker, salesman or other person has been authorized by the District, Lakewood or the Underwriter to give any information or to make any representations with respect to the Series 2016 Notes, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale hereunder implies that there has been no change in the matters described herein since the date hereof. The information set forth herein has been obtained from the District, Lakewood, USDA and from other sources which are believed to be reliable. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

THE SERIES 2016 NOTES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON THE EXEMPTION CONTAINED IN SECTION 3(a)(2) OF SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THESE SECURITIES IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF THE JURISDICTIONS IN WHICH THEY HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER JURISDICTIONS SHALL NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE JURISDICTIONS NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SECURITIES OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE BORROWER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

______

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT ______

This Official Statement, including Appendices A, B and C, contains statements which should be considered “forward-looking statements,”, meaning they refer to possible future events or conditions. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or similar words.

THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE BORROWER DOES NOT EXPECT OR INTEND TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR OR FAIL TO OCCUR.

TABLE OF CONTENTS

Page

INTRODUCTION ...... 1 DESCRIPTION OF THE SERIES 2016 NOTES ...... 4 AUTHORITY AND PURPOSE ...... 6 SECURITY FOR THE SERIES 2016 NOTES ...... 7 ESTIMATED SOURCES AND USES OF FUNDS ...... 9 NOTEHOLDERS’ RISKS ...... 9 FUTURE FINANCING ...... 34 BOND RATING ...... 34 FINANCIAL STATEMENTS ...... 34 FINANCIAL FORECAST ...... 34 TAX EXEMPTION AND RELATED CONSIDERATIONS ...... 35 CONTINUING DISCLOSURE ...... 36 LITIGATION ...... 37 LEGALITY ...... 37 UNDERWRITING ...... 37 RELATIONSHIPS AMONG THE PARTIES ...... 38 CERTIFICATION ...... 38

Appendix A – Information Concerning United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota Appendix B – Information Concerning Lakewood Health System Appendix C – Audited Financial Statements of Lakewood Health System Appendix D – Forecasted Financial Statements of Lakewood Health System Appendix E – USDA Letter of Conditions, Intent to Meet Letter of Conditions, and USDA Commitment Letter Appendix F – Definitions of Certain Terms and Summary of Principal Documents Appendix G - Form of Legal Opinion Appendix H – Form of Continuing Disclosure Certificate

DISTRICT ELECTED OFFICIALS

Name Position TermExpires December31, Mary Theurer Chair 12/31/2018 Judy Bjerga Vice-Chair 12/31/2018 Lana Hansen Secretary 12/31/2016 Barb Peterson Treasurer 12/31/2016 Linda Dietrich Trustee 12/31/2016 Sally Grove Trustee 12/31/2016 Bill Haehnel Trustee 12/31/2016 Bev Hoemberg Trustee 12/31/2018 Frances Kokett Trustee 12/31/2018 Bob Mueller Trustee 12/31/2016 Donald Sirucek Trustee 12/31/2016 Ron Storbakken Trustee 12/31/2016 Paul Wicht Trustee 12/31/2018

HEALTH SYSTEM ADMINISTRATORS

Tim Rice, Chief Executive Officer Lisa Bjerga, Chief Financial Officer Dr. John Halfen, Chief Medical Officer Teresa Fisher, Chief Operating Officer/Chief Nursing Officer Kathy Dobson, Vice President of Senior Services Craig Wolhowe, Vice President of Clinics and Hospital Services Lynn Rice, Vice President of Support Services Brad Anderson, Vice President of Strategy and Development

BOND COUNSEL

Faegre Baker Daniels LLP Minneapolis, Minnesota

UNDERWRITER

Raymond James & Associates Chicago, Illinois

SUMMARY OF OFFERING AMOUNT Series 2016A Notes: $22,090,000*. Series 2016B Notes: $22,085,000*

DISTRICT United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota (the “District”).

TYPE OF ISSUE Health Care Facilities Revenue Bond Anticipation Notes, (Lakewood Health System) Series 2016A (the “Series 2016A Notes”), and General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes, (Lakewood Health System) Series 2016B (the “Series 2016B Notes” and, together with the Series 2016A Notes, the “Series 2016 Notes”). See “AUTHORITY AND PURPOSE” and “SECURITY FOR THE SERIES 2016 NOTES” herein for additional information.

AUTHORITY, PURPOSE The Series 2016 Notes are being issued pursuant to Minnesota Statutes Chapters 447 and & SECURITY 475.

THE SERIES 2016A NOTES ARE SPECIAL LIMITED OBLIGATIONS OF THE DISTRICT, PAYABLE FROM USDA DIRECT LOAN PROCEEDS (DEFINED HEREIN), FROM THE PLEDGED FUNDS AND ACCOUNTS (OTHER THAN THE REBATE FUND AND THE SERIES 2016B TAX LEVY ACCOUNT) ESTABLISHED UNDER THE INDENTURE, FROM NET REVENUES (DEFINED HEREIN) AND FROM OTHER MORTGAGED PROPERTY AND COLLATERAL (AS EACH IS DEFINED HEREIN) ON A PARITY WITH THE OTHER PARITY OBLIGATIONS (DEFINED HEREIN), ALL AS FURTHER DESCRIBED HEREIN. THE SERIES 2016A NOTES ARE NOT PAYABLE IN ANY MANNER BY TAXATION, DO NOT CONSTITUTE A GENERAL OR MORAL OBLIGATION OF THE DISTRICT AND ARE NOT PAYABLE FROM OR SECURED BY ANY OTHER FUNDS OR PROPERTY OF THE DISTRICT.

THE SERIES 2016B NOTES ARE GENERAL OBLIGATIONS OF THE DISTRICT PAYABLE PRIMARILY FROM USDA DIRECT LOAN PROCEEDS, NET REVENUES ON A SUBORDINATE BASIS TO THE NET REVENUES PLEDGED TO THE PARITY OBLIGATIONS BUT ON A PARITY WITH THE PLEDGE OF NET REVENUES TO THE SERIES 2016 BONDS AND ANY OTHER SUBORDINATE OBLIGATIONS (AS EACH IS DEFINED HEREIN) AND CERTAIN PLEDGED FUNDS AND ACCOUNTS HELD BY THE TRUSTEE UNDER THE INDENTURE, AND, IF NECESSARY, THE PROCEEDS OF FUTURE GENERAL OBLIGATION BONDS OR NOTES PAYABLE FROM AD VALOREM TAXES LEVIED UPON ALL TAXABLE PROPERTY OF THE DISTRICT WITHOUT LIMITATION AS TO RATE OR AMOUNT.

DATED DATE Date of Issue.

INTEREST PAID June 1, 2017*, and semiannually thereafter on June 1 and December 1 and to registered owners of the Series 2016 Notes appearing of record in the bond register as of the close of business on the 15th day (whether or not a business day) of the immediately preceding month.

REDEMPTION At the option of the District, the Series 2016 Notes are subject to optional redemption, in whole or in part, on June 1, 2018*, and on any date thereafter, in such manner as the District shall determine and by lot within a stated maturity, at a price of par plus accrued interest. See “DESCRIPTION OF THE SERIES 2016 NOTES” for additional information.

MATURITY DATE December 1, 2018*

* Preliminary, subject to change. iii

BOOK-ENTRY Series 2016 Notes will be issued as fully registered and, when issued, will be registered in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York, to which principal and interest payments on the Series 2016 Notes will be made. Individual purchases will be made in book-entry form only, in the principal amount of $100,000 or integrals of $5,000 in excess thereof. Purchasers of Series 2016 Notes will not receive physical delivery of Series 2016 Notes.

TRUSTEE/PAYING The Bank of New York Mellon Trust Company, N.A., Chicago, Illinois. AGENT/REGISTRAR

LEGAL OPINION Faegre Baker Daniels LLP, Minneapolis, Minnesota (“Bond Counsel”).

BOND RATING Moody’s Investors Service, Inc., has assigned a rating of “MIG-1” to the Series 2016A Notes and “MIG-1” to the Series 2016B Notes. See “RATINGS” herein.

CLOSING On or about November 15, 2016.

$22,090,000* $22,085,000* UNITED HOSPITAL DISTRICT UNITED HOSPITAL DISTRICT TODD, MORRISON, CASS AND WADENA TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA COUNTIES, MINNESOTA General Obligation Health Care Facilities General Obligation Health Care Facilities Revenue Bond Anticipation Notes Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A (Lakewood Health System), Series 2016B

INTRODUCTION

This Official Statement, including the cover page and Appendices, is furnished in connection with the offering by the United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota, a political subdivision and municipal corporation of the State of Minnesota (the “District”), of its (a) $22,090,000* Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A (the “Series 2016A Notes”) and (b) $22,085,000* General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016B (the “Series 2016B Notes” and, together with the Series 2016A Notes, the “Series 2016 Notes”). The Series 2016 Notes are being issued pursuant to Minnesota Statutes, Chapters 447 and 475 and pursuant to the Indenture of Trust dated as of November 1, 2016 (the “Indenture”) between the District and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) and a resolution of the District adopted on September 29, 2016 (the “Note Resolution”).

The proceeds of the Series 2016A Notes will be used to (a) renovate and expand the Health System Facilities (defined herein) including emergency care expansion space to the hospital and completion of an in-house fixed MRI suite, and expansion of medical clinics located at 653 Pillsbury Street N, Pillager, MN and 49725 County 83, Staples, Minnesota, and including related parking (the “2016 Project”), (b) pay capitalized interest during construction of the 2016 Project, and (c) pay costs associated with the issuance of the Series 2016A Notes. See “GENERAL –Project” in Appendix B hereto for a further description of the Project. The Series 2016A Notes are being used to provide interim financing for the Series 2016 Project.

The proceeds of the Series 2016B Notes will be used to (a) refund a portion of the outstanding principal amount of the District’s General Obligation Health Care Facility Revenue Bonds (Lakewood Health System), Series 2004 (the “Prior Bonds”), issued pursuant to an election duly conducted by the District, the proceeds of which were used to (i) finance the acquisition, construction and equipping of a new hospital, clinic and outpatient center (the “2004 Project”); (ii) pay interest due on the Series 2004 Bonds during construction of the Project; and (iii) pay certain expenses related to the issuance of the Series 2004 Bonds, and (b) pay costs of issuance related to the Series 2016B Notes. See “ESTIMATED SOURCES AND USES OF FUNDS” herein. The Series 2016B Notes are being used to provide interim financing for refunding a portion of the Prior Bonds.

At the time of issuance of the Series 2016A Notes, the District and Lakewood (defined herein) will enter into (a) a Mortgage Agreement (Anticipation Notes) dated as of November 1, 2016 (the “Mortgage”) with the Trustee granting the Trustee a mortgage lien and security interest in the Mortgaged Property (defined herein) to secure repayment of the Series 2016A Notes, and (b) a Security Agreement dated as of November 1, 2016 (the “Series 2016A Security Agreement”) with the Trustee granting the Trustee a security interest in the Collateral (defined herein) to secure repayment of the Series 2016A Notes. At the time of issuance of the Series 2016B Notes the District and Lakewood will enter into a Security Agreement dated as of November 1, 2016 (the “Series 2016B Security Agreement” and, together with the Series 2016A Security Agreement, the “Security Agreements”) with the Trustee granting the Trustee a security interest in the Net Revenues (defined herein) to secure payment of the Series 2016B Notes, which security interest is subordinate to the security interest in the Net Revenues granted to secure the Series 2016A Notes and the other Parity Obligations (defined herein). THE SERIES 2016B NOTES ARE NOT SECURED BY THE MORTGAGE OR THE SERIES 2016A SECURITY AGREEMENT. THE SERIES 2016A NOTES ARE NOT SECURED BY THE SERIES 2016B SECURITY AGREEMENT.

* Preliminary, subject to change.

-1-

At the time of issuance of the Series 2016 Notes, the District anticipates issuing its $4,450,000* General Obligation Health Care Facility Refunding Revenue Bonds (Lakewood Health System), Series 2016 (the “Series 2016 Bonds”) pursuant to a resolution of the District adopted on September 29, 2016 (the “Bond Resolution”). The proceeds of the Series 2016 Bonds will be used to provide permanent financing to (a) refund a portion of the outstanding principal amount of the Prior Bonds, and (b) pay costs of issuance related to the Series 2016 Bonds. THE SERIES 2016 BONDS ARE NOT BEING OFFERED PURSUANT TO THIS OFFICIAL STATEMENT.

This Official Statement contains descriptions of, among other matters, the Series 2016 Notes, the Note Resolution, the Indenture, the Mortgage, the Security Agreements, the District and Lakewood (defined herein). Such descriptions do not purport to be comprehensive or definitive. All references to the Note Resolution, the Indenture, the Mortgage, the Security Agreements, are qualified in their entirety by reference to the Note Resolution, the Indenture, the Mortgage, the Security Agreements, respectively, and references herein to the Series 2016 Notes are qualified in their entirety by reference to the forms thereof included in the Indenture. Until the issuance and delivery of the Series 2016 Notes, copies of the Note Resolution, the Indenture, the Mortgage, the Security Agreements and the other documents described herein may be obtained from the Underwriter. After delivery of the Series 2016 Notes, copies of such documents will be available for inspection at the designated corporate trust office of the Trustee.

For a summary of the Indenture, the Mortgage and the Security Agreements, including certain covenants of the District, see “DEFINITIONS AND CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS” in Appendix F hereto.

Certain capitalized terms used in this Official Statement that are not required to be capitalized by proper rules of grammar have the meanings set forth in Appendix F hereto.

In connection with the issuance of the Series 2016 Notes, the District and Lakewood are undertaking to provide certain continuing disclosures, all as further set forth in the Continuing Disclosure Certificate dated as of November 1, 2016 (the “Continuing Disclosure Certificate”) to be entered into between the District and Lakewood. See “CONTINUING DISCLOSURE” herein.

For information with respect to the District, see Appendix A attached hereto. For information with respect to Lakewood and the Health System, see Appendix B attached hereto. Financial reports of Lakewood are included in Appendix C attached hereto. Certain forecasted financial statements of Lakewood (the “Forecast”) are included in Appendix D attached hereto.

The District

The District was established in 1973 by Minnesota Statutes, Chapter 447, and was established to serve portions of Todd, Morrison, Cass and Wadena Counties in Minnesota. The District owns (a) a 25-bed critical access hospital and a health clinic located in Staples, Minnesota (collectively, the “Main Campus”), (b) a 100-bed skilled nursing facility, a 10-bed inpatient geriatric psychiatric unit and the administrative offices for the District and Lakewood located in Staples, Minnesota (collectively, the “Senior Campus”), (c) a 40-unit independent/assisted living facility known as the Pines and a 25-unit assisted living facility known as the Manor located in Staples, Minnesota (collectively, the “Senior Living Facilities”), and (d) the health clinics located in Motley, Pillager and Browerville, Minnesota (collectively, the “Satellite Clinics”).

See “INFORMATION CONCERNING UNITED HOSPITAL DISTRICT, TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA” in Appendix A hereto.

Lakewood Health System

Lakewood Health System, a Minnesota nonprofit corporation (“Lakewood”) leases the Main Campus, the Senior Campus, the Senior Living Facilities and the Satellite Clinics (collectively, the “Pledged Facilities”) from the District pursuant to the Lease dated as of March 31, 1997 (as amended, the “Lease”) and provides for the operation, * Preliminary, subject to change. 2

management and administration of the Pledged Facilities. The term of the Lease currently extends to November 30, 2053 which occurs after the maturity of the Series 2016 Notes. The Lease provides that, as consideration for the lease of the Pledged Facilities, Lakewood will pay debt service on all the Series 2016 Notes and other outstanding bonds and notes of the District. The Lease further provides that Lakewood is prohibited from terminating the Lease while any bonds or notes issued by the District remain outstanding unless Lakewood pays all bonds and notes of the District then outstanding.

In addition, Lakewood leases a health clinic located in Eagle Bend, Minnesota and a dermatology clinic located in Sartell, Minnesota (collectively, the “Additional Leased Facilities”) (the Pledged Facilities and the Additional Leased Facilities are referred to herein as the “Health System Facilities”).

Pursuant to the Lease, Lakewood has agreed to deposit all of its gross revenues from the Pledged Facilities to the Operating Account, and to pay to the District from amounts remaining after payment of operating costs of the Pledged Facilities and all costs to operate the health care business at the Pledged Facilities, amounts sufficient to pay the principal, interest, fees and administrative costs on the outstanding notes and bonds of the District.

See “INFORMATION CONCERNING LAKEWOOD HEALTH SYSTEM” in Appendix B hereto.

Security for the Series 2016 Notes

THE SERIES 2016B NOTES ARE GENERAL OBLIGATIONS OF THE DISTRICT PAYABLE PRIMARILY FROM USDA DIRECT LOAN PROCEEDS, NET REVENUES ON A SUBORDINATE BASIS TO THE NET REVENUES PLEDGED TO THE PARITY OBLIGATIONS, BUT ON A PARITY WITH THE PLEDGE OF THE NET REVENUES TO THE SERIES 2016 BONDS, CERTAIN PLEDGED FUNDS AND ACCOUNTS HELD BY THE TRUSTEE UNDER THE INDENTURE, AND, IF NECESSARY, THE PROCEEDS OF FUTURE GENERAL OBLIGATION SERIES 2016 NOTES OR NOTES PAYABLE FROM AD VALOREM TAXES LEVIED UPON ALL TAXABLE PROPERTY OF THE DISTRICT WITHOUT LIMITATION AS TO RATE OR AMOUNT.

The Series 2016 Notes provide interim financing for the 2016 Project and refunding of a portion of the Prior Bonds. The primary security for the Series 2016 Notes is the USDA Direct Loan Proceeds (defined herein) provided by USDA (defined herein) to provide permanent financing for the 2016 Project and a portion of the 2004 Project.

Under the Indenture, the District is pledging to the owners of the Series 2016A Notes all the Net Revenues (as defined herein) on a parity basis with the other Parity Obligations (defined herein). The Series 2016A Notes are also secured by (a) the Mortgage, pursuant to which the District and the Health System are granting a mortgage lien and security interest in the Pledged Facilities (the property subject to such mortgage lien and security interest is referred to herein as the “Mortgaged Property”), and (b) the Series 2016A Security Agreement, pursuant to which the District and the Health System are granting a security interest in the Collateral. See “CERTAIN DEFINITIONS AND SUMMARY OF THE PRINCIPAL DOCUMENTS – Summary of Certain Provisions of the Mortgage”, “Summary of Certain Provisions of the Series A Note Security Agreement” and “ - Summary of Certain Provisions of the Series B Note Security Agreement”) in Appendix F hereto.

proceeds and condemnation awards, but excluding grants, gifts, bequests, and proceeds of loans, and excluding proceeds of any taxes levied by the District, less all claims which, according to generally accepted accounting principles, constitute current, reasonable and necessary costs of operation and maintenance of the Pledged Facilities, including ordinary repairs and all costs to operate the health care business at the Pledged Facilities but excluding interest and depreciation.

In addition, pursuant to the Series 2016B Security Agreement, the District is pledging to the owners of the Series 2016B Notes a security interest the Net Revenues that is subordinate to the security interest in such Net Revenues pledged to the Series 2016A Notes and the other Parity Obligations. The pledge of the Net Revenues to the owners of the Series 2016B Notes is on a parity with the pledge of the Net Revenues to the owners of the Series 2016 Bonds.

See “SECURITY FOR THE SERIES 2016 NOTES” herein for a more detailed description of the security for the Series 2016A Notes and the Series 2016B Notes.

Parity Obligations; Subordinate Obligations

The District previously issued its $5,093,625 Medical Facilities Gross Revenue Note, Series 2003A, of which $2,233,643.67 remains outstanding (the “Series 2003A Note”), its $612,000 Medical Facilities Gross Revenue Note, Series 2003B, of which $263,801.71 remains outstanding (the “Series 2003B Note”), and its $7,846,511.57 Medical Facility Mortgage Revenue Notes, Series 2013, of which $6,773,035.92 remains outstanding (the “Series 2013 Notes” and together with the Series 2003A Note, the Series 2003B Note and the Series 2016A Notes, the “Parity Obligations”). The Parity Obligations (including the Series 2016A Notes) are payable from the Net Revenues on a parity basis. In addition, the Parity Obligations (including the Series 2106A Project Notes) are secured with mortgage liens on the Pledged Facilities on a parity basis with the mortgage liens created under the Mortgage and a security interest in the Collateral on a parity basis with the security interest created under the Series 2016A Security Agreement.

The Series 2016 Bonds are anticipated to be issued contemporaneously with the Series 2016 Notes and are payable from the Net Revenues on a subordinate basis to the pledge of the Net Revenues to the Parity Obligations, but on a parity with the pledge of Net Revenues to the Series 2016B Notes. Pursuant to the Bond Resolution, the District may issue additional bonds ranking on a parity with the Series 2016 Bonds and the Series 2016B Notes (collectively, with the Series 2016 Bonds and the Series 2016B Notes, the “Subordinate Obligations”).

Risks

An investment in the Series 2016 Notes involves certain risks. See “NOTEHOLDERS’ RISKS” herein. This section discusses some of these risks, but it is not intended to be a comprehensive listing of all risks associated with the operation of the District’s facilities or the payment of the Series 2016 Notes.

DESCRIPTION OF THE SERIES 2016 NOTES

Details of Certain Terms

The Series 2016A Notes will be dated, as originally issued, as of their date of issuance, and will bear interest at the rate and mature on the date set forth on the front cover of this Official Statement under the caption for the Series 2016A Notes. The Series 2016B Notes will be dated, as originally issued, as of their date of issuance, and will bear interest at the rate and mature on the date set forth on the front cover of this Official Statement under the caption for the Series 2016B Notes. The Series 2016 Notes will be issued as fully registered notes in the denominations of $100,000 and integrals of $5,000 in excess thereof. Interest on the Series 2016 Notes will be payable semiannually on each June 1 and December 1, commencing June 1, 2017*.

* Preliminary, subject to change. 4

Book-Entry System

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2016 Notes. The Series 2016 Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Note certificate will be issued for each of the Series 2016A Notes and the Series 2016B Notes, each in the aggregate principal amount of maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of Series 2016 Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2016 Notes on DTC’s records. The ownership interest of each actual purchaser of each Series 2016A Project Note or Series 2016B Refunding Note (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2016 Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2016 Notes, except in the event that use of the book-entry system for the Series 2016 Notes is discontinued.

To facilitate subsequent transfers, all Series 2016 Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2016 Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2016 Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2016 Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Series 2016A Notes or the Series 2016B Notes, respectively, are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such series to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2016 Notes unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2016 Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Series 2016 Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or Paying Agent, on any payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with Series 2016 Notes held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Series 2016 Notes at any time by giving reasonable notice to the District or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Series 2016 Note certificates are required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor depository). In that event, Series 2016 Note certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the District believes to be reliable, but neither the District nor the Paying Agent takes any responsibility for the accuracy thereof.

Optional Redemption

The Series 2016A Notes and the Series 2016B Notes are subject to optional redemption, in whole or in part, on June 1, 2018*, and on any date thereafter, in such manner as the District shall determine and by lot within a stated series and maturity, at a price of par plus accrued interest.

Notice and Effect of Redemption

A conditional notice of redemption may be sent by electronic means or mailed, by first class mail, not less than thirty (30) days before such redemption date, to the owners of any Series 2016 Notes designated for redemption. Any such redemption is conditioned on Eligible Funds (as defined in the Indenture) being available for payment on the redemption date, and the notice shall state that it is revocable if the condition is not met.

After the redemption date, no further interest shall accrue on the principal of any Series 2016 Note called for redemption if notice has been duly given and funds for the payment of such Series 2016 Note have been deposited as provided in the Indenture.

AUTHORITY AND PURPOSE

The Series 2016 Notes are being issued pursuant to Minnesota Statutes, Chapters 447 and 475, the Note Resolution and the Indenture. The District owns the Pledged Facilities, which are leased to Lakewood. Proceeds from the sale of the Series 2016A Notes will be used to (i) finance the acquisition, construction and equipping of the 2016 Project; (ii) pay interest due on the Series 2016A Notes during construction of the Project; and (iii) pay certain expenses related to the issuance of the Series 2016A Notes. See “GENERAL – The 2016 Project” in Appendix B

* Preliminary, subject to change. 6

hereto for a further description of the 2016 Project. Proceeds from the sale of the Series 2016B Notes will be used to (i) refund a portion of the Prior Bonds; and (ii) pay certain expenses related to the issuance of the Series 2016B Notes. Capitalized interest on the Series 2016B Notes will be paid from the equity contribution of the District.

SECURITY FOR THE SERIES 2016 NOTES

General

THE SERIES 2016A NOTES ARE SPECIAL LIMITED OBLIGATIONS OF THE DISTRICT, PAYABLE FROM USDA DIRECT LOAN PROCEEDS, FROM THE PLEDGED FUNDS AND ACCOUNTS (OTHER THAN THE REBATE FUND AND THE SERIES 2016B TAX LEVY ACCOUNT) ESTABLISHED UNDER THE INDENTURE, FROM NET REVENUES AND FROM OTHER MORTGAGED PROPERTY AND COLLATERAL ON A PARITY WITH THE OTHER PARITY OBLIGATIONS, ALL AS FURTHER DESCRIBED HEREIN. THE SERIES 2016A NOTES ARE NOT PAYABLE IN ANY MANNER BY TAXATION, DO NOT CONSTITUTE A GENERAL OR MORAL OBLIGATION OF THE DISTRICT AND ARE NOT PAYABLE FROM OR SECURED BY ANY OTHER FUNDS OR PROPERTY OF THE DISTRICT.

THE SERIES 2016B NOTES ARE GENERAL OBLIGATIONS OF THE DISTRICT PAYABLE PRIMARILY FROM USDA DIRECT LOAN PROCEEDS, NET REVENUES ON A SUBORDINATE BASIS TO THE NET REVENUES PLEDGED TO THE PARITY OBLIGATIONS BUT ON A PARITY WITH THE PLEDGE OF NET REVENUES TO THE SERIES 2016 BONDS AND ANY OTHER SUBORDINATE OBLIGATIONS AND CERTAIN PLEDGED FUNDS AND ACCOUNTS HELD BY THE TRUSTEE UNDER THE INDENTURE, AND, IF NECESSARY, THE PROCEEDS OF FUTURE GENERAL OBLIGATION BONDS OR NOTES PAYABLE FROM AD VALOREM TAXES LEVIED UPON ALL TAXABLE PROPERTY OF THE DISTRICT WITHOUT LIMITATION AS TO RATE OR AMOUNT. USDA Direct Loan

The Series 2016 Notes mature on December 1, 2018* (the “Series 2016 Maturity Date”). The District will covenant in the Indenture to enter into a loan (the “USDA Direct Loan”) with the United States Department of Agriculture, acting through the United States Department of Agriculture – Rural Development (“USDA”) to refund the Series 2016 Notes on or prior to the Series 2016 Maturity Date. USDA has obligated funds to make the USDA Direct Loan and has committed to make the USDA Direct Loan in an amount not to exceed $44,175,000 pursuant to a commitment letter (the “Commitment Letter”), upon compliance by the District with the provisions contained in the Letter of Conditions dated September 6, 2016 from USDA to the (the “Letter of Conditions”), including but not limited to substantial completion of the 2016 Project in accordance with USDA requirements. See “USDA LETTER OF CONDITIONS, INTENT TO MEET LETTER OF CONDITIONS, INTENT TO MEET LETTER OF CONDITIONS AND USDA COMMITMENT LETTER” in Appendix E hereto for copies of the Letter of Conditions, the Intent to Meet the Letter of Conditions and the Commitment Letter. USDA has determined that the conditions contained in the Letter of Conditions can be met by the District. USDA will be reviewing all draws on the proceeds of the Series 2016A Notes to be used for construction of the 2016 Project. However, with the issuance of the Commitment Letter, USDA is not unconditionally bound to make the USDA Direct Loan such that the breach by the District of its covenants under the Letter of Conditions could result in a decision by USDA not to make the USDA Direct Loan. If USDA does not make the USDA Direct Loan, the District covenants and agrees to seek financing from other sources in order to refund the Series 2016 Notes on or before the Series 2016 Maturity Date. With regard to the Series 2016B Notes, if the USDA Direct Loan is not closed by October 15, 2018* or the District has not otherwise provided for the full payment of the Series 2016B Notes by such date to the satisfaction of the Underwriter, the District covenants and agrees to issue general obligations bonds or notes payable from an ad valorem tax upon all taxable property within the District without limitation as to rate or amount.

There is no assurance that the District will be able to sell any such bonds or notes or secure financing from other sources, and such failure to obtain the USDA Direct Loan, sell such bonds or notes or secure financing from other sources would result in the nonpayment of the Series 2016 Notes on the Series 2016 Maturity Date.

* Preliminary, subject to change. 7

In the event the District determines that there are economic benefits to defer obtaining the USDA Direct Loan on or before the Series 2016 Maturity Date even though all requirements for obtaining the USDA Direct Loan have been met, the District may request a deferral from USDA and obtain other interim financing to pay the Series 2016 Notes on or before the Series 2016 Maturity Date, through the issuance of other financing and optional redemption of the Series 2016 Notes, as permitted by the Indenture.

See “DESCRIPTION OF THE SERIES 2016 NOTES – Optional Redemption” herein. See “NOTEHOLDERS’ RISKS – Failure to Redeem the Series 2016 Notes” herein.

Trust Estate

Pursuant to the Indenture, the District will grant to the Trustee for the payment of principal and interest on the Series 2016A Notes and the Series 2016B Notes, as applicable, the following (collectively the “Trust Estate”):

(a) All of USDA Direct Loan Proceeds and all of the District’s rights, title and interest in and to the Indenture, including, but without limiting the generality of the foregoing, the present and continuing right to make claim for, collect and receive any of the money, income, revenues, issues, profits and other amounts payable or receivable thereunder, to bring actions and proceedings thereunder or for the enforcement thereof, and to do any and all things which the District or any other person is or may become entitled to do under the Indenture;

(b) All funds and accounts (except the Rebate Fund) established under the Indenture and the investments thereof, if any, and money, securities and obligations therein (subject to disbursements from any such fund or account upon the conditions set forth in this Indenture); provided that funds and accounts on deposit in the Series 2016B Tax Levy Account secure the Series 2016B Notes, but not the Series 2016A Notes;

(c) Any and all real or personal property of every name and nature from time to time hereafter by delivery or by writing of any kind conveyed, mortgaged, pledged, assigned or transferred as and for additional security under the Indenture by the District or by anyone in its behalf, or with its written consent, to the Trustee, including, with respect to the Series 2016A Notes, but not the Series 2016B Notes, the Mortgage and Series 2016A Security Agreement, which is authorized to receive any and all such property at any and all times and to hold and apply the same subject to the terms of the Indenture; and

(d) With respect to the Series 2016B Notes, but not the Series 2016A Notes, the full faith, credit and taxing power of the District and the Series 2016B Security Agreement.

Tax Levy

The Series 2016B Notes are general obligations of the District payable primarily from the USDA Direct Loan Proceeds, the Net Revenues on a subordinate basis to the Net Revenues pledged to the Parity Obligations and certain other funds and accounts held by the Trustee under the Indenture; provided, however, if the USDA Direct Loan is not closed by October 15, 2018*or the District has not otherwise provided for the full payment of the Series 2016B Notes by such date to the satisfaction of the Underwriter, the District is required to issue general obligations bonds or notes payable from an ad valorem tax upon all taxable property within the District without limitation to rate or amount to meet any deficiency in the funds available for the full payment of the principal of and interest on the Series 2016B Notes. Moreover, under Minnesota law, if the Series 2016B Notes are not paid in full on the Series 2016 Maturity Date, the registered owners thereof shall have the right to require the District to issue and exchange, at par, new temporary bonds for the Series 2016B Notes, maturing within one year from their date of issuance and bearing interest at the maximum rate permitted by law.

Mortgage; Series 2016A Security Agreement; Series 2016B Security Agreement

The District’s payment obligations with respect to the Series 2016A Notes are further secured by the Mortgage, which creates a mortgage lien in favor of the Trustee on the Pledged Facilities for the payment of the * Preliminary, subject to change. 8

Series 2016A Notes, and the Series 2016A Security Agreement, which creates a security interest in favor of the Trustee in certain personal property of the Pledged Facilities and the Net Revenues (collectively, the “Collateral”) for the payment of the Series 2016A Notes, which mortgage liens and security interests are on a parity with the mortgage liens and security interests securing the payment of the other Parity Obligations. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS – Summary of Certain Provisions of the Mortgage”, “ – Summary of Certain Provisions of the Series A Note Security Agreement” and “ – Summary of Certain Provisions of the Series B Note Security Agreement” in Appendix F hereto for a description of the Mortgage and the Security Agreements, including a detailed description of the Collateral. THE MORTGAGE AND THE SERIES 2016A SECURITY AGREEMENT DO NOT SECURE PAYMENT OF THE SERIES 2016B NOTES.

The District has also granted mortgages, liens and security interests on the Pledged Facilities and the Collateral with respect to the other Parity Obligations.

The District’s payment obligations with respect to the Series 2016B Notes are further secured by the Series 2016B Security Agreement, which creates a security interest in favor of the Trustee on the Net Revenues for the payment of the Series 2016B Notes, which security interest is subordinate to the security interests in the Net Revenues securing the payment of the Parity Obligations, but is on a parity with the security interest in Net Revenues securing the payment of the Series 2016 Bonds and any other Subordinate Obligations.

No Debt Service Reserve Fund

The Series 2016 Notes are not secured by a debt service reserve fund or any other reserve fund.

ESTIMATED SOURCES AND USES OF FUNDS*

The estimated sources and uses of funds relating to the Series 2016 Notes are as follows: Source of Funds Principal amount of the Series 2016A Notes $22,090,000.00 Principal amount of Series 2016B Notes 22,085,000.00 Principal amount of Series 2016 Bonds 4,450,000.00 District equity contribution 1,700,000.00 TOTAL SOURCES OF FUNDS $50,325,000.00

Uses of Funds Project Costs $21,557,880.08 Refunding of the Prior Bonds 26,160,000.00 Capitalized Interest 1,916,748.49 Issuance expenses 690,371.43 TOTAL USES OF FUNDS $50,325,000.00

NOTEHOLDERS’ RISKS

General

No person should purchase any Series 2016 Note without carefully reviewing this entire Official Statement, including, without limitation, the following information which summarizes some, but not all, of the risks associated with such purchase.

As noted above, the Series 2016 Notes are payable from (a) the proceeds of the USDA Direct Loan, (b) the Trust Estate (limited with respect to each series of the Series 2016 Notes as described under the heading “SECURITY FOR THE SERIES 2016 NOTES - Trust Estate” herein), (c) with respect to the Series 2016A Notes, the Net Revenues on a parity basis with the other Parity Obligations (but on a subordinate basis with respect to the pledge of Net Revenues to the Series 2016 Bonds), and amounts realized under the Mortgage and the Series 2016A Security Agreement on a parity basis with the other Parity Obligations, and (d) with respect to the Series 2016B

* Preliminary, subject to change. 9

Notes, the full faith and credit and taxing power of the District, and the Net Revenues on a subordinate basis to the Parity Obligations (including the Series 2016A Notes) but on a parity with the Series 2016 Bonds and the Other Subordinate Obligations.

Certain risks are inherent in the successful operation of the Health System Facilities. Such risks should be considered in evaluating the District’s ability to generate sufficient Net Revenues to pay the principal of, premium, if any, and interest on the Series 2016A Notes and other Parity Obligations when due and, on a subordinate basis, the Series 2016B Notes and the Series 2016 Bonds. This section discusses some of these risks, but it is not intended to be a comprehensive listing of all risks associated with the operation of the Pledged Facilities or the payment of the Series 2016 Notes.

Failure to Redeem the Series 2016 Notes

The Series 2016 Notes are intended to provide interim financing for a portion of the 2016 Project and refunding of a portion of the outstanding principal amount of the Prior Bonds, and mature on Series 2016 Maturity Date. USDA has obligated funds to the District in the amount of $44,175,000 and has committed to make the USDA Direct Loan upon satisfaction by the District of the terms and conditions contained in the Letter of Conditions, including substantial completion of the Project in accordance with USDA requirements. The Project is anticipated to be substantially complete by March 31, 2018. See “USDA LETTER OF CONDITIONS AND USDA COMMITMENT LETTER” in Appendix E hereto for a copy of the Letter of Conditions and the Commitment Letter.

As part of the construction process USDA will be reviewing and approving construction draw requests for construction of the 2016 Project in accordance with USDA standards. However, even with the issuance of the Commitment Letter and the issuance of the Series 2016 Notes, USDA is not unconditionally bound to make all of the USDA Direct Loan such that the breach by the District of its covenants under the Letter of Conditions could result in a decision by USDA not to fully fund the USDA Loan.

The Series 2016A Notes are secured by the Net Revenues on a parity basis with the other Parity Obligations, proceeds of the USDA Direct Loan, and certain funds and accounts established in the Indenture (limited as described under the heading “SECURITY FOR THE SERIES 2016 NOTES – Trust Estate” herein, and other than the Rebate Fund). The Series 2016B Notes are secured by the proceeds of the USDA Direct Loan, the full faith and credit and taxing power of the District, certain funds and accounts established in the Indenture (limited as described under the heading “SECURITY FOR THE SERIES 2016 NOTES – Trust Estate” herein, and other than the Rebate Fund), and the Net Revenues on a subordinate basis to the pledge of net revenues to the Parity Obligations but on a parity with the pledge or Net Revenues to the Series 2016 Bonds and any other Subordinate Obligations. See “SECURITY FOR THE SERIES 2016 NOTES” herein for a further discussion of the security for the Series 2016 Notes.

If (1) USDA determines that it will not fully fund the USDA Direct Loan because all of the conditions for the USDA Direct Loan have not been met on or before the Series 2016 Maturity Date, including but not limited to substantial completion of the 2016 Project, or (2) the District does not secure other interim or permanent financing for the 2016 Project and the refunding of a portion of the Prior Bonds, the District will not have sufficient net revenues to pay the principal of and interest on first, the Series 2016A Notes at maturity and the other Parity Obligations and, second, the Series 2016B Notes at maturity and the Series 2016 Bonds. See “SECURITY FOR THE SERIES 2016 NOTES” herein. There is no certainty that the District would be able to obtain other financing or generate sufficient revenues to pay the principal of, premium, if any, and interest on the Series 2016A Notes and the Series 2016B Notes on or before the Series 2016 Maturity Date, if ever, or would be able to timely levy a tax sufficient to pay the principal of, premium, if any, and interest on the Series 2016B Notes on or before the Series 2016 Maturity Date. The Net Revenues would be insufficient to pay in full the outstanding principal of, premium, if any and interest on the Series 2016A Notes and the other Parity Obligations when due, as well as the outstanding principal of, premium, if any and interest on the Series 2016B Notes and the Series 2016 Bonds when due on a subordinate basis. See “NOTEHOLDERS’ RISKS – Adequacy of Revenues” and “The Mortgage and the Security Agreements” herein. Failure by the District to pay the principal of and interest on the Series 2016 Notes when due would result in an event of default under the Indenture.

The Series 2016B Notes are general obligations of the District payable primarily from the USDA Direct Loan Proceeds, the Net Revenues on a subordinate basis to the Net Revenues pledged to the Parity Obligations but on a parity with the pledge of Net Revenues to the Series 2016 Bonds, and certain other funds and accounts held by the Trustee under the Indenture; provided, however, if the USDA Direct Loan is not closed by October 15, 2018 or the District has not otherwise provided for the full payment of the Series 2016B Notes by such date to the satisfaction of the Underwriter, the District is required to issue general obligation bonds or notes payable from an ad valorem tax upon all taxable property within the District without limitation to rate or amount to meet any deficiency in the funds available for the full payment of the principal of and interest on the Series 2016B Notes. Moreover, under Minnesota law, if the Series 2016B Notes are not paid in full on the Series 2016 Maturity Date, the registered owners thereof shall have the right to require the District to issue and exchange, at par, new temporary bonds for the Series 2016B Notes, maturing within one year from their date of issuance and bearing interest at the maximum rate permitted by law.

Termination of the Lease

Pursuant to the Lease, Lakewood has covenanted to pay debt service on all Series 2016 Notes and all other bonds and notes of the District. While any such bonds and notes remain outstanding, Lakewood is prohibited by the terms of the Lease from terminating the Lease without repayment of all bonds and notes of the District then outstanding. If Lakewood defaults under the Lease, the District has certain remedies, including termination of the Lease. Any such termination of the Lease and transfer of operations of the Health System could result in a delay in receiving Net Revenues, which could result in the inability of the District to pay principal of, premium, if any, and interest on the Series 2016 Notes on a timely basis, or at all.

Federal Budget Issues

The Budget Control Act of 2011 (the “BCA”) mandates significant reductions and spending caps on the federal budget for the federal fiscal years 2012-2021. The BCA also created a Joint Select Committee on Deficit Reduction (the “Super Committee”) to develop a plan by November 23, 2011 to further reduce the federal deficit in the amount of $1.5 trillion. As the Super Committee failed to act, the BCA mandated that a 2% reduction in Medicare spending, among other reductions, could be triggered to take effect on January 2, 2013. The Medicaid program would be exempt from such automatic reductions. The American Taxpayer Relief Act of 2012 (the “ATRA”) postponed this scheduled reduction until March 1, 2013. The Centers for Medicare and Medicaid Services confirmed that the 2.0% reduction to Medicare providers and insurers are for services provided after April 1, 2013.

It is possible that Congress will take action to eliminate some or all of the reductions in the future and any Congressional action could be made retroactive in order to eliminate some or all of the cuts even to the extent they were imposed. However, there is no certainty that Congress will take any action. Absent further Congressional action, these automatic spending cuts will become permanent. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts may have upon Lakewood and its Net Revenues. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If and to the extent Medicare and/or Medicaid spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of Lakewood and the District. Ultimately, these reductions or alternatives could have a disproportionate impact on providers and could have an adverse effect on the financial condition of Lakewood and the District, which could be material.

In the past, the United States government has shut down and curtailed most routine operations after Congress failed to enact legislation appropriating funds for a fiscal year, or to adopt a continuing resolution for interim authorization of appropriations for the remainder of a fiscal year. During such shutdowns, many federal employees are furloughed and other federal employees were required to report to work without known compensation dates. If a government shutdown occurs in the future, there can be no assurance that federal payments, including Medicare payments or Medicaid payments to the states or the purchase of the USDA Direct Loan Notes by USDA, will occur on a timely basis or at all during such a shutdown. While prior governmental shutdowns and continuing resolutions have not had a material adverse effect on Lakewood and the District, there can be no assurance that future governmental shutdowns will not adversely affect such revenues.

Changes in Federal and State Law

From time to time, there are legislative proposals that, if enacted, could adversely affect the federal and state tax matters referred to herein, adversely affect the marketability or market value of the Series 2016 Notes, or otherwise prevent holders of the Series 2016 Notes from realizing the full benefit of the tax exemption of interest on the Series 2016 Notes. No prediction is made concerning future events. The opinions expressed by Bond Counsel in connection with the issuance of the Series 2016 Notes are based upon existing law. Purchasers of the Series 2016 Notes should consult their own tax advisors regarding any pending or proposed legislation, regulatory actions, or litigation.

Regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value, marketability or tax status of the Series 2016 Notes. It cannot be predicted whether any such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Series 2016 Notes would be impacted thereby.

Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series 2016 Notes to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Series 2016 Notes. Prospective purchasers of the Series 2016 Notes should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion.

Government Regulation of the Health Care Industry

The health care industry in general is subject to regulation by a number of governmental and private agencies, including those which administer the Medicare and Medicaid programs discussed under the headings “NOTEHOLDERS’ RISKS – Medicare” and “NOTEHOLDERS’ RISKS – Medicaid” herein. The health care industry is also affected by federal, state and local policies developed to regulate the manner in which health care is provided, administered and paid for nationally and locally. As a result, the health care industry is sensitive to frequent and substantial legislative and regulatory changes. Congress and the states have consistently attempted to curb the growth of federal spending on health care programs. In addition, Congress and other governmental agencies have focused on the provision of care to indigent and uninsured patients, prevention of “dumping” such patients on public hospitals in order to avoid the provision of non-reimbursed care, the unlawful payment of remuneration in exchange for referral of patients, the unauthorized use or disclosure of patients’ protected health information, billing for services not in accordance with governmental requirements and other issues.

It is unlikely that Lakewood could attract sufficient numbers of private pay patients to the Pledged Facilities to become self-sufficient without reimbursement from governmental programs. Cost shifting to private sources of payment is not an option to offset declining federal and state reimbursement because private insurance companies have adopted cost containment measures similar to those used by government agencies. These cost containment mechanisms include managed care and capitated payment.

Despite these efforts, due to, among other things, the growing percentage of older persons in the population, improved technology and administrative costs in a highly regulated industry, health care expenditures as a percentage of the gross national product continue to rise. Consequently, any future aggressive cost containment measures and anti-fraud and abuse investigation and enforcement could have a material adverse effect on Lakewood and the District. Continued efforts in the form of statutory and regulatory activity to reduce the rate of increase in reimbursement for health care costs, particularly costs paid under the Medicare and Medicaid programs, can be expected.

The Medicare and Medicaid programs have been and continue to be affected by numerous legislative initiatives. In general, the purpose of much of the statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and 12

Medicaid programs have been enacted, and have caused reductions in reimbursement from the Medicare program. CAHs are reimbursed by the Centers for Medicare and Medicaid Services (“CMS”, formerly known as the Health Care Financing Administration or “HCFA”) on the basis of reasonable costs, with several caveats discussed in more detail below. The Health System includes a CAH and is currently reimbursed on that basis for costs related to Medicare.

Because the Health System includes a CAH, it is not subject to the Medicare inpatient prospective payment system; however, the provision is significant in that it links reimbursement to the quality of care a hospital provides. Current emphasis is placed on patient safety and reduction of medical errors and quality improvement in health care are expected to expand beyond PPS hospitals and could become a requirement for CAHs. This quality information is now available to the public online as well and it should be noted that while not obligated to do so, Lakewood already complies with certain reporting requirements related to the inpatient prospective payment system.

Numerous other proposals have been advanced by various parties to require or promote alternate methods of health care delivery, to establish health care cost containment measures, to provide alternatives for payment of health care costs under Medicare, Medicaid and private reimbursement programs, and to institute other changes in health care payment and reimbursement.

Lakewood is subject to governmental regulation under the federal Medicare program and the joint federal and state Medicaid program. Health care providers, including Lakewood, have been and will continue to be affected by changes that have occurred during the last several years in the administration of the Medicare and Medicaid programs.

The Health Reform Law

On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act (the “Affordable Care Act”) which included sweeping changes to how health care is paid for and provided in the United States. On March 30, 2010, the President signed the Health Care and Education Reconciliation Bill (the “Reconciliation Act”), which modifies the Affordable Care Act in many respects. Together, the Affordable Care Act and the Reconciliation Act will be referred to as the “Health Reform Law”. The Health Reform Law is estimated to expand health insurance coverage to 30 million individuals through 2022.

Private Insurance and Exchanges. Among other significant changes, the Health Reform Law has both immediate and ongoing effects on the private insurance market. For example, the Health Reform Law required that starting in 2010, among other things, all individual and group health plans must provide dependent coverage for children through age 26, certain insurers are prohibited from imposing lifetime limits on the dollar value of coverage, new prohibitions exist on rescinding coverage except in cases of fraud, and insurers are prohibited from imposing pre-existing condition exclusions.

For individuals and, at first, small employers, the Health Reform Law creates state-based health insurance marketplaces, known as “exchanges.” The exchanges became effective in 2014 and are administered by either a governmental agency or a non-profit organization. Starting in 2014, individuals and small employers with less than 50 employees can purchase insurance through an exchange. The exchanges are open to employers with between 50 and 100 employees beginning in 2016. In addition, states may elect to create regional exchanges or to permit more than one exchange to operate in a given state if each exchange serves a distinct geographic area. Furthermore, as of 2014, all qualified health benefits plans offered through the exchanges and in the individual and small group markets, with certain exceptions, must offer an “essential benefits package,” consisting of a minimum package of health benefits offering comprehensive services and covering at least 60% of covered out-of-pocket expenses with reasonable out-of-pocket maximums. Subsidies are available to assist low-income individuals and certain small businesses to cover the costs of purchasing health insurance through the exchanges.

To ensure competition between plans offered through the exchanges, the Health Reform Law directs the federal Office of Personnel Management to enter into contracts with private insurers to offer at a minimum two multi-state plans in each exchange in each state. At least one such plan must be offered by a non-profit insurer.

It is not possible to predict what effect changes in the health insurance market will have on demand for services from the Health System or the amount of reimbursement available for those services. During the most 13

recent annual open enrollment period, the U.S. Department of Health & Human Services estimated that about 12.7 million people signed-up for or renewed a health plan via the health insurance marketplaces created as a result of the Health Reform Law.

Employers. The Health Reform Law does not expressly require employers to offer health care coverage. However, large employers (i.e., those with one hundred or more employees) and small employers (i.e., those with between fifty and ninety-nine employees) are subject to a penalty if they do not offer health care coverage and if any of their workers obtain subsidized coverage through the planned health care exchanges. Employers with fewer than fifty employees are not required to provide health insurance to their employees. Also employers that offer coverage must provide a voucher equal to what the employer would have paid under the employer’s plan to employees with incomes up to 400% of the federal poverty level who choose to enroll in the planned health care exchanges.

Certain subsidies to purchase health insurance will be made available to qualifying employers. For example, employers with fewer than 25 employees and with certain average worker annual wages that purchase health insurance for their employees will qualify for a tax credit.

It is not possible to predict what effect changes that the Health Reform Law imposes on employers will have on demand for services from the Health System or the amount of reimbursement available for those services.

Individuals. Beginning in 2014, with some exceptions, all United States citizens and legal residents must have a minimum level of health insurance coverage or pay a penalty. Individuals without qualifying coverage must pay a tax penalty with certain maximums. The penalty will be phased in based on a preset schedule. Certain categories of individuals will qualify for an exception from the penalty; the main categories are: American Indians, individuals with religious objections, individuals who can show financial hardship, individuals without coverage for less than three months each year and households with incomes below a certain level. In addition, the Health Reform Law will provide tax credits (also referred to as subsidies) to purchase health insurance through the exchange on a sliding scale to individuals and families with incomes up to 400% of the federal poverty level.

It is not possible to predict what effect changes that the Health Reform Law imposes on individuals will have on demand for services from the Health System or the amount of reimbursement available for those services.

Medicare

Lakewood receives a significant portion of its gross patient service revenue from reimbursement under Medicare (approximately 36.44% in the fiscal year ended December 31, 2015 (see “SELECTED FINANCIAL DATA – Sources of Revenue” in Appendix B)). In 1966, the federal Social Security Act established the Medicare program to provide health care services to the elderly and the disabled. Medicare Part A provides health insurance benefits for covered hospital and related health care services to persons aged 65 years and older who are entitled to monthly Social Security retirement benefits, as well as to certain disabled persons. Medicare Part B provides supplemental medical benefits covering primarily outpatient and physician care costs for covered persons; beneficiary participation in Medicare Part B is on a voluntary basis.

Legislative action and the promulgation of related regulations since the program’s adoption have resulted in significant changes in the Medicare program. Formerly, Medicare provided reimbursement to hospitals for the reasonable direct and indirect costs of inpatient hospital services furnished to beneficiaries. Pursuant to the Social Security Amendments of 1983 and subsequent Budget Reconciliation Act modifications, Congress adopted a prospective payment system (“PPS”) to cover the routine and ancillary operating costs of most Medicare inpatient hospital services. Because the hospital owned by the District is designated as a CAH, it is not subject to either inpatient or outpatient PPS under Medicare. Instead, Lakewood is reimbursed on the basis of its reasonable costs, subject to certain limitations.

In an effort to restrict unbundling of services for which payment might be made separately, OBRA-90 directed that outpatient services, including diagnostic tests and other admission-related non-diagnostic services provided by a hospital on the day of hospital admission and up to three business days immediately preceding the admission date, would no longer be reimbursable under Medicare Part B if Medicare Part A is the primary payer.

CMS has stated that because CAHs are reimbursed on a cost basis, the three-day payment window rule does not apply to CAHs. However, this could change in the future and has the potential to have an adverse effect on 14

Lakewood and the District. While hospitals that have been prosecuted for unbundling have confronted a substantial amount of potential financial liability, the Department of Justice has typically offered reasonable settlements. Because the rules applicable to such unbundling provisions are complicated and were not well understood at the time of their implementation, investigations in other states have found some violations in virtually all hospitals.

The Health Reform Law in its net effect is estimated to reduce the projected growth of Medicare by $424 billion for the ten-year period from federal fiscal year 2010 through 2019, which is a six percent reduction from the Medicare spending that had been projected for that period, including $116 billion from private Medicare Advantage plans. In addition, payments to providers under Medicare will be more closely tied to quality outcomes. For example, the Health Reform Law introduced new quality reporting requirements, value-based purchasing programs, and hospital re-admission rate and hospital-acquired condition penalties. Some of these quality initiatives are discussed in more detail below.

The Health Reform Law establishes the Independent Advisory Board (“IPAB”), which is directed to recommend savings for Medicare if the per capita growth in Medicare spending exceeds defined target growth rates. The recommendations move to Congress for fast-track consideration, and if Congress does not act in the required timeframe, the Secretary of HHS is required to implement them. IPAB is prohibited from including any recommendation that would: 1) ration health care; 2) raise revenues or increase Medicare beneficiary premiums or cost sharing; or 3) otherwise restrict benefits or modify eligibility criteria. In addition, for implementation years through 2019, mandatory proposals cannot include recommendations that would reduce payment rates for certain providers and suppliers of services. As a result, payments for inpatient and outpatient hospital services, inpatient rehabilitation and psychiatric facilities, long-term care hospitals, and hospices are exempt from IPAB-proposed reductions in payment rates until 2020; clinical laboratories are exempt until 2016. President Obama has proposed to allow IPAB to start its work earlier, though the 2014 federal omnibus spending bill reduced its $15 million dollar budget by $10 million dollars, essentially gutting it. At this point there is no way to predict whether any deadlines will be moved up or how IPAB’s recommendations would impact hospital reimbursement, if at all.

Certain payment demonstration programs for payment and care have also been developed. An example of such a program is an accountable care organization (an “ACO”), which functions by integrating hospitals, physicians and other health care providers in order to provide care for a defined patient population. An ACO is partially paid based on, and generally held accountable for, the cost and quality of care furnished by the ACO provider members to the defined patient population. In turn, the ACO provider members are accountable for the total cost of care provided to such patient population. The ACO and its provider members are paid based on a preset formula for the care provided and they may be eligible to receive incentive payments for achieving certain cost and quality goals. Lakewood participates in an ACO established by Essential Health.

The Health Reform Law made changes to Medicare Part D, the prescription drug program, including taking steps to close the “donut hole” – or coverage gap – for prescription drug coverage. Beginning in 2010, individuals who faced the coverage gap received a $250.00 rebate and beginning in 2011, drug makers began providing a 50% discount on brand-name drugs to low- and middle-income Medicare Part D beneficiaries who must pay for the drugs themselves once the coverage gap begins. The drug makers’ rebate will increase to a 75% discount on brand name and generic drugs by 2020, effectively closing the coverage gap.

Hospital Inpatient and Outpatient Services. For inpatient services, the Medicare Prescription Drug Improvement and Modernization Act (“MPDIMA”) sets reimbursement at 101% of the reasonable costs of the CAH in providing those services. For outpatient services, a CAH may elect an All-Inclusive Rate for Outpatient Payments, which allows a CAH to be paid an all-inclusive rate that incorporates the cost-based facility payment and a professional fee based on 115% of the Medicare physician fee schedule on a single claim (referred to as “Method II billing”). In the alternative, a CAH could be paid on the basis of its reasonable costs. For cost reporting periods beginning on or after October 1, 2011, CMS has reduced CAH’s reimbursement under Method II billing from 101% of reasonable costs plus the professional fee, to 100% of reasonable costs plus the professional fee. However, the Health Reform Law provides that CAHs are now paid 101% of costs for all outpatient services they provide, regardless of the billing method selected. Additionally, the Health Reform Law expands the outpatient 340B program to CAHs and to certain Sole Community Hospitals and Rural Referral Centers, but does not expand the program to cover inpatient drugs for existing 340B hospitals. The 340B Drug Pricing Program limits the cost of covered outpatient drugs to certain federal grantees, federally-qualified health center look-alikes and qualified disproportionate share hospitals. Significant savings on pharmaceuticals may be seen by those entities that participate in this program. 15

Geriatric Psychiatric Hospital. Inpatient psychiatric facility services, including those within a geriatric psychiatric unit, are paid under the Inpatient Psychiatric Facility Prospective Payment System (IPF PPS). The IPF PPS sets a per diem payment amount that is determined based on geographic factors, patient characteristics, and facility characteristics. Facilities are eligible for additional or increased payments if the IPF has a qualifying emergency department, for outlier cases with extraordinarily high costs, and for Electroconvulsive Therapy (ECT) treatments it furnishes.

Laboratory Services. Prior to July 1, 2011, Medicare payment for clinical diagnostic laboratory tests provided to outpatients of a CAH was made on a reasonable costs basis only if the patient was an outpatient of the CAH and was physically present at the CAH when the specimen was collected. Otherwise, payment was made on the basis of the Medicare Clinical Laboratory Fee Schedule (“CLFS”). The Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) provided that effective July 1, 2011, patients no longer are required to be physically present at the CAH when the specimen is collected, and CMS has implemented regulations which provide for cost-based reimbursement if the patient received outpatient services from the CAH on the same day the specimen is collected or the specimen is collected by an employee of the CAH. Cost-based reimbursement will also be allowed if the specimen is collected while the patient is physically present in the CAH when the specimen is collected, or it is collected in a facility that is provider-based to the CAH. In other cases, services would be reimbursed under the CLFS.

Emergency Room Personnel. Medicare payments to CAHs include costs of compensation and other related costs of on-call emergency room physicians, physician assistants, nurse practitioners and clinical nurse specialists even if those physicians are not present at the facility, if the practitioner is not otherwise providing services and is not on-call at any other facility.

Physician Services. Payments for physician services, other than those performed in a rural health clinic, under Part B of the Medicare program are based on a national fee schedule. The fee schedule is based on a resource- based relative value scale (“RBRVS”), whereby physician work for a service is assigned a value reflecting the relative resources such as time, intensity, and risk required to perform the service. Values are also assigned to each service for practice expenses – for example, billing, rent, office personnel, and supplies, and for malpractice expenses. Payments are calculated by multiplying the combined costs of a service by a conversion factor. The conversion factor is a monetary amount that was previously adjusted annually by CMS’s Sustainable Growth Rate (“SGR”) system. On April 16, 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) was signed into law permanently repealed the SGR system. MACRA replaced the SGR system with a combination of automatic increases for physician payments, including an annual update of 0.5 percent between 2015 and 2019, and incentives for physicians to participate in a variety of pay-for-performance programs and alternative payment models. There is no guarantee that reimbursement for physician services will cover the cost of those services to beneficiaries.

Rural Health Clinics. Lakewood operates five rural health clinics (“RHC”). RHCs are independent or provider-based clinics which are certified under the Medicare program to receive special, generally increased, Medicare and Medicaid reimbursement in order to improve access to primary care in rural medically underserved areas. Lakewood’s rural health clinics are independent clinics. Medicare visits are reimbursed based on allowable costs and Medicaid visits are reimbursed under either the cost-based method or an alternative PPS system.

Skilled Nursing Facilities. Lakewood operates Lakewood Care Center, a 100-bed, Medicare-certified skilled nursing facility (“SNF”). Medicare Part A covers skill nursing facility services and payments are based on a PPS system. Under the PPS, the Medicare program pays SNFs per day rates, which cover all routine services, ancillary services, and capital-related costs for a beneficiary's Part A stay. The PPS payment rates are adjusted for case mix and geographic variation in wages. Based on the mix of services, the patient is classified into a resource utilization group (“RUG”) that determines the facility’s daily reimbursement for that patient. The more skilled services a patient needs, the higher the RUG, and the greater the reimbursement to the facility for inpatient services. Alternatively, patients not eligible for a Part A stay may still receive services covered under Medicare Part B. Part B pays for each therapy service provided, using CPT procedure codes. If the Part B patient is staying in the facility, charges for room, board and other services may be paid by the patient, Medicaid or other insurance.

Ambulance. Lakewood’s hospital-based Staples Ambulance Service, operates an ambulance service with five Paramedics, 14 Emergency Medical Technicians, and three Type III ambulances. Ambulance services are reimbursed under a CMS-established national fee schedule for ambulance services. The ambulance fee schedule 16

applies to all ambulance services, including institutional providers (i.e., hospitals and critical access hospitals, except when it is the only ambulance service within 35 miles, and skilled nursing facilities), furnished as a benefit under Medicare Part B. Like other Medicare providers, ambulance providers and suppliers must accept the Medicare allowed charge as payment in full and not bill or collect from the beneficiary any amount other than any unmet Part B deductible and the Part B coinsurance amounts.

Medicare Audits and Withholds. Hospitals that participate in Medicare and Medicaid are subject to audits and retroactive adjustments with respect to reimbursement claimed under those programs. Medicare and Medicaid regulations permit withholding of payments in certain circumstances. Any such withholding could have a material adverse effect on the financial condition of Lakewood and the District. Other than such potential repayment, management of Lakewood is not aware of any situation in which a Medicare or other payment is being, or may in the future be, withheld that would materially and adversely affect the financial condition of Lakewood and the District.

The CMS has also launched another major initiative to directly challenge providers, the Medicare Zone Program Integrity Contractors (“ZPIC”). ZPICs are organizations hired indirectly (or in connection with other CMS affiliated contractors) by CMS to perform a wide range of medical review, data analysis, Medicare evidence-based policy auditing activities and potential Medicare fraud audits. Any or all of these audit programs could adversely affect Lakewood’s reimbursement and financial performance.

The Medicare Modernization Act of 2003 established a Medicare Recovery Audit Contractor (“RAC”) program as a demonstration program to identify improper Medicare payments. Each RAC is paid on a contingency fee basis, receiving a percentage of the improper overpayments collected from providers. The Tax Relief and Health Care Act of 2006 made the RAC program permanent and authorized CMS to expand the program to all 50 states by 2010. Minnesota hospitals became subject to RAC review in 2009. CGI Technologies and Solutions, Inc. (“CGI”) is the RAC contractor for Region B, which includes Minnesota. The Health Reform Law expands the RAC audits to the Medicaid, Medicare Part D and Medicare Advantage Programs. RACs collected $3.65 billion in Medicare overpayments during fiscal year 2013, in addition to blocking $22 million in improper payments from being made through prepayment reviews.

The Medicare program is subject to judicial interpretations, administrative rulings, governmental funding restrictions and requirements for utilization review (such as second opinions for surgery and preadmission criteria), as well as national health care reforms, paid for in part by reductions to the Medicare and Medicaid programs. Such matters, as well as more general governmental budgetary concerns, may reduce payments made to Lakewood with respect to the Health System, and future Medicare payment rates may not be sufficient to cover increases in the cost of providing services to Medicare patients. At this time, the management of Lakewood cannot predict the full impact that national health reforms will have on Net Revenues, but it is possible that the Medicare program changes will have a material adverse effect on Lakewood and the District. See “NOTEHOLDERS’ RISKS - Government Regulation of the Health Care Industry” herein.

Medicare and the Health Reform Law

The Affordable Care Act will reduce the projected growth of Medicare by $500 billion over 10 years, including $116 billion from private Medicare Advantage plans. In addition, payments to providers under Medicare will be more closely tied to quality outcomes and will more increasingly be in part dependent upon meeting certain performance standards and avoiding hospital-acquired patient conditions. For example, beginning in 2013, a portion of a hospital’s Medicare payment was linked to the hospital’s performance on quality measures related to common and high-cost conditions. Similar programs will be introduced for other health care providers as well. Additionally, beginning in 2015, hospitals in the top 25th percentile of rates of hospital-acquired conditions for certain high-cost procedures are subject to a payment penalty. At this time, CAHs are exempt from the inpatient prospective payment system and hospital-acquired conditions payment provisions. However, there is no way to predict if this will change or what effect it may have on reimbursement.

Medicaid

Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependents. Under Medicaid, the federal government provides limited funding to

states that have medical assistance programs that meet federal standards. Attempts to balance or reduce federal and state budgets will likely negatively impact Medicaid and other state health care program spending. Federal and state budget proposals may contemplate significant cuts in Medicaid spending which will likely negatively impact provider reimbursement.

The ACA requires Medicaid to be expanded to all individuals under the age of 65 with income less than 138% of the federal poverty limit, effective in 2014. To fund this expansion, the ACA provides that the federal government will fund 100% of the costs of this expansion from 2014 - 2016, decreasing to 90% of the costs of this expansion in 2020 and thereafter. In June 2012, the U.S. Supreme Court held that the federal government cannot withhold existing federal funds for states that refuse to expand Medicaid as required by the ACA. Lakewood management cannot predict the effect of these changes to the Medicaid program on Lakewood’s operations or financial condition. Historically, Medicaid has reimbursed at rates below the cost of care. Therefore, increases in the overall proportion of Medicaid patients poses a risk, but it is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization replaces previously uncompensated patients.

For the fiscal years ended December 31, 2015 and 2014, Medicaid payments represented approximately 20.08% and 24.09% of Lakewood’s gross patient service revenues. See “SELECTED FINANCIAL DATA – Sources of Revenue” in Appendix B.

Minnesota Medicaid and Other Programs. The Minnesota Department of Human Services oversees Minnesota’s Medicaid program, Medical Assistance (“MA”), as a result of legislation passed in 1997 that modified MA to allow counties to serve as the administrator of the MA program in each county. Historically, MA had gaps in coverage for adults because eligibility was restricted to specific categories of low-income individuals (including children, their parents, pregnant woman, the elderly, and individuals with disabilities). In 2011, Minnesota engaged in an early expansion of MA - expanding coverage to parents at higher income levels and provided coverage to adults without children. Minnesota further expanded MA eligibility as of January 2014. Pursuant to the ACA, Minnesota expanded MA eligibility to almost all non-elderly adults with incomes at or below 133% of the federal poverty level.

Inpatient hospital services covered by MA are reimbursed according to a prospective DRG payment system similar to that used by Medicare, taking into account: (1) cost per admission; (2) relative value of DRGs; (3) case mix; (4) adjusted base year cost per admission; (5) hospital cost index; (6) disproportionate population adjustment; and (7) pass-through-per-admission costs. Most hospital outpatient services are now reimbursed by Medicaid under an Ambulatory Patient Classification Group methodology.

Inpatient mental health services provided within the geriatric psychiatric unit are also subject to the prospective DRG payment system. Outpatient evaluation and management and psychiatric services are separately covered by MA under RHC reimbursement guidelines.

Other outpatient hospital services are reimbursed at the lower of: (1) the submitted charge; (2) the customary charge; (3) the 50th percentile of the usual and customary charge amount among all providers; or (4) the comparable Medicare payment amount. Certain services, supplies and materials are reimbursed by MA at the lower of the submitted charge or a fee schedule.

In addition to MA, the Minnesota Department of Human Services administers MinnesotaCare, the state’s subsidized health insurance program for working Minnesotans without access to affordable health care coverage, which was enacted in 1992.

MinnesotaCare coverage is available to all who qualify. To apply for MinnesotaCare insurance, a person must have no access to affordable health care coverage and must not have an annual income in excess of certain levels. Beginning in July 2002, certain asset limitations were added as an eligibility requirement for MinnesotaCare. MinnesotaCare is funded by enrollee premiums using a sliding-fee scale, based on family size and income, and a 2% tax on non-Medicare revenues, subject to certain exceptions, of health care providers, including hospitals. All persons enrolled in MinnesotaCare receive their care through managed care health plans.

The MinnesotaCare Act sets forth various requirements to restrain the rate of growth in health care costs in Minnesota, and the Act includes various reporting requirements applicable to participating health care providers 18

such as Lakewood. For example, Lakewood is required to provide an annual report to the Minnesota Commissioner of Health (the “Commissioner”) with information related to new specialized services or any capital expenditures (in each case with a cost in excess of $1,000,000). The Commissioner does not have any approval or denial authority over such capital expenditures or new services, but is to use the information provided in an ongoing evaluation of state-wide and regional progress towards overall health care cost containment. The law does not require reporting to the Commissioner for expenditures made or new services offered by research and teaching institutions for the purposes of conducting medical education or medical research supported or sponsored by a medical school or a federal or a foundation grant. The law does, however, require Lakewood to collect and provide certain patient specific information and descriptive and financial aggregate data in addition to the number of available hospital beds dedicated to certain specialized services and annual occupancy rates on those beds. The effect on Lakewood of any future changes to those requirements cannot be predicted.

At any time, the Minnesota State Legislature may consider proposals to further reform the delivery of health care in Minnesota. At this time, it is impossible to measure the overall financial impact that any such proposed reforms, if enacted into law, would have on Lakewood.

Annual Cost Reporting

Lakewood’s annual cost reports, which are required under the Medicare and Medicaid programs, are subject to audit, which ultimately may result in adjustments to previously reimbursed amounts. Medicare and Medicaid providers must meet regulatory Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. CMS is responsible for ensuring that hospitals meet these regulatory Conditions of Participation, and the Health System is surveyed by the Minnesota Department of Health to determine whether it is in compliance with the Conditions of Participation for CAHs. Failure to comply with the CAH Conditions of Participation could, in severe cases, lead to loss of participation in Medicare and/or Medicaid which would materially affect Lakewood and the District.

Additionally, beginning in 2015, under the Medicare Electronic Health Record (“EHR”) Incentive Program, CAHs that are unable to demonstrate meaningful use of a certified EHR system are subject to negative payment adjustments. The negative payment adjustments began for reporting year 2015 and are increased for subsequent reporting periods. A CAH must demonstrate meaningful use during each reporting period in order to avoid the payment adjustment for that reporting period. In 2014, the federal government began auditing hospitals’ and providers’ records related to their attestation of being “meaningful users” in order to obtain incentive payments that were available in previous years. A hospital or provider that fails the audit will have an opportunity to appeal. Ultimately, hospitals or providers that fail on appeal will have to repay any incentive payments they received through these programs. Lakewood has successfully demonstrated meaningful use of its EHR system for Medicare and Medicaid. It first attested to successful demonstration of meaningful use in 2012 and has successfully attested through 2015.

Emergency Medical Treatment and Active Labor Act (EMTALA)

The federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) imposes certain requirements on hospitals and facilities with emergency departments. Generally, EMTALA requires that hospitals provide “appropriate medical screening” to patients who come to the emergency department, to determine if an emergency medical condition exists. The hospital must stabilize the patient, and the patient cannot be transferred unless stabilization has occurred or an appropriate transfer has been arranged. In addition, a hospital which receives an inappropriate transfer must report that transfer to CMS. Failure to comply with the law can result in exclusion from the Medicare and/or Medicaid programs as well as civil and criminal penalties.

The Management of Lakewood has policies and procedures in place to achieve material compliance with EMTALA, but no assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of Lakewood and the District.

Health Insurance Portability and Accountability Act

Congress enacted the Health Insurance Portability and Accountability Act (“HIPAA”). HIPAA has several provisions; however, the most relevant provisions to Lakewood are those directed toward administrative simplification in the health care industry. As part of this effort, Congress enacted significant requirements for health care providers with regard to billing, use and disclosure of patient information, and security measures to be utilized by entities covered by HIPAA.

Although Congress did establish some requirements in HIPAA itself, it delegated authority to the Secretary of the United States Department of Health and Human Services (the “Secretary”) to develop and implement the regulatory scheme. The Secretary has promulgated regulations for the three large components of HIPAA’s administrative simplification, privacy and security provisions, which are discussed in greater detail below. However, the American Recovery and Reinvestment Act of 2010 included the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”). The HITECH Act includes a number of provisions which significantly affect HIPAA covered entities.

On January 25, 2013, HHS issued comprehensive modifications to the existing HIPAA regulations to implement the requirements of the HITECH Act, commonly known as the “HIPAA Omnibus Rule.” The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of private health information, (ii) establishing four levels of culpability with respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information. While the effects of the HIPAA Omnibus Rule cannot be predicted at this time, the obligations imposed thereunder could have a material adverse effect on the financial condition of Lakewood and the District.

Management of the Health believes that Lakewood is in substantial compliance with HIPAA, the HITECH Act, and all accompanying regulations, include the HIPAA Omnibus Rule, however, the changes enacted by the HITECH Act and the HIPAA Omnibus Rule, and future changes may be costly and burdensome for Lakewood to implement, and may subject Lakewood to fines or assessments which could adversely affect the financial condition of Lakewood and the District.

Transactions/Code Sets. One major focus of HIPAA is in the area of electronic data interchange. Specifically, the regulations require all health care providers, health care clearinghouses and health plans who submit electronic transactions to do so in a nationally standardized format. The purpose is to allow for uniformity in claims and other electronic data communications between payers and providers. The regulations apply only to providers who submit transactions electronically. As part of the regulations, the Secretary has published implementation standards for providers to use when transmitting electronic transactions.

Privacy. The HIPAA privacy regulations are directed toward the protection of individually identifiable health information from certain uses and disclosures. To prevent improper use or disclosure of protected health information, providers must develop and maintain numerous safeguards, which may involve substantial administrative and financial burdens.

Specifically, HIPAA provides that protected health information is subject to stringent requirements for use inside the Health System and when disclosed to third parties. For example, HIPAA requires that covered entities: transmit data in standard code sets; maintain detailed records of uses and disclosures of a patient’s data, and make those records available to the patient upon his/her request; give patients the right to access, inspect and request amendments to their health records; develop and adhere to privacy policies and a notice of privacy practices for patients; provide appropriate training to employees; implement various physical, technical and administrative safeguards to prevent intentional and unintentional misuse of health information; and designate a privacy official to oversee the implementation of these requirements.

Subject to certain exceptions, when using or disclosing protected health information or when requesting protected health information from another covered entity or business associate, a covered entity or business

associate must make reasonable efforts to limit protected health information to the “minimum necessary” to accomplish the intended purpose of the use, disclosure, or request. Congress has directed the Secretary to publish guidance to covered entities on what constitutes “minimum necessary.” In addition, covered entities may use protected health information in a “limited data set” for certain non-treatment purposes (e.g., research and health care operations). The term “Limited Data Set” is defined under existing HIPAA regulations as information that excludes names, postal address, telephone and fax numbers, e-mail address, social security and medical record numbers, and nine other identifiers.

Covered entities that use an “electronic health record” will also be required to account for disclosures of information pursuant to the HITECH Act that are currently not subject to the accounting requirements, including disclosures for treatment, payment and health care operations, depending on when the covered entity acquired the electronic health record technology. The covered entity will have the option of accounting for all disclosures, including disclosures made by its business associates, itself, or providing an accounting of only the covered entity’s disclosures, with a list of the names and contact information of its business associates, so that a patient may request the information directly from each business associate. In addition, if a covered entity maintains an electronic health record, individuals have a right to receive a copy of the protected health information maintained in the record in an electronic format. Again, the Secretary is charged with developing guidance to refine these requirements.

The HITECH Act also includes several other major provisions. Among these is the requirement that covered entities comply with patient requests to restrict disclosure of information to a health plan for the purposes of carrying out payment or health care operations, if the information pertains solely to an item or service for which the provider was paid out of pocket in full. The Act also includes a prohibition on the direct or indirect payment or receipt of remuneration in exchange for protected health information without specific patient authorization, except in limited circumstances, such as the sale of a business. Finally of note, the Act imposes additional restrictions on the use and disclosures of protected health information for marketing communications and fundraising communications.

Security. The HIPAA regulations also address the security of electronic patient information.

The regulations require organizations to evaluate existing security and confidentiality policies, as well as technical practices and procedures, including access controls, audit trails, physical security and disaster recovery, protection of remote access points, protection of external electronic communications, software discipline and system assessment.

Under current HIPAA security regulations, there is no prescribed form of technology or information system capability a covered entity must use to meet the security requirements. Under the provisions of the HITECH Act, the Secretary is required to issue annual guidance on the most effective and appropriate technical safeguards to be used by organizations in carrying out HIPAA security obligations. While the technical safeguards set forth in the HHS annual guidance will not be considered the only means through which to comply with the requirements, covered entities and business associates who choose not to use the safeguards included in the guidance should be prepared to justify the choice to use different processes and/or systems. Further, to encourage covered entities and business associates to use technology that will render information unusable, unreadable or indecipherable in the event of unauthorized access, organizations that fail to adopt prescribed technology are required to provide written notification of security breaches to the affected individual and to HHS. In some cases, notice of the security breach may be required to be posted on the organization’s website, and/or provided to major print or broadcast media. The Secretary has published guidance specifying the technologies and methodologies that render protected health information unusable, unreadable or indecipherable.

In August 2010, the Secretary proposed regulations implementing the breach notification provisions of the HITECH Act, and in those regulations, declined to identify alternate forms of qualifying technology for purposes of the breach notification requirements. The term “breach” means the acquisition, access, use or disclosure of protected health information in a manner that is not permitted under the privacy regulations, which compromises the security or privacy of the protected health information. The HIPAA Omnibus Rule significantly changes the scope of covered entities’ breach obligations. Previously, a covered entity was permitted to use a “risk of harm” standard in determining whether a breach occurred such that the covered entity needed to take action. Under the new rule, an impermissible acquisition, access, use or disclosure of unsecured PHI is presumed to be a breach, and breach notification is required, unless the covered entity (or business associate, as applicable) demonstrates through a risk assessment that there is a low probability the PHI has been compromised. The rule provides four factors that covered entities may use in making this determination. The new rule reminds covered entities that they are required to 21

provide breach notification to the affected individuals without unreasonable delay and in no event later than sixty days following discovery of the breach, which is deemed discovered if “any person, other than the individual committing the breach, that is an employee, officer, or other agent of such entity or associate” knows or should reasonably have known of the breach. In some cases where notice is required, notice of the security breach may also be required to be posted on the organization’s website, and/or provided to major print or broadcast media. Each covered entity must also maintain a log of breaches, which must be submitted to the Secretary annually, except in cases in which more than 500 individuals are affected, in which case the Secretary must be notified immediately. Covered entities like Lakewood were required to update their internal policies and their business associate agreements to comply with this new rule. This is especially true since at the same time that the new rule imposes new obligations, it also expands federal enforcement for example, by requiring mandatory investigation of any complaint filed indicating a possible HIPAA violation due to willful neglect.

Business Associates. Under existing HIPAA regulations, covered entities must include certain required provisions in their contractual relationships with organizations that perform functions on their behalf which involve use or disclosure of protected health information. These organizations are called business associates, and have been indirectly regulated by HIPAA through those contractual obligations. The HITECH Act provides that all of the HIPAA security administrative, physical and technical safeguards, as well as security policies, procedures and documentation requirements will now apply directly to all business associates. In addition, the HITECH Act makes certain privacy provisions directly applicable to business associates. These changes are significant because business associates will now be directly regulated by HHS for those requirements, and as a result, will be subject to penalties imposed by HHS and/or state attorney general.

Enforcement. Violations of HIPAA can result in civil monetary penalties and/or criminal penalties for willful disclosures. While there is no private right of action under HIPAA, individuals who believe their rights have been violated may file a complaint directly with the HHS Office of Civil Rights (“OCR”), the administrative office tasked with enforcing HIPAA. OCR has stated that it has now moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered healthcare provider or health plan.

The HITECH Act revised the civil monetary penalties associated with violations of HIPAA. The January, 2013 final rule implements changes to the civil monetary penalty amounts that may be imposed for HIPAA violations. The final rule incorporates the tiered penalty structure from the HITECH Act, which categorizes violations of the HIPAA rules based on culpability of the entity into four categories: did not know, reasonable cause, willful neglect (but corrected within thirty days), and willful neglect (not corrected within thirty days). Penalties are assessed per violation and range from a minimum of $100 up to a maximum of $1.5 million for all such violations of an identical provision in a calendar year. In all cases, the penalties will be assessed after an evaluation of applicable factors including: (a) the nature and extent of the violation, including the number of individuals affected; (b) the nature and extent of resulting harm, including consideration of reputational harm to individuals affected; (c) history of prior compliance, including indications of noncompliance by the covered entity or business associate; (d) the financial condition of the covered entity or business associate; and (e) other such matters as justice shall require.

Management of Lakewood believes that it is presently in material compliance with all provisions of HIPAA, however, the changes enacted by the HITECH Act and subsequent HHS rules and guidance may be costly and burdensome for Lakewood to implement, and may subject Lakewood to fines or assessments which could adversely affect the financial condition of Lakewood and the District.

Statutes and Regulations Governing Hospitals, Relationships with Physicians and Other Providers The Health Reform Law contains more than thirty-two sections related to healthcare fraud and abuse and program integrity and makes significant amendments to existing criminal, civil, and administrative healthcare- related anti-fraud statutes. Some of these provisions, if violated, may create a basis for overpayment or fraud liability. These provisions include new employee and vendor screening requirements, new financial disclosure requirements, the requirement of face-to-face physician and patient encounters for durable medical equipment and home health services and new price reporting requirements in the 340B program.

Anti-Kickback Laws. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the “Anti-Kickback Law”) make it a criminal felony offense (subject to certain exceptions) to 22

knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under Medicare or Medicaid and other governmental health care programs. In addition to criminal penalties, violations of the Anti-Kickback Law can lead to exclusion from Medicare, Medicaid and other governmental health care programs for not less than five years, or the imposition of civil money penalties. Exclusion from any of these programs or sanctions of civil money penalties would have a material adverse impact on the operations and financial condition of Lakewood and the District. The State of Minnesota has expanded the application of the federal anti-kickback statute to prohibit the payment solicitation or receipt of remuneration intended to induce referrals, regardless of payor.

The arrangements prohibited under the federal Anti-Kickback Law can involve hospitals, physicians and other health care providers, and are broader than referral fees, kickbacks, rebates or other payments. Prohibited arrangements may include joint ventures between providers, space and equipment rentals, purchases of physician practices, physician recruiting programs and management and personal services contracts. Federal “safe harbor” regulations describe certain arrangements that will not be deemed to constitute violations of the Anti-Kickback Law.

The safe harbors generally are narrow and do not cover a wide range of economic relationships which many hospitals, physicians and other health care providers have historically considered to be legitimate business arrangements not prohibited by the Anti-Kickback Law. Because the safe harbor regulations do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, it is uncertain whether hospitals and other health care providers that have these arrangements or relationships may need to alter them in order to ensure compliance with the Anti-Kickback Law. The Anti-Kickback Law does provide for a mechanism to request determinations of the legality of arrangements, called an Advisory Opinion. These opinions, while only valid and enforceable for the entity requesting the opinion, are available for public review. While not binding on the Office of Inspector General (“OIG”) with regard to parties other than the requesting entity, these opinions are generally regarded as critical guidance in how economic arrangements may and may not be structured under the Anti-Kickback Law. The OIG also issues guidance in the form of Special Fraud Alerts (“Fraud Alerts”) and Special Advisory Bulletins, designed to warn providers about particularly suspect arrangements or billing practices. The OIG also publishes its Work Plan on an annual basis, which outlines what it considers to be the top priorities for enforcement and education.

Management of Lakewood believes that Lakewood is presently in material compliance with the Anti- Kickback Law. However, in light of the broad scope of the Anti-Kickback Law, the narrowness of the safe harbor regulations and the limited case law and regulatory activity interpreting the Anti-Kickback Law, there can be no assurance that no violation of the Anti-Kickback Law will be found, and if found, that any sanction imposed would not have a material adverse effect on the operations or the financial condition of Lakewood and the District.

The Health Reform Law amended the Anti-Kickback Law to relax the specific intent requirement for violating the law so that a violation of the law can now be established without showing that an individual knew of the statute’s proscriptions and intended to violate the statute. Additionally, the Anti-Kickback law is amended to explicitly provide that a violation of the statute constitutes a false or fraudulent claim under the federal False Claims Act.

Physician Self-Referral Prohibition. Federal law prohibits physicians from referring Medicare, Medicaid and other federally funded patients for certain designated health services (“DHS”) where the physician has a financial relationship (ownership interest or compensation interest) in the provider of the referral services unless an exception exists. Also, any services furnished pursuant to a prohibited referral are not eligible for payment by Medicare, Medicaid or other federally funded programs, and the provider is prohibited from billing any third party for such services. This law and the regulations that accompany it are commonly referred to as the “Stark” law. There are several exceptions to the self-referral prohibition. The Stark law has changed significantly over the years. The most recent revisions to the regulations were published in the Federal Register on November 16, 2015. These regulations contained two new exceptions and significantly changed several of the existing exceptions.

In addition, CMS published, on September 23, 2011, a voluntary self-referral disclosure protocol (“SRDP”) for actual and potential Stark Law violations, which gives CMS the authority to reduce the amount owed to the government as a result of a Stark Law violation within six months of enactment, and gives the Secretary authority to reduce the amount due and owing for Stark violations to an amount less than specified in the statute. Providers using the SRDP may have reduced penalties, which is particularly important since courts have construed the submission of claims for reimbursement of DHS to Medicare and other federally funded healthcare programs 23

resulting from referrals from a physician who has a noncompliant financial relationship with the provider as “false claims” under the FCA, with each such claim being subject to treble damages as well as penalties of up to $11,000 per claim.

Management believes that any ownership interest or compensation arrangement between Lakewood and physicians who refer patients to the Health System for services currently fall within one or more of the statutory or regulatory exceptions. However, in light of the most recent revisions to the Stark regulations, and the limited case law and regulatory activity interpreting and enforcing this complex law, there can be no assurance that no violation of this law will be found and, if found, that any sanction imposed would not have a material adverse effect on the operation or financial condition of Lakewood and the District.

Billing and Reimbursement Practices. Health care providers, including hospitals and physician clinics, are also subject to criminal, civil and exclusionary penalties for violating billing and reimbursement standards under state and federal law. In recent years, state and federal enforcement authorities have investigated and prosecuted providers for submitting false claims to Medicare or Medicaid for services not rendered or for misrepresenting the level or necessity of services actually rendered in order to obtain a higher level of reimbursement.

Management of Lakewood believes that its billing and claims practices are presently in material compliance with all federal and state billing and reimbursement standards. However, because the Medicare and Medicaid programs impose complex mechanisms for conditions for coverage and payments and for the determination of proper billing codes (including, but not limited to those under the prospective and DRG payment systems), and because future modifications to Medicare and Medicaid may occur such that Lakewood may not be able to comply expeditiously with such modifications, there is no assurance that no violation of federal and state billing and reimbursement standards will be found and, if found, that any sanctions imposed would not have a material adverse effect on the operations or financial condition of Lakewood and the District.

The Health Reform Law requires that providers must return identified overpayments within sixty days of identification or the overpayment becomes an “obligation” under the federal False Claims Act and the failure to return the overpayment after the sixty-day time period creates the potential for False Claims Act liability.

Enforcement Activities. Pursuant to the mandates of HIPAA, increased emphasis is being placed on federal investigations and prosecutions of Medicare and Medicaid “fraud and abuse” cases. HIPAA, among other things, amended existing criminal penalties for Medicare fraud and created new federal health care fraud crimes. HIPAA also expands the scope of the fraud and abuse laws to apply to all federal health care programs, defined to include any plan or program that provides health benefits through insurance that is funded by the federal government. HIPAA directed the Secretary to establish a program to collect information on health care fraud and abuse and to encourage individuals to report information concerning fraud and abuse, and for payment of a portion of amounts collected to such individuals.

On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 was signed into law and significantly changes the civil False Claims Act (the “FCA”) to provide the federal government with more power to apply and enforce the FCA. These changes will affect many health care providers.

The Health Reform Law revises the federal FCA to make it easier for whistleblowers to bring claims against healthcare providers. Additionally, the Health Reform Law itself includes whistleblower provisions in the event an individual would identify any entity or provider that violates any provision of the Health Reform Law. Further, the Health Reform Law amends the criminal healthcare fraud statute to reduce the intent required to establish a healthcare fraud offense violation as well as increases civil monetary penalties for many healthcare- related offenses, such as knowingly retaining an overpayment.

Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and other accrediting bodies. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, Lakewood’s license would materially impair Lakewood’s ability to generate Net Revenues and the District’s ability to pay the principal and interest on the Series 2016 Notes when due.

Coding Update

The International Classification of Diseases (“ICD”) is the international standard diagnostic classification used for health management purposes, clinical use and billing. HHS mandated a change from the ICD-9 coding standards currently used to ICD-10 standards effective October 1, 2015. The coding update changes are costly to physicians and hospitals and continue to require significant planning, training and updates to the software and systems of hospitals at substantial cost to the hospitals and providers.

Private Third Party Reimbursement

Apart from reimbursement by the federal government under Medicare and the federal and state governments under Medicaid (Medical Assistance), a significant portion of Lakewood’s revenue is provided by private third-party payors, such as commercial insurers and various types of “managed care” programs such as health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”). See “SELECTED FINANCIAL DATA – Sources of Revenue” in Appendix B attached hereto. Reimbursement received from managed care programs frequently is lower than rates charged to patients covered by commercial insurance. Future contract negotiations between such third-party payors and Lakewood, and other efforts of these third-party payors and of employers to limit hospitalization and health-care costs, could adversely affect the level of utilization of Lakewood’s services, or reimbursement to Lakewood, or both. In addition, it is possible that competitive pricing of plan premiums could cause an HMO or PPO to operate at a loss and expose Lakewood to delays in payment or nonpayment of claims for services to plan participants.

Changes in sources of revenue and case mix intensity may also adversely affect Lakewood’s operating revenue. For example, if patients formerly covered by commercial insurance programs that pay full hospital and physician charges shift to HMOs or other third-party payors that pay lower negotiated rates, the discounts reflected in Lakewood’s financial statements as contractual allowances will proportionately increase and income will proportionately decrease. In addition, if the average severity of illness or condition of patients of the Health System covered by a “capitated” plan (i.e., a plan that pays Lakewood a fixed sum for each participant regardless of the services actually performed by Lakewood for the participant) were to increase after execution of the plan contract, operating expenses of Lakewood would proportionately increase without an offsetting increase in operating revenues.

In addition, private insurers or managed care programs might enter into contracts with physicians, hospitals or other health care providers whereby the providers are the sole providers of care for participants in the program. If significant numbers of persons living in Lakewood’s market area participated in exclusive provider programs not involving Lakewood, Lakewood’s revenues and cash flow could be adversely impacted, thus adversely impacting the District’s ability to pay debt service on the Series 2016 Notes.

Environmental Risks

Health care facilities are subject to a wide variety of federal, state and local environmental and occupational and safety laws and regulations that address, among other things, health care operations or facilities and properties owned or operated by health care providers. Among the types of regulatory requirements improved upon by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at health care facilities; and requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as owners and operators of properties or facilities, health care providers may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off the property. Typical health care operations include, in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. For this reason, health care operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations or increase their cost, or both; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other government agency

actions. There can be no assurance that Lakewood will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of Lakewood and the District.

Future Health Care Legislation

The passage of the ACA is accelerating the pace of future health care legislation and regulatory change. Changes in the law or new interpretations of existing laws may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by government and third-party payors. This process has continued for many years, but has been greatly accelerated since the March 2010 passage of the ACA. Lakewood spends substantial amounts of management time and money monitoring proposed and recently adopted health care laws and regulations and expects to continue to spend increasing amounts of time and money monitoring and responding to future health care legislation, including regulations under and legislative changes in response to the ACA. Any new legislation or government policies, if enacted into law, could adversely affect the revenues and operations of Lakewood and the District.

In addition, many states have enacted, or are considering enacting, measures designed to reduce their Medicaid expenditures, change private health care insurance or otherwise respond to various provisions in the ACA. States have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand states’ Medicaid systems. Possible future changes in the Medicare, Medicaid, and other state programs, may reduce reimbursements to Lakewood and may also increase its operating expenses.

Other Factors Generally Affecting Health Care Facilities

In the future, the following factors, among others, may affect the operations and financial performance of health care facilities, including those of the Health System, to an extent that cannot be determined at this time:

1. Future medical and scientific advances, the development and requirement of the option for health maintenance organizations in labor contracts, state health plans, and other health plans, preventive medicine, improved occupational health and safety, and improved outpatient care could result in decreased usage of inpatient hospital facilities and thereby reduced revenues for Lakewood.

2. The recent focus on the billing and collection practices of tax-exempt hospitals nationwide could result in significant changes to those practices. Any such changes, to the extent they make billing and collection of fees more administratively burdensome or restrictive, could have a substantial impact on Lakewood and the District.

3. A shortage of qualified professional personnel, particularly registered nurses, could significantly increase payroll costs. Lakewood cannot control the prevailing wage rates in its service area, and any increase in such rates will directly affect its costs of operations and may inhibit the ability of Lakewood to provide services of the levels necessary to meet the demands of Lakewood’s service area. Similarly, Lakewood’s rural setting may affect the ability of Lakewood to recruit qualified professional personnel, especially physicians, which may affect the ability of Lakewood to maintain revenues sufficient to maintain proper operating margins. However, physicians who furnish care in a CAH that is located in a Health Professional Shortage Area (a “HPSA”) are eligible for a 10% HPSA incentive payment for outpatient professional services furnished to a Medicare beneficiary. If the service is furnished in an area that is on the CMS list of zip codes eligible for the HPSA incentive payment, payments are automatically paid on a quarterly basis. The Health System is located in a location currently designated as a HPSA and in a medically underserved area.

4. The possible inability to obtain future governmental approvals to undertake projects which Lakewood deems necessary to remain competitive as to rates and charges and to maintain the quality and scope of care may adversely affect Lakewood.

5. Substantially all of the revenue of Lakewood is derived from the treatment of patients admitted or directed to the Health System’s facilities by members of its medical staff. Each physician on the medical staff has the option of admitting or directing a particular patient, with the patient’s consent, to such facilities or to other acute care hospitals with which the physician may be affiliated. If a particular physician or group of physicians were to 26

admit to other area hospitals any patients who normally would have been admitted to the Health System’s facilities, revenue of Lakewood and the District could decrease.

6. The occurrence of a natural or man-made disaster that could damage the Health System Facilities, interrupt utility service to the facilities, result in an abnormally high demand for healthcare services or otherwise impair Lakewood’s operations and the generation of revenues from the facilities.

7. Various proposals have been made for tort reform or changes in medical malpractice liability laws or for a patient’s bill of rights. The Department of Health and Human Services’ Agency for Healthcare Research and Quality recently released a report linking caps on non-economic damages in malpractice cases to an increased number of physicians in those states that have enacted such caps. It is not possible to predict whether such proposals will be enacted or, if enacted, how Lakewood would be affected by tort reform legislation, if at all.

Competition from other Health Care Providers

Competition from other health care providers now or hereafter located in the service area of the Health System could adversely affect Lakewood’s operations. Lakewood could also be adversely affected by economic trends and changes in the demographics of its service area. See “HEALTH SYSTEM SERVICE AREA” and “COMPETITION” in Appendix B.

Adequacy of Revenues

The adequacy of the Net Revenues will be dependent on the amount of future income derived from the Pledged Facilities. If the occupancy of or services provided by Lakewood with respect to the Pledged Facilities decreases or reimbursement from government programs decreases, the future income of Lakewood and the Net Revenues may not be sufficient to pay the principal and interest on the Series 2016A Notes and the other Parity Obligations when due and thereafter the principal and interest on the Series 2016B Notes and then the Subordinate Obligations.

Matters Relating to Enforceability of Agreements

The Trustee, on behalf of the Holders of the Series 2016 Notes, shall have and possess all the rights of action and remedies afforded by the common law, the Constitution and statutes of the State of Minnesota and of the United States of America for the enforcement of payment of the Series 2016 Notes, and the pledge of the Trust Estate made pursuant to the Indenture and of all covenants of the District pursuant to the Indenture, including, but not limited to, the right to a proceeding in law or in equity by suit, action or mandamus to enforce and compel performance of the duties required by Minnesota law and the Indenture, or under certain circumstances to obtain the appointment of a receiver to take possession of or operate the Pledged Facilities and to perform the duties required by Minnesota law and the Indenture. Although the holders of a majority in aggregate principal amount of the Series 2016 Notes at the time outstanding shall have the right to direct the place and method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Indenture, all rights of action pursuant to the Indenture are vested in the Trustee, and no holder of any Series 2016 Note shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Indenture or any remedy thereunder except under certain circumstances described in the Indenture. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS – Summary of Certain Provisions of the Indenture – Defaults and Remedies”, “ – Acceleration of Maturity;” “ – Rescission and Annulment” and “ – Remedies; Rights of Noteholders” in APPENDIX F for a description of such rights.

The practical realization of any rights upon any default will depend upon the exercise of various remedies specified in the Indenture. The remedies available to the Trustee upon an event of default under the Indenture, in certain respects, may require judicial action, which is often subject to discretion and delay. Under existing law, including specifically the federal bankruptcy code, certain of the remedies specified in the Indenture may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in the Indenture. The legal opinions to be delivered concurrently with the delivery of the Series 2016 Notes will be qualified as to the enforceability of the various legal instruments by limitations imposed by general principles of equity and public policy and by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally.

No representation is made, and no assurance is given, as to the value of any assets of the District, or that the enforcement of any remedies with respect to such assets will result in sufficient funds to pay all amounts due under the Indenture, including principal of and interest on the Series 2016 Notes.

The obligations of the District to make payments on the Series 2016 Notes may also not be enforceable to the extent such payments are requested to be made from any assets which are donor-restricted or which are subject to a direct, express or charitable trust which does not permit the use of such assets for such payment. Due to the absence of clear legal precedent in this area, the extent to which the assets of the Health System constitute assets which are so restricted or subject to such trusts cannot now be determined. The amount of such assets could be substantial.

The Mortgage, and the Security Agreements

The District and Lakewood will deliver the Mortgage, which creates a mortgage lien on the Pledged Facilities, and the Series 2016A Security Agreement, which creates a security interest on the Collateral, to secure the payment of principal of and interest on the Series 2016A Notes, which mortgage lien and security interest are on a parity with the security granted to the other Parity Obligations. In addition, the District and Lakewood will deliver the Series 2016B Security Agreement, which creates a security interest in the Net Revenues, which is subordinate to the security interests in the Net Revenues securing the payment of the Parity Obligations. In the event that there is a default under the Indenture, the Trustee has the right to foreclose on the Mortgage and realize on the Collateral under the Series 2016A Security Agreement, under certain circumstances, subject to the parity rights of the holders of the Parity Obligations and then to realize on the Net Revenues for the benefit of the Series 2016B Notes and the Series 2016 Bonds. See “SECURITY FOR THE SERIES 2016 NOTES – Summary of Certain Provisions of the Mortgage,” “ – Summary of Certain Provisions of the Series A Note Security Agreement” and “ – Summary of Certain Provisions of the Series B Note Security Agreement” herein.

All amounts collected upon foreclosure of the Mortgaged Property and the Collateral pursuant to the Mortgage and the Series 2016A Security Agreement will be used to pay certain costs and expenses incurred by, or otherwise related to, the foreclosure, the performance of the Trustee under the Mortgage and Series 2016A Security Agreement, and the mortgages securing the Parity Obligations, and then to pay amounts owing under the Indenture with respect to the Series 2016A Notes on a pro rata basis with the other Parity Obligations. Only after the Series 2016A Notes and the other Parity Obligations are paid in full will any remaining Net Revenues be applied to the payment of the Series 2016B Notes on a pro rata basis with the Series 2016 Bonds. See “CERTAIN DEFINITIONS AND SUMMARY OF THE PRINCIPAL DOCUMENTS – Summary of Certain Provisions of the Mortgage”, “- Summary of Certain Provisions of the Series A Note Security Agreement” and “- Summary of Certain Provisions of the Series B Note Security Agreement” in Appendix F.

THE SERIES 2016B NOTES ARE NOT SECURED BY THE MORTGAGE OR THE SERIES 2016A SECURITY AGREEMENT. In the event the Trustee forecloses on the Mortgage, the ability of Lakewood to generate Net Revenues would be materially adversely affected, and will adversely affect the ability of the Trustee to obtain Net Revenues to apply to the principal of, premium, if any, and interest on the Series 2016B Notes on a parity basis with the Series 2016 Bonds and any other Subordinate Obligations after the application of Net Revenues to the payment of principal of, premium, if any, and interest on the Parity Obligations, including the Series 2016A Notes.

In the event the Mortgage is actually foreclosed and the Trustee acquires the Collateral pursuant to the Series 2016A Security Agreement, then, in addition to the customary costs and expenses of operating and maintaining the Pledged Facilities, the party or parties succeeding to the interest of the District and Lakewood in the Mortgaged Property and the Collateral (including the Trustee, if the Trustee were to acquire the interest of the District and Lakewood in the Mortgaged Property and the Collateral) could be required to bear certain associated costs and expenses, which could include the cost of complying with federal, state or other laws, ordinances and regulations related to the removal or remediation of certain hazardous or toxic substances; the cost of complying with laws, ordinances and regulations related to health and safety; and the continued use and occupancy of the Pledged Facilities, such as the Americans with Disabilities Act; and costs associated with the potential reconstruction or repair of the Mortgaged Property and the Collateral in the event of any casualty or condemnation.

The Pledged Facilities are not comprised of general purpose buildings and generally would not be suitable for industrial or commercial use. Consequently, it will likely be difficult to find a buyer or lessee for the Pledged 28

Facilities, and, upon any default, the Trustee may not realize the amount of the outstanding parity obligations, including the Series 2016A Notes from the sale or lease of the Pledged Facilities in the event of foreclosure.

Any valuation of the Pledged Facilities is based on future projections of income, expenses and capitalization rates. Additionally, the value of the Pledged Facilities will at all times be dependent upon many factors beyond the control of the District, such as changes in general and local economic conditions, changes in the supply of or demand for competing properties in the same locality, and changes in real estate and zoning laws or other regulatory restrictions. A material change in any of these factors could materially change the value of the Pledged Facilities. Any reduction in the market value of the Pledged Facilities could adversely affect the security available to the owners of the Series 2016A Notes and the other Parity Obligations. There is no assurance that the amount available upon foreclosure of the Pledged Facilities after the payment of foreclosure costs will be sufficient to pay the amounts owing by the District with respect to the Series 2016A Notes and the other Parity Obligations.

In the event of a foreclosure, a prospective purchaser of the Mortgaged Property or the Collateral may assign less value to the Mortgaged Property and the Collateral than the value of the Mortgaged Property and the Collateral while owned by the District or Lakewood since such purchaser may not enjoy the favorable financing rates associated with the Series 2016 Notes and other benefits. To the extent that buyers whose income is not tax- exempt may be willing to pay less for the Mortgaged Property and the Collateral than nonprofit buyers, then the resale of the Mortgaged Property and the Collateral after foreclosure may require more time to solicit nonprofit buyers interested in assuming the financing now applicable to the mortgaged property. In addition, there can be no assurance that the Mortgaged Property and the Collateral could be sold at 100% of its fair market value in the event of foreclosure. Although the Trustee will have available the remedy of foreclosure of the Mortgage and the Security Agreements in the event of a default (after giving effect to any applicable grace periods, and subject to any legal rights that may operate to delay or stay such foreclosure, such as may be applicable in the event of the District’s bankruptcy), there are substantial risks that the exercise of such a remedy will not result in recovery of sufficient funds to satisfy all the District’s secured by liens on the Mortgaged Property and the Collateral, including the Series 2016A Notes and the other Parity Obligations.

Nature of Financial Forecast

The information contained in the Forecast included in Appendix D hereto is based upon assumptions made by the management of Lakewood. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. The Forecast should be read in its entirety.

BECAUSE THERE IS NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE ASSUMPTIONS MADE BY MANAGEMENT, NO GUARANTEE CAN BE MADE THAT THE FORECAST WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES, EMPLOYEE RELATIONS, GOVERNMENT REGULATIONS, CHANGES IN POPULATION AND DEMOGRAPHICS TRENDS, CHANGES IN THE SENIOR LIVING INDUSTRY AND GENERAL ECONOMIC CONDITIONS WHICH ARE NOT KNOWN BY THE BORROWER AT THIS TIME.

Construction Risks

Lakewood has hired BWBR Architects, St. Paul, Minnesota to serve as architects for the 2016 Project at a cost of approximately $1,301,000. Lakewood has entered into a guaranteed maximum price contract with Nor-Son, Inc., Baxter, Minnesota (the “Construction Manager”) for the 2016 Project in the amount of $17,092,554, which includes the Construction Manager’s fee of $332,000 and a contingency of approximately $814,000. The entire construction cost of the 2016 Project, including architectural, engineering and construction management costs, furnishings and equipment of approximately $2,200,000 is anticipated to be approximately $20,593,554. The total costs of the 2016 Project, including capitalized interest and costs relating to the issuance of the Series 2016A Notes is anticipated to be approximately $22,090,000.00. See “ESTIMATED SOURCES AND USES OF FUNDS” herein.

The District intends to use the portion of the net proceeds of the Series 2016A Notes allocated to construction and funds of the Health System for construction of the 2016 Project. If the costs of construction of the 2016 Project exceed the proceeds of the Series 2016A Notes and the cash designated by the District to pay such construction and acquisition costs, the District would be required to contribute additional moneys to complete such construction or reduce the scope of such construction accordingly. In addition, there can be no assurances that such construction will be completed on schedule or that such construction or management by the District will be successful. See “AUTHORITY AND PURPOSE” herein. See “GENERAL – The Project” in Appendix B.

Rating

The Series 2016A Notes have been given a short-term rating of “MIG-1” by Moody’s Investors Service, Inc. (“Moody’s”), and the Series 2016B Notes have been given a short-term rating of “MIG-1” by Moody’s. See “RATINGS” herein. Any downgrade or withdrawal of the ratings on the Series 2016A Notes or the Series 2016B Notes could adversely affect the marketability of such Series 2016 Notes.

Lack of Market for the Series 2016 Notes

The Series 2016 Notes will not be listed on a securities exchange or inter-dealer quotation system. There can be no assurance that there will be a secondary market for the Series 2016 Notes, and the absence of such a market for the Series 2016 Notes could result in investors not being able to resell their Series 2016 Notes should they need or wish to do so.

Although the Underwriter intends to make a market in the Series 2016 Notes, the Underwriter is not obligated to do so. Any such market making may be discontinued at any time.

Damage or Destruction

Although the District will be required to obtain certain kinds of insurance as set forth in the Indenture, there can be no assurance that the District or Lakewood will not suffer uninsured losses in the event of damage to or destruction of the Health System Facilities due to fire or other calamity or in the event of other unforeseen calamities. See “CERTAIN DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS – Summary of Certain Provisions of the Indenture – Covenants – Insurance” in Appendix F for a description of the insurance provisions required by the Indenture.

Management

The continued operation of the Health System is heavily dependent upon the efforts of its management. For further information, see “GOVERNANCE AND MANAGEMENT” in Appendix B.

Nonprofit Healthcare Environment

The tax-exempt status of healthcare organizations is the subject of increasing regulatory and legislative threats. As a nonprofit tax-exempt organization, Lakewood is subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for religious and charitable purposes. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a healthcare organization such Lakewood. Health care providers may be forced to forego otherwise favorable opportunities for certain joint ventures, recruitment and other arrangements in order to maintain their tax-exempt status.

The operations and practices of nonprofit, tax-exempt healthcare organizations are routinely challenged or criticized for inconsistency or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit tax-exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the healthcare organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, labor unions, Congress, state legislatures 30

and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on Lakewood.

The IRS has provided guidance on a number of topics relating to tax-exempt organizations, including the importance of paying fair market value for goods and services, excess compensation and benefits to officers and other insiders, the implementation of the Intermediate Sanctions regulations, and the issues surrounding joint ventures and partnerships between tax-exempt and for profit entities. These issues, and developments in the area of physician recruiting and inducements for referrals by physicians, pose risk to tax-exempt entities in the current health care environment.

The IRS has stressed the importance of ensuring that in relationships with for-profit entities or individuals, the exchange of consideration is consistent with fair market value for the goods or services provided. Areas of particular focus include leasing arrangements, sale of physician practices and the compensation paid to physicians and executives. Generally, payments must be consistent with what would be paid in an arms’ length transaction, and should be supported by market data or an independent evaluation of reasonableness. Failure to ensure that payments are reasonable could result in the imposition of Intermediate Sanctions and/or the revocation of the organization’s exempt status.

The Intermediate Sanctions regulations apply to transactions with “disqualified persons”, who include directors, officers, and other individuals who are in a position to exercise substantial influence over the organization’s decisions. Physicians, while not disqualified persons per se, may be included in this category depending upon the extent of their influence over the organization. An excess benefit transaction can occur in the exchange of compensation for services between the organization and the disqualified person or in the exchange of property between an exempt organization and the disqualified person. If such a transaction is found to exist, the IRS may impose an excise tax on both the disqualified person and the organizational manager who knowingly participates in the excess benefit transaction. In determining whether to impose section 4958 excise taxes, the IRS stated it will consider whether the organization involved has been involved in repeated excess benefit transactions; the size and scope of the excess benefit transactions; whether, after discovering it was a party to an excess benefit transaction, the organization took appropriate corrective action and implemented safeguards to prevent future recurrences; and whether the organization has complied with other applicable laws. The imposition of Intermediate Sanctions on Lakewood could adversely impact the ability to pay the amounts due on the Series 2016 Notes. Lakewood may also be subject to an action to revoke its respective exempt status, thereby jeopardizing the tax- exempt status of the Series 2016 Notes.

In addition, the IRS has increasingly focused on relationships between exempt organizations and for-profit entities. Generally, the factors considered are whether the joint venture will be operated in furtherance of the exempt organization’s purpose, whether ownership interests are proportionate to each party’s investment, whether distributions to parties in the venture are consistent with their ownership interests and whether the exempt organization obtains access to capital and expertise that is not otherwise available.

Tax-exempt organizations are required to file Form 990 annually with the IRS. The form requires detailed public disclosure of compensation practices, corporate governance, loans to management and others, joint ventures and other types of transactions, political campaign activities, and other areas the IRS deems to be compliance risk areas. The Redesigned Form 990 also requires the reporting of detailed community benefit information, and would establish uniform standards for reporting charity care. The Redesigned Form 990 also contains a separate schedule requiring detailed reporting of information relating to tax-exempt bonds, including compliance with the arbitrage rules and rules limiting private use of bond-financed facilities, including compliance with the safe harbor guidance in connection with management contracts and research contracts. The Redesigned Form 990 will result in enhanced transparency as to the operations of exempt organizations. It is also likely to result in enhanced enforcement, as the Redesigned Form 990 will make available a wealth of detailed information on compliance risk areas to the IRS and other stakeholders, including state attorneys general, unions, plaintiff’s class action attorneys, public watchdog groups, and others.

The Health Reform Law imposes new requirements on tax-exempt hospitals. Specifically, tax-exempt hospitals will need to meet four community benefit standards in order to continue to be exempt. The community benefit standards include conducting a health needs assessment, developing and maintaining a written financial assistance policy, limiting the amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy, and a prohibition on engaging in 31

extraordinary collection actions before determining eligibility under the financial assistance policy. The IRS has developed Schedule H to the Form 990, requiring hospitals to report how they provide community benefit. Failure to meet the requirements for any tax year will result in a tax of $50,000 to the tax-exempt hospital.

If the IRS were to find that Lakewood has participated in activities in violation of certain regulations or rulings in any of the Health System Facilities, the tax-exempt status of Lakewood could be jeopardized. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit healthcare organizations, it could do so in the future. Loss of tax-exempt status by Lakewood could result in loss of tax exemption of the Series 2016 Notes, defaults in covenants regarding the Series 2016 Notes and other related tax-exempt debt and obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on the income of Lakewood, which could have an adverse effect on the Net Revenues, which could be material.

In some cases, the IRS has imposed substantial monetary penalties on tax-exempt organizations in lieu of revoking their tax-exempt status. In those cases, the IRS and tax-exempt organizations have entered into settlement agreements requiring the organization to make substantial payments to the IRS.

In lieu of revocation of exempt status, the IRS may impose a penalty in the form of excise taxes on certain “excess benefit transactions” involving 501(c)(3) organizations and “disqualified persons.” An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any “organization manager” who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on Lakewood the tax status of the Series 2016 Notes if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules.

If the above requirements are not satisfied and interest on the Series 2016 Notes becomes taxable, an event of default may occur under the Loan Agreement or the Indenture. See “NOTEHOLDERS’ RISKS – Redemption Prior to Maturity” herein for a description of the effects of an event of default under the Indenture.

See “NOTEHOLDERS’ RISKS – Changes in Federal and State Law” herein.

Bond Examinations. IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds in the charitable organization sector with specific review of private use. A schedule to the revised Form 990 return (Schedule K), effective for the 2009 tax year and thereafter, is intended to address what the IRS believes is significant noncompliance with recordkeeping and record retention requirements. Schedule K also requires tax-exempt organizations to report on the investment and use of bond proceeds to address IRS concerns regarding compliance with arbitrage rebate requirements and the private use of bond-financed facilities.

State Oversight. Nonprofit corporations, such as Lakewood, are subject to oversight and examination by state attorneys general to ensure their charitable purposes are being carried out, that their fundraising and investment activities comply with state law and that the terms of charitable gifts are followed.

Challenges to Real Property Tax Exemptions. The real property tax exemptions afforded to certain nonprofit healthcare providers by state and local taxing authorities have been challenged on the grounds that the healthcare providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins and operations that closely resemble for-profit businesses.

The foregoing are some examples of the challenges and examinations facing nonprofit healthcare organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly difficult operating environment for healthcare organizations. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals and healthcare providers, including the Hospital, and may have an adverse effect on the ability of the Hospital to pay debt service on the Series 2016 Notes.

Continuing Legal Requirements Relating to the Series 2016 Notes

The Code imposes a number of requirements that must be satisfied for interest with respect to state and local obligations, such as the Series 2016 Notes, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment of bond proceeds prior to expenditure, a requirement that certain arbitrage earned on investment of bond proceeds be paid periodically to the United States, and a requirement that the Issuer file an information report with the Internal Revenue Service (the “IRS”). The District has covenanted that it will comply with such requirements with respect to the Series 2016 Notes. Failure to comply with any of these covenants by the District may result in the treatment of the interest received with respect to certain of the Series Notes as included in federal gross income, retroactive to the date of their delivery.

The federal tax-exempt status of the Series 2016 Notes depends upon Lakewood maintaining its status as an organization described in Section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations and guidance regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions which may cause their assets to inure to the benefit of private individuals. See “NOTEHOLDERS RISKS – Nonprofit Healthcare Environment” herein for a further discussion of certain risks related to Lakewood’s status as an organization described in Section 501(c)(3) of the Code and its maintenance of such status.

If the above requirements are not satisfied and interest on the Series 2016 Notes becomes taxable to the holders thereof, the Series 2016 Notes are not subject to mandatory redemption or any increase in the interest rate borne by the Series 2016 Notes. See “TAX EXEMPTION AND RELATED CONSIDERATIONS” herein.

Malpractice and General Liability Claims

In recent years, the number of malpractice and general liability suits and the dollar amounts of damage awards have increased nationwide, resulting in substantial increases in malpractice insurance premiums. Malpractice insurance generally does not provide coverage for punitive damages, which are available to plaintiffs under Minnesota law and are often sought in malpractice cases. Litigation may also arise against Lakewood from its corporate and business activities, such as its status as an employer. While Lakewood maintains professional liability and general liability insurance coverage (see “INSURANCE” in APPENDIX B, and “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS, SUMMARY OF THE INDENTURE – Insurance”), Lakewood is unable to predict the availability or cost of such insurance in the future. It is possible that a medical malpractice plaintiff or other claimant may bring a claim that exceeds Lakewood’s policy limits. In addition, the bankruptcy or insolvency of an insurance company which provides insurance coverage to Lakewood would cause Lakewood to be at risk for claims which would have been covered by such insurance without adequate liabilities having been recorded on the balance sheet.

See “INSURANCE” in APPENDIX A for a description of the insurance coverages of Lakewood.

Pledge of Trust Estate

The Series 2016 Notes are secured by a pledge of the Trust Estate, as limited with respect to each series of the Series 2016 Notes as provided therein. See “SECURITY FOR THE SERIES 2016 NOTES” herein for a description of the Trust Estate and other security for the Series 2016 Notes.

Parity Obligations

The District previously issued the (a) Series 2003A Note in the original principal amount of $5,093,625, of which $2,233,643.67 is currently outstanding, (b) The Series 2003B Note in the original principal amount of $612,000, of which $263,801.71 is currently outstanding, and (c) the Series 2013 Notes in the original principal amount of $7,846,511.57, of which $6,773,035.92 is currently outstanding, which are on a parity with the Series 2016A Notes with respect to the Net Revenues, the other Mortgaged Property and the Collateral. In addition, the District is issuing the Series 2016 Bonds in the principal amount of $4,450,000.00*, which are secured by a *Preliminary, subject to change. 33

subordinate pledge of the Net Revenues on a parity with the subordinate pledge of the Net Revenues to the Series 2016B Notes.

Amendments to Documents

Certain minor amendments to the Indenture are permitted without the consent of the Noteholders. Certain other amendments to the Indenture may be made with the consent of the holders of a majority in principal amount of the Series 2016 Notes then outstanding, except that such amendments may not permit, or be construed as permitting (without the consent of the holders of 100% in principal amount of the Series 2016 Notes): (a) a change in the times, amounts or currency of payment of the principal of, or premium, if any, or interest on, any Series 2016 Note, a change in the terms of the purchase of Series 2016 Notes pursuant to the Indenture, or a reduction in the principal amount or redemption price of any Series 2016 Note or a change in the method of determining the rate of interest thereon; (b) the creation of a claim or lien upon, or a pledge of, the Trust Estate ranking prior to or on a parity with the claim, lien or pledge created by the Indenture; (c) a preference or priority of any Series 2016 Note or Series 2016 Notes over any other Series 2016 Note or Series 2016 Notes; or (d) a reduction in the aggregate principal amount of Series 2016 Notes the consent of the Owners of which is required for any such Supplemental Indenture. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF THE INDENTURE – Summary of Certain Provisions of the Indenture – Supplemental Indentures Not Requiring Consent of Holders” and “- Supplemental Indentures with Consent of Holders” in APPENDIX F.

Redemption Prior to Maturity

In considering whether to make an investment in the Series 2016 Notes, potential investors should consider the information included in this Official Statement under the heading “THE SERIES 2016 NOTES – Redemption”. The Series 2016 Notes are subject to redemption at the option of the District on or after June 1, 2018. Moreover, the Series 2016 Notes may be accelerated prior to maturity should certain Events of Default otherwise occur under the Indenture. The effect on Noteholders of such an acceleration would be similar to that of early redemption at par. See “THE SERIES 2016 NOTES – Redemption” herein.

FUTURE FINANCING

The District does not anticipate the need to finance any additional capital improvements with the issuance of general obligation bonds at this time.

BOND RATING

Moody’s Investors Service, Inc., has assigned a short-term rating of “MIG-1” to the Series 2016A Notes and “MIG-1” to the Series 2016B Notes. Any explanation of the significance of such ratings may only be obtained from the rating agency. Certain information and materials not included in this Official Statement were furnished to the rating agency concerning the Series 2016 Notes. Generally, rating agencies base their ratings on such information and materials and their own investigations, studies and assumptions. There is no assurance that a rating will remain in effect for any given period of time or will not be lowered or withdrawn entirely by the rating agency if, in its judgment, circumstances so warrant. Neither the District nor the Underwriter has undertaken any responsibility to bring to the attention of the holders of the Series 2016 Notes any proposed revision or withdrawal of the ratings on the Series 2016 Notes or to oppose any such proposed revision or withdrawal. Any such downward change or withdrawal may have an adverse effect on the market price for and marketability of the Series 2016 Notes.

FINANCIAL STATEMENTS

The financial statements of the District and Lakewood, for the fiscal years ending December 31, 2015 and 2014 included in Appendix C of this Official Statement have been audited by Wipfli LLP, independent auditors, as stated in their reports appearing in Appendix C.

FINANCIAL FORECAST

Wipfli LLP has examined the Financial Forecast contained in Appendix D hereto. The Forecast of management of the District contained therein, including that relating to the ability of Lakewood to generate revenues 34

from the operation of the Health System Facilities, which are sufficient to meet debt service requirements first of the Series 2016A Notes and the other Parity Obligations and second the Series 2016B Notes during the period of the Forecast of the six fiscal years ending December 31, 2016 through December 31, 2021, inclusive, is based on certain assumptions discussed in the Forecast. Certain of management’s assumptions may not materialize and unforeseen events and circumstances may occur subsequent to the date of the Financial Forecast. Therefore, there will usually be differences between the forecasted and actual results and those differences may be material. The assumptions of management of the District and the Health System upon which management’s Forecast is based are set forth in the Forecast and should be evaluated carefully to understand their implications. See “NOTEHOLDERS’ RISKS – Nature of Financial Forecast” herein. See “FORECASTED FINANCIAL STATEMENTS OF LAKEWOOD HEALTH SYSTEM” in Appendix D. THE FORECAST SHOULD BE READ IN ITS ENTIRETY.

TAX EXEMPTION AND RELATED CONSIDERATIONS

Tax Exemption

In the opinion of Faegre Baker Daniels, LLP, Minneapolis, Minnesota, Bond Counsel, according to present Minnesota and federal laws, regulations, rulings and judicial decisions, the Series 2016 Notes, as of their date of issuance, bear interest which is excluded from gross income for United States income tax purposes and is excluded, to the same extent from both gross income and taxable net income for State of Minnesota income tax purposes (other than Minnesota franchise taxes measured by income and imposed on corporations and financial institutions). Interest on the Series 2016 Notes is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations or the Minnesota alternative minimum tax applicable to individuals estates or trusts, but is taken into account in determining adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on corporations.

The exemption for federal and state income taxation of the interest on the Series 2016 Notes depends, however, upon compliance with certain continuing restrictions as to use of the proceeds and investment of the proceeds of the Series 2016 Notes and the use and operation of the facilities financed or refinanced with the proceeds of the Series 2016 Notes (the “Financed Facilities”), and upon compliance with certain tax covenants made by Lakewood in the Lease and the District in the Indenture. Noncompliance with such requirements may cause the interest on the Series 2016 Notes to be included in gross income for purposes of federal and State of Minnesota income taxation, either prospectively or retroactive to the date of issuance of the Series 2016 Notes.

The opinion of Bond Counsel as to tax exemption will be given in reliance upon representations of representatives of Lakewood and the District as to nature, use, cost, and economic life of the Financed Facilities, and upon the opinion of counsel for Lakewood, as to the due formation of Lakewood, its status as an organization described in Section 501(c)(3) of the Code and exempt from federal income taxation under Section 501(a) of the Code, and as to the characterization of Lakewood’s activities relating to the Financed Facilities as not constituting an unrelated trade or business under Section 513 of the Code.

Related Tax Considerations

Branch Profits Tax. The Code includes a tax imposed on any foreign corporation in an amount equal to thirty percent (30%) of the “dividend equivalent amount” for the taxable year. The “dividend equivalent amount” is the foreign corporation’s “effectively connected earnings and profits” reduced for increase (or increased for decrease) in “U.S. net equity.” According to the conference report provided in connection with the adoption of the Tax Reform Act of 1986, “..[t]he conferees intend that branch’s earnings and profits include income that would be effectively connected with a U.S. trade or business if such income were taxable, such as tax exempt municipal bond interest.”

Financial Corporations. Certain financial institutions, such as banks and savings and loan associations, are not allowed to deduct any portion of the interest expense allocable to the acquisition or carrying of the Series 2016 Notes.

S Corporations. Interest on the Series 2016 Notes may be subject to Federal Income Taxation under Section 1375 of the Code for S corporations that have Subchapter C earnings and profits at the close of the taxable year if greater than 25 percent of the gross receipts of such S corporation is passive investment income. 35

Property and Casualty Insurance Companies. Property and casualty insurance companies are required for taxable years after December 31, 1986, to reduce the amount of their loss reserve deduction by 15 percent of the amount of taxes on interest received or accrued during the taxable year on certain obligations acquired after August 7, 1986, including interest on the Series 2016 Notes.

Foreign Insurance Companies. The Code subjects foreign companies carrying on an insurance business in the United States to a tax on income which is effectively connected with their conduct of any trade or business in the United States. Such income includes “net investment income” which is effectively connected, which shall not be less than the product of (A) the required “U.S. assets” of such company, and (B) the “domestic investment yield” applicable to such company for such year. Net investment income includes, according to the conference report accompanying the law, “interest (including tax exempt interest).”

Retirement Benefits. Interest on the Series 2016 Notes may be taken into account under Section 86 of the Code so as to cause a Noteholder to be subject to federal income tax on a portion of his or her social security or railroad retirement benefits, if any.

THE FOREGOING IS NOT INTENDED TO BE AN EXHAUSTIVE DISCUSSION OF COLLATERAL TAX CONSEQUENCES ARISING FROM OWNERSHIP OR DISPOSITION OF THE SERIES 2016 NOTES OR RECEIPT OF INTEREST ON THE SERIES 2016 NOTES. PROSPECTIVE PURCHASERS OR NOTEHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO COLLATERAL TAX CONSEQUENCES AND APPLICABLE STATE AND LOCAL TAX RULES IN STATES OTHER THAN MINNESOTA.

CONTINUING DISCLOSURE

In order to permit the Underwriter and other participating underwriters in the primary offering of the Series 2016 Notes to comply with paragraph (b)(5) of Rule 15c2-12 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Rule”), the District and Lakewood will covenant and agree, for the benefit of the registered holders or beneficial owners from time to time of the outstanding Series 2016 Notes, to provide annual reports of specified information and notice of the occurrence of certain events, if material, as hereinafter described (the “Disclosure Covenants”) and certain quarterly reports pursuant to the Continuing Disclosure Certificate dated as of November 1, 2016 (the “Disclosure Certificate”) between the District and Lakewood. The information to be provided on an annual basis the events as to which notice is to be given, and a summary of other provisions of the Disclosure Covenants, are set forth under Appendix H to this Official Statement.

Breach of the Disclosure Covenants will not constitute a default or an “Event of Default” under the Series 2016 Notes or the Indenture. A broker or dealer is to consider a known breach of the Disclosure Covenants, however, before recommending the purchase or sale of the Series 2016 Notes in the secondary market. Thus, a failure on the part of the District to observe the Disclosure Covenants may adversely affect the transferability and liquidity of the Series 2016 Notes and their market price.

In connection with the Prior Bonds the District was the only obligated person pursuant to the continuing disclosure undertaking (the “2004 Undertaking”). Although the 2004 Undertaking obligated the District to provide its audited financial statements, the District does not prepare audited or unaudited financial statements and the District instead submitted audited financial statements of Lakewood. During the past five years, all Lakewood audited financial statement submissions were timely, except for the audited financial statements for the fiscal year ending December 31, 2012.

The 2004 Undertaking required certain operating data appearing in the corresponding official statement to be filed annually. During the past five years, the District either did not file, due to lack of practical availability, or did not timely file certain annual operating data.

The 2004 Undertaking required certain unaudited financial information of the District to be filed quarterly. Because the District does not prepare audited financial statements, the District instead filed such quarterly financial information pertaining to Lakewood. During the past five years, the District did not timely file the majority of its quarterly filings.

During the past five years, the District did not timely file notice of a rating upgrade with respect to the Prior Bonds.

The District also did not timely file notice of its failure to provide the aforementioned information on or before the date specified in its 2004 Undertaking.

As of the date of this Official Statement, the District now has filed all information required to be filed pursuant to the 2004 Undertaking, or in lieu of filing such information, has filed a statement that such information required to be filed is not available.

Under the Disclosure Agreement for the Series 2016 Notes, both the District and Lakewood are obligated persons thereunder, and the Disclosure Agreement requires Lakewood, on behalf of both the District and Lakewood, to file the required disclosure information. Lakewood has adopted procedures intended to assure timely compliance with the Disclosure Covenants, including, without limitation, registering for continuing disclosure filing email reminders from the “EMMA” website (http://emma.msrb.org).

LITIGATION

There is not now pending or, to the knowledge of the District, threatened against the District any litigation restraining or enjoining the issuance or delivery of the Series 2016 Notes or questioning or affecting the validity of the Series 2016 Notes or the proceedings or authority under which they are to be issued. Neither the creation, organization or existence of the District nor the title of any of the present members or other officials of the District to their respective offices is being contested. There is no litigation pending or, to the District’s knowledge, threatened against the District which in any manner questions the right of the District to secure the Series 2016 Notes in the manner provided in the Note Resolution or Minnesota Statutes, Chapter 447.

LEGALITY

Legal matters incident to the authorization and issuance of the Series 2016 Notes are subject to the approving opinion of Bond Counsel as to validity and tax exemption. A copy of such opinions will be available at the time of the delivery of the Series 2016 Notes. See Appendix G for the form of legal opinion.

UNDERWRITING

Raymond James & Associates, Inc. (the “Underwriter”) has agreed to purchase the Series 2016 Notes at an aggregate purchase price of $______(reflecting a par amount of $______less an underwriter’s discount in the amount of $______) pursuant to the Note Purchase Agreement relating to the Series 2016 Notes. The Note Purchase Agreement provides that the Underwriter shall purchase all of the Series 2016 Notes if any of the Series 2016 Notes are purchased, and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Note Purchase Agreement, the approval of certain legal matters by counsel and certain other conditions. The initial public offering prices set forth on the cover of this Official Statement may be changed from time to time by the Underwriter. Concessions from the initial public offering price may be allowed to selected dealers and certain special purchasers. The Underwriter reserves the right to join with dealers and other underwriters in offering the Series 2016 Notes to the public. The District has agreed to indemnify the Underwriter against certain liabilities, including certain liabilities under federal and state securities laws.

The Series 2016 Notes will not be listed on any securities exchange or inter-dealer quotation system. The Underwriter has advised the District that it presently intends to make a market in the Series 2016 Notes. However, the Underwriter is not required to engage in such market making, and such market making, if commenced, may be discontinued at any time without notice. The Underwriter and/or its parent or affiliates may from time to time perform additional services for the District or Lakewood in regards to the Series 2016 Notes and other matters and may be entitled to receive other fees in connection therewith.

RELATIONSHIPS AMONG THE PARTIES

In connection with the issuance of the Series 2016 Notes, Faegre Baker Daniels LLP is acting as Bond Counsel, Dorsey & Whitney LLP is acting as Underwriter’s Counsel, and Fredrikson & Byron, P.A. is acting as counsel to the District and Lakewood. In other transactions not related to the Series 2016 Notes, these law firms may have acted, or be acting, as Bond Counsel and/or may have represented, or be representing, the Underwriter, the District or their affiliates in capacities different from those described herein. There is and will be no limitations imposed as a result of the issuance of the Series 2016 Notes on the ability of any of these firms or attorneys to represent any of these parties, or to act as bond counsel, in any present or future transactions. Furthermore, the Underwriter, the District and their affiliates are not limited in engaging in future business transactions together or in any combination with each other. Potential purchasers of the Series 2016 Notes should not assume that the Underwriter and the District or their respective counsel, or Bond Counsel, have not previously engaged in, are not presently engaged in, or will not after the issuance of the Series 2016 Notes engage in, other transactions with each other or with any affiliates of any of them, and no assurance can be given that there are or will be no past, present or future relationships or transactions between or among any of these parties or these attorneys or law firms.

CERTIFICATION

The District will furnish a statement to the effect that this Official Statement to the best of its knowledge and belief, as of the date of sale and the date of delivery, is true and correct in all material respects, and does not contain any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

The references herein to the Act, the Note Resolution, the Indenture, the Mortgage, the Security Agreements, the Continuing Disclosure Certificate, and the Series 2016 Notes are brief outlines of certain provisions thereof. Such outlines do not purport to be complete, and, for full and complete statements of the provisions thereof, reference is made to the Act, the Note Resolution, the Indenture, the Mortgage, the Security Agreements, the Continuing Disclosure Certificate, and the Series 2016 Notes. Copies of such documents are on file at the offices of the District and the Underwriter.

The agreement of the District with the owners of the Series 2016 Notes is fully set forth in the Note Resolution and the Indenture, and neither any advertisement of the Series 2016 Notes nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Series 2016 Notes.

Statements made in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended merely as such and not as representations of facts.

The District has reviewed the information contained herein which relates to its property and other assets and its management and operation by Lakewood and has approved all such information for use within this Official Statement.

UNITED HOSPITAL DISTRICT, TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA

______Its Chairperson

APPENDIX A

INFORMATION CONCERNING UNITED HOSPITAL DISTRICT, TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA

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INFORMATION REGARDING UNITED HOSPITAL DISTRICT TODD, MORRISON, CASS AND WADENA COUNTIES, MINNESOTA

Overview

UNITED HOSPITAL DISTRICT TODD, MORRISON, CASS and WADENA COUNTIES, the District, a political subdivision and municipal corporation of the State of Minnesota, was established in 1973 pursuant to Minnesota Statutes, Chapter 447. The District was created for the purpose of owning and operating health care facilities within its jurisdiction. The District currently owns (a) a 25-bed critical access hospital and a health clinic located in Staples, Minnesota (collectively, the “Main Campus”), (b) a 100-bed skilled nursing facility, a 10-bed inpatient geriatric psychiatric unit and the administrative offices for the District and Lakewood located in Staples, Minnesota (collectively, the “Senior Campus”), (c) a 40-unit independent living facility known as the Pines and a 25-unit assisted living facility known as the Manor located in Staples, Minnesota (collectively, the “Senior Living Facilities”), and (d) the health clinics located in Motley, Pillager and Browerville, Minnesota (collectively, the “Satellite Clinics” and, together with the Main Campus, the Senior Campus, the Senior Living Facilities and the Satellite Clinics, the “Pledged Facilities”).

The District consists of, and was established to serve, portions of Cass, Morrison, Todd and Wadena Counties, which include the Cities of Staples and Motley and the Townships of Becker, Byron, Meadowbrook, Moose Lake, Moran, Motley, Poplar, Staples, Thomastown and Villard. The District, through its Pledged Facilities, strives to serve these communities by combining skilled health care professionals and technology with a commitment to provide superior personal service.

The District has entered into agreements with Lakewood Health System, a Minnesota nonprofit corporation (“Lakewood”), that provide for the operation, management, and administration of the Pledged Facilities, and the lease of the Pledged Facilities by the District to Lakewood. See “INFORMATION REGARDING LAKEWOOD HEALTH SYSTEM” in Appendix B to the Official Statement for more information regarding Lakewood.

LakewoodHealth UnitedHospital SystemGoverning District Board

UnitedHospital LakewoodHealth District.Political System Subdivision& Municipal (501(c)(3)Private Corporation Nonprofit)

10BedGeriatric HomeCare/Hospice 100BedSkilled 25BedStaffed Transportation Foundation ClinicsLocatedin: Ambulance SeniorHousing PsychUnit Locatedin: NursingFacility AcuteCareHospital Service

40Apartments Staples Staples (LakewoodPines) locatedinStaples

29Apartments LongPrairie Browerville (LakewoodManor) locatedinStaples

EagleBend

Motley

Pillager

SartellDermatology

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District Board of Directors

The District is governed by a 13-member Hospital Board (the “Board”). Members of the Board are elected to serve overlapping four-year terms of office, with one member elected at large and the remaining members elected to represent each city and township comprising the District. The current members of the Board, along with the expiration dates of their current terms, are as follows:

Term Name and Office Expires Dec. 31, Mary Theurer, Chair 12/31/2018 Judy Bjerga, Vice-Chair 12/31/2018 Lana Hansen, Secretary 12/31/2016 Barb Peterson, Treasurer 12/31/2016 Linda Dietrich, Trustee 12//31/2016 Sally Grove, Trustee 12/31/2016 Bill Haehnel, Trustee 12/31/2016 Bev Hoemberg, Trustee 12/31/2018 Frances Kokett, Trustee 12/31/2018 Bob Mueller, Trustee 12/31/2016 Donald Sirucek, Trustee 12/31/2016 Ron Storbakken, Trustee 12/31/2016 Paul Wicht, Trustee 12/31/2018

Operations of the District are performed & managed by Lakewood Employees.

District Affiliation and Lease Agreement

The District has entered into a Lease with Lakewood, dated as of March 31, 1997 (the “Lease”), effective as of April 1, 1997, pursuant to which the District leases to Lakewood the Pledged Facilities, together with all easements appurtenant thereto, and all furniture and moveable equipment used in the operation of the Pledged Facilities. In addition, the District has entered into an Affiliation Agreement with Lakewood, dated as of June 27, 1996, effective as of April 1, 1997, pursuant to which Lakewood assumed all operation, management, administration and maintenance of the Pledged Facilities, and assumed the District’s interests in certain contracts, the District’s interest in the related foundation, and certain liabilities of the District. The Lease currently expires on November 30, 2053, subject to earlier termination as set forth in the Lease. See “INFORMATION REGARDING LAKEWOOD HEALTH SYSTEM” in Appendix B to the Official Statement for information regarding Lakewood Health System. See the information under the heading “INTRODUCTION-THE DISTRICT” and “INTRODUCTION- LAKEWOOD HEALTH SYSTEM” in the Official Statement for a description of the Lease.

Location

The District consists of portions of Cass, Morrison, Todd and Wadena Counties, which include the Cities of Staples and Motley, and the Townships of Becker, Byron, Meadowbrook, Moose Lake, Moran, Motley, Poplar, Staples, Thomastown and Villard. The District’s Pledged Facilities are primarily located in the City of Staples, approximately 125 miles northwest of the Minneapolis/Saint Paul Metropolitan Area. U.S. Highway 10 and State Trunk Highway 210 run through the District and intersect with County Highway 21 in the City of Staples. The District is served by Burlington Northern Railroad and all major truck lines. The City of Staples operates a municipal airport which accommodates private aircraft on a 900-foot asphalt runway.

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District Population 2010 Census 7,070

2015 Estimated 7,542

Source: U.S. Census Bureau

Total County Population

Based upon Minnesota State Demographic Center projections by county, as of June 2010, total population by county is anticipated to increase as follows:

County 2010 Census 2020 Estimated 2030 Estimated Cass 28,567 31,538 31,828 Morrison 33,198 36,322 38,238 Todd 24,895 26,556 27,340 Wadena 13,843 15,255 16,028

Source: US Census Bureau website A-3

County Labor Force Data

Below are average labor force and unemployment rate comparative figures for the years ended December 2015 and 2014, and as of August 2016 from the Minnesota Department of Employment and Economic Development’s WorkForce Center. Figures are not seasonally adjusted and numbers of people are estimated by place of residence.

Year Ended December 2014 Year Ended December 2015 As of August 31, 2016 Civilian Unemploy- Civilian Unemploy- Civilian Unemploy- County/State Labor Force ment Rate Labor Force ment Rate Labor Force ment Rate Cass 13,647 7.9% 1,3745 8.3% 5.6% Morrison 17,576 6.9% 18,114 6.7% 4.3% Todd 13,014 4.9% 13,285 5.0% 4.5% Wadena 6,286 6.6% 6,471 6.6% 3.8% Minnesota 2,979,089 3.7% 3,020,213 3.7% 3.8%

Source: Minnesota Department of Employment and Economic Development

Summary of Building Permits

Below are the total number of residential and commercial building permits issued by the respective counties and cities, as provided by the respective counties and cities, for calendar year 2015 and to September 1, 2016:

County/City 2015 Permits Issued 2016 Permits Issued Cass Co. 942 758 Morrison Co. 505 464 Todd Co. 60 71 Wadena Co. 130 91 City of Motley* -- -- City of Staples 128 75 ______Source: Cities and Counties listed

City of Motley information unavailable.

Financial Institutions

Listed below are institutions that provide financial services in the primary population center of the District:

Reported Deposits Name Location as of 03/31/2016 First International Bank and Trust All Branches $ 1,946,378 Mid-Central Federal Savings Bank All Branches 86,743,000 Mid Minnesota Federal Credit Union All Branches 260,962,153 Unity Bank All Branches 179,640,000 ______Source: Calls to financial institutions

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Education

Portions of seven independent school districts are located within the District, as listed below:

Number of Approximate School District Schools 2016-17 Enrollment1 ISD No. 786, Bertha-Hewitt 2 420 ISD No. 787, Browerville 2 424 ISD No. 116, Pillager 2 938 ISD No. 2174, Pine River-Backus 4 931 ISD No. 820, Sebeka 2 502 ISD No. 2170, Staples-Motley 4 1,195 ISD No. 818, Verndale 2 500

Post secondary education in the District is available at the following institutions:2

Distance Institution Type Location from Staples Central Lakes College Community College Brainerd & Staples, Minnesota 28 Miles St. Cloud State University State University St. Cloud, Minnesota 75 Miles St. John’s University Private University Collegeville, Minnesota 80 Miles

Major Employers

Following are the eight largest employers within the City of Staples3:

Number of Name Product/Service Employees Lakewood Health System General Medical & Surgical Hospitals 823 Trident Seafood Food Processing 375 Staples Motley Schools Education 205 Morey’s Fish Company Food Processing 103 Stern Manufacturing Rubber Coating 67 3M Parts Fabrication Services 64 Central Lakes College (Staples Only) Education 48 ______Source: Calls to companies

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1 Source: Minnesota Department of Education 2 Source: Staples Motley Area Chamber of Commerce 3 Source: Minnesota Department of Employment and Economic Development Community Profiles A-5

Largest Taxpayers

Following are the ten largest taxpayers within the portion of the District that lies in Cass County, as provided by Cass County:

2015 Name Classification Tax Capacity Potlatch MN Timberland Rural Vacant Land $33,149 MN Power & Light Utility 18,094 Winnemucca Farms, Inc Rural Vacant Land 17,101 Corbea Farms, Inc Agricultural Non-Homestead 10,885 Gertjejansen, Scott Agricultural Non-Homestead 9,034 Bokelman, Henry & Irma & John Rural Vacant land 8,460 Wiebolt, Michael & Jani Residential Homestead 7,897 We B Farming, LLC / Judith Carlson Agricultural Non-Homestead 7,450 Haehnel, Ernest & Diane Agricultural Homestead 7,439 Hanson, Sandra Agricultural Homestead 7,403

Following are the ten largest taxpayers within the portion of the District that lies in Wadena County, as provided by Wadena County:

2015 Name Classification Tax Capacity Minnesota Pipeline Syst of Gas Utilities $227,084 R D Offutt Company Agriculture 29,502 Unite Hospital District 4 or More Units 24,863 Zhongli Holdings LLC Indust Land \ Building 17,832 Todd Wadena R E A Distrib Lines 16,141 Prairie View Apartments 4 or More Units 14,611 DBG Properties Limited Residential \ Single Unit 11,585 Paiute Industries LLC Comm Land \ Bldg 11,508 McKechnie Vehicle Components Indust Land \ Bldg 10,988 Schock, Dale & Rynell Agriculture 10,253

Following are the ten largest taxpayers within the portion of the District that lies in Todd County, as provided by Todd County:

2015 Name Classification Tax Capacity BNSF Railway Company RR Land \ Bldgs $169,197 Minnesota Pipe Line Co. Syst of Gas Utilities 151,978 Minnesota Energy Resources Syst of Gas Utilities 31,506 United Hospital District Comm Land \ Bldg 28,554 Franzen, Jason Wetlands 25,660 Staple Food Corporation Comm Land \ Bldg 19,076 Minnesota Mining & Mfg Co. Industrial Land \ Bldg 14,038 Enberg, Rodney & Lynn Residential Vacant Land 12,247 Aspen Plantation LLP Agriculture 10,830 Viking Gas Land \ Bldg-P Utility 9,768

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Following are the ten largest taxpayers within the portion of the District that lies in Morrison County, as provided by Morrison County:

2015 Name Classification Tax Capacity Trident Seafoods Corp Commercial $47,536 Morey Fish Company LLC Commercial 19,216 Eastwood of Motley LLC Commercial 12,805 MN Power & Light Co. Commercial 10,048 Brick’s Travel Center, LLC Commercial 9,330 James C Ohnstad LLC Commercial 7,562 Burlington Northern Inc. Commercial 6,442 United Hospital District Commercial 5,757 Brichacek, Lonnie Commercial 5,246 Garmisch PROP II LTD Partnership Low Income Land/Bldg 5,179

District Economic and Financial Information

Valuations

The following table sets forth the taxable market value and net tax capacity of the District for 2015/2016.

2015/2016 Taxable Net Tax Market Value* Capacity* Real Property $503,341,426 $4,717,911 Personal Property 23,066,300 452,888 Total Real & Personal Property $526,407,726 $5,170,793 Less: Tax Increment District 17,764 TOTAL VALUATION $5,151,839

* The value of property taxable by the District is as assessed in 2015 for the purpose of computing the rates of taxes collected in 2016 as provided by the counties.

The following table sets forth the net tax capacity of the District by county for 2015/2016.

TOTAL ADJUSTED TAXABLE NET TAX CAPACITY OF THE DISTRICT

TODD COUNTY $2,171,877 42.16% CASS COUNTY $1,230,084 23.88% WADENA COUNTY $1,220,519 23.69% MORRISON COUNTY $ 529,359 10.28% UNITED HOSPITAL DISTRICT $5,151,839 100.00%

Trend of Valuations

Collection Estimated Taxable Less Tax Incrt / Fiscal Adjusted Net Levy Year Year Market Value Market Value Disp / Trans Lines Tax Capacity 2015 2016 $578,082,400 $519,643,626 -$18,954 $5,151,839 2014 2015 571,327,500 513,305,700 -21,964 5,083,593 2013 2014 550,731,600 493,359,200 -25,744 4,907,845 2012 2013 553,740,400 494,957,800 -22,576 4,864,434 2011 2012 569,412,700 509,208,000 -22,721 4,986,686

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Trend of Indicated Market Value

Collection Real & Personal Levy Year Year Property* 2015 2016 $566,488,752 2014 2015 560,377,555 2013 2014 539,200,197 2012 2013 544,180,618 2011 2012 599,985,599 * Source: Minnesota Department of Revenue (based upon county abstract submittals in the Fall of the year prior to each levy year, which submittals may differ from actual taxes levied by the respective counties in the following levy year).

Tax Capacity by Class of Property*

REAL ESTATE Residential Homestead (Non-Ag) $1,351,332 26.13% Agriculture 1,846,703 35.71% Commercial & Industrial 514,119 9.94% Public Utility 93,370 1.81% Railroad Operating Property 340,899 6.59% Non-Homestead Residential 386,006 7.47% Commercial & Residential/Seasonal Recreation 155,485 3.01%

PERSONAL PROPERTY $452,888 8.76%

TOTAL $5,170,793 100.00%

* The tax capacity of the District is as assessed in 2015 for taxes collected in 2016 for the portions of the District in Todd County, Wadena County, Cass County, and Morrison County.

County Tax Levies and Collections

Morrison County Levy Year/ 2011/ 2012/ 2013/ 2014/ Collection Year 2012 2013 2014 2015

Percent of Net Tax Levy Collected -- first year 97.716% 97.866% 98.179% 98.198% Percent of Net Tax Levy Collected -- as of 05/15/2016 99.781% 99.673% 99.536% 99.254%

Cass County Levy Year/ 2011/ 2012/ 2013/ 2014/ Collection Year 2012 2013 2014 2015

Percent of Net Tax Levy Collected -- first year 97.669% 97.842% 97.824% 98.174% Percent of Net Tax Levy Collected -- as of 05/20/2016 99.825% 99.697% 99.462% 98.952%

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Wadena County Levy Year/ 2011/ 2012/ 2013/ 2014/ Collection Year 2012 2013 2014 2015

Percent of Net Tax Levy Collected -- first year 99.303% 98.009% 98.132% 98.274% Percent of Net Tax Levy Collected -- as of 12/31/2003 99.956% 99.139% 98.953% 98.274%

Todd County Levy Year/ 2011/ 2012/ 2013/ 2014/ Collection Year 2012 2013 2014 2015

Percent of Net Tax Levy Collected -- first year 95.244% 95.484% 95.819% 95.596% Percent of Net Tax Levy Collected -- as of 12/31/2015 99.383% 99.117% 98.409% 96.550%

Indirect Debts of the District

Tax Capacity Tax Capacity of Entire of Portion of G.O. Bonded Government Government Debt as of Issuer Unit Unit in District 12/31/15 Morrison County 29,410,536 529,359 6,975,000 Cass County 65,455,543 1,230,084 709,054 Motley City 344,206 327,753 6,505,548

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APPENDIX B

INFORMATION CONCERNING LAKEWOOD HEALTH SYSTEM`

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GENERAL

Lakewood Health System

Lakewood Health System is an independent, nonprofit 501(c)(3) health system located in the rural town of Staples, MN, a population of approximately 3,000 residents. Lakewood is located two hours northwest of Minneapolis.

Lakewood Health System (“Lakewood Health System,” or “Lakewood”). Lakewood leases from United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota (the “District”) (a) a 25-staffed bed critical access hospital and a health clinic located in Staples, Minnesota (collectively, the “Main Campus”), (b) a 10- bed skilled nursing facility, a 10-bed inpatient geriatric psychiatric unit and the administrative offices for Lakewood and the District located in Staples, Minnesota (collectively, the “Senior Campus”), (c) a 40-unit independent/assisted living facility known as the Pines and a 25-unit assisted living facility known as the Manor located in Staples, Minnesota (collectively, the “Senior Living Facilities”), and (d) the health clinics located in Motley, Pillager and Browerville, Minnesota (collectively, the “Satellite Clinics” and, together with the Main Campus, the Senior Campus and the Senior Living Facilities, the “Pledged Facilities”). In addition, Lakewood leases a health clinic located in Eagle Bend, Minnesota and a dermatology clinic located in Sartell Minnesota (collectively, the “Additional Leased Facilities” and, together with the Pledged Facilities, the “Health System Facilities”). Lakewood operates the Health System Facilities and a foundation to preserve and enhance health and wellness for the communities for which the system serves. Lakewood is dedicated to serving the people residing in the District and the surrounding area. The District has a population of 7,070 according to the 2010 Census. Lakewood is located in Staples, Minnesota (estimated population 2,981; U.S. Census Bureau), which is approximately 135 miles from Minneapolis, Minnesota. The hospital facility was originally constructed in 2006.

The organization was formed in 1936 as a freestanding Hospital. In 1997, nearly twenty years ago, the hospital integrated with the local physician group and has continued to grow to include the entire spectrum of care. Lakewood is in the heart of central Minnesota with the service area expanding into the counties of Todd, Wadena, Cass, Morrison, and Crow Wing. Lakewood is one of four hospitals located in the service area, a service area that is comprised of approximately 101,425 residents.

Currently, Lakewood operates a 25-bed inpatient critical access hospital that also provides emergency, outpatient, and other specialty services. Lakewood also operates five primary care rural health clinics in Staples and the surrounding communities of Motley, Pillager, Eagle Bend and Browerville as well as a dermatology specialty clinic in Sartell. Also located in the City of Staples, Lakewood operates a 100-bed long-term-care facility with a private dementia unit and Lakewood’s geriatric behavioral health unit known as “Lakewood Reflections.” Rounding out the comprehensive health services, Lakewood also includes a 40-unit independent senior apartment facility, a 24-hour skilled nursing facility, home health/hospice service, Palliative Care, Medical Home program, Women’s Health, surgery, durable medical equipment and non-emergent medical transportation service as well as ambulance.

Per the most recent community health needs assessment it was determined that overall, Lakewood’s entire service area has many unmet healthcare needs. The organization takes great pride in their ability to identify the needs of the communities and use all available resources to do everything possible to care for the people of these communities. They are continually identifying and implementing innovative treatment services to fill healthcare gaps and remove every obstacle between the population and access to quality services.

Our mission is….to provide quality, personalized healthcare for a lifetime. Our vision is….to be the region’s top value healthcare organization by 2019. We value….open communication, innovation, personalized service, ownership, and integrity.

Lakewood is governed by two separate and highly engaged board of directors. The two boards include a System Board of Directors and a District Board of Directors. The System Board consists of appointed professionals from the surrounding communities as well as medical staff representation from Lakewood’s integrated physician group. The System Board develops the overall mission, vision and strategic plan of the system while overseeing the financial position and medical staff relationships. The District Board is comprised of elected officials from the various townships the system serves. The District Board is tasked with monitoring the financial position of the

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system as well as maintaining the lease affiliation agreement between Lakewood and the District and authorizing real estate and debt transactions of the district.

The 2016 Project

The proposed 2016 Project includes: Clinical Expansion to clinic located on the hospital campus in Staples. Emergency care expansion space to the hospital. Completion of an in-house fixed MRI suite. Clinical expansion to the clinic located in Pillager. The proposed addition to the hospital in Staples includes: A 27,275 square foot clinical addition to the south side of the existing clinic plus some remodeling to the existing clinic. A 3,570 square foot addition adjacent to the existing emergency department to accommodate emergency care growth and enhance diagnostics including internal MRI. Associated parking to support the growth. The proposed addition to the clinic in Pillager includes: A 8.320 square foot clinical expansion plus some remodeling to the existing clinic to accommodate the expansion. Associated parking to support the growth.

Project Architect – BWBR Architects

BWBR is a design solutions firm with practices in architecture, interior design, and master and strategic planning. One of the Upper Midwest’s oldest and largest firms, BWBR has established a reputation for service and quality designing complex facilities in the health care, higher education, government, corporate, science and technology, secure environments, transportation, worship, wellness, and recreation markets. Working with organizations to leverage facility improvements for better service delivery and operations, BWBR designs solutions to enhance what people do.

Construction Manager – Nor-Son

Nor-Son specializes in rural healthcare facilities, having completed over 175 healthcare projects. Nor-Son demonstrates an extensive list of project references. Their current and past project experience substantiates their commitment before, during, and well after job completion.

Nor-Son has complete healthcare projects of all sizes and complexity including numerous critical access hospitals, clinics, medical offices, senior living, assisted living, and skilled nursing facilities.

Project Costs

Total Series 2016 Project costs are estimated at $21,600,000. Lakewood has entered into a guaranteed maximum price contract with the Construction Manager for the project in the amount of $17,092,554; which includes the Construction Manager’s fee of $332,000 and a contingency of approximately $814,000. Architect fees total approximately $1,301,000. Lakewood anticipates spending approximately $2,200,000 for furniture, fixtures and equipment for the Project.

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Services

Lakewood provides the following services: Inpatient PhysicianClinicServices Labor & Delivery Family Practice Swing-Bed Internal Medicine Medical –Surgical & Intensive Care Behavioral Health Hospice Surgical Behavioral Health Women’s Health

SurgicalServices SpecialtyClinicServices General Surgery Allergy& Asthma Ear/Nose/Throat Cardiology Gynecological Dermatology Orthopedic Ear/Nose/Throat Endoscopy Pediatrics Optical Gastroenterology Dental Neurology Urology Rheumatology Target Endovenous Therapy Nephrology Bariatric Oncology Ophthalmology Outpatient Orthopedics Physical Therapy Pulmonology Occupational Therapy Urology Speech Therapy Vascular Surgery Radiology OB/GYN Infusion Therapy/Chemotherapy Sleep Studies Laboratory Podiatry Respiratory Therapy Palliative Care Community Paramedic LongTermCare Emergency Services Hospice Home Health Palliative Care Hospice Diabetic Education Personal Training Lifeline Cardiac Rehab Behavioral Health Sleep Studies

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GOVERNANCE AND ADMINISTRATION

The Board of Directors consists of a Lakewood Board and District Board. Current members include:

Name Position Expiration LakewoodBoard Tim Rice President 06/30/2018 Loren Morey Chair 06/30/2018 Jim Hofer Vice-Chair 06/30/2017 Mary Theurer Secretary 06/30/2017 Larry Lundblad Treasurer 06/30/2017 Christine Albrecht, MD Trustee 06/30/2019 Curt McIlravy Trustee 06/30/2017 Arden Beachy, MD Trustee 06/30/2019 Jordan Moe, MD Trustee 06/30/2019 Jef Cichos Trustee 06/30/2019 Bob Mueller Trustee 06/30/2019 Michael Hudalla, MD Trustee 06/30/2017 DistrictBoard Mary Theurer Chair 12/31/2018 Judy Bjerga Vice-Chair 12/31/2018 Lana Hanson Secretary 12/31/2016 Barb Peterson Treasurer 12/31/2016 Linda Dietrich Trustee 12/31/2016 Sally Grove Trustee 12/31/2018 Bill Haehnel Trustee 12/31/2016 Bev Hoemberg Trustee 12/31/2018 Frances Kokett Trustee 12/31/2018 Bob Mueller Trustee 12/31/2016 Donald Sirucek Trustee 12/31/2016 Ron Storbakken Trustee 12/31/2016 Paul Wicht Trustee 12/31/2016

Administration

Tim Rice, Chief Executive Officer. Mr. Rice is responsible for the daily administration of the Health System Facilities and implementation of District policy pursuant to the Affiliation Agreement. Mr. Rice has served as administrator of the Organization since 1980. Mr. Rice has an A.A. degree from the Minneapolis Business College and a B.A. degree in management and an M.A. degree from the College of Saint Scholastica. Mr. Rice has been in health care administration since 1974.

Lisa Bjerga, Chief Financial Officer. Ms. Bjerga is responsible for the financial affairs of the Health System Facilities and oversight of daily finance and revenue cycle operations. Since starting with the organization in 2008, Ms. Bjerga has filled the financial leadership roles of Finance Director, Revenue Cycle Director and VP of Finance and Revenue Cycle before moving to her current CFO role in 2016. Ms. Bjerga is a Certified Public Accountant and Fellow of the Healthcare Financial Management Association. She was previously employed by BerganKDV. Ms. Bjerga has a B.S degree in Accounting and Economics from St. Cloud State University, Minnesota and a Master’s in Business Administration and Healthcare Management from the University Of St. Mary, Kansas.

Dr. John Halfen, Chief Medical Officer. Dr. Halfen, is responsible for a wide variety of the physician executive duties of the Health System Facilities while assuring full integration of the physicians into the direction of Lakewood. Dr. Halfen has Board Certification in Family Medicine and Geriatrics, having graduated from the University of Minnesota with a B.A. and M.D. degrees. His Family Medicine residency was also through the

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University of Minnesota at the North Memorial Medical Center Unit. Prior to moving his practice to Staples, Dr. Halfen was in White Sulphur Springs, Montana, and Long Prairie, Minnesota. He serves as Medical Director at LHS Care Center and Central Todd County Care Center. He is certified as a Medical Review Officer for drug screening and serves on the Certification Committee for the Minnesota Health Care Homes. In 2015, Dr. Halfen completed additional training through the Physician Leadership College at the University of St. Thomas.

Craig Wolhowe, Vice President of Clinics and Hospital Services. Mr. Wolhowe is responsible for the daily operations of the clinics and hospital services associated with direct patient care. Mr. Wolhowe has been with the Lakewood since 1997 and previously was with United Parcel Service for 10 years. Mr. Wolhowe graduated with a B.A. degree in Business and Hospital Administration from Concordia College in Moorhead, Minnesota.

Kathy Dobson, Vice President of Senior Services. Ms. Dobson is responsible for the oversight of the care center, assisted living facilities, and non-emergent medical transportation services. Ms. Dobson is a licensed social worker with additional graduate education in nursing home administration. She has been employed at Lakewood since 1996. Ms. Dobson has a Bachelor of Social Work degree from Minnesota State University at Moorhead.

Lynn Rice, Vice President of Support Services. Ms. Rice is responsible for the support functions at the Health System Facilities. Ms. Rice has a B.S. in Dietetics and Nutrition from the University of North Dakota and a Master’s in Public Health Administration from the University of Minnesota. Ms. Rice is a registered and licensed dietician with 25 years of executive level leadership. She has been employed with Lakewood since 1980.

Brad Anderson, Vice President of Strategy and Development. Mr. Anderson began his career with the Lakewood in 2005. He oversees Marketing, Provider Recruitment, Credentialing, Population Health, and Product and Service Development. Mr. Anderson graduated from Gustavus Adolphus College with a B.A. in Economics.

Teresa Fisher, Chief Operating Officer/Chief Nursing Officer. Ms. Fisher has been with the Lakewood since 2014. She has over 20 years healthcare administration and nursing leadership experience. Academically, Ms. Fisher holds a BSN from the University of Mary and a Masters in Arts with Concentrations in Healthcare Administration, Human Resources, Process Consultation, and Organizational Development from the College of St. Scholastica. She is currently working on her dissertation for a doctorate in Health Care Administration from the University of Phoenix.

MEDICAL STAFF

Lakewood’s medical staff consists of 63 active staff and 186 consulting specialty staff. All medical staff providers are credentialed through a process that verifies licensure, proof of insurance, professional memberships and disciplinary actions.

The table below depicts the distribution of the active medical staff (including both physicians and mid-level practitioners) by age category as of August 19, 2016.

Age of Active Providers Number of Active Providers Under 30 4 30-39 17 40-49 21 50-59 11 60-65 7 65 and over 3 ______Source: Lakewood Records

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The table below sets forth the distribution of all medical staff members by specialty and category of medical staff membership, indicating board certification percentages as applicable.

Active Consulting % Board Specialty Staff Staff Certified Cardiology 15 100 Family Practice 11 1 locum 100 Surgery 2 9 locum 100 ENT 1 100 Orthopedic 2 4 100 Pathology 3 100 Internal Medicine 1 100 Radiology 73 100 Urology 2 100 ER 3 11 locum 100 GI 9 100 Pulmonology 2 100 Oncology/radiation 3 100 Nephrology 6 100 Ophthalmology 1 100 OB/GYN 2 100 Neurology 4 100 Psychiatry 1 2 100 Podiatry 1 100 Anesthesia (CRNA) 5 11 100 Dermatology 1 100 ARNP 29 100 Pediatrics 1 100 TOTAL: 30 186

______Source: Lakewood Records

The top admitting medical staff at Lakewood contributed 81% of total admissions for the 12-month period ending July 31, 2016. The specialties, age, number of admissions and percentage of total admissions for these practitioners is set forth in the following table:

% of Total Specialty Age Admissions Admissions Family Practice 46 249 28.01 Family Practice 46 100 11.25 Family Practice 59 83 9.34 Family Practice 33 82 9.22 Family Practice 49 80 9.00 Family Practice 39 68 7.65 Family Practice 31 60 6.75 ______Source: Lakewood Records

Physician Recruitment

Lakewood Health System is continuously recruiting additional physicians and Advanced Practice Clinicians to increase the access and capacity of the medical staff. The current focus is family medicine, OB/GYN, and Mental Health.

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OPERATIONS OF THE HEALTH SYSTEM FACILITIES

Licensing, Accreditation and Membership

The Minnesota Department of Health licenses the Health System Facilities. Licensed for 37 beds total, Lakewood staffs a 25-bed critical access hospital and a 10-bed geriatric psychiatric unit, the facility offers acute, skilled, outpatient observation services (provided for patients who stay less than 48 hours), and other outpatient levels of care.

As a critical access hospital, regulations permit the utilization of the 25 beds in any combination of levels of care. The average length of inpatient stay is limited to less than 96 hours. For fiscal year ending December 31, 2015, the Lakewood reported an average length of stay of 70.32 hours.

Lakewood is certified as a provider under both the Medicare and Medicaid programs.

Employees

Lakewood has 826 employees (591 full-time, 152 part-time and 83 PRN/flex). No Lakewood employees are represented by a labor union, and management believes its relationship with its employees provides great stability.

The following tables indicate staffing levels expressed as Full-Time Equivalents (“FTEs”) as of the dates set forth therein:

Lakewood FTEs December 31, December 31, December 31, 2013 2014 2015

Clerical Office 177.19 164.51 161.94 Physicians & Mid-Level Providers 21.79 21.84 23.38 Nursing Staff 287.16 272.97 278.38 Other Professional 133.6 111.76 111.95 80.89 74.36 75.92 All Other Support Staff _____ Total 700.64 645.45 654.56

______Source: Lakewood Records

Insurance

Lakewood maintains coverage for medical professional liability of $1,000,000 per occurrence and $3,000,000 aggregate; facility general liability insurance is maintained at $3,000,000 in the aggregate. Excess liability coverage is maintained in the amount of $1,000,000 per occurrence and $3,000,000 annual aggregate. Directors and officers liability insurance is also maintained as well as property insurance.

Litigation

From time to time, Lakewood is subject to claims and lawsuits alleging malpractice. In the opinion of management, the ultimate cost, if any, related to the resolution of such pending legal proceedings, if any, will be within the limits of insurance coverage and, accordingly, will not have a significant effect on the financial position or the results of operations of Lakewood.

B-7

LAKEWOOD SERVICE AREA

Lakewood’s primary service area includes the following zip codes: 56434, 56438, 56440, 56446, 56466, 56473, and 56479. Lakewood’s primary service area has a total population of approximately 18,000 persons. In the year ended December 31, 2015, 70.7% of Lakewood’s patients were residents of this primary service area.

The City of Staples, Minnesota, is located in Central Minnesota. By car, it is 2.5 hours to Minneapolis, Minnesota. The population of Staples was estimated by the U.S. Census Bureau as 2,981 for 2014. Staples is located in Todd County, Minnesota, which has an economy primarily based on agriculture, education and some manufacturing.

Lakewood’s secondary service area includes 56437, 56443, 56453, 56477, and 56481. The cities and surrounding rural areas in the secondary service area have an additional total population of about 8,460 persons. The secondary service area accounted for approximately 13.3% of Lakewood’s total inpatient hospital admissions for the year ending December 31, 2015.

______Source: Lakewood Feasibility Study.

The following table provides information concerning major employers in Lakewood’s service area:

Employer Number of Employees Lakewood Health System 823 Trident Seafood 375 Staples Motley Schools 205 Morey’s Fish Company 103 Stern Manufacturing 67 3M 64 Central Lakes College (Staples Campus 48 Only) ______Source: Lakewood Feasibility Study

The following table sets forth unemployment statistics in the counties located in Lakewood’s service area as of August 2015 and 2016:

Unemployment Rate Unemployment Rate County August 2015 August 2016 Cass 5.1% 5.6% Crow Wing 3.9% 4.3% Morrison 3.9% 4.5% Todd 3.4% 3.8% Wadena 4.6% 5.0%

______Source: Minnesota Department of Employment & Economic Development

See the Historical and Forecasted Financial Statements of Lakewood Health System in Appendix D to this Official Statement for a further description of Lakewood’s service area.

B-8

COMPETITION

The following table indicates the percentage of discharges originating from Lakewood’s primary service area that received inpatient services at the listed health care facilities during the year ended December 31, 2015.

Distance Total Percent of Hospital City Staffed From Discharges Discharges Beds Lakewood County County

Lakewood Health System Staples 25 -- 824 41.8 Saint Cloud Hospital St Cloud 495 60 445 22.6 Essentia Health St Joe’s Brainerd 140 29 236 12.0 CentraCare Health Long Prairie 24 32 81 4.1 Tri-County Health Wadena 25 20 37 1.9 St. Gabriels’s Little Falls 25 37 20 1.0 All others Various 329 16.7 ______Source: Minnesota Hospital Association Market Data

The following table indicates the percentage of Lakewood’s inpatients coming from its primary & secondary service areas.

Service Area Hospital Patients % of County Total Primary Service 725 38.3% area

Secondary 158 19.4% Service area

______Source: Minnesota Hospital Association Market Data

See the Historical and Forecasted Financial Statements of Lakewood Health System in Appendix D to this Official Statement for a further description of Lakewood’s competition.

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B-9

UTILIZATION

The following table sets forth certain historical operating statistics for the Lakewood Health System:

Period from January 1 – December 31

2013 2014 2015 Licensed CAH Beds 27 27 27 Licensed Distinct Part Unit Psych 10 10 10 Patient Days Med-Surg 2,521 2,464 2,512 Obstetrics 1,183 1,160 1,008 Swing Bed 709 516 433 TOTAL HOSPITAL PATIENT DAYS 4,413 4,140 3,953 Distinct Part Unit Psych 2,912 2,826 3,293 Inpatient Admissions Med-Surg 796 805 952 Obstetrics 467 467 441 Swing Bed 78 46 39 TOTAL HOSPITAL ADMISSIONS 1,341 1,318 1,432 Distinct Part Unit Psych Admissions 183 202 192

Average Length of Stay (in days) Med-Surg 3.2 3.1 2.6% Obstetrics 2.5 2.5 2.3% Swing Bed 9.1 11.2 11.1% Distinct Part Unit Psych 15.91 13.99 17.15% Occupancy Hospital Occupancy 49.50% 47.21% 45.90% Geriatric Psychiatric Occupancy 47.21% 77.42% 90.22% Independent/Assisted Living Occupancy 95.33% 89.84% 95.93% Assisted Living Occupancy 65.67% 86.33% 88.00% Skilled Nursing Facility Occupancy 96.98% 96.46% 98.11%

Emergency Room/Urgent Care Visits 7,433 7,246 7,867 Surgical Cases 1,405 1,515 1,620 Outpatient Visits Outpatient 64,993 64,507 68,690

______Source: Health System Records

B-10

SELECTED FINANCIAL DATA

The selected condensed balance sheets and condensed statement of operations data shown below for the fiscal years ended December 31, 2014 and 2015 is derived from Lakewood’s financial statements, which have been audited by Wipfli LLP, independent auditors. The selected data for eight months ended August 31, 2015 and 2016 is derived from Lakewood records. Historical results are not necessarily indicative of future results. The selected information for the fiscal years ended December 31, 2014 and 2015 should be read in conjunction with the Lakewood’s audited financial statements, including the notes thereto.

Balance Sheets

Fiscal Year Ended December 31, Eight Months Ended August 31, 2014 2015 2015 2016 (Audited) (Audited) (Unaudited) (Unaudited)

Cash and Cash Equivalents $18,126,441 $ 3,372,773 $19,569,367 $17,370,145 Other Current Assets 21,385,593 36,289,201 21,168,706 23,236,694 Total Current Assets $39,512,034 $39,661,974 $40,738,343 $40,606,839

Interests in Perpetual Trusts $ 40,518 $ 43,545 $ 40,862 $ 38,128 Investment Whose Use is Limited 966,031 998,109 940,505 938,024 Net Property & Equipment 44,534,253 43,016,775 42,577,464 43,218,063 Investment in Subsidiaries Total Assets $92,699,277 $91,949,596 $92,793,746 $92,678,432

Total Liabilities $48,481,497 $44,246,439 $46,508,850 $43,736,782 Total Net Assets 44,217,780 47,703,157 46,284,896 48,941,640 Total Liabilities & Net Assets $92,699,277 $91,949,596 $92,793,746 $92,678,432

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B-11

Statements of Revenue and Expenses

Fiscal Year Ended December 31, Eight Months Ended August 31, 2014 2015 2015 2016 (Audited) (Audited) (Unaudited) (Unaudited)

Unrestricted Revenues Net patient service revenues $98,359,736 $91,733,159 $62,220,408 $64,365,033 Provision for bad debts 1,734,185 766,388 (134,209) (614,641) Gains and other support 1,078,270 1,700,746 Total Operating Revenue $100,456,538 $94,738,914 $63,164,469 $65,451,138

Expenses Salaries and wages $ 34,125,000 $ 37,215,600 $24,537,714 $26,571,477 Employee benefits 13,421,500 10,965,000 7,673,536 8,505,295 Purchased services Supplies, occupancy and other expenses 17,553,100 18,766,300 23,839,399 24,705,994 Depreciation and amortization 6,781,823 5,714,286 3,977,655 3,331,433 Interest 1,702,564 1,784,471 1,152,612 1,115,089 Total Operating Expenses $ 90,461,053 $91,964,766 $61,180,916 $64,229,288

Operating Income (loss) $ 9,995,485 $ 2,774,148 $ 1,983,553 $ 1,221,850 Other Income (losses) 341,489 91,285 28,486 122,472 Revenues in excess of expenses $ 10,336,974 $ 2,865,433 $ 2,012,039 $ 1,344,322

Change in net unrealized gains and losses Net assets released from restrictions $ 136,600 51,043 ______Increase in unrestricted net assets $ 10,473,574 $ 2,916,476 $ 2,012,039 $ 1,344,322

The following table shows key operating ratios for Lakewood’s fiscal year ending December 31, 2015 and August 31, 2016:

December 31, 2015 August 31, 2016 Days Cash on Hand 14.27* 96.09 Operating Margin 2.93% 1.91% Operating Cash Flow Margin -8.82%* 26.80%

* Lakewood underwent an Electronic Health Record conversion in mid-2015 which resulted in delayed processing of claims and related receipts. The system returned to current and timely billing and collections in January 2016.

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B-12

Historical Capitalization and Investment Position

The following table sets forth the capitalization and investment position of Lakewood as of December 31, 2015. The table also shows the historic ratio of long-term debt (net of current position) to total capitalization and days cash on hand.

Eight Months Ended Eight Months August 31, Ended August 2014 2015 2015 31, 2016 (Audited) (Audited) (Unaudited) (Unaudited)

Long Term Debt $36,752,030 $35,215,609 $36,309,542 $34,758,165

Total Capitalization 44,217,780 47,703,157 46,284,896 48,941,650 Ratio of Long Term Debt to 45.39% 42.47% 43.96% 41.53% Capitalization

Available Cash $18,126,441 $3,372,773 $19,569,637 $17,370,145 Cash Operating Expenses:

Total Operating Expenses $90,461,053 $91,964,766 $61,180,916 $64,229,288 Less: Depreciation & Amort (6,781,823) (5,714,286) (5,130,267) (4,446,522) Total Cash Expenses 83,679,230 86,250,480 56,050,649 59,782,766 Daily Cash Expenses $229,258 $236,303 $230,661 $246,020 Days Cash on Hand 79.07 14.27** 112.81 96.06

______*Available Cash includes cash, cash equivalents and board-designated investments not restricted as to use.

** Lakewood underwent an Electronic Health Record conversion in mid-2015 which resulted in delayed processing of claims and related receipts. The system returned to current and timely billing and collections in January 2016.

Sources of Revenue

Payments Lakewood are made on behalf of certain patients by the federal and state governments under the Medicare and Medicaid programs and by managed care and commercial insurance carriers. A significant portion of the revenue of Lakewood is derived from such third-party payors. Payments from third-party sources for services rendered could be adversely affected to the extent that reimbursement for services rendered is less than actual expenses incurred. The percentages of gross revenue for Lakewood by payors are as follows:

For Fiscal Years Ended 2015, 2014 and 2013

2015 2014 2013 Medicare 36.44% 35.60% 34.58% Medicaid 21.27% 23.88% 22.93% Commercial Insurance 18.56% 19.92% 15.29% Blue Cross 18.20% 13.79% 19.45% MSHO 2.87% 3.84% 4.45% Self Pay 2.66% 2.96% 3.31%

B-13

Managed Care Contracts

Lakewood is a party to numerous commercial insurance contracts with various commercial insurance carriers, the most prevalent of which is Blue Cross Blue Shield of Minnesota (BCBS) and Health Partners.

BCBS reimburses Inpatient services using the APR-DRG methodology and Outpatient services using the EAPG methodology. There is a percent of charge floor to ensure minimum reimbursement thresholds are in place. Clinic and Professional services are reimbursed using a fee schedule methodology.

Health Partners reimburses Inpatient and Outpatient services based on a percentage of gross charges. Clinic and Professional services are reimbursed using a fee schedule methodology.

MANAGEMENT DISCUSSION AND ANALYSIS

The leadership team at Lakewood Health System is a group of experienced individuals who are dedicated both personally and professionally to maintaining a reputation of quality healthcare and five-star service. They continuously work together to identify and direct the priorities of the Organization through the development and implementation of strategic plans. The Organization has been under the direction of the current CEO, Tim Rice, since 1980. Mr. Rice has done an exceptional job setting the tone of the organization and has created a culture of innovation, ownership, and integrity. Lakewood’s leadership team, management team, and staff are highly engaged and focused on the overall success of the organization. As a rural community the success of the system is a reflection of the success of the community and therefor the employees take great pride in seeing Lakewood succeed and are very invested in their employment at Lakewood.

The initial plans for the building expansion were developed in 2012. With the passing of the affordable care act, and changing models of care delivery, Lakewood determined a need to revise the original expansion blue prints to better accommodate new care delivery models. Lakewood has made a commitment to primary care and care coordination and as a result 57 physicians, specialists and advanced practice clinicians have been added to the staff since 2004. This increase in primary and specialty care and care coordination model, has resulted in a need to increase clinical space both in Staples and Pillager. Lakewood has also seen growth in emergency services leading to a need to expand emergency and urgent care service offerings. Emergency services have grown from 4,500 visits in 2004 to 8,000 visits per year today. Lakewood anticipated the 2016 Project will strengthen its financial position through increased clinic volume, an improved care delivery model and serving the unmet healthcare needs of the community.

Current financial operations indicate Lakewood is exceeding budgeted net income by 11%. Original budget amounts are based on historical trends and seasonality as well as known charges and projections. Our overall target total margin for 2016 is 3.90%, the system is trending to surpass that mark slightly with a projected margin of 3.99%. Compared to the prior year to date, system revenue is up $3.35 million which is solely through growth as the system did not increase rates for 2016 but actually implemented targeted decreases to allow Lakewood to remain competitively priced. Lakewood continues to recruit and retain physicians with two primary care physicians added September and three more in the next six months.

On the balance sheet side, the system has recovered from the 2015 Electronic Health Record conversion with days cash on hand also improving since the beginning of 2016. Lakewood is currently at 95 days cash on hand, excluding restricted sources. In August of 2015, Lakewood went through and Electronic Health Record conversion to Epic which prevented the submission of claims for 4 months. The 2016 days cash on hand goal is 110 which Lakewood’s trending to meet by year end. In regards to receivables, the majority of outstanding 2015 receivables were collected and current by the end of March 2016. Days in Accounts Receivable, Gross, returned to normal levels of 58.39 and 53.29 for March and April respectively.

B-14

APPENDIX C

AUDITED FINANCIAL STATEMENTS OF LAKEWOOD HEALTH SYSTEM

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Lakewood Health System Staples, Minnesota

Financial Statements Years Ended December 31, 2015 and 2014

C-1 Lakewood Health System

Financial Statements Years Ended December 31, 2015 and 2014

Table of Contents

Independent Auditor's Report...... 1

Financial Statements Balance Sheets...... 3 Statements of Operations...... 5 Statements of Changes in Net Assets...... 6 Statements of Cash Flows...... 7 Notes to Financial Statements...... 9

C-2 Independent Auditor's Report

Board of Directors Lakewood Health System Staples, Minnesota

We have audited the accompanying financial statements of Lakewood Health System, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

C-3 1 Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lakewood Health System as of December 31, 2015 and 2014, and the results of its operations, changes in its net assets, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States.

Wipfli LLP

April 14, 2016 Minneapolis, Minnesota

C-4 2 Lakewood Health System

Balance Sheets December 31, 2015 and 2014

Assets 2015 2014

Current assets: Cash and cash equivalents $ 3,372,773 $ 18,126,441 Assets limited as to use 998,109 966,031 Short-term investments 3,184,461 3,182,731 Accounts receivable - Net 28,244,968 13,453,194 Due from third-party reimbursement programs 280,321 - Other receivables 429,171 472,099 Inventories 1,402,562 1,533,875 Prepaid expenses and other 1,749,609 1,777,663

Total current assets 39,661,974 39,512,034

Assets limited as to use - Net of amounts required for current liabilities 7,606,565 7,022,564

Property and equipment - Net 43,016,775 44,534,253

Other assets: Resident deposits and funds held in trust 43,545 40,518 Cash surrender value of life insurance 335,602 303,596 Investments in unconsolidated affiliates 764,753 735,655 Unamortized debt issuance costs 520,382 550,657

Total other assets 1,664,282 1,630,426

TOTAL ASSETS $ 91,949,596 $ 92,699,277

C-5 3 Liabilities and Net Assets 2015 2014

Current liabilities: Current maturities of long-term debt $ 1,536,422 $ 1,505,992 Current portion of capital lease obligations 6,904 162,484 Accounts payable 1,545,985 1,536,397 Accrued liabilities: Compensation and related liabilities 3,001,410 2,686,184 Health care claims 1,228,331 840,970 Interest 123,635 124,431 Retirement plan obligation 10,589 2,452,879 Other 721,753 322,487 Deferred revenue 563,547 563,546 Due to third-party reimbursement programs - 674,348

Total current liabilities 8,738,576 10,869,718

Long-term liabilities: Long-term debt - Less current maturities 35,215,609 36,752,030 Capital lease obligations - Less current portion - 6,903 Long-term portion of deferred revenue 248,781 812,328 Resident deposits and funds held in trust 43,473 40,518

Total long-term liabilities 35,507,863 37,611,779

Total liabilities 44,246,439 48,481,497

Net assets: Unrestricted 46,668,627 43,803,194 Temporarily restricted 1,034,530 414,586

Total net assets 47,703,157 44,217,780

TOTAL LIABILITIES AND NET ASSETS $ 91,949,596 $ 92,699,277

See accompanying notes to financial statements. C-6 4 Lakewood Health System

Statements of Operations Years Ended December 31, 2015 and 2014

2015 2014

Revenue: Patient service revenue, net of contractual allowances and discounts $ 91,733,159 $ 98,359,736 Provision for doubtful accounts (766,388) (1,734,185)

Net patient service revenue, less provision for doubtful accounts 90,966,771 96,625,551 Other operating revenue 3,772,143 3,830,987

Total revenue 94,738,914 100,456,538

Expenses: Nursing services 17,632,571 15,594,059 Other professional services 33,827,347 32,608,852 General services 4,793,979 4,544,896 Administrative services and employee benefits 28,294,019 29,146,952 Interest 1,702,564 1,784,471 Depreciation and amortization 5,714,286 6,781,823

Total expenses 91,964,766 90,461,053

Income from operations 2,774,148 9,995,485

Other income (expenses): Interest income 129,707 332,116 Contributions 25,211 22,619 Fund-raising event income - Net 14,605 4,389 Loss on disposal of property and equipment (78,238) (17,635)

Total other income - Net 91,285 341,489

Excess of revenue over expenses $ 2,865,433 $ 10,336,974

See accompanying notes to financial statements. C-7 5 Lakewood Health System

Statements of Changes in Net Assets Years Ended December 31, 2015 and 2014

2015 2014

Unrestricted net assets - Excess of revenue over expenses $ 2,865,433 $ 10,336,974

Temporarily restricted net assets: Contributions 629,703 162,771 Fundraising event income - Net 41,284 41,533 Net assets released from restrictions for operations (51,043) (136,600)

Increase in temporarily restricted net assets 619,944 67,704

Increase in net assets 3,485,377 10,404,678 Net assets at beginning 44,217,780 33,813,102

Net assets at end $ 47,703,157 $ 44,217,780

See accompanying notes to financial statements. C-8 6 Lakewood Health System

Statements of Cash Flows Years Ended December 31, 2015 and 2014

2015 2014

Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Increase in net assets $ 3,485,377 $ 10,404,678

Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities: Provision for doubtful accounts 766,388 1,734,185 Depreciation and amortization 5,714,286 6,781,823 Loss on disposal of property and equipment 78,238 17,635 Increase in cash surrender value of life insurance (32,006) (13,229) Increase in equity of unconsolidated affiliates (162,574) (141,793) Principal forgiven on note payable (1,395) (1,395) Changes in operating assets and liabilities: Accounts receivable (15,558,162) (1,557,231) Due (to) from third-party reimbursement programs (954,669) 1,047,126 Other receivables 42,928 (77,995) Inventories 131,313 184,025 Prepaid expenses and other 28,054 (189,937) Resident deposits and funds held in trust (72) - Accounts payable 9,588 (884,576) Accrued liabilities (1,341,233) 2,163,865 Deferred revenue (563,546) (563,546)

Total adjustments (11,842,862) 8,498,957

Net cash provided by (used in) operating activities (8,357,485) 18,903,635

Cash flows from investing activities: Purchase of property and equipment (4,244,771) (1,847,666) Net change in short-term investments (1,730) (2,620,767) Purchases of assets limited as to use (2,861,156) (5,373,697) Proceeds from assets limited as to use 2,245,077 2,427,084 Distributions from unconsolidated affiliates 133,476 96,845

Net cash used in investing activities (4,729,104) (7,318,201)

C-9 7 Lakewood Health System

Statements of Cash Flows (Continued) Years Ended December 31, 2015 and 2014

2015 2014

Increase (decrease) in cash and cash equivalents: (Continued) Cash flows from financing activities: Payments on capital lease obligations $ (162,483) $ (345,332) Principal payments on long-term debt (1,504,596) (1,902,621)

Net cash used in financing activities (1,667,079) (2,247,953)

Net increase (decrease) in cash and cash equivalents (14,753,668) 9,337,481 Cash and cash equivalents at beginning 18,126,441 8,788,960

Cash and cash equivalents at end $ 3,372,773 $ 18,126,441

Supplemental cash flow information:

Cash paid during the year for interest $ 1,703,360 $ 1,788,780

Noncash investing and financing activities:

Principal forgiven on note payable $ 1,395 $ 1,395

See accompanying notes to financial statements. C-10 8 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies

The Entity

Lakewood Health System (the “Organization”) is a nonstock, nonprofit corporation located in Staples, Minnesota. The Organization provides the following health care services to residents of Staples and the surrounding area of central Minnesota:

Hospital - The Organization operates a 25-bed critical access hospital (CAH) providing inpatient, outpatient, emergency, and other specialty health care services, including a 10-bed mental health unit in Staples, Minnesota.

Senior Services - The Organization operates a 100-bed, Medicare-certified skilled nursing facility in Staples, Minnesota, that provides long-term and rehabilitative care to residents. In addition to skilled nursing care, the Organization also operates home health care and hospice programs to provide nursing care and assistance at the patient's residence. Assisted living and independent living facilities operated by the Organization, located in Staples, Minnesota, provide combinations of health-related and supportive services for tenants.

Clinics - The Organization operates clinics located in Staples, Motley, Pillager, Eagle Bend, and Browerville, Minnesota. Physicians, physician assistants, and a nurse practitioner provide clinic patients with primary care and other health care services.

Foundation - The Organization's foundation provides financial support for health care services, community education, and preventative health care programs.

Financial Statement Presentation

The Organization follows accounting standards contained in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The ASC is the single source of authoritative accounting principles generally accepted in the United States (GAAP) to be applied to nongovernmental entities in the preparation of financial statements in conformity with GAAP.

C-11 9 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Use of Estimates in Preparation of Financial Statements

The preparation of the accompanyingfinancial statements in conformity with GAAP requires management to make estimates and assumptions that directly 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 revenue and expenses during the reporting period. Actual results may differ from these estimates.

Cash and Cash Equivalents

The Organization considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents, excluding amounts whose use is limited or restricted.

Accounts Receivable and Credit Policy

Accounts receivable are uncollateralized patient obligations that are stated at the amount management expects to collect from outstanding balances. These obligations are primarily from local residents, most of whom are insured under third-party payer agreements. The Organization bills third-party payers on the patients' behalf, or if a patient is uninsured, the patient is billed directly. Once claims are settled with the primary payer, any secondary insurance is billed, and patients are billed for copay and deductible amounts that are the patients' responsibility. Payments on accounts receivable are applied to the specific claim identified on the remittance advice or statement.

The Organization has a policy not to charge interest on past due accounts less than one year old.

C-12 10 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Accounts Receivable and Credit Policy (Continued)

Accounts receivable are recorded in the accompanying balance sheets net of contractual adjustments and an allowance for doubtful accounts, which reflects management’s best estimate of the amounts that will not be collected. Management provides for contractual adjustments under terms of third-party reimbursement agreements through a reduction of gross revenue and a credit to accounts receivable. In addition, management provides for probable uncollectible amounts, primarily for uninsured patients and amounts patients are personally responsible for, through a reduction of gross revenue and a credit to the allowance for doubtful accounts.

In evaluating the collectibility of accounts receivable, the Organization analyzes past results and identifies trends for each of its major payer sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for doubtful accounts. Management regularly reviews data about these major payer sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. Specifically, for receivables associated with services provided to patients who have third-party coverage, the Organization analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for doubtful accounts for expected uncollectible deductibles and copayments on accounts for which the third-party payer has not yet paid or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely.

For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Organization records a significant provision for doubtful accounts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.

C-13 11 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Inventories

Inventories consist of supplies and durable medical equipment and are valued at the lower of cost, determined on the first-in, first-out (FIFO) method, or market.

Assets Limited as to Use

Assets limited as to use, are measured at fair value in the accompanying balance sheets, except for certificates of deposit, which are carried at cost plus accrued interest. Assets limited as to use include assets designated 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, assets set aside under terms of a bond trust indenture agreement for principal and interest payments, a workers compensation reserve fund, and assets held to fund specific board and donor designations. Amounts required to meet current liabilities of the Organization have been classified as current assets.

Investments and Investment Income

Investments, other than investments in unconsolidated affiliates, are measured at fair value in the accompanying balance sheets. Fair value represents the quoted market values of the underlying investments on the last business day of the fiscal year, including current income and investment expenses.

Investment income or loss (including realized gains and losses on investments, interest, and dividends) is reported as other income and is included in the revenue in excess of expenses (operating indicator) unless the income or loss is restricted by donor or law. Unrealized gains and losses on investments are excluded from the operating indicator unless the investments are trading securities. Realized gains or losses are determined by specific identification.

The Organization monitors the difference between the cost and fair value of its investments. If investments experience a decline in value that the Organization determines is other than temporary, the Organization records a realized loss in investment income.

C-14 12 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Fair Value Measurements

Fair value is 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. GAAP establishes a framework for measuring fair value. That framework 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). Assets or liabilities measured and reported at fair value are classified and disclosed in one of the three following categories.

Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Organization has the ability to access.

Level 2 - Inputs to the valuation methodology include:

! Quoted prices for similar assets or liabilities in active markets. ! Quoted prices for identical or similar assets or liabilities in inactive markets. ! Inputs other than quoted prices that are observable for the asset or liability. ! Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

C-15 13 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment acquisitions are recorded at cost or, if donated, at fair value at the date of donation. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included with depreciation and amortization expense in the accompanying financial statements. Estimated useful lives range from 5 to 15 years for movable equipment and from 10 to 40 years for land improvements, leasehold improvements, buildings, and fixed equipment.

The Organization capitalizes interest costs on restricted tax-exempt borrowings, less any interest earned on temporary investment of the proceeds of those borrowings, from the date of the borrowing until the specified qualifying assets acquired with those borrowings are ready for their intended use. For major capital additions that require a period of time to get them ready for their intended use but are not acquired with a specific tax-exempt borrowing, the Organization capitalizes an allocation of interest cost incurred during the period required to complete the asset.

Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from the excess of revenue over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.

C-16 14 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Asset Impairment

The Organization evaluates its long-lived assets, which consists primarily of property and equipment with finite useful lives, for impairment whenever events or changes in circumstance indicate that the carrying value may not be recoverable. Carrying value of the long-lived assets is compared to the estimated future undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future cash flows be less than the carrying value, the Organization would recognize an impairment loss at that time. No impairment loss was recognized in 2015 or 2014.

Resident Deposits and Funds Held in Trust

The Organization is the trustee of various resident funds and has a fiduciary responsibility for the administration and distribution of these funds for the residents. The Organization also holds tenant security deposits for residents of Lakewood Pines and Lakewood Manor. These funds are on deposit in separate bank accounts and are reported as an asset and liability on the accompanying balance sheets.

Cash Surrender Value of Life Insurance

The Organization is the owner and primary beneficiary of an individual life insurance policy. The face value of the life insurance policy at December 31, 2015 and 2014, was approximately $250,000.

Investments in Unconsolidated Affiliates

The investments in unconsolidated affiliates are accounted for using the equity method.

Unamortized Debt Issue Costs

Costs related to issuance of long-term debt are amortized over the life of the related debt using the straight-line method. Amortization expense of $30,275 and $30,274 for 2015 and 2014, respectively is included in depreciation and amortization expense in the accompanying statements of operations.

C-17 15 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Self-Funded Insurance

The Organization self-funds health benefits for eligible employees and their dependents. Health insurance expense is recorded on the accrual basis. An accrued liability, which estimates incurred but not yet reported claims, is recorded in the accompanying balances sheets. The Organization has stop-loss insurance to cover catastrophic claims.

Deferred Revenue

Deferred revenue consists of incentive payments the Organization received from the Medicare program for having demonstrated meaningful use of electronic health record (EHR) technology. Amounts expected to be recognized in revenue within one year have been reclassified to current liabilities in the accompanying balance sheets.

Net Assets

Unrestricted net assets consist of investments and otherwise unrestricted amounts that are available for use in carrying out the mission of the Organization and include those expendable resources, which have been designated for special use by the Organization’s Board of Directors. Temporarily restricted net assets are those whose use by the Organization has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Organization in perpetuity.

For 2015 and 2014, the Organization has no permanently restricted net assets.

C-18 16 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Patient Service Revenue

The Organization recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services rendered. Certain third-party payer reimbursement agreements are subject to audit and retrospective adjustments. Retrospective 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 provision for contractual adjustments (that is the difference between established rates and expected third-party payor payments) and discounts (that is the difference between established rates and the amount billable) are recognized on the accrual basis. These amounts are deducted from gross patient service revenue to determine patient service revenue (net of contractual allowances and discounts).

For uninsured patients who do not qualify for charity care, the Organization recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by the Organization's uninsured patient policy). On the basis of historical experience, a significant portion of the Organization's uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Organization records a significant provision for doubtful accounts related to uninsured patients in the period the services are provided. The provision for doubtful accounts is based on historical loss experience and is deducted from patient service revenue (net of contractual allowances and discounts) to determine net patient service revenue, less provision for doubtful accounts.

C-19 17 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Charity Care

The Organization provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. The Organization maintains records to identify the amount of charges forgone for services and supplies furnished under the charity care policy. Because the Organization does not pursue collection of amounts determined to qualify as charity care, they are not reported as patient service revenue, net of contractual allowances and discounts.

The estimated cost of providing charity care to patients under the Organization's charity care policy is calculated by multiplying the Organization's ratio of cost to gross charges by the gross uncompensated charges associated with providing the charity care

Contributions

Contributions are considered available for unrestricted use unless specifically restricted by the donor. Unconditional promises to give cash and other assets to the Organization are reported at fair value at the date the promise is received. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions upon which they depend are substantially met.

Contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the accompanying statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions.

C-20 18 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Other Operating Revenue

Other operating revenue consists of grant income, rental income, equity in unconsolidated affiliates’ earnings, cafeteria and vending proceeds, medical records, the 340b pharmacy program, Medicare and Medicaid EHR incentive payments, and revenue from various other services.

The American Recovery and Reinvestment Act of 2009 (ARRA) provides for incentive payments under the Medicare and Medicaid programs for certain hospitals and physician practices that demonstrate meaningful use of certified EHR technology. These provisions of ARRA, collectively referred to as the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), are intended to promote the adoption and meaningful use of health information technology and qualified EHR technology. The demonstration of meaningful use is based on meeting a series of objectives. Meeting the series of objectives in order to demonstrate meaningful use becomes progressively more stringent as its implementation is phased in through stages as outlined by the Centers for Medicare and Medicaid Services (CMS).

The Organization recognizes revenue for EHR incentive payments when there is reasonable assurance that the Organization will meet the conditions of the program, primarily demonstrating meaningful use of certified EHR technology for the applicable period. Incentive payments from the Medicare EHR incentive program is recognized as revenue over the estimated useful lives of the health information technology. Incentive payments from the Medicaid EHR incentive program are recognized as received.

Amounts recognized under the Medicare and Medicaid EHR incentive programs are based on qualifying costs expended for EHR technology and are subject to audit by fiscal intermediaries; accordingly, amounts recognized are subject to change. In addition, the Organization’s attestation of its compliance with the meaningful use criteria is subject to audit by the federal government or its designee.

The Organization incurs both capital expenditures and operating expenses in connection with the implementation of its EHR initiative. The amount and timing of these expenditures does not directly correlate with the timing of the Organization's receipt or recognition of the EHR incentive payments.

C-21 19 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

Excess of Revenue Over Expenses

The accompanying statements of operations and statements of changes in net assets include the classification excess of revenue over expenses, which is considered the operating indicator. Changes in unrestricted net assets, which are excluded from the operating indicator consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfer of assets 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 purposes of acquiring such assets.

Income Taxes

The Organization is a tax-exempt corporation as described in Section 501(c)(3) of the Internal Revenue Code (the "Code") and is exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. The Organization is also exempt from state income tax on related income.

Unemployment Compensation

The Organization has elected reimbursement financing under provisions of the Minnesota unemployment compensation laws. Unemployment claims are paid to the State of Minnesota as incurred.

Advertising Costs

Advertising costs are expensed as incurred.

C-22 20 Lakewood Health System

Notes to Financial Statements

Note 1 Summary of Significant Accounting Policies (Continued)

New Accounting Pronouncements

The FASB issued Accounting Standards Update (ASU) 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which amends ASC Topic 835- 30. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, and the amortization of debt issuance costs be reported as interest expense. The guidance in the ASU is effective for the Organization's year ending December 31, 2016.

Subsequent Events

Subsequent events have been evaluated through April 14, 2016, which is the date the financial statements were issued.

C-23 21 Lakewood Health System

Notes to Financial Statements

Note 2 Reimbursement Arrangements With Third-Party Payers

Hospital

The Organization has agreements with third-party payers that provide for reimbursement at amounts which vary from its established rates. A summary of the basis of reimbursement with major third-party payers follows:

Medicare - The Hospital is designated as a CAH. Under this designation, inpatient and outpatient hospital services are paid based on a cost-reimbursement methodology, with the exception of certain laboratory and mammography services, which are paid based on prospectively determined fee schedules.

Medicaid - Inpatient services rendered to Medicaid program beneficiaries are reimbursed at prospectively determined amounts per discharge. These rates vary according to a patient classification system based on clinical, diagnostic, and other factors. Under the CAH designation, outpatient hospital services rendered to Medicaid program beneficiaries are paid based on a cost-reimbursement methodology.

Others - The Organization has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Organization under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates.

Other Nonacute Services

Physician and Professional Services - Certain physician and professional services rendered to Medicare and Medicaid beneficiaries qualify for reimbursement as Medicare-approved rural health clinic services. Qualifying services are reimbursed based on a cost-reimbursement methodology. Under federal law, the rural health clinics are also entitled to receive a wraparound payment for the difference between the cost and the amount paid by Medicaid managed-care health plans. All other physician and professional services rendered to Medicare and Medicaid beneficiaries are paid based on prospectively determined fee schedules.

C-24 22 Lakewood Health System

Notes to Financial Statements

Note 2 Reimbursement Arrangements With Third-Party Payers (Continued)

Other Nonacute Services (Continued)

Nursing Home - Medicare - The Organization’s reimbursement for Part A residents under the Medicare program is based on a prospectively based case-mix system.

Nursing Home - Medicaid and Other - The Organization's reimbursement for Medicaid residents is based on prospectively determined daily rates determined under a contractual arrangement with the Minnesota Medical Assistance program under Title XIX of the Social Security Act. Reimbursement is based on predetermined rates per resident day, which vary depending on the resident's level of care and type of services provided. By Minnesota statute, a skilled nursing facility may not charge its private-pay residents in multiple-occupancy rooms per diem rates in excess of the approved Medicaid rates for similar services. The Organization has also entered into payment agreements with certain commercial insurance carriers and health maintenance organizations. The basis for payment to the Organization under these agreements includes prospectively based case-mix system and per diem rates based on the resident's level of care.

Behavioral Health Unit - Medicare and Medicaid - The Organization's reimbursement for patients in the behavioral health unit is based on prospectively determined rates. These rates vary according to a patient classification system based on clinical, diagnostic, and other factors.

Home Health - Medicare and Medicaid - Home health services are reimbursed based on a predetermined rate per episode of care, which varies depending on the patient’s level of care and types of services provided.

C-25 23 Lakewood Health System

Notes to Financial Statements

Note 2 Reimbursement Arrangements With Third-Party Payers (Continued)

Accounting for Contractual Arrangements

The Organization is reimbursed for cost-reimbursable items at tentative rates, with final settlements determined after audit of the related annual cost reports by the respective Medicare and Medicaid fiscal intermediaries. Estimated provisions to approximate the final expected settlements after review by the intermediaries are included in the accompanying financial statements. The Organization’s cost reports have been reviewed by the Medicare fiscal intermediaries through December 31, 2012. The Organization's cost reports have been reviewed by Medicaid fiscal intermediaries through December 31, 2007.

Net patient service revenue, net of contractual allowances and discounts, increased approximately $5,714,000 in 2014 because of retroactive adjustments in excess of amounts previously estimated for Medicare settlement payments and Medicaid wraparound payments. In 2014, the Minnesota Department of Human Services (DHS) final settled years 2006 through 2011 for additional reimbursement due to the Organization for the difference between the interim rate paid and final rate per encounter for those years, including additional wraparound payments for managed care claims which had already received wraparound payments at the interim rates.

In addition, in 2014, the Organization evaluated previously recorded estimates for 2012 and 2013. As the result of an increase between the interim rates paid and revised estimated final rates for those years, the Organization recorded additional Medicare and Medicaid net patient service revenue of approximately $1,250,000.

C-26 24 Lakewood Health System

Notes to Financial Statements

Note 2 Reimbursement Arrangements With Third-Party Payers (Continued)

Accounting for Contractual Arrangements (Continued)

Medicare and Medicaid Electronic Health Record Incentive Funding

In 2013, the Organization received EHR incentive payments totaling $2,817,731 from the Medicare program that is being recognized over the useful life of related EHR assets. The Organization recognized EHR incentive income of $563,546 in 2015 and 2014. At December 31, 2015 and 2014, the Organization reported $812,328 and $1,375,874, respectively, of deferred revenue from the Medicare EHR incentive program in the accompanying balance sheets.

The Organization received $195,500 and $364,264 in EHR incentive payments from the Medicaid program in 2015 and 2014, respectively. Medicare and Medicaid EHR incentive revenue is included in other operating revenue in the accompanying statements of operations.

C-27 25 Lakewood Health System

Notes to Financial Statements

Note 2 Reimbursement Arrangements With Third-Party Payers (Continued)

Laws and Regulations

The health care 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 health care program participation requirements, reimbursement for patient services, and billing regulations. Government activity with respect to investigations and allegations concerning possible violations of such regulations by health care providers has increased. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayment for patient services previously billed. Management believes that the Organization is in compliance with applicable government laws and regulations. While no significant regulatory inquiries have been made of the Organization, 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.

CMS uses recovery audit contractors (RACs) as part of its efforts to ensure accurate payments under the Medicare program. RACs search for potentially inaccurate Medicare payments that might have been made to health care providers and not detected through existing CMS program integrity efforts. Once a RAC identifies a claim it believes is inaccurate, the RAC makes a deduction from or addition to the provider's Medicare reimbursement in an amount estimated to equal the overpayment or underpayment. The Organization has the ability to appeal these adjustments. At December 31, 2015, management is not aware of any current RAC reviews that would result in significant reimbursement adjustments.

C-28 26 Lakewood Health System

Notes to Financial Statements

Note 3 Accounts Receivable

Accounts receivable consisted of the following at December 31:

2015 2014

Accounts receivable $ 44,735,264 $ 21,759,406

Less: Contractual adjustments 13,966,351 6,055,173 Allowance for doubtful accounts 2,523,945 2,251,039

Accounts receivable - Net $ 28,244,968 $ 13,453,194

The Organization's allowance for doubtful accounts for self-pay patients increased from 39.5% of self-pay accounts receivable at December 31, 2014, to 39.6% of self-pay accounts receivable at December 31, 2015. Bad debt write-offs, net of recoveries, were approximately $930,000 and $2,315,000 for the years ended December 31, 2015 and 2014, respectively. In 2014, the Organization expanded its charity care policy to provide eligibility to additional low-income patients. The expanded policy increased the income limit, based on the federal poverty guidelines, for patients that are eligible.

Note 4 Other Receivables

Other receivables consisted of the following at December 31:

2015 2014

340b pharmacy $ 347,636 $ 373,068 Miscellaneous 81,535 99,031

Other receivables $ 429,171 $ 472,099

C-29 27 Lakewood Health System

Notes to Financial Statements

Note 5 Assets Limited as to Use

Assets limited as to use, stated at fair value, consisted of the following at December 31:

2015 2014

Board-designated for capital improvements: Cash $ - $ 53,000 Money market funds 4,745,570 4,635,644

Total Board-designated for capital improvements 4,745,570 4,688,644

Workers compensation reserve fund 239,288 238,640

Under bond trust indenture agreement for principal and interest payments: Cash 86,450 43,104 Money market funds 1,935,362 1,239,818 Certificates of deposit 565,332 564,209 Municipal bonds - 734,961

Total under bond trust indenture agreement for principal and interest payments 2,587,144 2,582,092

Held to fund specific designations by the Board and donors: Cash 799,963 247,675 Certificates of deposit 232,709 231,544

Total held to fund specific designations by the Board and donors 1,032,672 479,219

Total assets limited as to use 8,604,674 7,988,595 Less - Amount required for current liabilities 998,109 966,031

Assets limited as to use - Net of amount required for current liabilities $ 7,606,565 $ 7,022,564

C-30 28 Lakewood Health System

Notes to Financial Statements

Note 5 Assets Limited as to Use (Continued)

Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Because of the level of risk associated with certain investments, it is reasonably possible that changes in the values of certain investments will occur in the near term and that such changes could materially affect the amounts reported in the financial statements.

Note 6 Fair Value Measurements

The following tables set forth by measurement level, within the fair value hierarchy, the Organization's assets measured at fair value on a recurring basis at December 31:

Total Assets 2015 Level 1 Level 2 Level 3 at Fair Value

Assets limited as to use - Money market funds $ - $ 6,680,932 $ - $ 6,680,932 Cash surrender value of life insurance - - 335,602 335,602

Totals $ - $ 6,680,932 $ 335,602 $ 7,016,534

Total Assets 2014 Level 1 Level 2 Level 3 at Fair Value

Assets limited as to use: Money market funds $ - $ 5,875,462 $ - $ 5,875,462 Municipal bonds - 734,961 - 734,961 Cash surrender value of life insurance - - 303,596 303,596

Totals $ - $ 6,610,423 $ 303,596 $ 6,914,019

The carrying values of current assets and current liabilities are reasonable estimates of their fair value because of the short-term nature of these financial instruments.

C-31 29 Lakewood Health System

Notes to Financial Statements

Note 6 Fair Value Measurements (Continued)

The following table is a rollforward of the financial instruments that were classified by the Organization within Level 3 of the fair value hierarchy above:

Cash Surrender Value of Life Insurance

Fair value at December 31, 2013 $ 290,367 Increase in policy surrender value 13,229

Fair value at December 31, 2014 303,596 Increase in policy surrender value 32,006

Fair value at December 31, 2015 $ 335,602

Following is a description of the valuation methodologies used for assets measured at fair value.

Money market funds - Money market funds are valued using $1 as the net asset value.

Municipal bonds - Municipal bonds are valued using quotes from pricing vendors based on recent trading activity and other observable market data.

Fair values determined by Level 3 inputs are unobservable data points of the asset and include situations in which there is little, if any, market activity for the asset.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Organization believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

C-32 30 Lakewood Health System

Notes to Financial Statements

Note 7 Property, Equipment, and Depreciation

Property and equipment consisted of the following at December 31:

2015 2014

Land $ 838,858 $ 838,858 Land improvements 3,478,569 3,425,054 Leasehold improvements 165,063 165,063 Buildings 30,090,628 30,193,445 Fixed equipment 29,330,483 29,202,792 Movable equipment 26,372,605 23,875,171

Total property and equipment 90,276,206 87,700,383 Less - Accumulated depreciation and amortization 49,150,105 44,950,043

Net depreciated value 41,126,101 42,750,340 Construction in progress 1,890,674 1,783,913

Property and equipment - Net $ 43,016,775 $ 44,534,253

Cost of equipment under capital lease obligations, which is included in movable equipment, was $3,312,583 and $4,026,813 at December 31, 2015 and 2014, respectively. Accumulated amortization of equipment under capital lease obligations was $2,825,776 and $3,341,584, at December 31, 2015 and 2014, respectively.

At December 31, 2015 and 2014, construction in progress consisted primarily of costs associated with information technology and costs incurred for facility planning and pursuit of financing for projects under consideration at the main campus and a clinic location.

In 2014, the Organization completed an evaluation of the estimated useful life for its electronic health records software. The result of shortening the life over which the software is expected to be used increased deprecation expense by approximately $1,300,000 in 2014. Total depreciation expense for 2015 and 2014, was $5,684,011 and $6,751,548, respectively.

C-33 31 Lakewood Health System

Notes to Financial Statements

Note 7 Property, Equipment, and Depreciation (Continued)

Property and equipment include the cost of assets initially acquired under a lease agreement dated March 31, 1997, (the "Lease") with United Hospital District of Todd, Morrison, Cass, and Wadena Counties (the "District"). The Lease also includes assets subsequently acquired with proceeds from the Medical Facilities Gross Revenue Notes - Series 2003A and 2003B, General Obligation Health Care Facility Revenue Bonds - Series 2004, Medical Facilities Revenue Notes - Series 2007 and 2009, construction note, and special assessments. The initial term of the Lease was through June 1, 2011, at which time the Lease was renewed for a 10-year term. Subsequent to June 1, 2011, an amendment to the Lease was executed extending the term of the first renewal period from 10 years to 25 years. The first renewal term will expire June 1, 2036, and allows for the renewal term to extend past the due date of the final bond issued as part of the General Obligation Health Care Facility Revenue Bonds-Series 2004. The amendment to extend the term of the initial renewal period did not alter the term of any subsequent renewal periods. Upon expiration of the first renewal term, the Organization has the option to renew the Lease for an additional 10-year term.

Under terms of the Lease and subsequent amendments to the Lease, the Organization operates and pays all of the operating costs of the District's facilities. In lieu of making lease payments, the Organization pays the principal and interest on the preceding notes, assessments, and bonds that are secured by the District's facilities or the taxing power of the District. The Organization has capitalized the assets acquired, has recorded the related notes and bonds as liabilities, and records depreciation of the assets acquired as an operating expense.

C-34 32 Lakewood Health System

Notes to Financial Statements

Note 8 Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates consisted of the following at December 31:

2015 2014 Increase Increase (Decrease) in (Decrease) in Investments Equity Investments Equity

Lakewood-CentraCare LLC $ 166,351 $ 17,429 $ 148,922 $ 14,965 Medical Spa LLC 305,506 22,471 283,035 33,349 Central Minnesota Diagnostic, Inc. 292,896 (10,802) 303,698 (3,366)

Totals $ 764,753 $ 29,098 $ 735,655 $ 44,948

Following is a summary of the financial position and results of operations of investments accounted for under the equity method as of and for the year ended December 31:

(Unaudited) (Unaudited) 2015 2014

Total assets $ 1,281,118 $ 1,359,424 Total liabilities 337,402 495,511 Total equity 943,715 863,913 Revenue 810,459 731,818 Net income 79,802 96,628

The Organization has a 50% ownership interest in Lakewood-CentraCare, LLC (the "LLC"), which is accounted for under the equity method. The Organization leases medical office space from the LLC. Rent expense was $40,008 for 2015 and 2014.

The Organization has a 50% ownership interest in Medical Spa LLC, a medical spa located in Sartell, Minnesota, which is accounted for under the equity method.

C-35 33 Lakewood Health System

Notes to Financial Statements

Note 8 Investments in Unconsolidated Affiliates (Continued)

The Organization is also a member of Central Minnesota Diagnostic, Inc. (CMDI), a joint venture cooperative based in Princeton, Minnesota. CMDI provides ultrasound, MRI, and CT services to member hospitals and clinics in Minnesota and Wisconsin. Earnings or losses by the cooperative are allocated to the members based on utilization of services. The Organization purchases MRI scans from CMDI. Total expenses for purchased MRI scans were $478,850 and $485,025 for 2015 and 2014, respectively. The Organization received distributions totaling $133,476 and $96,845 in 2015 and 2014, respectively.

Note 9 Line of Credit

At December 31, 2015 and 2014, the Organization had a $1,000,000 unsecured line of credit with a local bank. The bank line of credit bears interest at the greater of 2.5% over prime or 5.95%. At December 31, 2015 and 2014, the interest rate on the line of credit was 6.00% and 5.95%, respectively. The line of credit expires April 30, 2016. There were no borrowings against this line of credit at December 31, 2015 and 2014.

C-36 34 Lakewood Health System

Notes to Financial Statements

Note 10 Long-Term Debt

Long-term debt consisted of the following at December 31:

2015 2014

3.5282% Medical Facilities Gross Revenue Notes - Series 2003A, principal and interest due in monthly installments of $29,736 through September 2023. $ 2,416,499 $ 2,682,951

4.65% Medical Facilities Gross Revenue Notes - Series 2003B, principal and interest are due in monthly installments of $3,952 through September 2023. 285,398 316,867

4.5% General Obligation Health Care Facility Revenue Bonds - Series 2004, interest due semiannually, principal payments due in annual installments, serial bonds of $885,000 due in 2016, term bonds commencing in 2021, due December 2034. 27,045,000 27,895,000

2.90% Medical Facilities Mortgage Revenue Note - Series 2013A, principal and interest due in monthly installments of $12,144 through July 2029. 1,634,595 1,731,395

2.90% Medical Facilities Mortgage Revenue Note - Series 2013B, principal and interest due in monthly installments of $32,847 through April 2033. 5,364,956 5,599,831

Note payable, principal due in annual installments of $1,395, with final payment due in 2020. The annual principal payment is forgivable per conditions of the loan agreement. 5,583 6,978

C-37 35 Lakewood Health System

Notes to Financial Statements

Note 10 Long-Term Debt (Continued)

2015 2014

Promissory note payable, principal due in annual installments of $25,000, with final payment made in 2015. $ - $ 25,000

Totals 36,752,031 38,258,022 Less - Current maturities 1,536,422 1,505,992

Long-term portion $ 35,215,609 $ 36,752,030

The bond indentures require the establishment of certain funds, which are unavailable for general corporate purposes, to be held in deposit. Required funds have been established and are shown as assets limited as to use in the accompanying balance sheets.

Scheduled principal payments on long-term debt, including current maturities, are summarized as follows at December 31, 2015:

2016 $ 1,536,422 2017 1,597,521 2018 1,664,314 2019 1,736,823 2020 1,808,669 Thereafter 28,408,282

Total long-term debt $ 36,752,031

C-38 36 Lakewood Health System

Notes to Financial Statements

Note 11 Capital Lease Obligations

The Organization uses certain equipment under lease agreements classified as capital leases. Capital lease obligations consisted of the following at December 31:

2015 2014

First American capital lease obligations at varying rates of imputed interest rates varying from 4.0248% to 6.4910%, with payments due in monthly installments through March 2016, collateralized by leased equipment. $ 6,904 $ 33,834

PNC Equipment capital lease obligation at an imputed interest rate of 5.47%, the obligation was paid in full in 2015. - 62,180

SHI International Corporation non-interest-bearing purchase agreement for capitalized assets, the obligation was paid in full in 2015. - 73,373

Totals 6,904 169,387 Less - Current portion 6,904 162,484

Long-term portion $ - $ 6,903

Minimum future payments under capital lease obligations at December 31, 2015, are as follows:

2016 - Total minimum lease payments $ 6,950 Amount representing interest 46

Present value of net minimum lease payments 6,904 Less - Current portion 6,904

Long-term obligations under capital leases $ -

C-39 37 Lakewood Health System

Notes to Financial Statements

Note 12 Temporarily Restricted Net Assets

Temporarily restricted net assets include assets set aside in accordance with donor restrictions as to time or use. Temporarily restricted net assets were available for the following purposes at December 31:

2015 2014

Community innovation grant $ 500,000 $ - Capital campaign 86,558 86,558 Physicians fund 98,318 105,898 Children and youth fund 83,016 74,177 Hospice fund 32,750 31,395 Aging gracefully fund 56,621 48,354 Women's health 69,349 31,316 Other equipment and health care services 107,918 36,888

Total temporarily restricted net assets $ 1,034,530 $ 414,586

C-40 38 Lakewood Health System

Notes to Financial Statements

Note 13 Patient Service Revenue, Net of Contractual Allowances and Discounts

Patient service revenue, net of contractual allowances and discounts, consisted of the following for the years ended December 31:

2015 2014

Gross patient service revenue: Hospital inpatient and outpatient $ 39,526,906 $ 38,429,153 Other professional services 68,732,266 71,745,005 Physician clinics 18,379,944 17,400,013 Senior services 14,390,010 13,587,770

Total gross patient service revenue 141,029,126 141,161,941 Less: Contractual allowances and discounts 49,295,967 42,802,205

Patient service revenue, net of contractual allowances and discounts $ 91,733,159 $ 98,359,736

Patient service revenue, net of contractual allowances and discounts (but before the provision for doubtful accounts), recognized from these major payer sources, was as follows for the years ended December 31:

2015 2014

Third-party payers $ 88,809,947 $ 92,124,962 Self-pay 2,923,212 6,234,774

Totals $ 91,733,159 $ 98,359,736

Medicare revenue as a percent of gross patient service revenue totaled 34.5% and 32.1% in 2015 and 2014, respectively. Medicaid revenue as a percent of gross patient service revenue totaled 17.4% and 12.5% in 2015 and 2014, respectively.

C-41 39 Lakewood Health System

Notes to Financial Statements

Note 14 Charity Care

Consistent with the mission of the Organization, care is provided to patients regardless of their ability to pay, including providing services to those persons who cannot afford health insurance because of inadequate resources or who are underinsured. Patients who meet certain criteria for charity care, generally based on federal poverty guidelines, are provided care without charge or at a reduced rate, as determined by qualifying criteria defined in the Organization's charity care policy and from applications completed by patients and their families.

The estimated cost of providing care to patients under the Organization's charity care policy was approximately $261,000 and $439,000 in 2015 and 2014, respectively.

In addition to the direct care provided to patients under the Organization’s charity care policy, the Organization provides health care services and other financial support through various programs that are designed, among other matters, to benefit the broader community. Benefits for the community include health screenings, community education through seminars and classes, and other health-related services.

Note 15 Retirement Plan

The Organization has a defined contribution retirement plan covering substantially all employees. The Organization can make a discretionary match of employee contributions up to a maximum contribution of 6% of the employee’s compensation and can make discretionary profit sharing contributions. The Organization made a 3% matching contribution in 2015 and a 6% matching contribution and a 4% profit sharing contribution in 2014. The Organization's retirement plan expense totaled approximately $788,500 and $2,447,000 in 2015 and 2014, respectively.

Note 16 Medical Service Agreement

The Organization has entered into a Medical Service Agreement with Lakewood Clinic, P.A. for the provision of physician and other professional medical services. The agreement expires in 2016. Physician fees for 2015 and 2014 were $9,289,755 and $10,092,832, respectively, and are included in other professional services in the accompanying statements of operations.

C-42 40 Lakewood Health System

Notes to Financial Statements

Note 17 Professional Liability Insurance

The Organization's professional liability insurance for claim losses of less than $1,000,000 per claim and $3,000,000 per year covers professional liability claims reported during a policy year (claims-made coverage). The professional liability insurance policy is renewable annually and has been renewed by the insurance carrier for the annual period extending through August 1, 2016.

In addition, the Organization maintains umbrella coverage for claims in excess of the professional liability limits to a maximum of $2,000,000 per occurrence and $2,000,000 per year.

Under a claims-made policy, the risk for claims and incidents not asserted within the policy period remains with the Organization. Although there exists the possibility of claims arising from services provided to patients through December 31, 2015, which have not yet been asserted, the Organization is unable to determine the ultimate cost, if any, of such possible claims, and accordingly no provisions have been made for them.

Note 18 Self-Funded Insurance

The Organization has a self-funded health care plan that provides medical and vision benefits to employees and their dependents. Employees share in the cost of health benefits. Health care expense is based on actual claims paid, reinsurance premiums, administration fees, and unpaid claims at year-end. The Organization buys reinsurance to cover catastrophic individual claims over $75,000.

Health care expense totaling approximately $5,731,000 and $7,030,000 for 2015 and 2014, respectively, is included in administrative services and employee benefits in the accompanying statements of operations. A liability of $1,250,000 and $945,000 for claims outstanding at December 31, 2015 and 2014, respectively, has been recorded in accrued liabilities in the accompanying balance sheets. Management believes this liability is sufficient to cover estimated unpaid claims, including claims incurred, but not yet reported.

C-43 41 Lakewood Health System

Notes to Financial Statements

Note 19 Functional Expenses

The Organization provides general health care services to residents within its geographic location. Expenses related to providing these services consisted of the following for the years ended December 31:

2015 2014

Health care services $ 71,518,821 $ 70,967,657 General and administrative 20,445,945 19,493,396

Total expenses $ 91,964,766 $ 90,461,053

Note 20 Concentration of Credit Risk

Financial instruments that potentially subject the Organization to possible credit risk consist principally of accounts receivable, cash deposits in excess of insured limits, and investments.

Accounts receivable consist of amounts due from patients, their insurers, or governmental agencies (primarily Medicare and Medicaid) for health care provided to patients. The majority of the Organization’s patients are from Staples, Minnesota, and the surrounding area.

The mix of receivables from patients and third-party payers was as follows at December 31:

2015 2014

Medicare 29.5 % 24.0 % Medicaid 5.8 % 7.2 % Other third-party payers 49.9 % 41.0 % Patients 14.8 % %27.8

Totals 100.0 % %100.0

C-44 42 Lakewood Health System

Notes to Financial Statements

Note 20 Concentration of Credit Risk (Continued)

The Organization maintains depository relationships with area financial institutions that are Federal Depository Insurance Corporation (FDIC) insured institutions. Depository accounts at these institutions are insured by the FDIC up to $250,000. At December 31, 2015, the Organization exceeded the insured limits by approximately $5,279,000. In addition, other investments held by financial institutions and investment companies are uninsured.

Note 21 Commitments and Contingencies

The Organization’s Board of Directors has approved the Organization's pursuit of a clinic expansion project totaling approximately $22,000,000. As of December 31, 2015, the Organization has contracts with firms associated with the design and financing of the project, but had not yet entered into construction contracts. The project is expected to be funded with interim financing during construction and upon completion with a United States Department of Agriculture loan.

Note 22 Reclassifications

Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 classifications.

C-45 43

[THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX D

FORECASTED FINANCIAL STATEMENTS OF LAKEWOOD HEALTH SYSTEM

[THIS PAGE INTENTIONALLY LEFT BLANK]

Lakewood Health System Staples, M innesota

Historical and Forecasted Financial Statements Years Ended December 31 , 2013 through 2015 (Historical) and Years Ending December 31 , 2016 through 2021 ( Forecasted)

D-1 Lakewood Health System

Historical and Forecasted Financial Statements Years Ended December 31, 2013 Th rough 2015 (Historical) a nd Years Ending December 31, 2016 Through 2021 (Forecasted)

Table of Contents

Independe nt Accountant's Re port...... 1

Ba lance Sheets ...... 3 Statements of Operations ...... 5 Statements of Changes in Net Assets ...... 6 Statements of Cash Flows ...... 7 Schedu le of Rat ios ...... 9 Su mma ry o f Significant Accounting Policies, Forecast Assum ptions, and Sensitivity Ana lyses ...... 1 0

Supplementary Information

Mission and Vision of Lakewood Health System ...... 101 Profile o f Lakewood Hea lth System and Its Opemtions ...... 102 Management of the Fac il ity ...... 102 Hospital Medica l Sta ff ...... 106 Competition ...... 108 Median Household Income ...... 109 Employers ...... 11 0

D-2 WIPFLL

Independent Accountant's Report

Board of Directors Lakewood Hea lth System Staples, Minnesota

We have examined the accompanying forecasted barance sheets of Lakewood Health System as of December 31, 2016 through 2021, and the related forecasted statements of operations, changes in net assets, and cash flows, and schedule of ratios for the years then ending. Lakewood Health System's management is responsib le for the forecasts. OUT responsibility is to express an opinion on the forecasts based on our examinations.

OUT examinations were conducted in accordance w ith attestation standards established by the American Institute of Certified Pu blic Accountants CAlePA) and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast. We beli eve that our examinations provide a reasonable basis for our opinion.

In our opinion, the accompanying forecasts are presented in conformity w ith gU idelines for presentation of a forecast establi shed by the AICPA, and the underlying assumptions provide a reasonable basis for management's forecasts. However, there wll i usually be differences between the forecasted and actual resu lts because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update th is report for events and circumstances occurring after the date of this report.

Assumptions which are pa rticularly sensitive and for which a variation in the assumption would have a significant effect on forecasted resu lts are presented on pages 92 through 100.

Management is responsible for the accompanying historica l financial statements of Lakewood Health System, which comprise the balance sheets as of December 31,2013 through 2015, and the related historica l statements of operations, changes in net assets, and cash flows, and schedule of ratios for the yea rs then ended in accordance with GMP. We have performed the compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA We did not audit or review the financia l statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

D-3 Management has elected to omit substantially all of the disclosures required by GAAP in the historical financial statements. If the omitted disclosures were included in the historical financial statements, they might influence the user's conclusion about Lakewood Health System's financial position, results of operations, and cash flows. Accordingly, these historical financial statements are not designed for those who are not informed about such matters.

Our examinations of the financial forecasts were made for the pu rpose of forming an opinion on whether the financial forecasts were presented in conformity w ith AICPA gUidelines for presentation of a fnancial i forecast and whether the underlying assumptions provide a reasonable basis for the forecasts. The supplementary information presented on pages 101 to 110 is presented for pu rposes of additiona l analysis and is not a requi red pa rt o f the financia l forecasts. Such information is the responsibility of management and has not been subjected to procedures applied in the examination of the financial forecasts and, accordingly, we express no opinion or any other form of assurance on it.

Wipfli LLP

Ju ly 20, 2016 Minneapoli s, M innesota

D-4 2 00 700 ,7 4, 3 51,900 150,600 442,300 913,100 1,035,(1();) 1.879,700 2,089,300 1,41 4, 3,203,600 5,756,500 =, 48,815 2 54,683,400 15,154,900 11Q670,300 S , 100 4, "',oro 428,300 449,700 "",,= 37 990,000 365,200 ",",,= , ,443,200 1,797,800 2,028,400 1, ~ 47 14,752,000 23 56,926,400 111,306,800 S , 200 000 900 900 , , , , ",,900 407 719 "",000 015 046,500 327 860,700 &0,= &0,= &0,= , , 1, 1,969,300 1, 1,317,500 3,197,200 3,200,400 5,317,600 5,572.000 ~" 46 22,690,700 14,438,200 59 112,009,500 S , _ted ee 400 000 000 For , , , "'= 087,500 644 96; 566 &0"", "''= "'- ""1m , , 1, 3,194,000 5,138,400 ~" 45 22,490,700 14,004,700 61 113,003,900 S , 100 200 000 900 600 , , , , 7, 46,100 134 "",000 92 370 666 571 811,300 &0,= , , 1, 1, 3,1<;Q,800 ~n 45 21,856,900 13,696,600 11,143,100 56 114,432,300 S , 100 400 400 9OO 300 , , , , , (Forecasted) ,",,000 YJ 481 278 7 787,700 431,400 352 &0,= 1,602,100 1, 1,856,200 1,911,900 1, ~" 42. 44,116 25,098,800 2O,501,f:IXJ 13,218,400 113,IYJ,9OO 2021 S , 100 100 000 600 800 , , , , Through 402 260,3I:Xl = , 998 662 , 1,749,6O:l 1, 7/:1)6,600 1,143,900 1,184,900 1,227,400 1,271,600 4372,600 4184,500 4187,600 ~" 44016 2&245,000 91,429,400 39 2016 , S , 31 000 000 900 000 300 , , , , ",,= ",,= 472,100 429,200 = , %6 533 512 534 , , 1,777,700 1, 7,022,600 1,079,800 3,182,700 ~" 44 18,126,400 13,453,200 92,148,700 39 HIstorical December S , and 400 "" 9(1) 800 , , , , 38,= 455 290 372,800 717 9381m 394,100 991 690,700 735,700 764,800 562,000 , , 1, 1,587,700 4,103,200 1,019,300 8,789,0::0 ~" 49 27 13,630,100 82,570,700 System S , (Historical) ' ..... 2015 f""09" required 9: U nl es tr e ot l Health In ffi o ornoun" Mid i"'uronce Through of . er life s UM relmbu,....,m oth f of - Ne t A$ui, ..e e u ont - Net 2013 ..e .... ond u to ...... "" es lo_" unconsolidoted equi,,~len'" to ti uipm ... l 31, Sheet in o. o. IhIrd-p"rty bi eq ,,,,,,,stmenu " urren o a " n x~no61...-.1 - Net n" deposl" e. sels e e ond nt ntl r>d Irnited from ..eo"" ... term ~ tori e e surrender - Irnited ... n nl nl ToIGloItlero Toloic ... ALASSETS P"'i 'e [).Je e r ",,-, curr Reoelveble P,..,poid Re

D-5 000 4 51,9CQ 787,500 ,594,700 1,035, 1,810,000 5,131,400 4 = , 59,053,500 51,616,800 43,545,400 110,670,300 $ $ 8,500 60,300 "','>00 6 762,700 7 377,000 387,300 "',000 "',000 559,100 ",",= ,841,100 1, 1,628,100 1,710,300 4 5;369,600 = 10,359,200 10,861,500 505 44, 49,979,100 48,192,000 60,338,300 111,306,800 $ , 5q,900 ,,",oro 738,700 "',000 4 ",",oro ,376,100 1,015,000 1,549,900 4 9,760J;IJO 6,119,600 50,552,.600 51,696.300 61, 50,018,100 50,434,000 51,082,300 112,009,500 $ , euted ... Fo ,500 ,600 75,200 47 716,800 "',000 4 14 4 359,400 "",= ,089,700 1, 1,665,000 1,712,000 4 4845,600 ~" ~" 5.l. 5Q.378,200 46,521,500 45,527.800 49,843,700 62,.685,700 113,063,900 $ , (Forecasted) '00 300 '" Analyses. 56,100 210,000 =,000 _,000 3~,000 404, 2021 1, 1» 1,6al,500 7,549,800 9,518,900 9,271,100 9,834,300 9,29;1,800 ~" 55,0~,100 47,48.),200 4 4 64,598,000 114,432,300 ivity $ $ Through 000 Sensit ~,= 210, "',000 .. 672,500 337,800 ,689,900 ,515,000 016 1,Qb8,4OQ 1,55lI,8Ul 1,335,500 7,980,500 8,679,700 8,231,500 ~ 55,966,200 47 4 48 64,645,9CQ and 2 113,160,9CQ $ $ 31, ons, i ,oro '0"'" "'000 12.:\600 722,.100 S63,.500 ",,,'00 1,~()()() 1,53q,4OQ 1,22&.300 1,034,500 3,001,400 3,500,700 3,795,700 8,731:\800 December ~" Assumpt 43,726,300 47,703,100 91,429,400 34,695;200 $ , nding E ,400 ,600 4 ',oro Forecast '>0,000 52,900 12 162,500 .. 4 14 4 322,700 674,300 841,000 812,300 S63,.500 ,217,800 1,5(16,000 1,536,400 2,686,200 2, ~ 10,869,900 Years 47,9YJ,900 43,803,200 46,668,600 44 92,148,700 HIstorical $ icies, l , and Po ng i System 38,200 128,700 169,400 =,000 ~,.500 845,000 ,""oro "',000 1;486,500 1,375,900 2,421,000 2,834,100 9,(f79,400 ~" 48,757,600 38,094,700 36,201,300 39,678,200 37,061,000 34,987,500 33,466,200 33,813,100 82,570,700 (Historical) ) $ Report. , 5 Account 01 2 nued i e<: i trust ie. progll."" urit Health lt ificant /, debt: nt m<1 of obI re i 8bi M>d ms "'8'0. 1 ts MId e l ., :! - Le l e, I " 8 ts .. 8n:1 i : ... i • i iti • • tie. tie" nu pt." on cio endent 31, Sheet li i lt .... ili restr>cted pil!!!'lu i li .,nq.lerm ,.,.t"" de CUllent COI,e mGtu, Llllhllltl l l li l 1 1l: 8bi o\<> o\<> 0\<> - wd""t st Indep t:> S i nt dent T T T T i e .. N" T,ad E><.lst HeGith Exist Ret Exist Ex New Inter Construct Compens..t ""., empor8r t8_tso o./err Lor.g D!!ft!,, Du Re. Un,estdcied Ao:ounls Acc,u T Current Ne Lonq.term TOTAL Cu" Lakewood December Balance See See

D-6 100 = ,COO , 4 5 75,1000 54 ",= 00,"'" 81,100 1m,we 401,COO 4 7 5n,<;()() "","", ""', ,084,100 1, 4 5,203,COO 2,08b,XlO 7/XP,COO (2.112,200) =, 13, 12,169,100 2o.62 44,467,1000 loa,3n,ffiO 1011,368,<;()() 106, 10&453,COO • • '00 700 ,600 4 12,600 15,900 29,300 ",'00 (84,200) 4 4 389,500 "'" 1,70=\200 1,573,500 1,522,100 5,120,100 2,026,100 3,965,9CQ 6,82B, ~" (2,Obl,100) 12,Il3Q,l00 11,711,300 03,57~OCO 20,17 l03.ml00 101,872,000 105,857,900 105,9112,100 • • 00 ,7 8,400 """" "'MO 174,400 37 432,700 ,.,..", (256,300) 1,967.600 1,653 1,620,.500 5,Qlll,OOO ~6S2,400 J,8<;Q.3OQ (2.010)300) 2019 12,.'IT7,(Xl) 11,271.000 19,734,700 42,685,400 99,433,100 101;4113,900 100.323,400 103,581,700 ~ • • ca.l '-' Fc: ,Il00 (Forecasted) 7 ",,= ",= ,","", 36 4S5,ffiO 373,100 503,<;()() 1,588,JoOO 1,605,aJO 1,111,<;00 ~,~...,,<>JV 5,099,OCIO 1,910,700 3.7'17."CO ~" (1,961,&>0) , 10,8ll8,COO 19.303,ffiO 4 98.822.3JO 96,8«:J,BOO l00,569,<;()() 100,658,200 2021 • • 00 '00 7 ,300 1,300 7 "oro ,."'" 031,100 ""oro 411 Through 511,200 "",'00 "'" 1,369, 1,855,500 1.319,300 4,969,300 3,707,000 6,237,200 6,400,700 2017 (1,913,500) 11,m3,(Xl) 18,880,300 10, 97,22~200 JoO,36.II,800 96.240,800 94,32 96,Q3.II,3OO Analyses. • • 2016 vity , i 31 100 f'IJ,700 31,200 51,700 »,= 128,1100 7 -,"", 291,<;()() (336,-'100) "~~",,",,, Sensit 1, 1,801,ffiO 1,329,aJO 1.311,<;()() 5,QII2,700 1,2f'IJ,700 ~063, 9,919,100 1I.931,3JO ~" (1.8'l7.COO) , lB,3n,ffiO ~212,700 93, 94,932,COO 91,281,400 3&8YI,OOO • • and December ons, "'" i ,~ 7 32,<;00 25,200 '" (7B,200) 12~<;()() 129,700 ""= /Yn.l00 ,7 (76t1JoOO) Ending 1,291,100 1 2~,XlO 4 5.684,COO 1,749,COO 2,738,1000 9,459,700 5,929,0CI0 ~" lGSM,OOG 17,792.1000 91.~<;()() 911,894,600 37,215,600 • • Assumpt Years ", and I" ",oro noro (17,600) 143,900 751,500 1103,200 332.100 "",oro ... 1,193,700 1,485.800 1,814,900 t 9,326,300 6, 9,97VOO 5, 11.491,100 (1,734.200) 13,~21~ 201-' 10,337,OCO 16,955.800 ~102,600 ~,79 97,836.800 90,621,600 92,156,200 34,12S,oco ll 10C\sq3,700 H Forecast • • "'" (Historical) icies, l 15,700 37,100 "', w.,= 355,COO 300,100 ,852,Il00 Po .305.too (1-'16,200) 1,123,1000 1.352,<;()() 1.607,<;()() 4 2,003,200 5,291,1000 1.307,OCIO 9,355,1000 5,021,COO ~" (3.2-'10,200) 12,223,~ 16,734,COO 91P92.ffiO 92,158,000 37,176,500 90,850,200 8 7 2015 ng i System • • 1 " Report. l Through "n dO,,",, bng 01 ''n •• •• . ), !lti ~ of nUll -N of "' 01 , .. Income ..... s ...... December ope, ' _se t; O\'e' ,.",... n\en""". li . i ,_nue, di oge ",oo ng ng ... Incom i doubtful i event ..... (upe ...... "", ..... _ from , n""dng ... on .. i ,!lt .. .. rvioo for n!!lf ,e/ ""d end .nt ,E!. ,"'4""''' ; ... ,e>oenue o'l'l expe : Ended bulion o on ope, l l l ", so:><.Jnl> d,,"on (boo) ... ndependent end ; rs i i (boo) es ...., ... I nt of ..- Summary i""""", on i .. pet .. n ." ." e t pej iW ", ToIo TctG Tolo ati .. N" £m~t.;;; Ut P,,,,,,," P P'oI Rent> R D..p, Fund-,!!Ising L".. 1_,flSti",,,,,,,,, 1_,fISt accounts SoIor Ott\e, Cont, G QIh Suppl ""dd j;\o"."". E>e, Lakewood See See Statement Years

D-7 6 6'>8.300 6'>8.300 "''' 51,61l\600 !O,968,5W $ $ 415,<;(1(1 415,m ~ 50,96f\500 !D,552,toJ $ $ 4)() , 174.1«) 174 ~" X1,552.600 !D,378,2Xl $ $ (Forecasted) 100 Fa-eel.ted . '"".100 '"" ~" X1,378,200 'R,8..."'t,X'J 2021 $ $ yses. l ,m ,m Through 319 Ana 1.319,.))() ~" 49,834,.);)Q ,+&515,00:;0 2016 vity $ $ , i 31 ,m ,m 1, Sensit .. 811 (500,000) (500,00:)) 1,311,<;QO ~ 48,515,000 4-7,703,1C'J and $ $ December ons, i 700 300 , , 1,300 Ending 4 mpt (51,0:.0) 485 6Z'1 6X1,000 ,700,100 u 2,865,300 3, ~" 47 '+'t,217,ew Ass Years $ $ 00 and OOO , ,7 ,000 1,500 7 4 67,700 l{;{J 4OtI .. , (136,60.) Forecast ~ 10,33 10 44,217/!i)O 33,813,1C'J HIstorical $ $ (Historical) icies, l 100 900 , , Po 37,200 ets (36,300) 113,000 112 nO 2015 1,607,900 1, ~" ss ng 33,813,100 32,C'?2,2C'J i System A nt $ $ u Report. Net OM Through i Acco in s operlll 2013 fo, , ~ i Health ficant 31 i ' '''' po,o, " Accountant's em Sign restrictiON "PO Change t e · Ne t fI \ftssets: In of nfI ) of ts from 1>; incom ng """" ... i s .... December eo nl o c,"d nn i ...... i t ""'" ea e~ ...... net beg er.d (d ,est, , on. '''WI'''''' i nel_ mmary ~ ~ ot i in cted d ..... i but Ended ts rosin;; i ndependent kted e · I Su se ... o ~=t:i

D-8 000 (2,100) ",= (81,90:) (00,90:) (21,-'100) 112,200 = , M8,= ,628,500 (100,100) 2, 5,2n,COO 5 ",91:0,200 "'" (2,515,100) • 7 100 , ,900) 1,:nJ " 36,200 "',000 (59,100) 415,<;00 55 5 (159,:nJ) 2,061 5,15'1,100 5,120,300 5, ",,, (2,37 • 4,.1\00 (2,200) (2,200) "7,000 (19,-'100) (20,-'100) (57,-'100) 1 7 370,000 (158,000) 5,075,000 2Pl0,6:lO ".8Ob,300 ",900,700 2019 (2,38'4,300) '" t • ecas or :nJ <;00 F ,aJO) , 57 "',= & (72,100) (55,700) (75,200) (78,000) (18,500) (Forecasted) 543 3 7" , ,"16,:nJ (l 1,961,500 5 5,115,eoo 1 201 (2,329,-'100) • 202 ,100) 6,000 0,-'1(0) (2,200) (2,200) 57 ",;00 (17,t:OO) (90,000) (54,100) 3 7 (1 1,913,500 1,J19,:no 5,932,700 ".613,-'100 ".872,-'100 11,985,300 2017 (2,391,900) Through 16 16 • 20 -'1(0) OOO , ',000 (I, 0,»0) ffi 31, (78,500) (52,500) (16,.eoo) 811,<;00 =,"", (156,-'100) (5Il),000) (812,.3QO) l,847.COO 5,073,-300 2016 13,179,600 19,6116,<;00 18,835,000 • ) December 00 300 7(0) 100 , ,"00) 7 ',oro (1."00) 7a200 2& ""'" ing (J2,OCO) 131,300 76t1400 (95",600) (162,600) '''''''''' 3,485 5,7111,300 "''' (1,3111,2 (&35 nd (11,8112, 05,55&200) E • Years ,100 7 17.6fYJ (13,200) (7aoCO) 18-",OCO .. (190,OCO) (88-",600) (5bJ.000) (141,BOO) toi on o>g operating omo,H n_ of ""or. at . .... r ty i ati bill bt in dfl.pco"'x I ope,o i •i • o nor-.:lng cosh equ on ; b ""., rec:er.obIe> d . for in iorg"'.n adi-J_ in in (\O)lr re/ ntor l l . by pai from ",,;ded . pr Olrl on .... Pr Deferr.d 0.... I Acco.Jnts Accrued Acco.Jnts T Other ...... (deere"..,) Ended fbYs _inn

D-9 200) 6:10) 600 , ,100 , , 4 8 (3 133,500 150 776,500 (9';Q,OOO) (762 1,488,100 4, ~" (1,752,6:10) (3,m,200) (3,000,000) 23,37 2 $ • • 100 4, (.1,200) """" """" (229,400) (229,500) (73&700) 1,539,5CO ~~ (I,OI~OOO) (J,OOQOOO) (3,099,100) 22.690,700 23,37 $ • • (3,200) "'''''' 200,000 (71~800) (965,000) (229,200) '-"''''' ~" (3,000,000) (1,681,800) (1,753,700) (3,09&900) 22~700 22.490,700 ... 1 .. $ • • 1'00-.., 6:10 700 , , (Forecasted) 133,500 490 631 858,'iQO ,175,000 ,385,000) , , (694,<100) (<;04,400) 1,095,0;00 4 6,705,&::lO ~" (3,880,100) 44 21 22 (10,716,200) (4 2021 $ • • • • • • XIO 200) 900 , , , ,&:10 ."'" yses. , l (3,200) (3,200) " 133,500 392,500) 357 8112,200 858 Through , , (210,000) (671 (881,200) 1, ~ (3,694,200) 13,568,000 21 20,501 Ana (17 $ • • • 2016 vity i 100) "" 31, ,900) 2,500) '. 4 (~900) (3, (35,000) 197,800 12&800 "'''''' 69 , , (690,400) ~" 1,750,100 7,77 3,372,800 Sensit (5.07~800) 17 4&625,000 2Q (1 (22,715,900) (27 $ $2Q501.6OO $ • and December 800) "" , ,700) '. ons, (1 29,100) 44 00,3d) i 7 504,600) 133,500 ,7 , ,753,600) (616,100) (162,5CO) 1, 4 3,3n,800 nding ~" (11 (4.2 (1 (1,667,100) 1&126,400 (1 E mpt u $ • • • Ass Years 100) '."" ,," 8ll,800 ""'" 12~400 .. 902,800) , ,7 , (311~300) and 1 I«I 9,337,400 8,789,000 , ~ (2,~600) (1,847,600) (2.620,700) (7,3111,100) (1 (2,24& 18 HI $ • • • Forecast 000 400) , 7, '."" (2.100) (Historical) icies, (78,200) 78 107.300 789 846,500 l ""- (8118,<100) 1,978,500 7, 5,036,500 3,752,500 8, ~" (11, (2.838,000) (2,322,900) (3,%9,100) (10,869,000) Po nued) 2015 • • • • ti ng i System nt u .. l (Con Report. . Through y&b : "t~ Acco ; p& .s . .. ""t .. .. equ"'''''''ts 2013 d<>bt ll not Flows g off adlvltl u,," ..... on Health debt; c i , ficant in ,, on 31, i to n""dnQ .. es; ... d for: vlt doted .... i bng-term ve l n) I in obl eq"';pment beonn Accountant's act;" ""~,, t.&d oo ..... ad nandng 0/ Sign Informllilon: Cash c g fi a\ aten<;t; lea"" nee mount .. (used of of <;tin ) on l low o.ono:>n a of nt f th and .... toy ts ",, .. ;.ets """"ing of "'lera in ,,,lera "' sale December In\oestr~ i /; .nort-t.e,m ...... ym lng copit.. lrom er in Wl"""'" in cash & endent property in ;;tl i . .. l Net e ",,,,, d debt p on /rom ().Jrln9 lrom 0/ from Irom (d poymen - 01 ge rep ... . . ts t nla debt mmary ~rO\'lded u ng ~>v.st nded "" ... i cosh &1 &1 Go'Ih ,n a but;"n st E i ...... ~&Id cho"9' ch .. nde k>ws Aows ...... I Su ncipal i co<;/, co h E>ci l. m. N d and i"", N"t Pr Distr Pro:eed Pure N" t Pro:eed PIo",,, PIoymen Interest h h

D-10 ::: - !>

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D-11 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview

Operations

Lakewood Health System (the ~O rgan i zat i on~) is a nonstock, nonprofit corporation located in Staples, Minnesota. The Organizat ion provides the following health care services to residents of Staples and the surrounding area of centra l M innesota:

Hospital - The Organizat ion operates a 2S-bed critical access hospital providing inpatient, outpatient, emergency, and other specialty hea lth ca re services, including a 10-bed behavioral hea lth unit in Staples, t-1. innesota.

Senior Services -The O rganization operates a l00-bed, Medicare-certified skilled nursing facility in Staples, M innesota, which provides long-term and rehabilitative care to residents. In addition to ski lled nursing ca re, the O rganization also operates home health care and hospice programs to provide nursing ca re and ass istance at the patient's residence. Assisted living and independent liv ing facilities, located in Staples, M innesota, provide combinations of health-related and supportive services for tenants.

Clinics -The Organization operates primary and specialty care clinics located in Staples, Motley, Pi ll ager, Eag le Bend, and Browerville, M innesota. It also operates a dermatology cl inic in Sartell, Minnesota. Physicians and advanced practice clinicians provide cl inic patients w ith prima ry care and other hea lth ca re services.

Foundation - The O rganization's foundation provides financial support fo r hea lth ca re services, community education, and preventative health care programs.

History

The hospita l began as a 24-bed facility owned and operated by the City of Staples in 1936. The hospital was expanded to 40-beds in 1957 and was operated as such by the city until 1973. In 1973, followinq an election by various townships and cities to form a hospital district, United Hospital District, consistinq of 10 townships and 2 cities, (the UDistrict") was formed for the purposes of expanding Board representation and providing financial support for health care services in the Staples/Motley area.

D-12 10 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview (Continued)

History (Continued)

Since Minnesota statutes allowed a hospital district to have more flexibili ty in secu ring debt and owning rea l estate and to have fewer operating restrictions than a city owned facility, operations and ownersh ip of the hospital were transferred to the District. In 1977, after having acquired the tv'lary Rondorf Nu rsing Home, a new hospita l and nursing home was constructed by the Dsl:r i ict on Pra irie Avenue in Staples, Minnesota and was operated under the name of the G reater Staples Hospita l and Care Center.

In the 1990's, it was projected that payment systems across the country would be changed to a capitated doll ar system in whic h a set dollar amount would have to be div ided between hospitals, clinics, and other hea lth ca re providers. In response to this proposed change, insu rance companies and la rger health systems began buying cl inics to contro l the dollars in providing hea lthca re services. In 1995, a proposal was made by the Dst i rict to purchase the practice of Lakewood Clinic, PA

In 1996, the O rganization was incorporated as a Mnnesota i nonprofit corporation, for the purposes of assuming operation, management, administration, and maintenance of the District's hea lthcare facilities. In June 1996, Affili ation and Lease Agreements were approved by t he Dst i rict and the O rganization. Included in the Affiliation Agreement was a requi rement for an Asset PUrchclse Agreement with Lakewood Clinic P.A, under whic h the O rganization acquired su bstantia lly all assets of Lakewood C li nic PA and a Medical Services Agreement, under which the Organization would purchase physician and other professional services from Lakewood Clinic P.A. Under the Lease Agreement and subsequent amendments, the O r ~ l anization pays all operating costs of the District's facilities. In li eu of making lease payments to the District, the Organizat ion pays all of the debt service on notes payable, assessments, and bonds payable that are secu red by the District's facilities o r taxing power of the District. On Ma rch 1, 1997, the O rganization began operating the cl inics and Dist rict's facilities.

D-13 11 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview (Continued)

Service Area

The city of Staples has a population of approximately 3,000 and is located in central Minnesota in Todd and Wadena Counties, approximately 140 miles northwest of Minneapolis, Minnesota.

Competition

The O rganization has two competing hospita ls in Todd and Wadena Counties. Tri-County Healthcare is located 19 mil es to t:he west, and CentraCare - Long Pra irie is located 27 miles to the south. 51. Joseph's, located in Brainerd, Minnesota, is a arger l tertiary care hospita l located 26 miles to the eclst of the Organization .

Facilities and Serv ices

The Organization is the operational entity of United Hospital District. The Organization is a hospital and clinic system based out of Staples, Minnesota. The Organization consists of a hospital and main clinic located in Staples, Minnesota, and five clinics located around the community. This preliminary feasibility report includes an addition to the hospital and clinic in Staples and an expansion to the Pillager Clinic. The hospital i s located one mile east of Staples on Highway 10. The Pillager Clinic is located on Highway 210 on the north edge of Pillager. The Organization serves the needs of the four county area, including Todd, Wadena, Cass, and Morrison, and serves a population of 35,000 family members plus the vacation populcltion on the west side of the Brainerd Lakes Regions. Fifty-eight percent of the Organization's patients are Medicaid/Medicare recipients.

The current facil ities were both bu il t in 2004 through 2006 and have successfully se rved the community. With changes in healthca re delivery, the Organization has been positioning itself to be ready to meet the demands of new healthcare delivery models including Medical Home and an Accountable Ca re O rganization (ACO). The primary focus of hea lthcare reform is to increase the role of primary care in the community, to reduce the costs of providing healthcare, and to more effectively coordinate the ca re to improve the qua lity and service to the community.

D-14 12 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview (Continued)

Facilities and Services (Continued)

Both faci li ties are in good physical condition yet do not have adequate space to meet the demands of the communities they serve. The hospita l sits on a 60-acre pa rcel, of which 40 acres are avail able for expansion. The Pi llager C li nic sts i on a pa rcel of 3 .25 acres in a commercial development.

Facility Expansion Plan

As a resu lt o f theOrgan ization's focus on primary ca re, 57 physicians, specialists, and advanced practice cl inicians have been added to the O rganization's staff since 2004. This increase in p rimary and specialty care has resu lted in a need to increase clinical space both in Staples and Pillager. The O rganization has also seen growth i n emergency services leading to a need to expand emergency and urgent care service offerings. Emergency services have grown from 4,500 in 2004 to 8,000 v isits per year, today. The proposed project includes:

• Clinical expansion to cl inic located on the campus. • Emergency ca re expansion space to the hospita l. • Completion of an in-house fixed MRI su ite. • Clinical expansion to the clinic ocated l in Pllage i r.

The proposed addition to the hospita l i n Staples includes:

• A 27,275 square foot clinical addition to the south side of the existing clinic plus some remodeling to the e;.:;isting cl inic. • A 3,570 square foot addition adjacent to the existing emergency department to accommodate emergency ca re growth and enhanced diagnostics including internal MR I. • Assoc iated parking to support the growth.

D-15 13 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview (Continued)

Facility Ex pansion Plan (Continued)

The proposed addition to the Pi lia'ger Cli nic ncludes: i

• 8,320 square foot of cl inical expansion plus remodeling to the existing clinic to accommodate the expansion. • Assoc iated parki ng to support the growth.

Community Impact

The O rganization is an independent, integrated rura l healthcare system. Founded in 1936 and located in the c ity of Staples, it is a recognized leader in providing innovative, patient• based care including women's specialty services, senior services, surgical, and outreach care.

The Organization has dedicated Cdre management staff members w ho focus on a proactive approach to proViding care to ultimately improve the health and life of the people they serve. The quality of patients' care is their number one priority. From physical, to emotional, to spiritua l care, they are prepared to gUide you through even the smallest of health care changes.

Hospitals vary widely in the services they offer and, therefore, in the departments they have. The Organization has acute services such as inpatient care, outpatient care, swing beds, transitional care, and respite care, along with a Level III trauma center, surgery, radiology, laboratory, pharmacy, rehabilitation service, inpatient and outpatient psychiatric care, intensive care, obstetrics, cancer care, and newborn care, along with on-site specia lists to provide care for patients.

The O rganization has six clinics to meet a wde i variety of patients' medical needs. The cl inics have approximately 30 dedicated fam ily medic ine medical staff members rotate among the cl inics, along w ith numerous other specialty and v isiting special ists.

The O rganization has supporting IJnits on the nonmedical side including medica l records, patient financial services, faci lities management, ma intenance, nutrition and dining services departments.

D-16 14 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 1 Overview (Continued)

Community Impact (Continued)

Completed in 2006, the state-of-the-art main campus faci lity ta kes the patient's psycho logical needs into account, such as provid ing more fresh air, better views, quiet space, and more p leasant color schemes.

A transformation in ca re has taken place at the O rganization through the adoption of a medica l home model that appli es 21 st century technology to o ld-fash ioned, personalized medica l care. Th rough the implementation of the medical home, the O rganization has taken on an advocacy role, both in the state of M innesota and nationally.

The proposed additions to the hospita l and cl inics w ill beneficially impact the community in a variety of ways, both short- and long-term. The following are some of the key community impacts:

• ProViding construction jobs within the community during the construction process of the hospital and cl inics. • Increasing the capacity of clinica l services, both primary care and specialty within the hospital and clinics. Th is w ill increase access for patients and the community. • Expanding access for emergency care for those patients needing immediate care in t he community. • ProViding a greater breadth of diagnostic services for the community including fixed MRI services. • Increasing the amount of parking available to patients and families within the community to access both the hospital and clinics.

Forecasted Financial Statement Presentation

The O rganization follows accounting standards conta ined in the Financial Accounting Standa rds Boa rd (FASB) Accounting Standa rds Codification CASC). The ASC is the single source of authoritative account i n~1 principles generally accepted in the United States (GMP) to be applied to nongovernmental entities in the prepa ration of financial statements in conformity w ith GMP.

D-17 15 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies

Use of Estimates in Preparation of Forecasted Financial Statements

The preparation of the accompanying forecasted financia l statements in conformity with GMP requi res management to milke estimates and assumptions that directly affed the reported amounts of assets and li abilities and d isc losure of contingent assets and liabilities at the date of the forecasted financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

Cash and Cash EqUivalents

The Organization considers all highly iqu l id debt instruments w ith an origina l maturity of th ree months or less to be cash equivalents, excluding amounts whose use is limited or rest ricted.

Accounts Receivables and Credit :Policy

Accounts receivable are uncollaterali zed patient obligations that are stated at the amount management expects to collect from outstanding balances. These obligations are primarily from local residents, most of whom are insu red under third-party payor agreements. The O rganization bills t hird-pa rty payors on the patients' behalf, or if a patient is uninsured, the patient is billed directly. Once claims are settled w ith the primary payor, any secondary insurance is billed, and patients are billed for copay and deductible amounts that are the pcltients' responsibility. Payments on accounts receivable are appli ed to the specific claim dent i ified on the remittance advice or statement.

The Organizat ion has a policy not to charge interest on past due accounts less than one yea r od. l

D-18 16 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Patient Receivables and Credit Policy

Accounts receivable a re recorded in t he accompanying forecasted balance sheets net of contractual adj ustments and an allowance for doubtful accounts, w hich reflects management's best estimate of the amounts that will not be collected. Management provides for contractual adjustments under terms of third-party reimbursement agreements through a reduction of gross revenue and a c redit to accounts receivable. In addition, management provides fo r probable uncollectible amounts, primarily for uninsu red patients and amounts patients are persona lly responsible for, th rough a reduction of gross revenue and a credit to the allowance for doubtful accounts.

In evaluating the collectab il ity of accounts receivable, the Organization analyzes past resu lts and identifies trends for each of ts i major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for doubtful accounts. Management regu larly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. Specifically, for receivables associated w ith se rvices provided to patients who have third-party coverage, the Organization ana lyzes contractually due amounts and provides an allowance for doubtful accounts and a p rovision for doubtful accounts for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet pa id or for payors w ho are known to be having financial difficu lties that make the rea lization of amounts due unlikely.

For accounts receiva ble associated with self-pay patients (which includes both patients w ithout insurance and patients with deductible and copayment balances due for which th ird-party coverage exists for part of the bill ), the Organizat ion records a sgn i ificant provision for doubtful accounts in the period of service on the basis o f its past experience, which indicates that many patients are unable o r unwilling to pay the portion of thei r bill for which they are financia lly responsible. The d ifference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is cha rged off against the allowance for doubtful accounts.

D-19 17 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Inventories

Inventories consist of supplies and durab le medical equipment and are va lued at the lower of cost, determined on the first- in, first-out ( FI FO) method, o r market.

Assets limited as to Use

Assets limited as to use are measured at fa ir va lue in the accompanying forecasted ba lance sheets, except for certificcltes of deposit, w hich a re carried at cost plus accrued interest. Assets limited as to use include a construction fund, assets designated by the Board of Directors for future capitel l improvements, over which the Board retains control and may at its discretion subsequently use for other purposes, assets set aside under terms of a bond trust indenture agreement for principa l and interest payments, a workers' compensation reserve fund, and assets held to fund specific board and donor designations. Amounts required to meet current liabili ties of the Organization have been classified as current assets.

Investments and Investment Income

Investments, other than investments in unconsolidated affiliates, are measured at fa ir value in the accompanying forecasted balance sheets. Fair va lue represents the quoted ma rket values of the underlying investments on the last business day of the fisca l year, including current income and investment expenses.

Investment income or loss ( including rea lized ga ins and losses on investments, interest, and dividends) is reported as other income and is included in the excess of revenue over expenses (operating indicator) unless the income or loss is restricted by donor or law. Unrealized ga ins and losses on investments are excluded from the operating indicator unless the investments are trading securities. Rea lized gains or losses are determined by specific identification.

The Organizat ion monitors the d ifference between the cost and fair value of its investments. If nvestments i experience a decline in va lue that the Organization determines is other than temporary, the Organization records a rea lized loss in investment income.

D-20 18 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment acquisitions are recorded at cost Of, if donated, at fair va lue at the date of donation. Depreciation is provided over the estimated usefu l life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the stra ight-li ne method over the shorter period of the lease term or the estimated useful li fe of the equipment. Such amortizat ion is included with depreciation and amortization expense in the accompanying forecasted financial statements. Est imated useful lives range from 5 to 15 years for movable equipment and from 10 to 40 years for land improvements, leasehold improvements, buil dings, and fixed equipment.

The Organizat ion capita lizes interest costs on restricted tax-exempt borrowings, less any interest earned on temporary investment of the proceeds of those borrowings, from the date of the borrowing until the specified qualifying assets acquired w ith those borrowings are ready for their ntended i use. For major capital additions that require a period of time to get them ready for their intended use but are not acquired with a specific tax-exempt borrowing, the O rganization capita lizes an allocation of interest cost incurred during the period required to complete the asset.

G ifts of long-lived assets such as land, bu ild ings, o r equipment are reported as unrestricted support and are excluded from the excess of revenue over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gfts i of long• lived assets w ith explicit restrictions that specify how the assets are to be used and g ifts of cash or other assets that must be Llsed to acquire long-lived assets are reported as rest ricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirat ions of donor restrictions are reported when the donated or acquired long-lived assets are placed in se rvice.

D-21 19 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Asset Impairment

The Organization evaluates its lonl;J-lived assets, which consists primarily o f property and equipment with finite useful lives, for impairment w henever events or changes in c ircumstance indicate that the carrying va lue may not be recoverable. Carrying va lue of the long-lived assets is compared to the estimated futu re undiscounted cash flows expected to result from the use of the assets, including cash flows from d isposition. Should the sum of the expected fu.ture cash flows be less than the carrying value, the

Organization would recognize an impa irment 1055 at that time. No impairment losses are recognized during the forecasted period.

Resident Deposits and Funds Held in Trust

The Organization is the trustee of various resident funds and has a fiduciary responsibili ty for the adm inist ration and dist ribution of these funds for the residents. The O rganization also holds tenant secu rity deposits for residents of ts i assisted and independent liv ing facilities. These funds are on deposit in separate bank accounts and are reported as an asset and liabil ity on the accompanying forecasted balance sheets.

Cash Surrender Value of life Insurance

The Organizat ion is the owner and primary benefic iary of an individual life insurance policy. The face va lue of the life nsu i rance policy is approximately $250,000.

Investments in Unconsolidated Affiliates

The investments in unconsolidated affil iates are accounted for using the equity method.

Unamortized Debt Issue Costs

Costs related to issuance of long-term debt are amortized over the life of the related debt using the stra ig ht-line method. Amortization of deferred financing costs is included w ith interest expense in the accompanying forecasted statements of operations.

D-22 20 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Self-Funded Insurance

The Organization se lf-funds health benefits for eli g ible employees and their dependents. Health insurance expense is recorded on the accrual basis. An accrued li ab il ity, which estimates incurred but not yet reported claims, is recorded in the accompanying fo recasted balance sheets. The O rganization has stop-loss insurance to cover catastrophic claims.

Deferred Revenue

Deferred revenue consists of incentive payments the Organization received from the Medica re program for having demonstrated mean ingful use of electronic hea lth record (EHR) technology. Amounts expe.:::ted to be recogn ized in revenue w ithin one year have been reclassified to current liabil ities in the accompanying forecasted balance sheets.

Net Assets

Unrestricted net assets consist of investments and otherwise unrestricted amounts that are available for use in carrying out the mission of the O rganization and include those expendable resources, which have been designated for specia l use by the Organization's Boa rd of Directors. Temporarily restricted net assets are those whose use by the Organization has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Organization in perpetuity. The Organization has no perma nently restricted net assets.

Excess of Revenue Over Expenses

The accompanying forecasted statements of operations and statements of changes in net assets include the classification excess of revenue over expenses, which is considered the operating indicator. Changes in unrestricted net assets, which are excluded from the operating indicator consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfer of assets to and from affiliates for other than goods and services, and contributions of long-lived assets including assets acquired using contri butions, which by donor restriction were to be used for the purposes of acqu iring such assets.

D-23 21 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Patient Serv ice Rev enue

The Organization recognizes patient service revenue associated with services provided to patients w ho have third-party payor coverage on the basis o f contractual fates for the services rendered. Certain third-pa rty payor re imbursement agreements are subject to audit and retrospective adjustments. Retrospective adjustments are accrued on an estimated basis in the period the re lated services are rendered and adj usted in future periods as f inal settlements are determined.

The provision for contractual adjustments (that is t he diffe rence between established rates and expected thi rd-party payor payments) and discounts (that is the difference between established rates and the amount bill able) are recognized on the accrual basis. These amounts are deducted from gross patient se rvice revenue to determine patient service revenue (net of contractual allowi:lnces and discounts).

For uninsured patients who do not qualify for charity care, the Organization recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated, or provided by the Organization's uninsured patient policy). On the basis of historical experience, a sign ificant portion of the Organization's uninsured patients will be unable or unwilling to pay for the services provided. Thus, the Organization records a sgnificant i provision for doubtful accounts related to uninsured patients in the period the services are provided. The provision for doubtful accounts is based on historical loss experience and is deducted from patient service revenue (net of contractual allowances and discounts) to determine net patient service revenue, less provision for doubtful accounts.

D-24 22 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Charity Care

The Organization provides ca re to patients who meet certain criteria under its charity care policy w ithout charge or at amounts less than its established rates. The Organization ma intains records to identify the amount of charges forgone for services and supplies furnished under the charity care policy. Because the Organizat ion does not pu rsue collection of amounts determined to qualify as charity care, they are not reported as patient service revenue, net of contractua l allowances and d iscounts.

The estimated cost of provid ing charity care to patients under the Organizat ion's charity care policy is ca lculated by mu ltiply ing the O rganization's ratio of cost to g ross cha rges by the gross uncompensated cha rqes associated w ith providing the charity care.

C ontributions

Contributions are considered available for unrestricted use unless specifically restricted by the donor. Unconditional promises to g ive cash and other assets to the Organization are reported at fair value at the date the promise is received. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions upon which they depend are substantially met.

Contributions are reported as either temporarily or permanently restricted support if they are received w ith donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipu lated time restriction ends or purpose rest riction is accomplished, temporarily restricted net assets are reclass ified as unrestricted net assets and reported in the accompanying forecasted statements of operations as net assets re leased from restrictions. Donor-restricted contributions whose restrictions are met w ithin the same year as received are reported as unrestricted contributions.

O ther Operating Re venue

Other operating revenue consists o f g rant income, renta l income, equity in unconsolidated affiliates' earnings, ca feteria and vending proceeds, medical records, the 340b pha rmacy program, Medica re and Medicaid EH R incentive payments, and revenue from various other services.

D-25 23 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Other Operating Re venue (Continued)

The American Recovery and Reinvestment Act of 2009 CARRA) provides for incentive payments under the Medicare and Medicaid p rograms for certa in hospitals and physician practices that demonstrate mean ingful use of certified EHR technology. These provisions of ARRA, collectively referred to as the Hea lth Information Technology for Economic and Cl inical Health Act (the "HITECH Act"), are ntended i to promote the adoption and meaningful use of health information technology and quali fied EHR technology. The demonstration of meaningful use is based on meeting a series of objectives. Meeting the series of objectives in order to dernonstrate mean ingful use becomes progressively more st ringent as its implementation is phased in through stages as outlined by the Centers for Medica re and Medicaid Services (eMS).

The Organizat ion recognizes revenue for EHR incentive payments w hen there is reasonable assurance that the O rganization w ill meet the conditions of the program, primarily demonstrating meaningful use of certified EHR technology for the applicable period. Incentive payments from the Medicare EHR incentive program are recognized as revenue over the estimated useful lves i of the health information technology. Incentive payments from the Medicaid EHR incentive program are recognized as received.

Amounts recognized under the Medicare and Medicaid EHR incentive programs are based on quali fying costs expended for EHR technology and are subject to audit by fisca l intermediaries; accordingly, amounts recognized are subject to change. In addition, the Organizat ion's attestation of its compliance w ith the meaningful use criteria is subject to audit by the federa l government or its designee.

The Organizat ion incurs both capital expenditu res and operating expenses in connection w ith the implementation of its EH~1 initiative. The amount and timing of these expenditures does not directly correlate w ith the timing of the Organizat ion's receipt or recognition of the EHR incentive payments. No EHR incentive revenue is recorded in the accompanying forecasted statements of operations after 2016 due to amortizat ion of Medica re incentives ending in 2016 and Medica id EHR incentive payments ending in 2016.

D-26 24 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Inco me Ta xes

The Organization is a tax-exempt corporation as described in Section 501 (cX3) of the Internal Revenue Code (the "Code ") and is exempt from federal income taxes on related income pursuant to Section SOlea) of the Code. The O rganization is also exempt from state income tax on related income.

Unemployment Compensation

The Organizat ion has elected reimbursement financing under provisions of the Minnesota unemployment compensation laws. Unemployment cla ims are paid to the State of M innesota as incurred.

Advertising Costs

Advertising costs are expensed as incurred.

D-27 25 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Reimbursement Arrangements With Third-Party Payors

Hospital

The Organizat ion has agreements with third-party payors that proVide for reimbursement at amounts that va ry from its established rates. A summary of the basis of reimbursement w ith major third-party payors follows:

Medica re - The hospital is designated as a CAH. Under this designation, inpatient and outpatient hospital services are paid based on a cost-reimbursement methodology, w ith the exception of certain laboratory and mammography services, which are paid based on prospectively determined fee schedules.

Medica id - Inpatient se rvices rendered to Medicaid program beneficiaries are re imbursed at prospectively determined amounts per discharge. These rates vary according to a patient class ification system based on clinica l, dagnostic, i and other factors. Under the CAH designation, outpatient hospita l services rendered to Medica id p rogram beneficiaries are pa id based on a cost-reimbursement methodology.

Others - The Organizat ion has also entered into payment agreements with certa in commercial insurance carrrers, hea lth ma intenance organizations, and preferred provider organizations. The basis for payment to the Organizat ion under these agreements includes prospectively determined rates per discharge, discounts from established c harges, and prospectively determined da ily rates.

D-28 26 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Reimbursement Arrangements Wit:h Third-Party Payors (Continued)

Other Nonacute Serv ices

Physician and Professional Services - Certain physician and professional services rendered to Medicare and Medicaid beneficiaries qualify for reimbursement as Medica re-approved rura l health clinic services. Qualifying services are re imbursed based on a cost-reimbursement methodology. Under federal law, the ru ral hea lth cl inics are also entitled to receive a w raparound payment for the difference between the cost and the amount paid by Medicaid managed-care health plans. All other physician and professional services rendered to Medicare and Medica id beneficia ries are paid based on prospectively determined fee schedu les.

Nursing Home - Medica re ·· The Organization's reimbursement for Part A res idents under the Medicare progra m isbased on a prospectively based case-mix system.

Nursing Home - Medicaid imd Other - The Organization's re imbursement for Medica id residents is based on cost subject to certain limits, quality indicators, and resident's level of care under a contractual arrangement with the Minnesota Medica l Assistance prograrn under Title XIX of the Social Secu rity Act. Reimbu rsement is based on predetermined rates per resident day, which vary depending on the resident's evel l of care and type of services provided. By Minnesota statute, a skilled nursing facility may not charge its private-pay res idents in mu ltiple-occupancy rooms per diem rates in excess of the approved Medica id rates for sim ilar services. The O rganization has also entered into payment agreements w ith certa in commercial insurance carriers and hea lth ma intenance o rganizations.. The basis for payment to the Organization under these agreements includes prospectively based case-mix system and per diem rates based on the resident's level of ca re.

Behavio ral Health Unit - Medicare and Medicaid - The O rganization's re imbursement for patients in t he behavioral hea lth unit is based on prospectively determined rates. These rates vary according to a patient classification system based on clinica l, diagnostic, and other factors.

D-29 27 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 2 Significant Accounting Policies (Continued)

Reimbursement Arrangements Wit:h Third-Party Payors (Continued)

Other Nonacute Services (Continued)

Home Hea lth - Medicare and Medica id - Home hea lth services are reimbursed based on a predetermined fate per episode of care, which varies depending on the patient's level of care and types of services provided.

Accounting for Contractual Arran~,ements

The Organization is reimbursed for cost-reimbursable items at tentative rates, with final settlements determined after audit of the related annua l cost reports by the respective Medica re and Medicaid fiscal intermediaries. Estimated provisions to approximate the final expected settlements after review by the intermediaries are ncluded i in the accompanying forecasted financial statements.

Medicare and Medicaid Electronic: Hea lth Record Incentive Funding

The Organizat ion received EHR n::::ent i ive payments from the Medicare and Medicaid programs that are be ing recognized over the useful lfe i of related EH R assets. Defe rred revenue from the Medicare EHR incentive program is presented in the accompanying forecasted ba lance sheets. MediccHe EHR incentives are fu lly recognized as of December 31, 2016.

D-30 28 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions

This financial forecast presents, to the best of management's knowledge and belief, the Organization's expected financia l position, results of operations, and cash flows fo r the forecast period. The forecast reflects the judgment of the Organizat ion's management regarding the expected conditions and expected courses of action as of July 20, 2016, the date of this forecast.

This forecast has been prepa red in accordance w ith the following assumptions, which are those that management beli eves a re significant to the forecast. These assumptions are based on thei r judgment, and the ilssumptions may not be all-inclusive. Furthermore, even if the assumptions are significantly correct, there w ill usually be differences between the forecasted and actua l results because events and ci rcumstances frequently do not occur as expected, and those differences may be material.

Cash and Cash Equivalents and Shtort-Term Cash

Interest earnings on cash and cash equivalents and short-term cash are forecasted at 0.2196 of the beginning of year ba lances through 2019. With an expected rise in interest rates over time and management's. investment strategy, half of the cash balance is forecasted to earn 1.2596 interest in 2020 and 2021.

Short-Term Investments

Short-term investments are forecasted bnsed on historica l levels adjusted for cash flow needs and interest earnings of 0.1096 on the beginning of year balances.

Based on the above, short-term cash and investments are forecasted as follows at December 31:

2016 20 17 20 18 2019 20 20 2021

$ 3,187,600 $ 3,190,800 $ 3,194,000 $ 3,197,200 $ 3,200,400 $ 3,203,600

D-31 29 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Accounts Receiv able - Net

Historical days net patient service revenue, less provision for doubtfu l accounts in

accounts receivable based on internal records was 57 days as of December 31 f 2013, 51 days as of December 31 , 2014, and 114 days as of December 31, 2015. The increase in 2015 resu lted from an EHR conversion, causing delays in bill ing and collections, and is not expected to stay at this evel l going forwa rd. Days net revenue in accounts

receivable a re forecasted at 53 days as of December 31 f 2016 through 2021 .

Based on the above, accounts receivable - net is fo recasted as follows at December 31 :

201 6 2 017 201 8 2 0 19 2020 2 0 21

$ 13,218,400 $ 13,696,800 $ 14,064,700 $ 14,438,200 $ 14,752,000 $ 15, 154,900

Due from Third-Party Reimbursement Programs

Settlements from the Medica re and Medicaid programs have been forecasted assuming there will be diffe rences in reimbu rsement between interim rates and the final cost reports, and management has assumed these diffe rences will result in a receivable of $860,300 as of Decembe r 31, 2016 through 2021 .

Accounts Receivable - Other

Other accounts receivable consist of receivables from the 340B program and other miscellaneous receivables. The 3LJ-OB program receivable is forecasted consistent w ith historic levels at 40.196 of 340B program revenue throughout the forecast period. Miscellaneous accounts receivable are orecasted f at historic evels l based on 2015 amounts. Based on the information above, other accounts receivable are fo recasted as follows at December 31 :

2016 2017 2018 2019 2020 2021

3408 Prog r~m $ 349.800 $ 352,000 $ 358,600 $ 360.700 "'t- AR 81# lO 81,600 81,600 81,600

Tot~ 1 other rec:eiv~b l es $ 433,600 $ 438,000 $ 440,200 $ 442,300

D-32 30 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Prepaid Expenses and O ther

Prepaid expenses and other, which incl udes prepaid insurance, are forecasted based on historica l levels increased 396 each year for inflation.

Based on the above, prepaid expenses and other a re orecasted f as follows at December 31:

2016 2017 2018 2 01 9 2 0 2 0 2021

$ 1,802,100 $ 1,856,200 $ 1,91 1,900 $ 1,969,300 $ 2,0 28,400 $ 2.089,300

Inventories

Inventories refled inventoried medical supplies and drugs. Historical days expense in inventories was approximately 93 days of suppli es expenses based on internal records as of December 31 , 2013, 82 days a~ , of December 31, 2014, and 75 days as of December 3 1, 2015. Days expense in inventories is fo recasted based on 75 days of medical suppli es and d rug expense as of December 3 1, 2016 through 2021.

Based on the above, inventories are fo recasted as follows a t December 31 :

2 01 6 2017 2 01 8 2 0 19 2020 2 0 21

$ 1,481 ,100 $ 1,571 ,900 $ 1,644,000 $ 1,719,200 $ 1,797,800 $ 1,879,700

D-33 31 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Assets limited as to Use

Assets limited as to use include a construction fund, assets designated by the Board of Directors for futu re capital improvements, over w hich the Boa rd retains control and may at its d iscretion subsequently use f or othe r pu rposes, a workers' compensation reserve fund, assets set as ide under terms of a bond trust indenture agreement for a debt service reserve fund, and assets held to fund donor designations. Amounts required to meet current liabili ties of the Organization have been classified as current assets.

Construction Fund

The Organization w ill be required to obtain temporary construction loan financing beginning November 2016, to fund the p roject. In December 2018, a USDA di rect loan w ill be issued to payoff the temporary construction loan and serve as long-term financing for the project.

Board-designated

Board designated funds include investments set aside by the Board of Directors for capital improvements.

Worke rs Compensation Fund

Worke rs Compensation Funds are designated to cover any claims the Organization may incur.

D-34 32 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Assets limited as to Use (Continued)

Trustee Held Funds

The Organizat ion is expected to fund one year's debt service for the 2018 USDA direct financing loan beginning January 2019 and will be funded over a ten year period. There are no earnings forecasted related to the funds held by the Trustee.

The debt service rese rve fund is to be used to fund any shortfalls in the Organization's ability to make related principa l and interest payments on the USDA Direct Financing Loan Program when due. The deb t service reserve fund is not forecasted to fund any shortfalls during the forecast period.

Held to Fund Donor Restricted Contributions

Funds are set aside as required to meet certain donor restricted contributions.

D-35 33 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Assets limited as to Use (Continued)

Interest earnings are forecasted at approximately 0.50% annually on the beginning of yea r balances.

Based on the above, assets lim ited as to use are forecasted as follows at December 31:

2016 2017 2018 201Q 2020 2021

Construction fund $ 20,331 ,200 $ 6,734,600 $ $ $ $

Bo

Held to fund restrided contributions 1,036,700 1,040,800 1,044,900 1,049,000 1,053,200 1,057,400

ToliIl ll,;set,; limded liS to use 26,377,200 12,809,200 6,1 03,400 6,332,600 6,562,000 6,791,500 less - Amount requ ired for current liabilities 1,278,400 1,666,100 965,000 1,015,000 990,000 1,035,000

As.sets limited liS to use - Less current portion $ 25,098,800 $ 11,143,100 $ 5,1 38,400 $ 5,317,600 $ 5,572,000 $ 5,756,500

D-36 34 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assu mptions (Continued)

Property and Equipment

The Organization is planning a construction project as described on pages 13 through 15. The project is forecasted to commence construction Novembe r 2016, w ith construction completed in April 2018. Operations of the renovated hospital and expanded clinic are forecasted to begin in May 2018. The project costs are forecasted as fo ll ows:

Land improvements $ 1,750,900 Bu ildings 18,038,200 Fixed equipment 820,000 Moveable e g upment i 1,573,400

Total $ 22,182,500

The construction will be financed through the USDA Community Facilities Direct Loan program in conjunction with an equity contribution from the Organization.

The Organization is also forecasting routine equipment additions of $3,000,000 to $4,000,000 annually from 2016 through 2021 . The O rganization's routine capita l additions, including capitalization of construction in progress related to other projects existing at December 31, 2015, are forecasted as follows:

2016 2017 2018 2019 2020 202 1

umd ;mproveme nt< 155,900 $ 1 55,900 116,900 116,900 116,900 11 6,900 Bu;lding< • 1,443,600 1,348,300 • 1,011,200 • 1,01 1,200 • 1,0 11 ,200 • 1,011,200 Fixed "'lu;pment 1,3 1 7,600 1,314,200 985,700 9B5,700 9B5,700 9B5,700 MOVNb." "'lu;pmenl 1,946,100 1,1 81,bOO BBb,200 886,200 886,200 B86,200 0' (863 200) Tol. l< • 4,000,000 $ 4,000,000 $ 3,000,000 , 3,000,000 , 3,000,000 $ 3,000,000

D-37 35 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assu mptions (Continued)

Property and Equipment (Continued)

The Organization's planned property and equipment additions relating to the bUil ding project are forecasted as foll ows at December 31 :

$ 2,142,200 $ 13,780,200 $(16,949,900) $ $ $ llmd j mp'~""t, 1,750,900 Buildi"'9' 19,065,600 Fixed equipment 820,000 Moveable equipme nt 1 573500

Total, $ $

The Organizat ion's total property

2016 2017 2018 2019 2020 2021

umd improvement< $ 155.900 $ 155,900 $ 1,867,800 $ 116,900 $ 116,900 $ 116,900 Building< 1/'143,600 1,34B,300 20.o76,BOO 1,011,200 1,011,200 1,011,200

Fi~ ~uipm " nt 1,317,600 1,314,200 1,B05.1OO 985.100 985.100 985,700 MovNlble ""uip m""t 1,946,100 1,181,600 2,459.100 886,200 886,200 MO.W<> 0' 1.279,000 13.]80,200 (16,949,900)

Tol.1 $ 6,142,200 $ 17.]80,200 $ 9,260,100 $ 3,000,000 $ 3,000,000 $ 3,000,000

Forecasted depreciation expense was computed fo r existing property and equipment and fo r property and equipment acquired o r constructed during the forecast period using the st raight-li ne method based on the lives of assets as described on page 19.

Based on the above, depreciation is forecasted as follows at December 31 :

2016 2017 2018 2019 2020 2021

l..!md improv","I'nt. $ 208,900 $ 199.]00 $ 244.400 $ 301,900 $ 309,000 $ 313,000 L.easehokl implOvemenis 33,200 30,000 Building, 816.]00 850,200 1,156,300 1.471,500 1,487,900 1,493,200 Fixed equip ment 1,535,000 1,619,600 1,774,900 1,848,700 1,937,400 2,045,100 Mov""bk. equipml'nt 2,448,900 2,269,800 1,924,200 1,418,900 1,385,800 1,391,700

Tot.1 $ 5,042,700 $ 4,969,300 $ 5,099,800 $ 5,041,000 $ 5,120,100 $ 5,243,000

D-38 36 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Property a nd Eq uipment (Continued)

Based on the above, property and equipment is forecasted as follows at December 31 :

2016 2017 2018 2019 2020 202 1

F iK~ . ,,,eh ~o, , 838,900 $ 838,900 , 838,900 • 838,900 , 838,900 $ 838,900 umd improvement" 3,634,500 3.790,400 5,658,200 5,775,100 5,8'/2,000 6,008,900

~~kl improvement, 165,100 165,100 165,100 165,100 165,100 165,100 Buildin!l' 31,426,800 32-/,63,100 52,624,400 53,516.700 54,405,500 55,290.900

F ~ equipment 30,373,300 3 1,400,900 32,911,200 33,592.700 34,265,300 34.'129,100 MovNlble """ipm"nl 27,586,900 28,005,300 29 ,678,300 29,754,300 29,806,700 29,835,600

Total property and ""luipm""t 94,025,500 %,863,700 121 ,876,100 123,642,800 125,373,500 127,068,500

Les, - Accumulated depreciation umd improvement' (2,050,900) (2,250,600) (2,495,000) (2,796,900) (3,105,900) (3,418,900)

~>ehold improvement, (135,000) (165,000) (165,000) (165,000) (165,000) (165,000) Building' (15,396,700) (16,134,900) (17,175,700) (18,528,300) (19,893,800) (21,261,200) Fixed equipm""t (1 4,6 28,300) (1 5,961,300) (17,440,800) (18,985,300) (20,609,600) (22,332,800) Mov.... ble ""luipment (20,868,000) (22,374,600) (23,512,100) (24,120,800) (24,672,800) (25,207,200)

Total IKcumulated depreciation (53,078,900) (56,886,400) (60,788,600) (64,596,300) (68,447,100) (72,385,100)

Net depreciated v alue 40,946,600 39,977,300 61 ,087,500 59,046,500 56,926,400 54,683,400

COll>truction in p r ~r"" 3,169,700 16,949,900

ProErtr and e<]uipm""t ~ '" , 44116300 $ 56 927 200 $ 61087500 $ 59 046500 $ 56926400 $ 54683400

Investments in Unconsolidated Affiliates

Investments in unconsolidated affil iates are included in the forecast at historical amounts, increased annually by 396 based all historica l trends.

D-39 37 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Other Assets

Cash su rrender value of life insurance policies are forecasted at historical levels nc i reased 596 each year. Resident deposits and funds held in trust are forecasted based on historica l levels, increased 396 each year for inflation.

New Debt

The Organizat ion w ill be required to obtain temporary construction financing in t he form of a Bond Anticipation Note (BAN). This wll i be in place beginning Novembe r 2016 and extend th rough December 2018. The BANs are forecasted to be $44,175,000, w hich includes a refinancing of the Se ries 2004 bonds in the amount of $21,770,000, and financing fees of $315,000. The O rganization will pay interest only on the BAN at a rate of 296. The remaining ba lance on the se ries 2004 bonds of $4,390,000, plus issuance costs of $60,000 w ill be refinanced with General Obligation Bonds (GO Bonds) in December 2016. The GO Bonds w ill be for a term of 18 years at interest rates ranging from 1.0696 to 3 .4096. Amortization of the GO Bonds w ill be annual principal and interest payments and are forecasted to begin December 2016.

The forecast includes the issuance of debt in the amount of $44,175,000 through a USDA Community Faci lities Direct Loan, which w ill be used to reti re the BANs that are for construction and refinancing of the Series 2004 Bonds.

The USDA Direct Loan w ill be for a term of 35 years at a fixed rate of 2.87596. Amortization of the loan will be annual principal and monthly interest payments and are forecasted to begin January 2019.

D-40 38 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumpt ions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

New Debt (Continued)

The fo llowing sc hedu le su mmarizes the fo recasted sou rce and use of funds related to the project: Source of fund. Bond Antic:ip

Gener~ 1 Obligation Bond<; 4,450,000 Equity Contribution 1,700,000

Tot.. 1 o;ource of fu rd; $ 50,325,000

Use of fund. Ref'I'k'l JlC e 2004 Bonds $ 26,1 60,000 Construction 21,557,900 Costs of ;';su,mce 690,400 Tot .. 1 interest accrued 1,916,700

Tot.. 1 use of funa; $ 50,325,000

Unamortized debt issu e costs represent $690,400 of costs associated w ith issuance of the new debt. Unamortized debt ssue i costs related to the new debt are amo rtized on a st raight-line basis over the li fe o f the debt beginning w ith principal payments in December 2016 fo r the General O bligation Bonds and in January 2019 fo r the USDA loan. Unamortized debt issue costs offset long-term debt on the ba lance sheets.

Based on the above, amortiza tion o f the unamo rtized debt ssue i costs included in nte i rest expense is forecast as fo llows for 2016 through 2021:

2016 2017 2018 2019 2020 2021

$ 300 $ 3,300 $ 3,300 $ 21,300 $ 21,300 $ 21,300

Based on the above, defe rred fi nancing fees on the n ew debt are forecasted as follows at December 31 :

2016 2017 20 18 2019 2 020 2021

$ 690,100 $ 686,800 $ 683,500 $ 662,200 $ 640,900 $ 6 19,600

D-41 39 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumption s, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Si gnifi cant Forecast Assu mptions (Continued)

New Debt (Continued)

Princi pa l pay ments on the new debt are fo recasted as fo llows for 2016 through 2021:

"''' "''' 201 8 20 1Q "'''' ''''' Bond Anh:: ip"tion Notes $ $ $ 44,175,000 $ $ $ USDA Direcll.o

Totals $ 35,000 $ 210,000 $ 44,385,000 $ 965,000 $ 1,01 5,000 $ 990.000

Based on the above, ba la nce of the new mortgage payable is forecasted as fo ll ows at December 31 :

"''' "''' 201 8 20 1Q "'''' ''''' Bond Anh::ip"tion Notes $".175,000 $ 44, 175,000 $ $ $ $ USDA Direcl l.o

Totals 48,590,000 48,380,000 48,1 70,000 47,205,000 46,IQ(),OOO 45,200,000 L= Current ITliIturities 210,000 210,000 965,000 1,01 5,000 990.000 1,035,000 less - Un ~ mortized debt issue cosh; 6Q(),I00 """.= ""'.= 662,200 MO.900 619,600

long-term portion $47689 900 $ 47483200 $ 46521 500 1> 45527800 1> 44 559 100 1> 43545400

The Organization capita lizes interest during the construction period on the fi nancing of major capital additions, The Ogan r ization's nterest i expense on the new debt nclud i ing capita lized interest on the new project is fo recasted as follows fo r 2016 through 2021 :

2016 2017 20 18 20 19 20 20 2021

Bond Anticip~tion Not.,,; $ 154,500 $ 883,100 $ 883,500 $ $ $ USDA Direct LO

lolllis 173,400 990,700 988,700 1,363,1 00 1,339,300 1,311 ,800

L.,,;s - Amou nt c~p;u,l ized 69,400 416,300 138,800

lot~ls $ 104,000 $ 574,400 $ 849,900 $ 1,363,1 00 $ 1,339,300 $ 1,311 ,800

D-42 40 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumpt ions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Existing Debt

Existing debt consists of:

• 3.528296 Medical Facili ties Gross Revenue Notes, Series 2003A, principal and interest are due in monthly installments of $29,736 through September 2023.

• 4.6596 Medical Faci lities G ross Revenue Notes - Series 20038, principal and interest are due in monthly installments of $3,952 through September 2023.

• 4.596 General O bli gation Health Care Facility Bonds, Series 2004, interest due semiannually, principa l payments are due in annual insta ll ments, serial bonds of $885,000 due in 2016. Series 2004 Bonds will be refinanced du ring 2016.

• 2.90% Medical Facil ities Revenue Note - Series 2013A, principal and interest are due in monthly nsta i ll ments of $12,144 through Ju ly 2029.

• 2.90% Medical Facilities Revenue Note - Series 2013B, principal and interest are due in monthly nsta i ll ments of $32,847 through April 2033.

• Note payable, principal due in annual installments of $1,395, w ith final payment due in 2020. T he annual principal payment is forgiva ble per conditions of the loan agreement.

• Capita l lease obligation due in monthly nsta i ll ments th rough December 2016.

Unamortized debt issue costs represent $520,400 as of December 31, 2015 of costs associated with issuance of the existing debt. Unamortized debt issue costs are amortized on a stra ight-line basis over the life of the related debt. A loss on refinancing of ong-term l debt is forecasted in the amount of $338,400 in 2016. Unamortized debt issue costs offset long-term debt on the ba lance sheets.

D-43 41 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Existing Debt (Continued)

Based on the above, amortization o f the deferred financing fees included in nte i rest expense is forecasted as fo ll ows for 2016 through 2021 :

2016 2017 2018 2019 2020 2021

$ 30,300 $ 12,700 $ 1 2,700 $ 12,700 $ 12,700 $ 1 2,700

Based on the above, defe rred financing fees on the exist ing debt a re orecasted f as follows at December 3 1:

2016 2017 2018 2019 2020 202 1

$ 151,700 $ 139,000 $ 126,300 $'13,600 $ 100,900 $ 88,200

Principal payments on the existing debt, w hich includes the retirement of the 2004 bonds, are fo recasted as fo ll ows for 2016 through 2021 :

2016 2017 2018 2019 2020 2021

$27,696,300 $ 672,600 $ 694,400 $ 716,800 $ 738,700 $ 762,800

Based on the above, existing debt is forecasted as follows at Decembe r 31 :

2016 2017 2018 2019 2020 2021

2003A $ 2,140,500 $ 1,854,600 $ 1,558,400 $ 1,251,600 $ 933,800 $ 604,600 2003B 252,800 219,000 184,000 147,800 1 10,300 71,400 2013A 1.535,000 1,432,400 1,326,800 1,218,100 1,1 06,200 991,000 2013B 5,123,200 4,874,300 4,618,100 4,354,400 4,082,QOO 3,803,400 Note plIYlIble 4,200 ,.eoo 1,400

l otllis 9,055,700 8,383,100 7,688,700 6,971,QOO 6,233,200 5,470,400

L~ Current ITl1Iturities 672,500 694,300 716,800 738,700 762,700 787,500 Le55 - Unllmortized debt issue costs 151,700 139,000 126,300 1 13,600 l 00,QOO 88,200

long-term portion $ 8,231,500 $ 7,549,800 $ 6,845,600 $ 6,1 19,600 $ 5,369,600 $ 4,594,700

D-44 42 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumption s, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Si gnifi cant Forecast Assu mptions (Continued)

Existing Debt (Continued)

Based on the above, interest expense on the existing debt is forecasted as fo llows for 2016 thmugh 202L

2<)" 2017 2018 2<)" 202Q 2021 2003A • 80,800 • 70,900 • 60,700 • 50,1 00 • 39,1 00 • 27,700 2003B 9,500 8,400 7,200 ',9110 4,600 3,300 2004 1,357,300 2013A 46,1 cro 43,200 40,1 00 37,000 33,800 30,600 2013B 152,400 145,300 138,000 130,400 122,700 114,700

lO\1I1 intere5t exeen5e • 1,646,100 • 267,800 • 246,000 • 223,400 • 200,200 • 176,300

Based on the above, interest expense re lated to all debt is forecasted as follows for 2016 th rough 2021 :

2016 2017 2018 20 19 2020 2021

Bond Anticipation Notes $ 154,500 883,100 $ 883,500 $ $ $ USDA Direct lO

Subtot"ls 1,850,100 1,274,500 1,250,700 1,620,500 1,573,500 1,522,100 Less - Amount "" pit"lized 69,400 416,300 138,800 Tot"ls $ 1,780)00 " 858,200 $ 1,111 ,900 $ 1,620,500 $ 1 ,573,500 $ 1,522,1 00

The revenue bonds payable agreements require maintenance of certain debt service coverage ratios and require compliance w ith various other restrictive covenants.

D-45 43 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Accounts Payable - Trade

Accounts payable - trade is forecasted, based on historica l i nformation, for December 31, 2013 through 2015, ranging from 15 to 26 days of total expenses excluding sa laries and wages, employee benefits, interest and depreciation. Accounts payable - trade is forecasted at 15 days of tota l expenses excluding sa laries and wages, employee benefits, interest, and depreciation and amortization as of Decembe r 31, 2016 through 2021.

Based on the above, accounts payable -trade is forecasted as follows at December 31:

2016 2 0 17 2018 2 01 9 2 0 2 0 2021

$ 1,554,800 $ 1,608,500 $ 1,665,000 $ 1,712,000 $ 1,760,300 $ 1,810,000

Accrued Payroll and Related liabHities

Accrued payroll and related liabilities incl ude accrued sa laries and wages and accrued pa id tme i off (PTO).

Accrued Sa lar ies and Wages

Accrued sa lar ies and wages incl ude sa laries and wages, payroll taxes, and other payroll • re lated liabili ties.

Accrued sa lar ies and wages are forecasted based on the historica l accrual average sa lary cost per day, adjusted for overall increases in sala ries and wages and the number of days of payroll outstanding at December 31 as follows:

2016 201 7 2018 2019 2020 2021

kcrued salaries, w~, a nd related liabilit ies per do, $ 165,900 $ 172,400 $ 177,600 $ 182,300 $ 186,100 $ 189,900

o..ys p"yroll outstanding at Clec:ember 31 7 8 9 10 12 13

D-46 44 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Accrued Payroll and Related liabi[ities (Continued)

Based on the information a bove, accrued salaries and wages are forecasted as foll ows a t December 31:

2016 2017 2018 2019 2020 2021

$ 1,161,300 $ 1,379,200 $ 1,598,400 $ 1,823,000 $ 2 ,233,200 $ 2,468,700

Accrued PTO

Accrued PTO is orecasted f based on historical accrued paid time off per fu ll -time eq uivalent ( FTE) increased by the change in wage ra te each year for inflation as follows at December 31:

2016 2017 2018 2019 2020 2021

FTC, 6684 669.4 669.7 670.1 670.4 670.7

Accrued PTO per FTE $ 3,500 $ 3,610 $ 3.720 $ 3,810 $ 3,890 $ 3,970

Based on the informa tion above, accrued PTO is forecasted as follows at December 31 :

2016 2017 2018 2019 2020 2021

$ 2,339,400 $ 2,416,500 $ ::::',49 1,300 $ 2,553,100 $ 2,607,900 $ 2,662,700

Based on the information above, accrued payroll and related liabilities are forecasted as follows at December 3 1:

2016 2017 2018 2019 2020 2021

Accrued 5"I" ries "nd

wog~ $ 1,161 ,300 $ 1,379,200 $ 1,598,400 $ 1,823,000 $ 2,233,200 $ 2,468.700 Accrued PTO 2,339,400 2,416,500 2,491,300 2,553,100 2,607,900 2,662.700

Tot,,1 "ccrued p"yroll "nd rel"ted li"bilities $ 3,500,700 $ 3.795,700 $ 4,089,7 00 $ 4,376,100 $ 4,841,1 00 $ 5,1 3 1,400

D-47 45 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Accrued Health Care Claims

The Organization maintains a se lf-funded health nsurance i ca re plan that provides medical and dental benefits to employees and their dependents. liabilities related to health care cla ims are forecasted using a hsto i rica l accrual per FTE, nc i reased 5% each yea r for inflation.

Based on the above, accrued health insurance cla ims a re forecasted as follows at December 31:

2016 2017 2018 2019 2020 2021

$ 1,335,500 $ 1,404,300 $ 1,475,200 $ 1,549,900 $ 1,628,100 $ 1,710,300

Accrued Pension Obligation

Discretionary pension obligation is included in the forecast and assumes the Organization has transferred payment to employees' accounts as of year-end, thus no liability accrual.

Other Accrued liabilities

Other accrued liabili ties are forecasted based on historical other accrued lia bilities as a percentage of Accounts Receiva ble - Net. Other accrued liabilities are as follows at December 31:

2016 2017 2018 201 9 2020 2021

$ 337,800 $ 350,000 $ 359,400 $ 368,900 $ 377,000 $ 387,300

D-48 46 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Constru ction and Equipment Paya ble

Construction and equipment payab le is forecasted, based on the construction draw schedule, as follows at December 31:

2016 2017 2018 20 19 2020 2021

$ 1,068,400 $ 1,456, 100 $ $ $ $

Re venue

The Organizat ion's patient service revenue is forecasted based on anticipated levels of revenue per patient day or unit of se rvice adjusted for changes in utili zat ion, pricing, and reimbursement.

An ana lysis was completed of the O rganization's market area, population trends, the effect of the construction project that will be completed April 2018 w ith the hospital and clinic expansions opening May 2018, and the impact of other anticipated operating changes. ncluded I in the forecast is the addition of a clinic physician's assistant as of October 2016. Also included in this forecast is a ca re coordination model the Organization implemented in 2016. This ncludes i wages and benefits for 9 .0 FTE navigators, 5.0 FTE schedulers, and 1.5 FTE LPNs, along w ith increases in ancillary departments associated w ith increases in clinic volume. Volume and reimbu rsement impacts are aso l included in the forecast. Data sources utilized within this report may refer to discharge or admiss ions. For the purpose of this report, admissions and discharges are used interchangeably. Based on this analysis, patient days, admiss ions, and significant ancillary departments were forecasted for the yea rs ending December 31, 2016 thmugh 2021.

D-49 47 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Service Area Definition and Patient Origin

The primary and secondary service areas were developed based on several factors, including:

• Geography and distance o f ZIPcodes and competitors in re lation to the Organization. • Hospita l patient orig in dsc i harge data, which was utili zed to study the historica l admiss ion pattern of patients in Staples and the surrounding ZIP codes.

The primary and secondary service areas are defined by the fo llowing ZIP codes:

ma ry Service Area

. Adri l ch • Motley

~ Browerville - Pillager

- Clarissi~ . S t.

- Eagle Bend

ndary Service Area

~ Bertha 'Alc7? - Sebeka

- Cushing

- Hewitt

D-50 48 Lakewood Health System

Summary of Sign ifi cant Accounting Policies, Forecast Assumpt ions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Service Area Definition and Patient Origin (Continued)

The following map shows the location of the O rganization and other area hospita ls as well as the primary service a rea (PSA) and secondary service area (SSA) .

, . J ' __ 00 , .. . ~ .::-}:, . ~.. ""'f T" w ood c."" ..

D-51 49 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Indepe nde nt Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Service Area Definitio n and Patient Origin (Continu ed)

The PSA has experienced fla t growth over the past six years. Many rural areas are decl ining in population, and as a resu lt, CAHs t hat are experiencing growth are rare. The SSA has experienced small decl ines in g rowth. The PSA and SSA population cha nges have been as foll ows:

50434 - Aldnch 50438 - Browerville 3,122" 3, 132 " 3,1 '1 "2 3,15 "1 3,16 "1 3,171 " Sb44O - 00,;,;", ' .00 . 1 .'~ 1,412 1/<19 1,425 1/.31 Sb446 - EJogIe Bend '.'" 1.'\30 1,428 1,425 1,423 1,421 OMM , ,,,,,,", 3,234 3,256 3,277 "m 50473 - PiL>ger 3,467 3.'~ 3,493 """ Sb47Q - St"pb "'" PS<

~Ar~ ( SSA) 50437 - Bertha '.'" 1/ ;41 '.= '.= 1,567 1,575 Sb443 - ClJSi1 ing '."'" 1;J57 '.'" '.'" 1,351 50453 - Hewitt .," .'" ''''" "'. 50477 - ~ 1:a ",'" z:m "" ","" ",'""" 1,7'""'11 - V" ,ndale .< "'''' """. s« 8,'173 8,470 8,'168 8,'165 8,'163

S. rvic. Ar ...

Source ESRI Business Information Solutio ns

D-52 50 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Service Area Definition and Patient Origin (Continued)

Popu lation g rowth scenarios were developed to provide sensitivity to volume estimates. ESRI six-yea r population growth estimates point to a small growth in population in the p rimary and secondary service areas. An increase of 1.1% is projected according to ESR I estimates as fo llows:

Service Are!! (PSA) 56434 Aldrich 0.0% 0.0% 56438 - Browerville 1.6% 1.3% 56440 ClIlrisslI 2.2% 1.5% 56446 - Ellgle Be nd -0.8% 0.1% 56466 Motley 3.3% 3.0% 56473 - Pilillger 1.9% 2.3% 56479 St<'lples -0.7% 0.1% PSA Tot(ll 1. 1% 1.496

56437 - Berth!! 2.7% 2.0% 56443 Cushing -0.5% 0.4% 56453 - Hewitt -0.8% 0.1% 56477 Sebek!! -1.7% -0.7% 56481 - Vernd!!le $SA Tot(ll -0.296

Source : ESRI Business Informat ion Solutions

D-53 51 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Service Area Definition and Patient Origin (Continued)

Under the medium scenario, which is util ized in the forecast, tota l service area population is anticipated to increase by 340 as follows:

56434 Aldrich 18 18 56438 Browerville 3,171 3,219 48 56440 ClorisSll 1,431 1,457 26 56446 E!lgle Bend 1,421 1,423 2 56466 Motley 3,342 3,462 120 56473 Pill!lger 3,533 3,631 98 56479 Sl1lples 7 p", 302

56437 Bertha 1,575 1,6 13 38 56443 Cushing 1,351 1,357 6 56453 Hewitt 848 849 56477 Sebekll 2,741 2,718 56481 - Verndille

I Service Area

Source: ESRI Business Information Solutions

D-54 52 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Service Area Definition and Patient Origin (Continued)

The PSA and SSA have an older population than state and national averages. The population g raphs reflect the 65+ categories for the PSA and SSA, both above the state and national averages. This resu lts in an expectation of higher utili zation of inpatient and outpatient services per 1,000 population; however, health ca re reform effo rts could counteract this expected increase. The util ization could continue to increase as the baby boomers continue to age in t he service area over the next six yea rs. Demographic information for the PSA and SSA compared to the state of M innesota and the entire nation is summarized below:

2015 Age Distribution -.,.

-•• j 1 ~ !, ". • -,,.

,~ ,. ~ ...... ,.

2020 Age Distribution -.,. - I ". ~ J ,,. •~ -,,.

,~ ,.

Source ESRI Business Informat ion Solut ions

D-55 53 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue

A combination of proven methodologies to forecast demand, patient utili zation, and overa ll volumes was util ized for the Organization.

Population Served - The first methodology in forecasting future demand is performing a detailed ma rket/demand analysis to establish a ·population served» for the Organization.

The population served represents d subset of the tota l service area population w ho are most likely to utilize the O rganization now and in the future. The following g raphic depicts the key data elements analyzed to establish the population served:

Geography served Service Area Population/Demographics

Historical trend Growth/expansion plans by program X Market Share Physician growth Unmet need/demand Competitive situation/activity

• Historical trend Allowance for + In-migration

POPULATION - SERVED

D-56 54 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpatient Bed Demand - The second methodology involves establish ing expected demand fo r inpatient services as d riven by the population served. Demand for inpatient services w ill be established based on histor ica l use rates, length of stay, and occupancy rates. The fo llowing methodology calculates the bed need by service:

Discharges per 1,000 Historical trend/market factors/program priorities • - Calculations x Technological advances Changes in standard of care • - Ass ..... pliotJs Experience in other settings

Historical trends Changes in standard of care x Adjusted to market factors Previous experience

D-57 55 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Andl/ary Services Demand - Demand for ancillary serv ices wll i be establi shed based on population served, historica l use rates (by modality), minutes per procedure, and throughput rates as fo ll ows:

Projections, Population Use Volumes of Diag nostic alld Treaunent Population Serv Rates = Service Volumes Service Are

~ Pr cedure length Room Minutes Requirements Tu naround time Pr jected room/equipment utilization Ho rs of operation III C Key Ancillary Rooms Needed

D-58 56 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Serv ice Re venue (Continued)

Service area use Tates in the PSA (lnd SSA have increased over the past three years. Increases were particularly significant in 2015. The historica l service area use Tates for the Organizat ion are higher in the PSA and lower in the SSA than the state. The hig her util izat ion li ke ly stems from a more elderly population in the PSA. Service area utilization Tates could rise over the next f ive years as the population continues to age. It is d ifficult to predict the impact that reform w ill have on inpatient use rates, if any. To the extent that inpatient use rates are elective, higher rates of insured w ill drive up inpatient use rates. However, the push to a mo:re managed health care system will likely drive use rates down. The historica l service area use rates for the O rganization's PSA and SSA compared to the state and region were as foll ows:

701 J 7014 701 S Discharges Per 1,000 Population LWHS Primary Service Area 103.5

Minnesota 103.7 100.5 Wisconsin 98.6 95.8 North Dakota 13 1.0 125.3

Inpatient utilization rates are forecasted in su bsequent ta bles w ithin the forecasted financial statements.

D-59 57 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re ve nue (Continued)

Historical market admissions were analyzed to develop market share for the Organization. The Organization's market sha re is summa rized below:

701 J 7014 7015

PSA Service Area Discharges 1,892 1,891 1 , SSA Service Area Discharges 816 734 T atal Service A rea Discharges 2,708 2,625

PSA LWHS Discharges 725 750 SSA LWHS Discharges 158 177 T atal Service A rea L WHS Disch;jrges 883 927

PSA LWHS Ma rketshare 38.396 39.796 41.896 SSA LWHS Marketshare 19.496 24.196 22.696

Tota l Service Area LWHS Markelshare 32.6% 35.3% 36.0%

Source: Minnesota Hospita l As5OCiation Market Data

D-60 58 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpa tient

Historical market data was analyzed to understand trends in the PSA and SSA. The O rganization's admissions from the PSA and SSA have increased from 2013 to 2015. The PSA market has rea lized an overall increase of 81 admissions and the SSA has real ized an increase o f 32. The O rg a nization is one o f the hospitals seeing an increase in adm issions over the last three years w hile t he majority of hospitals h ave ea r lized a decrease in admissions.

A sum mary o f historical inpatient admissions and market data is as foll ows:

Prlm .. ry ServIce Are.. La ke wood He .. lth Syste m 725 750 8" 99 Saint OO

Second .. ry ServIce Are .. La ke wood He .. lth Syste m 158 177 192 34 Saint OO

Tot .. 1 ServIce Are .. La ke wood He .. lth Syste m 883 9 27 1,016 133 Saint OO

D-61 59 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

Inpatient (Continued)

The fo llowing reflects the percentHge change of historical inpatient admissions and market data for the past three years as follows:

2013 2014 2015 Change l llkewood Heelth Syste m 38.3'16 39.796 41.896 3 .4'16 Saint Goud Hospital 23.896 23.696 22.696 -1.396 Essentill Health St Joe's -Br!linerd 12.996 12.496 12.0% -1.096 Ceotr<'lGHe Health -Long Pr<'l i rie 4 0% 4.0% 4.196 0.196 Tri-County Health - Wlldenll 2.0% 2. 196 1.9% {l.196 St G ll briel'5 - little Flltls 1.296 1.396 1.096 {l.196 All Others 17.796 16.996 16.796 -1.096 Totlll 10096 10096 10096

SecondlHY Service Arell l llkewood Heelth Syste m 19_4'16 24_1'16 22_6'16 3 _3'16 SlIint Goud Hospitlll 22.7'16 20_8'16 25_396 2_696 Essentill Health St Joe's -Brllinerd 7_896 7.296 7 _1 96 {l_8'16 CeotrllGHe Health - l ong Prllirie 0 .9% 1.1 96 0.596 {l.4'16 Tri-County Health - Wlldenll 23.4'16 23_6'16 20_696 -2_8'16 St G llbriel'5 - little Flllls 3_296 1.9% 3 _396 0 _1 96 All Others 22.796 21.396 20_696 -2_1'16 Totlll 100'16 100'16 100'16

Secondllry Service Arell lllkewood Heliith Syste m 32_6'16 35_3'16 36_0'16 3 _4'16 SlIint Goud Hospitlll 23.5'16 22_9'16 23.496 {l_1'16 Essentill Health St Joe's -Brllinerd 11 .496 11 _096 10.596 {l_9'16 CeotrllGHe Health - long Prllirie 3 _196 3 .296 3 _096 0 _096 Tri-County Health - Wlldenll 8.596 8 _1 96 7_596 {l_9'16 St G llbriel'5 - little Flliis 1.896 1.596 1.796 {l_1'16 All Others 19_296 18_196 17_996 -1.3'16 Totlll 100'16 100'16 100'16 Source M innesota Hospita l Associat ion

D-62 60 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpatient (Continued)

In-mig ration refers to admissions that come from outside the Organization's service area. In-mig ration has averaged approximately 3096 over the last three years. This is a high level of in-migration compared to most other rural hospitals and indicates the Organization is able to pull patients from a larger geography, in part due to the presence of satellite clinics in selected geographies. In-migration is typically difficult to impact or shift. The Organization's historica l in-migration is as follows:

2013 2014 2015

LWHS Total D i sch ar~les 1,305 1,315 LWHS Discharges fro m outside Se rvice Area 422 388

% of LWHS Dischllrges from

D-63 61 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Serv ice Re venue (Continued)

Inpatient (Continued)

The 2021 estimated population served was developed based on market share and population g rowth assumptions. The medium scenario, which is utilized in the forecast, anticipates slight population growth in the Organization's overall service area as described on pages 51 and 52, and PSA market share 196 above 2015 levels. Th is market share growth reflects anticipated growth in volume resulting from clinic expansion and increased capacity of services.

The Organization's forecasted "population served~ calculation is as follows:

LWHS P9I Mo.kt 9,...., (- ) W l WHSPS,\Pot>uI-'ion SeN....

Talai SSA PopuIoIion (X) LWHSS511 Mo,k/ 9,....,(- ) (8) LWHS SSA """"I-'ion SeN....

A-Toiol LWHS ServiceNe..1'o!>. SeN.... 0<) I".....;g...oon",""""""",(- ) (8) In-rnillAlion T otoI

(M8 ) Total lWHS Population s.~""

D-64 62 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Serv ice Re venue (Continued)

Inpatient (Continued)

Total inpatient admissions are expected to grow by 22 admissions over the next six years based on the medium scena rio, anticipating no market share g rowth. SWing-bed, transitional, and psych admissions are forecasted to remain flat over the forecast period. Only minimal growth is anticipated during the forecast period.

Low, medium, and high scenarios were developed to add sensitivity to forecasted

volumes and ~pressu r e test" facility capacity under moderately more aggressive (high) and moderately less aggressive ( low) scenarios. These scenarios refled varying levels of ma rket share capture, utilization, and growth. The medium scenario was utilized in the forecasted financial statements, since it is considered the most likely scenario to occur. The low and high scenarios are included for reference purposes only and are based on information found in the market demand ana lys is utilized for the forecasted financial statements.

The Organization's admissions assum ing no market sha re growth are forecasted as foll ows:

~~ /I.U7 IZ031 IZ·2, IZU, 12,447 12.517 "-'" ~, *, ,.. Po,>. s--./o\dm-.. _ I,. s--./ o\dm~_ ', . ~ o\dm -"~ ,IPfXJ 11'1.4 10'H 116•• 116.. 116.' 116 . 1153 116. . kdAdm'.. _ . .. Po,>. s--./ o\dm~_ ', . s--./o\dm--"_',

Note: 2013 through 2015 reflect historical information for the Organization. 2016 through 2021 reflects forecasted admissions for the Organization anticipating the construction completion of the proposed project and opening in April 2018

D-65 63 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Serv ice Re venue (Continued)

Inpatient (Conti nued)

The O rganization's incremental volume p rojections for admissions anticipating market sha re g rowth are fo recasted as fo ll ows:

Increment.. 1 Volume PrOjections (From Ma rke' Sha,,, Growth) 2013 2

0 _2. 0.2. 0 _2. 0_2. o.n · 0 .•• 0_2. '.n 0. 1. D.'. D.'. 0. 1. D. '. _0.4. D. '. 0_". o~ o~ o~ o~ o~ o~ o~ ,~ S. nrcJ {F,.,,,, Irf. rt.t SIt ... (;",1+11» U] 97_5 IUd 191..7 2#..' 00 295_ 0 791..0 , 0 0 " ", " " ,. " n " " Bed Ad "~'''n'

The O rganization's admissions anticipating incremental ma rket share g rowth are forecasted as follows:

8t,m.ted 2011

PI 2015 201b 2017 2018 2019 2020 low Med,um H, h

'""

", " ", ", '" '" '" '''' "" '" ""

D-66 64 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpatient (Continued)

Average length of stay (ALOS) for all patients is expected to remain steady. The ALOS is forecasted as follows:

Average Length of Stay

- MediSurg - leu - Obstetrics - SWing Transitional " • 'U - • • " .2 11 .2 • / ,(, •• •• •• ...... •• ...... " " .. .. L .. .. ,.. • .. -." • " •" " " " "

" ...... " ...... =, = 1 =, . . '-- -.. - Note: 2013 through 2015 reflect historical information for the Organization 2016 through 2021 reflect forecasted ALOS for the O rganization

D-67 65 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re ve nue (Continued)

Inpatient (Continued)

Patient days are est imated to grow by 184 under the medium scenario from 2015 to 2021. Days increase more significantly under the high scenario due to the combined impact of g rowth in population, m;)rket share, util ization rate, and ALOS. The O rgan ization's patient days are forecasted as follows:

Inpatient Days g MedlSlKQ II leu • Obstetrics • SWiIlQ • Transitional , ~

•.~ .~

.~

,~

~

.n 1112. 1112. 21121 "" "" "" ." "" "" '- -......

Note: 2013 through 2015 reflect historical information for the Organization. 2016 through 2021 reflects forecasted patient days for the O rganization anticipating proposed construction completion and opening in April 2018

D-68 66 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpatient (Continued)

Average daily census (ADC) is estimated to increase by 0.5 under the medium scenario. It could increase by 1.1 under the high scenario. The Organization's ADC is forecasted as fo ll ows:

Average Daily Census

--, Note: 2013 through 2015 reflect historical information for the Organization 2016 through 2021 reflects forecasted average daily census for the Organization anticipating proposed construction completion and opening in April 2018

D-69 67 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

Inpatient (Continued)

The Organizat ion experienced an increase in admissions from 2013 to 2015, and low growth is anticipated to continue through 2021. The number of admissions generated in the PSA and SSA has been increasing since 2013. Admissions in the PSA rose from 1,892 in 2013 to 1,973 in 2015. There may be a continued increase in market admissions, because while the service area population continues to age, utilization and, therefore, market admissions are expected to rise. Additional ancillary volume is expected to come from higher utilization within the existing population and higher capture of market share from competitors w ith the proposed construction project. Ancillary volume projections were modeled around historical trends and future expectations for higher utilization and ma rket share capture w ithin t he service area.

D-70 68 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

Based on the above, the foll owing table su mmarizes the O rganization's fo recasted statistics fo r significant ancillary services based on the medium scenario as pev r iously discussed for 2016 through 2021:

HlSto"" .. 1 2013 2014

Popukllion Served 11,417 12,031

Tot,,1 Cu • • 7,354 7,210 8,121 8,172 8,224 8,275 8,326

Proe. dur • • Tot,,1 Cu • • 1,405 1,515 1,630 1,640 1,651 1,661 1,671 1,681

Tot,,1 Cu • • 1,182 1,164 1,139 1,146 1,153 1,161 1,168

, Radiology Tot,,1 Cu • • 14,916 15,498 15,780 16,411 16,514 16,617 16,720 16,821

Tot,,1 Cu • • 4,130 4,239 4,250 4,448 4,476 4,504 4,532

Tot,,1 Cu • • 1,286 1,259 1,269 1,328 1,336 1,345 1,353 1,361

Tot,,1 C" •• • 5,564 5,603 5,314 5,561 5,596 5,631 5,666

Tot,,1 Cu • • 3,914 3,742 4,032 4,220 4,246 4,273 4,299

Tot,,1 Cu • • 2Db 204 ". '99 201 202 203 Sc"nn. r Tot,,1 Cu • • 420 >D' ", m 4n 480 483

Tot,,1 T • •t. 182,604 180,226 199,995 209,303 210,614 211,928 213,245

D-71 69 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Indepe nde nt Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

H.. tor,cal 2013 2014

"S >13 1,010 1,017 1,023 1,029 1,036

Tot,,1 Cuu 18,988 18,526 21,472 21,607 21,742 21,878 22,014

Tot,,1 Cuu 1,817 2,341 2,158 2,172 2,186 2,199 2,213

Tot,,1 Cuu 9,574 9,515 7,032 7,076 7,120 7,165 7,209

Tot,,1 Scripts 136,906 125,458 109,774 110,464 " 1,156 111,850 112,545

I • Eagle Bend Tot,,1 Vi,its 2,663 2,793 3,062 3,081 3,101 3,120 3,139

Tot,,1 Visits 41,039 38,693 42,488 44,188 44,464 44,742 45,020

III . Browe rvill. Tot,,1 Visits 3,128 3,037 3,325 3,346 3,366 3,387 3,409

IV . MoU. y Tot,,1 Visits 5,426 5,115 6,027 6,065 6,103 6,141 6,179 6,218

ill Tot,,1 Visits 9,139 9,177 10,037 10,100 10,163 10,227 10,291 10,355 10,417

Ca nta r Tot,,1 Days 35,603 35,197 35,561 35,561 35,561 35,561 35,561 35,561 35,561

D-72 70 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

The Organization maintains ra tes that allow it to recover its costs and provide an operating ma rgin to meet its financial requi rements. The Organization expects to have the freedom to set its prices without regulatory intervention throughout the forecast period . The average price increase was 396 for 2013 and 196 or less for 2014 and 2015. The Organization is not forecasted to increase rates for 2016, then, on average, 296 each year 2017 th rough 2021.

The Organization's historical inpatient percentage by payor, based on internal records, was as foll ows:

2013 2014 2015

Medicllre 41.3% 42.5% 47_8% Medicllid 18.2% 19.5% 14_3% Commercilll 12 _4% 15 _9% 13_3% Blue Cross 18.5% 12.5% 15_8% MSHO 6 _4% 5 _9% 4_9% Self-pllY 3 .2% 3.7% 3_9%

Totllis 100_0% 100_0% 100.0%

The Organization's historical g ross inpatient service revenue by payor, based on internal records, was as fo ll ows:

2013 2014 2015

Medicllre $ -13,991,700 $ 13,5 13,300 $ 15,211 ,200 Medicllid 6,147,700 6,203,000 4,556,700 Commercilll 4,211,000 5,050,700 4,238,800 Blue Cross 6,254,000 3,967,700 5,020,700 MSHO 2, 156,700 1,882,100 1,558,700 Self-pllY 1,091,400 1,187,300 1,203,700

Totllis $ 33,852,500 $ 31,804,100 $ 31,789,800

D-73 71 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

Management utilized the December 31, 2015, percentages as a basis to forecast payor mix. The Organization's inpatient percentages by payor a re forecasted as follows:

2016 2017 2018 2019 2020 2021

t-\edic,"re 47.8% 47.8% 47.8% 47.8% 47.8% 47.8% t-\edic"id 14.3% 14.3% 14.3% 14.3% 14.3% 14.3% Commerc;,,1 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% Blue Cross 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% MSHO 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% Self-pay 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%

Tot"l, 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

The Organization's g ross inpatient service revenue by payor is forecasted as fo llows:

2016 2017 2018 2019 2020 2021

Medic",,, $ 15,329,200 $ 15,779,300 $ 16,181,300 $ 16,604,300 $ 17,028,000 $ 17,456,500 Medic"id 4,590,200 4,722,6C() 4,841,500 4,966,500 5,091,700 5,218,500 Comme"Y 1,207,200 1,235,3C() 1,262,600 1,290,800 1,319,100 1,348,200

Tot"l, $ 32,028,800 $ 32,959,6C() $ 33,793,700 $ 34,670,600 $ 35,549,400 $ 36,438,400

D-74 72 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

The Organization's historical outpatient percentages by payor, based on internal records, were as fol lows:

2013 2014 2015

Medicllre 36_6% 37.896 37_496 Medicllid 18 _6% 19_696 17 _896 Commercilll 17.3% 23_096 2 1.696 Blue Cross 20_7% 14.796 19.796 MSHO 4.0% 3.196 2.196 Self-pllY 2.8% 1.896 1.496

Totllis 100.0% 100.0% 100.096

The Organization's historical gross outpatient service revenue by payor, based on internal records, was as fo ll ows:

2013 2014 2015

Medicllre $ 27,652,100 $ 29,573,400 $ 28,830,700 Medicll id -14,073,800 15,351,300 13,687,400 Commercilll "13,075,100 18,026,800 16,621,600 Blue Cross "15,615,400 11,463,700 15,148,300 MSHO 2,987,500 2,463,000 1,584,000 Self -plly 2,184,600 1,362,700 1,114,100

Totllis $ 75,588,500 $ 78,240,900 $ 76,986,100

D-75 73 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

The Organization's forecasted outpatient percentages by payor, based on December 31 f 2015, a re as follows:

2016 2017 2018 2019 2020 2021

Medic~re 37_4% 37.4'J!) 37.4% 37.4% 37.4% 37.4%

Medic~id 17_8% 17.S'l!) 17_8% 17.8% 17_8% 17_8%

Commerci~1 21.6% 21.6'J6 21.6% 21.6% 21.6% 21.6% Blue Cross 19.7% 19.7'16 19_7% 19.7% 19.7% 19.7% MSHO 2.1% 2.1'16 2.1% 2.1% 2.1% 2.1% Self-p~y 14% 1.4'16 1.4% lM6 1.4% 1.4%

Tot~ l , 100_0% HXW16 100.0% 100.0% 100.0% 100.0%

The Organization's g ross outpatient service revenue by payor is forecasted as follows:

2016 2017 2018 2019 2020 2021

Medi",,,e $ 28,984,000 $ 30,102,700 $ 30,873,000 $ 31,660,200 $ 32,464,100 $ 33,285,300 Medi""id 13,759,300 14,287,000 14,651,600 15,024,100 15,404,600 15,793,200 Commerc;,,1 16,712,100 17,364,500 17,8 11,100 18,267,500 18,733,600 19,209,600 Blue Cross 15,233,100 15,836,000 16,245,900 16,664,600 17,092,400 17,529,300 MSHO 1,592,800 1,655,900 1,698,700 1,742,500 1,787,200 1,832,900 Self-pay 1,120,400 1,164,000 1,194,200 1,224,900 1,256,100 1,288,200

Tot~ l s $ 77,401,700 $ 80,410,100 $ 82,474,500 $ 84,583,800 $ 86,738,000 $ 88,938,500

The Organization's historical cl inic percentages by payor, based on internal records, were as fo ll ows:

2013 20 14 2015

Medicare 25_896 27_996 27596 Medicaid 24_396 25_896 22.496 Commercial 20_096 22_696 2 15 96 Blue Cross 26_296 19.496 25.296 MSHO 3596 2_996 2 .396 Self-pay 0_296 1.496 1.196

Totals 100_096 100_096 100096

D-76 74 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Revenue (Continued)

The Organization's historica l gross clinic se rvice revenue by payor, based on internal records, was as fo ll ows:

20 13 20 14 20 15

Medicllre $ 5,185,700 $ 5,841,800 $ 6,046,200 Medicll id 4,885,700 5,402,500 4,922,500 Commercilll 4,026,800 4,735,200 4,728,400 Blue Cross 5,274,600 4,058,900 5,544,500 MSHO 699,400 608,900 495,500 Self -pllY 23,000 305,000 253,100

Totll is $ :20,095,200 $ 20,952,300 $ 21,990,200

The Organization's forecasted clinic percentages by payor, based on December 31, 2015, are as foll ows:

2016 2017 2018 2019 2020 2021

Medic .. ,e 27_5% 27.5% 27_5% 27_5% 27.5% 27.5% Medic .. id 22_4% 22 .4 % 22.4% 22.4% 22.4 % 22.4% Comme,ci.. 1 2 1.5% 2 1.5% 21.5% 21.5% 21.5% 21 .5% Blue Cross 25 _2% 2:5.2% 25 _2% 25 _2% 25 _2% 25 .2% MSHO 2_3% 2 .3 % 2_3% 2_3% 2_3% 2 .3% Self-p .. y 1.1 % 1.1% 1.1 % 1.1 % 1.1% 1.1%

Tot .. ls 100_0% 10>0.0% 100_0% 100_0% 100_0% 100.0%

D-77 75 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

The Organization's gross clinic service revenue by payor is forecasted as follows:

2016 2017 2018 2019 2020 2021

Medic" ,e $ 6,075,800 $ 6,340,800 $ 6,499,500 $ 6,662,300 $ 6,829,1 00 $ 6,998,900 Medicaid 4,946,600 5,1 6 2,300 5,291,600 5,424,000 5,559,900 5,698,1 00 Commercial 4,751,500 4,958,700 5,082,900 5,210,200 5,340,600 5,473,400 Blue Cross 5,571,700 5,8 14,700 5,960,300 6,1 09,500 6,262,500 6,418,200 MSHO 497,900 5 19,60 0 532,600 546,000 559,700 573,600 SelftMy 254,400 265,50 0 272,1 00 278,900 285,800 293,000

Tol"" $ 22,097,900 $ 23,061,60 0 $ 23,639,000 $ 24,2 30,900 $ 24,837,600 $ 25,455,200

The Organizat ion's historica l ski lled nursing faci li ty percentages by payor, based on internal records, were as follows:

2013 20 14 2015

Medicllre 14 .2% 13_4% 13_4% Medicllid 68_9% 65_7% 65_4% Commercilll 0 .1% 3 _4% 6_1% MSHO 3_6% 4_6% 4_0% Self -pllY 13 _2% 12_9% 11_1%

Totllis 100_0% 100_0% 100.0%

The Organizat ion's historical g ross skilled nursing facility revenue by payor, based on internal records, was as follows:

2013 2014 2015

Medicllre $ 1,415,800 $ 1,392,100 $ 1,413,000 Medicllid 6,883,100 6,802,300 6,894,700 Commercilll 13,200 349,800 642,700 MSHO 358,700 481,000 416,900 Self-PIIY 1,315,300 1,333,500 1,18 1,700

Totllis $ 9,986,100 $ 10,358,700 $ 10,549,000

D-78 76 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Patient Service Re venue (Continued)

The Organization's forecasted skilled nursing faci li ty percentages by payor, based on December 31, 2015, are forecasted as fo ll ows:

2016 2017 2018 2019 2020 2021

Medic",e 13.496 13A% 13.496 13.4% 13.496 13.496 Medic,,;d 65.496 65A96 65.496 65.4% 65.496 65.496

Commefc;,,1 6.196 6_"I'~ 6. 196 6 .1% 6.196 6.196 MSHO 4096 4.096 4.0% 40% 4.0% 4.0% Selft>"y 11.196 11."196 11.196 111% 11.196 11.196

Tolals 100.0% 100.0% 100_0% 100.0% 100.0% 100_0%

The Organization's gross skilled nursing facil ity service revenue by payor is forecasted as fo ll ows:

2016 2017 2018 2019 2020 2021

Medicare $ 1,413,000 $ 1,441,300 $ 1,470,100 $ 1,499,500 $ 1,529,500 $ 1,560,100 Medicaid 6,894,700 7,032,500 7,173,200 7,316,700 7,463,100 7,612,300 Comm ...ci al 642,700 655,600 668,700 682,100 695,700 709,600 MSHO 416,900 425,300 433,800 442,400 451,300 460,300 Self-pay 1, 181,700 1,205,200 1,229,300 1,254,000 1,279,000 1,304,600

Totals $ 10,549,000 $ 10,759,900 $ 10,975,100 $ 11,194,700 $ 11,418,600 $ 11,646,900

The Organization's historical total percentages by payor, based on internal records, were as fo ll ows:

2013 2014 2015

Medicare 34_696 35_696 36.496 Medicaid 22_996 23_996 21 .396 Commercial 15_396 19_996 18 .696 Blue Cross 19_596 13.896 18 .296 MSHO 4.496 3.896 2 .996 Self-pay 3_396 3096 2 .696

Totals 100_096 100_096 100.096

D-79 77 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Si gnifi cant Forecast Assu mptions (Continued)

Patient Service Re venue (Continued)

The Organization's historica l g ross total patient service revenue by payor, based on internal records, was as follows:

2013 2014 2015

Medic,",e $ 48,245,300 $ 50,320,600 $ 51,501,100 Medic"id 31,990,300 33,759,100 30,061,300 Commercia l 21,326,100 28,162,500 26,231,500 Blue Cross 27,1 44,000 19,490,300 25,713,500 MSHO 6,202,300 5,435,000 4,055,100 Self-pay 4,614,300 4,188,500 3,752,600

Totals $ 139,522,300 $141,356,000 $141,315,100

The Organizations total forecasted percentages by payor, based on December 31, 2015, are as foll ows:

2016 2017 2018 2019 2020 2021

Medic",e 36.4'16 36 . 4~' 36.4'16 36.4'16 36.4'16 36.4'16 Medic"id 21.3'16 21.3~' 21.3'16 21_3'16 21.3'16 21.3'16 Commerci,,1 18_6'16 18.M' 18_6'16 18_6'16 18.6'16 18_6'16 8lueC,oss 18_2'16 18 . 2~' 18_2'16 18_2'16 18_2'16 18_2'16 MSHO 2.9% 2 .9'iI' 2.9% 2.9% 29% 2.9% Self-p"y 2_6'16 2 .M' 2_6'16 2_6'16 2 .6'16 2_6'16

Tot"l, 100_0'16 1000% 100_0'16 1000'16 100_0'16 100_0'16

The Organizations g ross total service revenue by payor is forecasted as fo ll ows:

2016 2017 2018 2019 2020 2021

Medic",e $ SI,802,000 $ 53,664,100 $ 55,023,900 $ 56,426,300 $ 57,850,700 $ 59,300,800 Medic"id 30,190,800 31 ,204,400 31 ,957,900 32,731,300 33,519,300 34,322,100 Comme,ci,,1 26,378,100 27,375,900 28,071,900 28,786,800 29,515,100 30,257,200 8lueC,oss 25,864,400 26,859,000 27,547,1 00 28,254,600 28,975,300 29,709,300 MSHO 4,078,400 4,217,800 4,323,300 4,432,400 4,543,200 4,655,600 Self-p"y 3,763,700 3,870,000 3,958,200 4,048,600 4,140,000 4,234,000

Tot"ls $ 142,077,400 $ 147,191,200 $ 150,882,300 $ 154,680,000 $ 158,543,600 $ 162,479,000

D-80 78 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Deductions From Revenue

The Organization's contractual adjustments are forecasted by applying each significant th ird-party reimbursement program's reimbu rsement methodology to forecasted revenue by payor for each yea r, considering the following:

It is forecasted that the Organizat ion's Medicare inpatient, outpatient, and sWing-bed re imbursed costs will increase in the new facility as a resu lt of the increased depreciation and interest costs.

Medica re inpatient and outpatient reimbursement fates were forecasted based on modeling the Medicare cost report: during the forecast period util izing forecasted revenue and expenses. The O rganization is forecasted to be reimbursed at 9996 of Medicare re imbursable costs throughout the fo recast.

Medicaid inpatient services are reimbursed based on prospectively determined amounts per discharge. However, Medicaid outpatient services are reimbursed based on a cost re imbursement methodology.

In addition to Medicare and Medicaid, the Organization provides services to patients whose health care costs are covered by insurance companies, health maintenance organizations, and other health plans. These payors compensate the Organization under various financial arrangements, including discounts from established charges and prospectively determined rates.

Because the Organization's rates have historically been consistent w ith those in the region, the O rganization has generally been able to pass a significant portion of ts i rate increase through to these payors in t he form of additional reimbursement. Consequently, the forecasted financial statements reflect the following assumptions regarding payments from these thi rd parties: • A sta ble proportion of total hospital revenue w ill come from patients covered

by these payors, such clS Blue Cross. • Contracts with these payors will be renewed with similar terms through the forecast period, which w ill include price increases similar to historica l terms.

D-81 79 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Deductio ns Fro m Re venue (Continued)

Contractual Ad justments

The historica l contractual adjustments for the Organization's third-party payors, as a percentage of gross patient service revenue, based on internal records, were as follows for 2013 th rough 2015:

2013 201-4 2015

3j~O% 30.3% 34.9%

The contractual adjustments for the Organization's third-party payors, as a percent of gross patient serv ice revenue, a re forecasted to be as follows:

2016 2017 2018 2019 2020 2021 33_996 34.0% 33_996 33.896 33_996 33_996

Charity Ca re

The Organizat ion's charity care approximated 0.7596, 0.5196, and 0.3296 of g ross patient service revenue based on internal records as of December 31, 2013 through 2015. Charity care as a percent of gross patient service revenue is forecasted over the forecast period as fo llows for 2016 through 2021 :

2016 2017 2018 2019 2020 2021

0.5896 0.5896 0.5896 0.5896 0.5896 0.5896

D-82 80 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Conti nued)

Deductions From Revenue (Continued)

Provision for Doubtful Accounts

The provision fo r doubtful accounts approximated 2.3296, 1.2396, and 0.5496 of gross patient service revenue based on internal records as of Decembe r 31, 2013 through 2015. Based on the above, the p rovision for bad debts as a perce nt of gross patient service revenue is forecasted as follows for 2016 through 2021 :

2016 2017 2018 2019 2020 2021

'.3096 ' .3096 '.3096 '.3096 , .3096 , .3096

Based on the above, the provision for doubtful accounts is forecasted as follows for 2016 through 2021 :

2016 2017 2018 2019 2020 2021

$ 1,847,000 $ 1,913,500 $ 1,961,500 $ 2,010,800 $ 2,061,100 $ 2,112,200

D-83 81 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Sig nifi cant Forecast Assumptions (Continued)

Net Patient Service Re venue

Historical net patient service revenue, based on internal records, was as follows:

2013 201 . 201 5

Plltient service revenue

Inpotienl $ 33,852,500 $ 31,804,100 $ 31,789,800

OJtpotienl 75,588,500 78,240,900 76,986,100 RHC 20,095,200 20,952,300 21,9CX),200 SNF 9,986, '00 10,358,700 1O,S49,OCO

Gross potient service revenue 139,522,300 141,356,(0) 14',315,100

L= Ch!lrity aue ',049,200 717,00:> 455,100 Contractuol adjustments lind discounts 47,300,500 42,802,200 49,296,100

Plltient service

revenue - Net of contractu!!1 adjustments!lnd discounts 9',092,600 97,836,800 9',563,900

Less - Provision for

doubtful occounts 3,240,200 1,734,200 766,400

Net potient service revenue $ 87,852,400 $ 96,102,600 $ 90,797,500

D-84 82 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assu mptions (Continued)

Net Patient Service Revenue (Continued)

Based on the information above, net patient service revenue is forecasted as follows:

20" 20" 20" 20" """ 2021

P;ilie nt service revenue Inplltient $ 32m 8,800 $ 32, 959,tflJ $ 33,793,700 $ 34,670,600 $ 35,549,400 $ 36,438,400 Outpotient 77,401,700 80,410 ,1 00 82,474,500 B4,583,1nl 86,738,OCO 88,938,500 RHC 'n,097,900 23,061,600 23,639,COO 24,230,'01 24,837,600 25,455,200 SNF 10,549,COO 10,759,900 10,975,1 00 11,1 94,700 11,418,600 11,646,900

G,,,,,,, pMient seNice re"",..,., 142,077,400 147,1 91,200 150,882,300 154,680,axJ 158,543,600 162,479,OCO

"'"Ch ",ity G<1re 824,300 804,

P..tient service ,...... ,nue - Netofcontraduill

i!djuslmerm " nd di<;courm 93,128,400 96.240,800 96,822,Dl 10 1,443,

Less - Pr<7o'i'iion for

doubtful iICCOUn15 1,847,axJ 1,913,500 1,961,500 2,01 0,800 2,061,100 2,112,200

Net patient service revenue $ 91,281,400 $ 94,327,Dl $ 96,IlW,8OO $ 99,433,1 00 $ 101,8n,OCO $ 104,368,

D-85 83 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Significant Forecast Assu mptions (Continued)

Other Operating Revenue

Other operating revenue consists of 340B program revenue, EH R incentive, cafeteria income, net assets released for operations, and other operating income.

Historical other operating revenue was as follows:

2013 2014 2015

340B program revenue $ 235,500 $ 806,600 $ 867,300 Dietary income 706,300 621,700 656,300 EHR incentive 581,300 563,500 563,500 Other revenue 2,782,500 2,499,300 2,010,000

Total other operating revenue $ 4,305,600 $ 4,491,100 $ 4,097,100

340B program revenue is based on historical levels and increased each yea r thereafter based on the forecasted change in pharmacy utilization.

EHR incentive revenue is based on Medicare reimbursement methodologies.

Other revenue is forecasted based on historical levels and increased 3 96 each yea r for inflation.

Based on the information above, other operating revenue is forecasted as follows:

2016 2017 2018 2019 2020 2021

3408 p rogr~m revenue $ 872,700 $ 878,200 $ 883,700 $ 889,200 $ 894,700 $ 900,1 00 Dietary income 676,()JO 696,300 717,200 738,700 760,900 783,700 EHR incentive 8 12,3lJO Net ~ssets rel""sed for operations 500,()JO Other revenue 2,o70,3lJO 2,1 32,500 2,196,500 2,26 2,400 2,330,300 2,400,300

Tot~1 other oper~ling revenue $4,931,3lJO $3,70 7,000 $3,797,400 $3,890,300 $3,985,900 $4,084,100

D-86 84 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses

The health care industry has seen i ncreased pressu re in recent yea rs to reduce the overall cost of ca re. Management of the Organization realizes that cost conta inment strategies w ill be imperative to ma inta ining f inancial health in the upcoming years. As such, st rategies to conta in costs over time are being developed to meet this objective. Efforts include workforce management, which is further explained below, as well as continued educational efforts on lean principles for key department managers, along with

management's w illingness to hire il consu ltant specia lizing in lean principles and process improvement to ensure adequate resou rces are dedicated to this initiative and to maximize the rea li zed cost savings.

Sa laries and Wages

Employee compensation is based on anticipated employee rates and staffing levels. Due to a stable workforce, low turnover, and minimal util ization of agency nursing, wage levels are forecasted to increase on average 396 each yea r for inflation. To account for cost containment efforts, inflation is increas ing 296 for years 2018 through 2021 . Staffing levels were adjusted for forecasted increases in patient se rvice volumes adjusted for ava il able capacity, and productivity improvements.

Historical FTEs based on internal records were as foll ows for 2013 through 2015:

2013 2014 2015

699.5 645.5 651.6

Total FTEs are forecasted as follows:

2016 2017 2018 201 9 2020 2021

668.4 669.4 669.7 670.1 670.4 670.7

D-87 85 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Sa laries and Wages (Continued)

During 2016, the Organizat ion implemented a new care coordination model at its Staples clinic. As described on page 48, an additional provider, as well as numerous support positions, were added to faci litate this care model. Management expects that over time, processes and procedures around the new care model will become more efficient, and there are sufficient FTE's included in the forecast period to operate this care model as intended. FTE counts w ill also be managed through natural attrition and evaluation of the necessity to replace these positions.

Historical average sa lary expense per FTE, based on internal records Was as foll ows:

2013 2014 2015

$ 53,100 $ 52,900 $ 57,100

Average sa lary expense per FTE is orecasted f as fo llows:

2016 2017 2018 2019 2020 2021

$ 58,100 $ 60,300 $ 62,100 $ 63,700 $ 65,000 $ 66,300

Based on the above factors, sa laries and wages are forecasted as follows:

2016 2017 2018 2019 2020 2021

$ 38,834,000 $ 40,364,800 $ 41,588,400 $ 42,685,400 $ 43,576,000 $ 44,467,400

D-88 86 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Employee Benefits

Employee benefits consist of social security and unemployment taxes, retirement plan expense, health insurance, workers' compensation, and other benef its.

Social security and unemployment tax rates are forecasted to remain constant during the forecast period.

Retirement p lan expense is forecasted based on a percent of historical salaries and wages.

Health insurance costs are forecasted as a percentage of historical salaries and wages. Sa laries and wages are adjusted for inflation and changes in FTEs. The Organization w ill contro l health costs through benefit offerings and employee premium contributions.

All other benefits are forecasted to increase based on a percent of historica l sala ries and wages.

Historical employee benefits as a percent of sa lar ies and wages based on internal records was as follows:

2013 2014 2015

32.9% 39.3% 29.5%

Benefits as a percent of salaries were high in 2014 due to the Organization meeting its operational goals which qualified employees for a profit sharing distribution. 2014 is the only historical year that such a distribution was awarded, and is not expected to reoccur in the forecasted years, thus, the 2015 benefits as a percent of sa laries w ill be used throughout the forecast period.

D-89 87 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Employee Benefits (Continued)

Based on the above, the overall benefit percent of salaries and wages is forecasted as fo ll ows:

2016 2017 2018 2019 2020 2021

29.5% 29596 29596 29.596 29.596 29.596

Based on the above, tota l employee benefit cost is forecasted as follows:

2016 2017 2018 2019 2020 2021

$ 11,441 ,800 $ 11,893,000 $ 12,253,600 $ 12,577,000 $ 12,839,100 $ 13,101 ,600

Professional Fees

Professional fees consist o f emergency room, radiology, oncology, administration, and other. Certain expenses are volume sensitive and were adjusted to reflect fluctuations in re lated patient se rvices and volume indicators for the respective department. The remaining expenses were based on historica l levels. Inflation adj ustments of 396 for 2016 and 2017, and 296 for 2018 th r ou~ih 2021 were appli ed based on explanation on page 85. Reductions for changes in employment status for specific positions were also accounted for beginning in 2017. Based on the above, professional fees are forecasted as follows:

2016 2017 2018 2019 2020 2021

P,ol",..ioMI lees $ 5,065,600 $ 5,1 50,400 $ 5,273,800 $ 5,399,600 $ 5.527,600 $ 5,658,300 Phy:;;c ... n lees 13,307,000 13,729,900 14,029,800 14,335,100 14,647,000 14.965,700

lollli prolession.,l lee, $ 18,372,600 $ 18,880,300 $ 19,303,600 $ 19,734,700 $ 20.174,600 $ 20,624,000

D-90 88 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Supplies

Supplies include medica l suppli es, drugs, and other supplies, which include food costs, laboratory supplies, ma intenance ~,upplies, and other patient service and departmental supplies. Certa in expenses are volume sensitive and were adjusted to reflect fluctuations in re lated patient services and volume indicators for the respective department, plus an inflat ion factor of 596 for 2016 and 2017, and 496 for 2018 through 2021. The remaining expenses were based on historical levels plus an inflation factor of 396 for 2016 and 2017, and 296 for 2018 through 2021 . Adjustments to inflation refled the projected resu lts of cost containment strategies as described on page 86.

Based on the above, supplies are forecasted as follows:

2016 2017 2018 2010 2020 2021

Mediclll supplie-s $ 7,208,100 $ 7,649,800 $ 8,000,900 $ 8,367,000 $ 8,749,200 $ 9,147,800 Other supplie-s 2,711,000 2,791,500 2,847,100 2,904,000 2,962,100 3,021,300

Totlll supplie-s $ 9,919,100 $ 10,441,300 $ 10,848,000 $ 11,271,000 $ 11,711,300 $ 12,169,100

Utilities

Utilities include electrica l, gas, water, and telephone costs. Utilities are forecasted based on historical levels ncreased i for additional square feet and 396 each year for inflation. Total squa re feet is forecasted to increase from approximately 148,000 square feet to approximately 181,000 square feet at the main campus.

Based on the above, util ities are forecasted as follows:

2016 2017 2018 2019 2020 2021

$ 1,329,800 $ 1,369,700 $ '1,605,800 $ 1,653,700 $ 1,703,200 $ 1,754,100

D-91 89 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Rents and Leases

The majority of rents and leases are fixed contracts and are forecasted based on historical levels increased approximately 3 96 each year for inflation.

Based on the above, rents and leases expense is forecasted as follows:

2016 2017 201 8 2019 2020 2021

$ 346,600 $ 356,900 $ 367,400 $ 378,400 $ 389,500 $ 401 ,000

Repairs and Maintenance

Repairs and ma intenance are forecasted based on historical levels ncreased i approximately 3 96 each year for inflation.

Based on the above, repa irs and maintenance expense is forecasted as follows:

2016 2017 2018 2019 2020 2021

$ 1,801,600 $ 1,855,500 $ 1,910,700 $ 1,967,600 $ 2,026,100 $ 2,086,300

Other Expenses

Repairs and ma intenance are forecasted based on historical levels ncreased i approximately 3 96 each year for in flation.

Other expenses incl ude minor equipment, dues, travel and education, and various o ther expenses for patient service and other departments. The M innesota ca re tax is forecasted at 0.996 of gross patient service revenue each year. The Hospita l su rcharge is based on h istorica l amounts and increased consistent w ith gross revenue. The care center surcharge is fixed b ased on licensed beds, and forecast based on historical levels. Other expenses are forecasted based on historical levels ncreased i approximately 3 96 each yea r for inflation.

D-92 90 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Expenses (Continued)

Other Expenses (Continued)

Based on the above, other expenses are forecasted as follows:

2016 2017 2018 2019 2020 2021

M inor equ ipment $ 426,700 $ 439,400 $ 452,200 $ 465,000 $ 478,400 $ 492,000 Telephone 212,400 218,sao 224,700 231,200 238,000 244,900 Dues "nd subscriptions 822,800 847,400 872,700 898,800 925,700 952,900 Travel 728,800 750,300 772,300 794,800 817,900 841,600 Promotion 393,200 405,000 417,000 429,500 442,400 455,600 Insurance 337;JOO 3-47,400 436,BOO 449,900 463,400 477,300 MNcilre laxes 1,244,300 1,289,200 1,321,500 1,354,700 1,388,500 1,423,000 SurcM.ge 852,900 864,300 875,900 887,800 899,900 912,200 Taxes 169,500 174,600 179,900 185,300 190,800 196,600 Other operating 875,200 901,100 927,700 955,400 983,700 1,012,900

O ther operating expense $ 6,063,100 $ 6,237,200 $ 6,480,700 $ 6,652,400 $ 6,828,700 $ 7,009,000

Nonoperating Revenue

Interest Income

Interest income, based on the rates of return described preViously, is forecasted as follows:

2016 2017 2018 2019 2020 2021

$ 291,900 $ 431,100 $ 373,100 $ 347,800 $ 412,600 $ 482,800

D-93 91 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Nonoperating Revenue (Continued)

Noncapital Grants and Contributions

Noncapital grants and contributions are forecasted based on historica l levels, increased 396 each year for inflation.

Based on the above, noncapital grants and contrib utions are forecasted as foll ows fo r 2016 thmugh 202L

2016 2017 2018 2019 2020 2021

$ 26,000 $ 26,800 $ 27,600 $ 28,400 $ 29,300 $ 30,200

Sensitiv ity Ana lyses

Forecast assumptions are considered particularly sensitive if e ither there is a relatively high probability of a si zable variation from the assumption or the effect of virtually any variation in the assumption would have a significant effect on forecasted resu lts.

Management believes the following assumptions do not have a hgh i probability of variation. However, forecasted operating results and related cash flows are deemed particularly sens itive to variations in these assumptions:

• Reimbursement - The Organizdtion's net patient service revenue is forecasted based on the forecasted payor mix and on reimbursement methods under agreements with third parties. If the method and rates of reimbursement change or the payor mix changes, net patient service revenue would be affected, and the effects could be materia l.

• Bad Debts and Charity Care - Bad debts and charity care are forecasted based on a percentage of gross patient service revenue. If the O rganization does not achieve the bad debt and charity ca re leve ls forecasted, net patient service revenue would be affected, and the effects could be material.

D-94 92 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Sensitiv ity Ana lyses (Continued)

• Competition - The Organizat ion is the only provider of hospita l services in its PSA and estimates capturing 42.8% of inpatient services in ts i PSA by 2021 . The O rganization is also the only p rovider of hospital services in the SSA and estimates capturing 23.1 96 of inpatient services in ts i SSA by 2021 . There are a number of hospita ls wth i in 35 m iles of the O rganization. Management is not aware of any significant strategic o r operationa l changes planned by these competitor hospita ls. If these competitor hospita ls mp i lement significant st rategic or operationa l changes, the Oganization r 's market share, patient service volumes, and net patient service revenue could be affected, and the effects could be material.

• Market Share - The planned construction is fo recasted to achieve a certa in ma rket share for the O rganization. If t hey are unable to achieve the ma rket share included in the forecast, net patient service revenue would be affected, and the effects could be material.

• Physicians - The Organization's volume and related patient service revenue for hospita l and clinic services are linked to its ability to recruit and retain physicians. An ina bili ty to recruit the necessary physicians could adversely affect market share, patient service volumes, and net patient service revenue, and the effects could be material.

• Project Costs - Construction of the project is subject to the usua l risks associated w ith construction projects, i nclud i n~~, but not li mited to, cost overruns, delays in ssuance i of required bUi lding permits o r other necessary approvals, strikes, shortages of materials, and adverse weather conditions. It is anticipated proceeds from the new debt, together with anticipated investment earnings thereon and other funds provided by the O rganization, will be sufficient to complete the acquisition, construction, furnishing, and equipping of the project. Should significant cost overruns occur o r should the completion of the project be delayed, assets and revenue could be affected, and the effects could be material.

• Financing - If the financing terms and conditions change from w hat is presented, the O rganization's net income would be affected, and the effects could be material.

D-95 93 Lakewood Health System

Summary of Significant Accounting Polic ies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Sensitivity Ana lyses (Continued)

• Laws and Regulations - The health care industry is su bject to numerous laws and regu lations of federal, state, and loca l governments. These laws and regu lations include, but are not necessa rily li mited to, ma tters such as licensure, accreditation, government health care progrilm pa rt icipation requi rements, reimbursement for patient services, and billing reuulations. Government activ ity w ith respect to investigations and allegations concerning possible v iolations of such regulations by health care providers has increased. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of fines and penalties, as well as repayments for patient services previously billed. Management believes the Organization w ill be in compli ance with applicable government laws and regulations. Compliance with such laws and regu lations can be su bject to futu re government review and interpretation, as well as regulatory actions unknown or unasserted at this t ime. The financial forecast assumes the O rganization will be in substantial compliance w ith laws and regulations throughout the forecast period.

CMS has implemented a project using recovery audit contractors (RACs) as pa rt o f CMS's efforts to ensure accurate payments. The project uses RACs to search for potentially inaccurate Medicare payments that may have been made to hea lth care providers and that were not detected th rough exist ing CMS program integrity efforts. Once the RAC identifies a cla im it beli eves is inaccurate, it makes a deduction from or addition to the provider's Medicare reimbursement in an amount estimated to equal the overpayment or underpayment. Certain states have also hi red Medicaid Integrity Contractors (MICs) to perform audits simila r to RACs. RAC and M IC reviews are anticipated; however, the outcomes of such potential reviews are unknown and cannot be reasonably estimated at th is tme, i and the effects could be material.

D-96 94 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumpt ions (Continued)

Sensitiv ity Analyses (Continued)

• National Health Care Reform - The impact of national hea lth care reform in the fu ture is unknown. Depending on the impact, if any, net patient service revenue could be affected, and the effects could be material.

The following sens itivity analyses have been performed to illustrate the estimated impact if the volumes, contractual adjustments, and expenses are higher or lower than what is reported in the accompanying forec ast.

1. Ma rket share and population g rowth reaches high scenario by 2021, without taking into account any additional operationa l changes:

2016 2017 2018 201Q 2020 2021

k, forec"sted oper"ting income (loss) $ 1,280,700 BOB,I00 $ 88,300 $ (258,300) $ (84,200) $ 75,400 Sensitivity #1 forec"sted " oper"ting income 1,570,600 1,449,400 1,140,800 1,112,900 1,654,300 2,448,400 0."," 289,900 641 ,300 1,052,500 1,371,200 1,738,500 2,373,000

k, forec"sted debt service cover"ge 3.33 4.15 3.38 2", 2.16 229 Sensitivity #1 forec"sted debt service cover"ge 3.41 4.45 3.85 2.49 2.67 300 a...nge 008 0.30 0.47 040 0.51 0 .71

k, forec"sted ooys ""sh on Mnd - "II r.ources 203 150 122 119 120 121 Sensitivity #1 forec"sted ooys c"sh on Mnd - "II r.ources 203 151 127 129 135 143 a...nge 5 10 15 22

D-97 95 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Si gnificant Forecast Assumptions (Continued)

Sensitiv ity Ana lyses (Continued)

2. Market share and population g rowth d rops to low scenario by 2021, w ithout ta king into account any additional operational changes:

2016 ,." 2018 2019 ,.,. 202 .

As forecilsted operilting ;ocome (k=l $ 1,2BO,700 $ 808,100 $ 88.300 $ (258,300) $ (84,200) $ 75,400 Sensitivity #2 forecasted operilting income (loss) 1,083,1 00 169,300 (768,900) (1,340,000) (1 ,404,000) (1,486,100) a."'" (1 97,600) (638,800) (857,200) (1,081,700) (1,31 9,800) (1,561,500)

As forecasted debt service coverage 3.:n 4.1 5 338 2 0'1 2.1 6 2 .29 Sensitivity #2 forecasted debt service coverage 3.21 3_72 2.91 1.74 1.74 1.78 a."'" (0.12) (0.43) (0 .47) (0 .35) (0.42) (0 .5 1)

As forec ~ sted mY' e .. 41 on ..... oo .. II sources 20.3 .'" 122 11 9 120 121 Sensitivity 112 forec .. sted mY' e .. 41 on ..... oo .. II sources 202 . 46 11 0 . 06 102 (I) (4) '" (9) (1 4) (1 9) a."'" '"

D-98 96 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumpt ions (Continued)

Sensitiv ity Analyses (Continued)

3. Overall contractual adj ustment: and charity care decrease 196 each year, w ithout taking into account any additional operational changes:

2016 201 7 2018 2<)" 2020 2<)"

As forec".ted op<"<"tiflg income (loss) $ 1,280,7(X) , 808,100 , 88.300 , (258,300) $ (84,200) $ 75,400 Sensitivity #3 forecasted operating income 1,788.400 1,336,1 00 627,800 293,100 479,800 651 ,600 Ch.nge 507,7(X) 528,000 539,500 551 ,400 564,000 576,200

As forec".ted debt ",rvice coverage 3_33 4.1 5 3_38 2.09 2.1 6 2_29 Sensitivity #3 forecasted debt ",rvice coverage 3.5J, 4 _45 3_65 2_26 2_33 2.47 Chonge 0_2 ·1 0.30 0.27 0.17 0.17 0.18

As foreca.ted days cash on Mnd " II <;ources 20,3 ,>0 122 11 9 120 12' Sensitivity #3 forec" sted days cash on Mnd " II <;ources 205 m m 130 132 o",nge :1 '"4 , 8 '0 11

D-99 97 Lakewood Health System

Summary of Sign ificant Accounting Policies, Forecast Assumptions, and Sensitivity Ana lyses See Independent Accountant's Report

Note 3 Si gnificant Forecast Assumptions (Continued)

Sensitivity Ana lyses (Continued)

4. Overall contractual adjustment: and charity care nc i rease 196 eac h year, w ithout taki ng into account any additional operational changes:

20 16 2<)" 2<)" 2019 2<)20 202.

As fo rec~sted operating income (10",) $ 1,280,700 $ 808,1 00 $ 88)00 $ (258,300) $ (84,200) $ 75,400 Sen'iitivity #4 foreca.ted operating income (10",) 773,100 280,100 (451,200) (809,600) (648,200) (500,700) a...nge (507,600) ( 528,000) (539,500) (551,300) (564,000) (576,1 00)

As fo recasted debt ",.vice cov...... ge 3.3.'3 4.1 5 3_38 2 09 2.1 6 2.29 Sen'iitivity #4 foreca.ted debt ",.vice cov...... ge 3.1:2 3." 3.11 1.92 1.99 2 .11 a...nge (0.21) (0.30) (0.27) (017) ( 0.17) (0 .18 )

As fo rec~sled my-; c~"" on M nd ~II SOlIrces 20.'3 . >0 122 11 9 120 12. Sen'iitivity #4 forec,,'iled my-; c~"" on M nd ~II SOlIrces 20 . 146 In II. 11 0 11 0 o",nge (:2) (4) (' ) (8) (1 0) (11)

D-100 98 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumpt ions (Continued)

Sensitivity Analyses (Continued)

5. Operating expenses excluding depreciation and a mortization and interest decrease 296 each yea r, wth i out taking into account cost re imburse ment impacts and any additiona l o perational changes:

2016 2<)" 2<)" 2<)" 2<)20 202'

As fo r ec ~sled oper~tin g income (10",) $ 1,280,700 $ 808,100 $ 88)00 $ (258,300) $ (84,200) $ 75,400 Sen'iitivity #5 forec".ted operating iJlCome 3,042,900 2,635,100 1,973,500 1,677,000 1,892,300 2,091,100 a...nge 1,762,200 1,827,000 1,885,200 1,935,300 1,976,500 2,0 15,700

As fo recasted debt ",.vice cov.... age 3.3.'3 4.15 3_38 2 09 2.16 2.29 Sen'iitivity #5 forec".ted debt ",.vice cov.... "ge 405 5 _21 4_32 2.69 2.77 2 .93 a...nge on 1.06 0_94 060 0_61 0.64

As fo rec"sted my-; c"",,, on hand "II sources 20 .'3 , >0 122 11 9 120 121 Sen'iitivity #5 forec".ted my-; c"",,, on ha nd "II sources 21 · ~ , 6> , 4> , >0 , 6> a...nge 11 23 31 '" 44 " "

D-101 99 Lakewood Health System

Summary of Significant Accounting Policies, Forecast Assumptions, and Sensitivity Analyses See Independent Accountant's Report

Note 3 Significant Forecast Assumptions (Continued)

Sensitiv ity Ana lyses (Continued)

6. Operating expenses excluding depreciation and amortization and interest increase 296 each year, wthout i taking into account cost re imbursement impacts and any additiona l operational changes:

2016 201 7 2018 201Q 2020 2021

As forec .. sled operat ing inGome(loss) $ 1,280,700 $ 808,100 $ 88,300 $ (258,300) $ (84,200) $ 75,400 Sensit .... ity #6 forec .. sted operating inGome(loS5) (481,500) (1,018,900) (1,797,000) (2,193,600) (2,060,500) (1,940,400) Olilnge (1,762,200) (1,827,000) (1,885,300) (1,935,300) (1,976,300) (2,015,800)

Iv; fO[e(;dsted debt service coverdge 3.33 4 .15 3.38 2.09 2 .16 2.29 Sensit .... ity #6 forecdsted debt service coverdge 2.58 303 2.39 1.48 1.53 1.63 o,dnge (0.75) (1 .12) (0.99) (0.61) (0.63) (0.66)

As forecdsted da~ cdsh on hdnd d ll sources 203 150 122 119 120 121 Sensit .... ity #6 forecdsted

da~ cdsh on hdnd d ll sources 192 132 98 89 83 78 o,dnge (11 ) (18) (24) (30) (37) (43)

D-102 100 Supplementary Information

D-103 Lakewood Health System

Mission and Vision of Lakewood Health Syst .. m See Independent Accountant's Report

The Organization's Mission:

-To provide quality, personalized healthcare for a lifetime.»

The Organizat ion's Vision:

-To transform healthcare through innovation and service:

D-104 101 Lakewood Health System

Profile of Lakew ood Health System and Its Operations See Independent Accountant's Report

Management of the Facility

Governance

Board of Directors

System Board

The System Board is tasked w ith various responsibili t ies, such as hiring and retaining the CEO, ensuring qua lity ca re, developing the mission, v ision, and strategic plan, overseeing the financial position, and developing strong Board medica l staff relationships.

Members Position Term Ending Tim Rice President Loren Morey Chair 6130118 Jim Hofer Vice-Chair 6130116 Mary Theu re r Secretary 12/31/17 La rry Lundblad Treasurer 6130117 Ch ristine Albrecht, MD Member 6/30118 Ju li e Benson, MD Memb er 6/30116 Michael Hudalla, MD Member 6/30117 Cu rt Mcl lravy Member 6/30117 Jordan Moe, MD Member 6/30/17 Ron Storba kken Member 12/31116 Pau l Wick Member 6130116

D-105 102 Lakewood Health System

Profile of Lakewood Health System an d ts I Operations (Continued) See Independent Accountant's Report

Management o f t heFacili ty (Continued)

Di stri ct Board

The District Board is tasked with various responsibil ities, such as ma inta ining the Affiliation and Lease Agreements with Lakewood Health System, acquirinq rea l estate and issu ing debt, pursu ing Board education and development, and advocacy.

Members Position Township Term Ending Mary Theu re r Chair City of Staples 12/31118 Judy Bjerga Vice-Chair Becker 12/31118 Lana Hansen Secretary City of Motley 12/31116 Ba rb Peterson Treasu re r Villard 12/31116 linda Dietrich Member Moose Lake 12/31116 Sa ll y Grove Member Moran 12/31/18 Bill Haehnel Member Meadow Brook 12/31116 Bev Hoembe rg Member Byron 12/31118 Frances Kokett Member Motley 12/31 11 8 Bob Mueller Member Member-at-Large 12/31116 Donald Si rucek Member Poplar 12/31116 Ron Storba kken Member Staples 12/31116 Pau l Wicht Member Thomastown 12/31118

D-106 103 Lakewood Health System

Profile of Lakewood Health System and Its Operations (Continued) See Independent Accountant's Report

Management of the Facility (Continued)

Management

Executive Management

The leadership team at Lakewood Hea lth System (the ·Organization") is a group of experienced individuals who are dedicated both persona lly and professionally to maintain a reputation of quality healthcare and five-sta r service. They continuously work together to identify and direct the p riorities of the Organization th rough the development and implementation of stra.tegic plans, within the scope of the mission.

As described above, all management and operations are the responsibility of the Organization, and all personnel are employees of the Organization.

The Organizat ion's President and Chief Executive Officer, Tim Rice, is responsible for the daily administ ration of the O rganization and implementation of District policy pursuant to the Affiliation Agreement. Mr. Rice has served as administrator of the Organizat ion since 1980. Mr. Rice has an AA degree from the Minneapolis Business Coll ege and a BA degree in management and an M.A degree from the College of Saint Scholastica. Mr. Rice has been in health ca re administration since 1974.

The Organizat ion's Chief Financial O fficer, Jim Dregney, is no longer w ith the O rganization effective May 31, 2016. Mr. Dregney was responsible fo r the financial affa irs of the Organizat ion. lisa Bjerga, the Organizat ion's Vice President of Finance and Revenue Cycle, has taken over the interim CFO ro le and her profile appears on the following page. The O rganizCltion is currently in the process of hiring a permanent CFO.

Dr. John Ha lfen, Chief Medical O fficer of the System, is responsible for a wde i va riety of the physician executive duties of the Organizat ion while assuring f ull integration of the physic ians into the direction of the System. Dr. Halfen has board certification in Family Medicine and Geriatrics, having g raduated from the University of Minnesota w ith BA and M.D. degrees. His Family Medic ine residency was also through the University of Minnesota at the North Memorial Medical Center Unit. Prior to moving his p ractice to Staples, he was in White Su lphur Springs, Montana, and Lon~l Pra irie, Minnesota. H e serves as Medical Di rector at LHS Care Center and Central Todd County Care Center. He is certified as a Medical Review O fficer for drug screening and se rves on the Certification Committee for the Minnesota Hea lth Ca re Homes. In 2015, Dr. Halfen completed additional tra ining through the Physic ian Leadership College at the University of St. Thomas.

D-107 104 Lakewood Health System

Profile of Lakewood Health System and Its Operations (Continued) See Independent Accountant's Report

Management of the Facility (Continued)

Craig Wolhow€ , Vice President of Clinics and Hospital Services, is responsible for the daily operations of the clinics and hospita l services associated w ith direct patient ca re. Mr. Wolhowe has been w ith the Organizat ion since 1997 and previously was w ith United Parcel Se rvice for 10 years. Mr. Wolhowe graduated w ith a B.A degree in Business and H osp i h~ 1 Administration from Concordia College in Moorhead, M innesota. lisa Bjerga, Vice President of Finance and Revenue Cycle, is espons r ible for oversight of da ily finance and revenue cycle operations. Ms. Bjerga is a certified public accountant and Fellow of the Healthca re Financia l Management Association and has been employed with Lakewood Health System since 2008. She was previously employed by BerganKDV. Ms. Bjerga has a B.5. degree in Accounting and Economics from St. Cloud State University, Minnesota and a Master's in Business Administ ration and Healthcare Management from the University of St. Mary, Kansas .

Kathy Dobson, Vice Pres ident of Senior Services, is responsib le for the oversight of the care center, assisted living faci li ties, and non-emergent medica l transportation services. Ms. Dobson is a licensed social worker w ith additional graduate education in nursing home ddministration. She has been employed at Lakewood Health System since 1996. Ms. Dobson has a Bacheror of Social Work degree from Minnesota State University at Moorhead.

Lynn Rice, Vice President of Support Services, is responsible for the support functions at the Organization. Ms. Rice has a B .S. in Dietetics and Nutrition from the University of North Dakota and a Master's in Public Health Administration from the University of Minnesota. Ms. Rice is a registered and licensed dietic ian w ith 25 years of executive level leadership. She has been employed w ith the Organization since 1980.

Brad Anderson, Vice President of Strategy and Development; began his career w ith the Organization in 2005. He oversees Ma rketing, Provider Recru itment, Credentialing, Population Health, and Product and Service Development. Brad graduated from Gustavus Adolphus College w ith a B.A in Economics.

Teresa Fisher, Chief Operating Officer! Chief Nursin':l O fficer, has been with the Organizat ion since 2014. She has over 20 years of hea lthca re administration and nursing leadership experience. Academically, Teresa holds a BSN from the University of Mary and a Masters in A rts w ith Concentrations in Hea lthcare Administration, Human Resources, Process Consultation, and Organizationa l Development from the College of Sa int Scho last ica . She is currently working on her dissertation for a doctorate in Hea lth Ca re Administration from the University of Phoenix.

D-108 105 Lakewood Health System

Profile of Lakew ood Health System and Its Operations (Continued) See Independent Accountant's Report

Hospital Medical Staff

Neither the District nor the Organization employs any physicians. The Organization contracts w ith Lakewood Clinic PA, a professional association for physician services. Lakewood Cl inic P.A. is composed of 15 boa rd-certified fam ily p ractice physicians, 2 surgeons, 1 rheumatologist, 1 dermatologist, 1 podiatrist, 2 OB/GYN's, and 1 pediatrician who account for nearly all of the admissions to the Organization, with the exception of speciali sts from neighboring hospital facilities. Lakewood Health System also employs 8 family practice physician assistants, 1 family practice nurse practitioner, 1 dermatology physician ass istant, 1 hospita list nurse practitioner, 2 women's health nurse practitioners, 2 midwives, 1 nurse speciali st, 2 psychologists, 1 psychotherapist, 2 psychiatry nurse practitioners, and 5 Certified Registered Nurse Anesthetists. The District has had a working relationship w ith Lakewood C li nic PA since 1973, and the District and the Organization be lieve their present relationships with Lakewood C li nic PA to be good.

Organization medical staff classifications are as follows:

Active medical staff - The active medical staff of the Organization currently consists of family p ractice and specialist physicians and advanced practice clinicians who have been appointed by the Organization to attend to patients and assume all the functions and responsibil ities of membership on the active medica l sta ff. Active members must ma intain professional offkes or live w ith in 30 miles of the O rganization's facilities at which they practice. Physic ian members of the active medical staff are elig ible to vote and hold office. Family practice physicians and advanced practice clinicians must provide emergency services to the Organizat ion on a rotating basis.

For the year ended December 31, 2015, the physicians of Lakewood Clinic PA accounted for nearly 10096 of the admissions to the Organizat ion's hospital faci li ty.

Consulting medical staff - The consulting medical staff consists of physicians and advanced practice clinicians whose special skills are not readily ava ilable in the active medical staff and who come to the Organization either on ca ll or on a regu larly-scheduled bas is and who are members of the active medica l staff at another hospital. Consulting medical staff specia lizes primarily in the areas of surgery, neurology, orthopedics, ca rdiology, urology, ENT, gastroenterology, nephrology, oncology, and ophthalmology.

D-109 106 Lakewood Health System

Profile of Lakewood Health System and Its Operations (Continued) See Independent Accountant's Report

Hospital Medical Staff (Continued)

Active and consulting medical staff at the Organization provides services in the following areas:

Ambulance Se rvice Mammograms Pharmacy Bone Density Scans Massage Therapy Physical Therapy/Rehab Services Cardiac/Intensive Ca re MBCCC Program Pu lmonary Rehab Cardiology Medical/Surgery Care Sleep Studies CT Scan MRI Social Services Chemotherapy Neurology Speech Therapy Emergency Room Nuclear Medic ine Su rgery/Ambulatory Care Health Education Obstetrics Swing Beds Home Hea lth Care Occupational Health Te emed l ic ine Hospice Occupational Therapy U ltrasound Joint Replacement Newborn Hearing Screening X- ray/Telerad io logy Laboratory licenses and Accreditations

The Organizat ion is licensed by the M innesota Department of Health. The Organization presently meets all the requirements for participation in Medica re and Medicaid programs.

D-110 107 Lakewood Health System

Competition See Independent Accountant's Report

All acute care hospitals within 40 miles of the OrganIzation are identified below. There are no hospitals located within the Organization's primary or secondary service areas.

Health System Stll ples 25 1,391 15 433 Hospitlll Wilden!! 20 25 907 9 295 - St Joseph's Brllin erd 29 140 4,290 46 915 Health - Long Pr<'l i rie Lon g Prllirie 32 24 400 7 129 ~ St Gllbriel's HeIIl!h little Fll iis 37 25 1,108 10 28S

source: www_ lI hd.com; http J/www.defhc.com

D-111 108 Lakewood Health System

Median Household Income See Independent Accountant's Report

Median Household Income

The median household income fo r the Organization's service area compares to the entire state o f Minnesota as follows:

Prlm!!ry Secondllry

Service Arel!J Service Arel!J

15_0% 13_096 1 7.596 24.096 27.096 I'"",U"U - $74,999 32_396 36.096 37.096 I> "',U"U - $99,999 14.896 10.0% 11.096 00,000 lind Gre.'lter 25_796 , 5.096 12.096

MediCin Household Income 201 5 2020 96 eh!!n e

$42,945 $48,991 14.0896 $42,975 $48,094 11.9196 $60,056 $70,243 16_96%

Source: ESRI Business Information Solutions, 2015

D-112 109 Lakewood Health System

Service Area Employment (Continued) See Independent Accountant's Report

Employers

The following table ists l some of the top employers in Staples, Minnesota, and the number of employees.

Employer # of Employees Lakewood Health System 823 Trident Seafood 375 Staples Motley Schools 205 Morey's Fish Company 103 Stern Manufacturing 67 3M 64 Central Lakes College 48 (Staples Campus Only)

Source: Lakewood Health System Leadership

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APPENDIX E

USDA LETTER OF CONDITIONS, INTENT TO MEET LETTER OF CONDITIONS, AND USDA COMMITMENT LETTER

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USDA United States Department of Agriculture

USDA, Rural Development MN 1942-A, Guide 9 Letter of Conditions (Rev. 05/16)

September 6, 2016

United Hospital District/Lakewood Health System < Via E-mail Only> Attn: Lisa Bjerga, CFO 49725 County 83 Staples, MN 56479

Re: Letter of Conditions

Dear Ms. Bjerga:

This letter establishes the conditions which must be understood and agreed to by you and your organization before further consideration may be given to your Community Facility application. The loan will be administered on behalf of the Rural Housing Service (RHS) by the State and Area staff of USDA, Rural Development. Any changes in project cost, source of funds, scope of services or any other significant changes in the project or applicant must be reported to and approved by USDA, Rural Development Community Facility Program personnel (referred to as RD in the balance of this letter). Approval will be by written amendment to this letter. Any changes not approved by RD may be cause for discontinuing processing of the application.

This letter is not to be considered as loan or grant approval, or as representation of the availability of funds.

All conditions set forth up through the Bidding Stage must be met within 180 days of the date of this letter. If you have not met these conditions, the Agency reserves the right to discontinue the processing of your application.

If you agree to meet the conditions set forth in this letter and desire further consideration be given to your application, please complete and return the following forms within 7 days:

Form RD 1942-46, "Letter of Intent to Meet Conditions" Form RD 1940-1, "Request for Obligation of Funds"

Your loan will be considered approved and funds will be reserved on the date RD signs and returns, Form RD 1940-1 "Request for Obligation of Funds".

900 Robert St, Suite 103 • Alexandria, MN 56308-1380 Voice (320) 763-3191 • Fax (855) 804-4094

USDA is an equal opportunity provider and employer.

If you wish to file a Civil Rights program complaint of discrimination, complete the USDA Program Discrimination Complaint Form (PDF). found online at http://www.ascr.usda.gov/complalnCfilin9_cusl.html. or at any USDA office, or call (866) 632·9992 to request the form. You may also write a letter containing ali of the information requested in the form. Send your completed complaint form or letter to us by mail at U.S. Department of Agriculture, Director. Office of Adjudication, 1400 Independence Avenue, S.W., Washington, D.C. 20250·9410. by fax (202) 690·7442 or email at [email protected].

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Further processing of your application is to be done under the following conditions:

1. Total Project Cost - Total costs must not exceed $50,325,000 for the proposed hospital & clinic project. Funding from all sources has been budgeted for the estimated expenditures as follows:

Project Costs: Total Budgeted:

Admin, Legal, & COl $882,638 Capitalized Interest $1,916,750 Land, ROW's, Appraisals $15,000 Relocation Expenses $20,000 Architectural & Engineering $1,301,000 Other Arch. & Engineering $200,000 Project Inspection $142,328 Site Work $1,230,882 Demo & Removal $125,000 Construction $13,972,954 Equipment $2,000,000 Misc. $450,000 Contingencies $1,908,448 Refinancing $26,160,000

GRAND TOTAL: $50,325,000

Your funding needs will be reassessed if there is a significant reduction in project costs after bids are received. Obligated loan funds not needed to complete the proposed project will be deobligated.

2. Project Funds - Project funding is planned from the following sources:

Project Funding Source Funding Amount:

Applicant Contribution $1,700,000 USDA Community Facility Loan $44,175,000 Market Rate Loan $4,450,000

Total Project Funding (All Sources): $50,325,000

The applicant contribution and funding from other sources shall be considered as the first funds expended in the project. An agreement should be reached with all funding sources on how funds are to be disbursed before the start of construction.

Any changes in funding sources following obligation of CF funds must be reported to the processing official. Prior to advertisement for construction bids, you must provide evidence of applicant contributions and of approval on the other funding sources. This evidence should include a copy of the award letter and any agreements or contracts.

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3. "Loan Resolution" - RD 1942-47 and RD 1942-9, as appropriate, must be properly executed.

4. Repayment Schedule - Payments will be equally amortized payments of principal plus interest due monthly on the anniversary date of loan closing. The exception to this would be if the closing date is the 29, 30 or 31 of a month, in this case the due date will be the 28th .

For planning purposes use the following:

RD Loan Amount Est. Monthly Payment

$38,000,000 35 2.75% $141,360 $6,175,000 40 3.125% $22,600

Total: $44,175,000 $163,960

The interest rate will be the lower of the rate in effect at the time of loan approval or the time of loan closing, whichever is less, unless you choose otherwise. Should the interest rate be reduced, the payment will be recalculated to the lower amount.

Subject to availability of funds RD may elect to issue a new obligation to replace the above referenced $6,175,000. This new funding would be for 35 years and carry the interest rate in effect at the time of loan approval. A revised Letter of Conditions will be issued in conjunction with any such change.

5. Pre-authorized Debit Payment Process (PAD) - You will be required to complete Form RD 3550-28 "Authorization Agreement for Pre-authorized Payments". The PAD payment process allows your payment to be electronically deducted from your account on the day your payment is due. You will be notified of the amount of the principal and interest due, and the date of the withdrawal from your account. The statement your bank provides monthly will confirm the entry to your account. The first loan payment(s) and any extra payments may require separate processing of payment(s) being handled individually outside of the PAD process.

6. Security Requirements - $22,090,000 of the total RD loan amount will be secured by a revenue bond and real estate mortgage. A debt service reserve is required to be funded in accordance with details provided later in this letter.

$22,085,000 of the total RD loan amount will be secured by a general obligation bond payable by special assessments, user fees, property taxes, or other revenues. Additional security includes a pledge of the project's revenues and other agreements between you and RD as set forth in the bond resolution.

7. Business Operations -

A. Ordinances or Resolutions - Enact an ordinance or resolution necessary for collection of revenues for loan payment and operation and maintenance expenses. Enact an ordinance or resolution establishing rules and regulations for the facility.

E-3 4

B. Debt Service Reserve - As required in the loan resolution, there shall be set aside into a Debt Service Reserve Account the sum of $8,218 each month until there is accumulated in that account a sum equaling one year's annual loan installment of $986,160, After which time, deposits may be suspended, except to replace withdrawals. When necessary, disbursements may be used for payments due on the Note if sufficient funds are not available in the General or Debt Service Account. With the prior written approval of the Government, funds may be withdrawn for: (1) paying the cost of repairing or replacing any damage to the Facility which may have been caused by catastrophe, or (2) making extensions or improvements to the Facility. Whenever disbursements are made from the Reserve Account, monthly deposits shall then be resumed until there is again accumulated an amount of $986,160, at which time deposits may be discontinued.

C. Initial Operating Budget and Rate Schedule - Prior to Obligation of the RD Loan and Grant, the applicant shall establish and approve the initial operating budget and rate schedule. You must maintain a rate schedule that provides adequate income to meet the minimum requirements for operation and maintenance, debt service and reserves.

8. Accounting. Management Reports and Audits - RD approval of your accounting and financial reporting system, including the agreement with your auditor, will be needed prior to the start of construction. MN 1942-A, Guide 4, "Accounting, Reporting System and Audit Agreement Approval", may be used for this agreement

A. Submission to Rural Development of an annual audit or Annual Financial Statements (Income & Expense Statement, Balance Sheet & Projected Budgets are required for the duration of the loan. The total Federal funds expended from all sources shall be used to determine Federal financial assistance expended. Projects financed with interim financing are considered federal expenditures. See below for requirements:

a. 2CFR Subtitle A, Chapter II, Part 200 Subpart F 200.501 Audit Requirements: A non-Federal entity that expends $750,000 or more during the non-Federal entity's fiscal year in Federal awards must have a single or program-specific audit conducted for that year in accordance with the provisions of this part.

(1). Single audit. A non-Federal entity that expends $750,000 or more during the non-Federal entity's fiscal year in Federal awards must have a single audit conducted in accordance with §200.514 Scope of audit except when it elects to have a program-specific audit conducted.

(2). Program-specific audit election. When an auditee expends Federal awards under only one Federal program (excluding R&D) and the Federal program's statutes, regulations, or the terms and conditions of the Federal award do not require a financial statement audit of the auditee, the auditee may elect to have a program-specific audit conducted in accordance with §200.507 Program-specific audits. A program-specific audit may not be elected for R&D unless all of the Federal awards

E-4 5

expended were received from the same Federal agency, or the same Federal agency and the same pass-through entity, and that Federal agency, or pass-through entity in the case of a subrecipient, approves in advance a program-specific audit.

(3). §200.36 Federal Audit Clearinghouse (FAC). FAC means the clearinghouse designated by OMB as the repository of record where non• Federal entities are required to transmit the reporting packages required by Subpart F-Audit Requirements of this part. The mailing address of the FAC is Federal Audit Clearinghouse, Bureau of the Census, 1201 E. 10th Street, Jeffersonville, IN 47132 and the web address is:

http://harvester.census.gov/sacl. Any future updates to the location of the FAC may be found at the OMB Web site.

b. Annual Financial Statements (Income & Expense Statement, Balance Sheet & Projected Budget) for borrowers who did not expend $750,000 or more in Federal Funds and have an outstanding loan balance. Must have Rural Development's approval for this option and must meet requirements of 1942.17 (r) (1) (ii) (C). Financial statements are still required within 60 days of the fiscal year end in accordance with RD Instruction 1942-A.

c. Quarterly Management Reports are required for all borrowers for a period of at least three years. Quarterly Management Report includes: current balance sheet, year to date income & expense figures, and when applicable, a Workout Agreement per 7 CFR 1942.17 (q) (2). With the submission of the annual budget, you will be required to provide a current rate schedule and a current listing of the Board or Counsel Members and their terms. Quarterly Management Reports are due within 30 days of the end of each quarter. The Quarterly Management Reports may be waived after 3 years if the facility is viable, as determined by RD. Likewise, at the Agency's discretion, if the viability of the facility is in question, RD can again require Quarterly Management Reports. A year-end management report shall consist of: Form RD 442-3, "Balance Sheet", and Form RD 442-2, "Statement of Budget, Income and Equity", or forms that provide the information in a similar format. An annual audit report may be submitted in lieu of Forms RD 442-2 and 442-3. The audit report must be submitted no later than 150 days after the end of the borrower's fiscal year.

d. The Debt Service Reserve Account must be individually tracked in the annual financial records/audits of your organization, and identified as the Debt Service Reserve Account for this specific RD funded project.

B. Your organization will retain all records, books and supporting material for three years after the issuance of management reports.

9. Insurance and Bonding - Prior to loan closing or start of construction, whichever occurs first, you must acquire the types of insurance and bond coverage shown below. The use

E-5 6

of deductibles may be allowed providing you have the financial resources to cover potential claims requiring payment of the deductible. RD strongly recommends that you have your architect, attorney and insurance provider(s) review proposed types and amounts of coverage, including any exclusions and deductible provisions. It is your responsibility and not that of RD to assure that adequate insurance and fidelity or employee dishonesty bond coverage is maintained.

A. General Liability Insurance - Include vehicular coverage.

B. Worker's Compensation - In accordance with appropriate State laws.

C. Malpractice Insurance-In accordance with appropriate State laws.

D. Position Fidelity Bond(s) - All positions occupied by persons entrusted with the receipt and/or disbursement of funds must be bonded. You should have each position bonded in an amount equal to the maximum amount of funds to be under the control of that position at anyone time. The minimum coverage acceptable to RD will be for each position to be bonded for an amount at least equal to one annual installment on your loan(s). The coverage may be increased during construction of this project based on the anticipated monthly advances. The amount of coverage should be discussed and approved by RD.

E. National Flood Insurance - In addition to meeting the requirements for the type of assistance requested, the following requirements must be met for financial assistance for acquisition and/or construction in designated special flood or mudslide prone areas:

I. If flood insurance is available, you must purchase a flood insurance policy at the time of loan closing.

II. Applicants whose buildings, machinery or equipment are to be located in a community which has been notified as having special flood or mudslide prone areas will not receive financial assistance where flood insurance is not available.

F. Real Property Insurance - Fire and extended coverage will normally be maintained on all structures except reservoirs, pipelines and other structures if such structures are not normally insured and subsurface lift stations except for the value of electrical and pumping equipment. Prior to the acceptance of the facility from the contractor(s), you must obtain real property insurance (fire and extended coverage) on all facilities identified above.

G. Builder's Risk Insurance - It is the Owners responsibility to carry Builder's Risk insurance, during the construction of the proposed project.

10. Legal Services - You will be required to obtain a "Legal Services Agreement." This agreement will address the fees necessary for the services outlined in this agreement. At closing the owner's attorney will certify that the executed contract documents, including performance and payment bonds on contracts over $100,000 are adequate

E-6 7

and that the persons executing these documents have been properly authorized to do so by the entity in accordance with RD Instruction.

11. Property Rights - Prior to advertisement for construction bids, you must furnish satisfactory evidence that you have or can obtain adequate continuous and valid control over the lands and rights needed for the project. Such evidence must in the following form:

A. A Title Insurance binder will be required on all real estate now owned and property to be acquired in connection with the project. The binder will be in the amount of the proposed loan and name the United Stated of America, acting through the United States Department of Agriculture, as the proposed insured.

B. Opinion Concerning Permits, Certificates, Licenses and Other Items - The Applicant's attorney will provide a narrative opinion showing that all legal requirements can be met and stating how they will be met.

C. Immediately after closing a Title Insurance Policy will be provided showing no exceptions that would adversely affect the use of the real property in connection with the proposed project.

12. Architectural Services - The Agency must approve any agreements and modifications to agreements for profession architectural services. The agreement for architectural services should consist of the AlA documents as indicated in RD Guidance.

13. Restrictions on Lobbying

In order to comply with Section 319 of Public Law 101-121 which prohibits applicants and recipients of Federal contracts, grants and loans from using Federal appropriated funds for lobbying, the Federal Government in connection with the award of a specific contract, grant or loan, the Applicant, and all contractors and subcontractors must:

A. Execute the attached Certification for Contracts, Grants, and Loans.

B. Complete Standard Form LLL, "Disclosure of Lobbying Activities", if they have made, or agreed to make payment, using funds other than Federal appropriated funds, to influence or attempt to influence a decision in connection with the contract.

The Certification (and, if appropriate, the Disclosure) must be provided to USDA, Rural Development.

14. Contract Documents. Final Plans and Specifications -

A. The contract documents should consist of the AlA Construction Contract Documents with attachments, additional guidance is provided in MN 1942 Guide 27, "Community Facilities Information for Architects (April 2011) or other approved form of agreement.

E-7 8

B. The final plans, and specifications must comply with guidance in MN 1942 Guide 27, "Community Facilities Information for Architects (April 2011) and require submission to the Agency for final review/approval by the RD Architect prior to advertisement for bids.

C. The use of any procurement method other than competitive bidding must be requested in writing and approved by the Agency.

D. The Agency requires a pre-construction conference, pre-final, final, and warranty inspection.

E. The Agency requires prior agency concurrence with all Change Orders, Invoices, and Payment Estimates.

15. Bidding Phase -

A. Contract bidding will be authorized by RD only after the final design has been reviewed and accepted; funding has been arranged; and loan closing instructions have been completed by the USDA Office of General Counsel (OGC).

B. After you receive MN 1942-A - Guide 10, "Authorization to Bid" from RD, you shall authorize the Architect to proceed with the bid phase. The architect will assist in the following:

I. The Architect will assist you in providing a written statement or other evidence to RD of the steps taken to comply with affirmative action to assure that small, minority and women-owned businesses will be utilized when possible on projects as a source of supplies, equipment, construction and services.

II. The Architect will assist you in advertising for and obtaining bids for the Work and maintaining a record of prospective bidders to who Bidding Documents have been issued, attend pre-Bid conferences, if any, and receive and process Contractor deposits for accessing the Bid Documents.

III. Issue Addenda as appropriate to clarify, correct or change the Bidding Documents.

IV. Consult with you as to the acceptability of subcontractors, vendors, suppliers and other person and entities proposed by Contractor for those portions of the work as to which such acceptability is required by the Bidding Documents.

V. Determine the acceptability of substitute materials and equipment proposed when substitution is necessary because the specified item is incompatible with the Project or fails to comply with applicable codes.

VI. Perform or provide other additional Bidding tasks as necessary in the obtaining and delivery of acceptable bids for the Project.

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VII. Consult with you and RD on qualifications and acceptance of qualified apparent low bidder. Provide RD with bid tabulation and Architect's evaluation of bids and recommendations for contract awards.

VIII. Contracts will be completed in accordance with the appropriate AlA contract and RD supplement.

16. Cost Overruns - Cost overruns exceeding 20% of the development cost at time of loan or grant approval or where the scope of the original purpose has changed will compete for funds with all other applications on hand as of that date. Cost overruns must be due to high bids or unexpected construction problems that cannot be reduced by negotiations, redesign, use of bid alternatives, rebidding or other means prior to consideration by the Agency for subsequent funding. Such requests will be contingent on the availability of funds.

17. Construction Phase-

A. Pre-Construction Conference - A Pre-construction conference must be held. It will be directed or led by the Architect. It is expected that you, Rural Development, Architect, Contractor, Sub-contractors and others attend. The "Notice to Proceed" with construction will be authorized at or after this meeting. See "Record of Pre-Construction Meeting"

B. Environmental Mitigation Measures - All mitigation measures must be followed as described in the environmental report. The project as proposed has been evaluated to be consistent with all applicable environmental requirements. If the project or any project element deviates from or is modified from the original approved project, additional environmental review may be required.

18. Disbursement of Funds -

A. Interim Construction Financing - is to be obtained from commercial sources or special funding sources (approved by RD) in an amount equal to the loan when available at reasonable rates and terms. Any additional temporary bond amount over the RD loan must be agreed to in writing by RD.

B. Partial Payments - During construction, RD 1924-18, "Partial Payment Estimate," will be used for periodic construction estimates. Prior to disbursement of funds you and RD will review and approve each payment estimate. All bills and vouchers must be approved by RD prior to payment.

C. Electronic Funds Transfer - Loan funds will be transferred into your account at the time of closing using the "Automated Clearing House" payment system. You must complete Form SF 3881, "Electronic Funds Transfer Payment Enrollment Form" prior to closing or start of construction, whichever is earlier.

D. Use of Remaining Funds - Remaining funds may be used for eligible purposes, provided the use will not result in major changes to the original scope of work and the project purpose remains the same. Any funds not needed for authorized

E-9 10

purposes will be cancelled. You will be notified of RD's intent to cancel the remaining funds and given appropriate appeal rights.

19. Civil Rights. Accessibility and Other Special Requirements -You should be aware of and will be required to comply with other federal statute requirements including but not limited to:

A. Drug-Free Workplace - All recipients of RD grants must provide a drug-free workplace. Form AD 1049, "Certification Regarding Drug-Free Workplace Requirements", must be completed.

B. Civil Rights Act of 1964 - All borrowers are subject to and facilities must be operated in accordance with Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d et seq.) and 7 CFR 1901 subpart E, particularly as it relates to conducting and reporting of compliance reviews. Instruments of conveyance for loans and/or grants subject to the Act must contain the covenant required in 7 CFR 1901 Subpart E paragraph 202(e).

C. Civil Rights Compliance Reviews - RD financial programs must be extended without regard to race, color, religion, sex, national origin, marital status, age, or physical or mental handicap. The Applicant is required to gather racial identity and national origin information on the people in the community and the service area being served by the "Federally assisted program". This information must be provided to RD periodically for required Compliance Reviews during the application process and during the term of the loan. Tracking of this information is required by Federal Civil Rights laws even for grant funding.

D. Age Discrimination Act of 1975 - Provides that no person in the United States shall on the basis of age, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.

E. Section 504 of Rehabilitation Act of 1973 - All recipients of RD funding must comply with Section 504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 794). No handicapped individual in the United States shall, solely by reason of their handicap, be excluded from participation in, be derived of benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance. A "Self Evaluation and Transition Plan" will be required to be completed, prior to the loan and grant being closed. The Federal Access Board may be contacted for a copy of the ADAAG checklist (www.access-board.gov or (800) 872-2253), which may be used to complete the self-evaluation.

F. The Americans with Disabilities Act (ADA) of 1990 - Prohibits discrimination on the basis of disability in employment, State and local government services, public transportation, public accommodations, facilities, and telecommunications. Title II of the Act applies to facilities operated by State and local public entities, which provided services, programs and activities. Title III of the Act applies to facilities owned, leased, or operated by private entities, which accommodate the public.

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G. Limited English Proficiency (LEP) under Executive Order 13166 - LEP statutes and authorities prohibit exclusion from participation in, denial of benefits of, and discrimination under Federally-assisted and/or conducted programs on the ground of race, color, or national origin. Title VI of the Civil Rights Act of 1964 covers program access for LEP persons. LEP persons are individuals who do not speak English as their primary language and who have a limited ability to read, speak, write, or understand English. These individuals may be entitled to language assistance, free of charge. You must take reasonable steps to ensure that LEP persons receive the language assistance necessary to have meaningful access to USDA programs, services, and information your organization provides. These protections are pursuant to Executive Order 13166 entitled, "I mproving Access to Services by Persons with Limited English Proficiency" and further affirmed in the USDA Departmental Regulation 4330-005, "Prohibition Against National Origin Discrimination Affecting Persons with Limited English Proficiency in Programs and Activities Conducted by USDA

20. System for Award Management - Requirement for System for Award Management(SAM) a) You as the recipient must maintain the currency of your information in the SAM system until you submit the final financial report required under this award and all grants funds under this award have been disbursed or de-obligated, whichever is later. This requires that you review and update the information at least annually after the initial registration, and more frequently if required by changes in your information or another award term. Recipients can register on-line at (https://www.sam.gov). b) You as the recipient may not make a sub-award to an entity unless the entity has provided its Data Universal Numbering System (DUNS) number to you. Sub• recipients with sub-awards of $25,000 or more must also have and maintain a current CCR registration through the SAM system. c) Recipient Reporting. You as the recipient must report each first tier sub-awards of $25,000 or more in non-Recovery Act funds to http://www.fsrs.gov no later than the end of the month following the month the obligation was made. As part of your registration profile at http://www.sam.gov, you must report the total compensation of the 5 most highly compensated executives (if the award was $25,000 or more, 80% or more of annual gross revenues subject to Transparency Act, and $25 Million of annual gross revenues subject to Transparency Act) by end of month following month in which award was made. This requirement also pertains to sub-recipients (if the award was $25,000 or more, 80% or more of annual gross revenues subject to Transparency Act, and $25 Million of annual gross revenues subject to Transparency Act).

21. Assurance Regarding Felony Conviction or Tax Delinquent Status for Corporate Applicants - This award is subject to the provisions contained in the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2012, P.L. No. 112-55, Division A, Sections 738 and 739, regarding corporate felony convictions and corporate federal tax delinquencies.

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Accordingly, by accepting this award the recipient acknowledges that it: (1) does not have a tax delinquency, meaning that it is not subject to any unpaid Federal tax liability that has been assessed, for which all judicial and administrative remedies have been exhausted or have lapsed, and that is not being paid in a timely manner pursuant to an agreement with the authority responsible for collecting the tax liability, and (2) has not been convicted (or had an officer or agent acting on its behalf convicted) of a felony criminal violation under any Federal or State law within 24 months preceding the award, unless a suspending and debarring official of the United States Department of Agriculture has considered suspension or debarment of the recipient corporation, or such officer or agent, based on these convictions and/or tax delinquencies and determined that suspension or debarment is not necessary to protect the interests of the Government. If the recipient fails to comply with these provisions, the Rural Utilities Service will annul this agreement and may recover any funds the recipient has expended in violation of sections 738 and 739.

22. Loan and Grant Closing - The loan will be closed in accordance with instructions prepared by OGC. Form RD 1910-11, "Application Certification, Federal Collection Policies for Consumer or Commercial Debts", must be read and signed prior to loan closing.

A. Post-closing Issues or Errors - The parties agree and acknowledge that it is their intent to close this transaction in the required manner. As part of loan closing instructions and upon the request of RD, the Borrower/Grantee agrees to fully cooperate and adjust any post-closing issues or errors necessary or desirable in the reasonable discretion of, or required by the laws and regulations governing Rural Development, its programs, policies, or operations. If additional costs are involved in performing theses duties, those costs will be borne by the parties as required under the terms of the program, loan documents, security agreements, and/or other supplemental agreements. If post-closing issues are not satisfactorily resolved, the transaction shall be voidable by RD.

B. Borrower Graduation Requirement Certification - By accepting this loan, you are also agreeing to refinance (graduate) the unpaid loan balance in whole, or in part, upon request of the government. If at any time the Agency determines your entity is able to obtain a loan for such purposes from responsible cooperative or private sources at reasonable rates and terms, you will be requested to refinance. At the time of loan closing the Borrower will certify that they understand that the law requires them to refinance their loan when other credit is available at reasonable rates and terms. MN 1780 Guide 23 - "Graduation Certification" will be used for this certification.

If the conditions set forth in this letter are not met within 180 days from the date of this letter, RD reserves the right to discontinue processing the application. In the event the application has not advanced to the point of bidding within 180 days and it is determined the applicant still wishes to proceed, it may be necessary to review the conditions outlined in this letter. If during that review, it is determined the conditions outlined are no longer adequate, Rural Development reserves the right to require that the letter of conditions be revised or replaced.

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We believe the information in this letter clearly sets forth the conditions which must be complied with; however, this letter does not relieve you from meeting the requirements of RD Instruction. If you have any questions, please do not hesitate to contact me.

Sincerely,

\'\\ \' ~" \ \ \ Digitally signed by JEFF SCHOLTEN \\ ~ '~ DN:c ..US,o"U.s.Government, \.\. \'! \ ~. \\ ~ _,., ou"'Oepartmenl of Agriculture, ,"",JEFF 1\ ." ~~~~~~~1~200300.IOO.I.l"'12001000211713 ~ \\J F::':::: Date:2016.09.0210:33:39-0S'OO' JEFF SCHOLTEN Area Specialist

CC: State Office, USDA Rural Development Architect Bond Counsel Attorney Accountant

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Form RD 1942-46 UNITED STATES DEPARTMENT OF AGRICULTURE FORM APPROVED (Rev. 6-10) RURAL DEVELOPMENT OMB NO. 0575-0015 OMB NO. 0570-0062

LETTER OF INTENT TO MEET CONDITIONS

Date 09-06-2016

TO: United States Department of Agriculture Rural Development (Name of USDA Agency) 900 Robert Street NE, Suite 103 Alexandria, MN 56308

(USDA Agency Office Address)

We have reviewed and understand the conditions set fOlih in your letter dated 09 - 06 - 2 0 16 . It is our intent to meet all of

them not later than 03 - 06 - 2 0 1 7

United ital District

~~Nall1e ofAssociation) BY__ ~~~~~~ ______Tim Rice, CEO (Title)

According to the Paperwork Reduction Act of1995. an agency //lay not conduct 01' sponsor, and a persons is not required to respond to a col/ecllon of InfoI'll/at Ion IInless il displays a val/d OMB conlrolnumbel'. The valid OMB conll'ol nllmbel'fol' this ilifol'malion colleclion is 0575-0015 and 0570-0062. The lime I'eqllired to complele lhis ilifol'malion col/eclion is estimaled 10 average 1 hOIl/'pel' response, Including the I/mefor reviewing instmctions, searching exisling data sources, gathering and maintaining the dala. needed, and complellng and reviewing the collecllol1 ofiliformation.

Form RD 1942-46 (Rev. 6-10)

E-14 United States Department of Agriculture

Rural Development October 11th, 2016

Minnesota State Office Bank of New York Mellon Trust Company, N.A. Attn: Mietka Collins 375 Jackson Street Suite 410 2 North LaSalle Street, Suite 1020 Saint Paul, MN 55101 Chicago,lL 60602

Voice 651.602.7800 Fax 855.744.0400 Dear Ms. Collins:

The United Hospital District (UHD) proposes to obtain interim financing to make improvements to their hospital and clinic in Staples, MN and their clinic in Pillager, MN. This letter is to confirm certain understandings on behalf of the United States Department of Agriculture Rural Development (RD).

RD Direct Loan Funds in the amount of $44,175,000 have been obligated for the project. Final plans and specifications have been prepared and approved, a contractor has been selected, and the applicant is ready to finalize construction contracts. It has been determined by UHD and RD that the conditions of the permanent loan closing can be met.

It is proposed by UHD with the approval of RD that upon presentation of properly approved payment estimates or invoices, interim loan funds be advanced as needed to pay for authorized construction and other legally eligible expenses incurred by UHD as part of this project.

The RD Direct Loan will be closed upon satisfaction of all conditions. We will schedule the RD loan to be closed when the construction to be financed is substantially complete, so that funds will be available to payoff the total amount of advances your organization has made for authorized purposes, including accrued interest to the date of closing.

We appreciate your assistance to UHD and look forward to working with you on this project.

Sincerely,

Terry L. Louwagie Community Programs Director

Cc: Lisa Bjerga, United Hospital District CFO USDA RD Alexandria Office - Jeff Scholten, Area Specialist

USDA is an equal opportunity provider and employer.

If you wish to file a Civil Rights program complaint of discrimination, complete the USDA Program Discrimination Complaint Form, found online at hllp:/Iwww.ascr.usda.gov/complaint_filing_cusl.html. or at any USDA office, or call (866) 632-9992 to request the form. You may also write a leller containing all of the information requested in the form. Send your completed complaint form or leller to us by mail at U.S. Department of Agriculture, Director, Office of Adjudication, 1400 Independence Avenue, S. w., Washington, D.C. 20250-9410, by fax (202) 690-7442 or email at [email protected].

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APPENDIX F

DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF PRINCIPAL DOCUMENTS

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A brief description of the Indenture, Mortgage, Series A Note Security Agreement, Series B Note Security Agreement and the definitions of certain terms used therein and herein are included in this Appendix F. Such description does not purport to be comprehensive or definitive. All references herein to the Indenture, Mortgage, Series A Note Security Agreement or Series B Note Security Agreement are qualified in their entirety by reference to such document and all references to the Series 2016 Notes are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the Indenture. Copies of such documents are available for review prior to the issuance and delivery of the Bonds at the office of the Underwriter, and after issuance, at the office of the Trustee.

DEFINITIONS OF CERTAIN TERMS

Set forth below are the definitions of some of the terms used in this Official Statement and the Indenture. Reference is hereby made to the Indenture for a complete recital of the terms defined therein.

“Act” means Minnesota Statutes, Sections 447.45 to 447.50, as amended.

“Authorized Denomination” means $100,000 or any integral multiple of $5,000 in excess thereof.

“Authorized Representative” means with respect to the Issuer, the Chairman or Secretary of the Board or any officer thereof, or any other person or persons designated as an Authorized Representative of the Issuer by a resolution of the Hospital Board of Trustees of the Issuer and filed with the Trustee and the Paying Agent/Registrar, and with respect to Lakewood, the Chief Executive Officer/President or Chief Financial Officer or any officer thereof, or any other person or persons designated as an Authorized Representative of Lakewood by a resolution of the Board of Directors of Lakewood and filed with the Trustee and the Paying Agent/Registrar.

“Board” or “Board of Trustees” means the Hospital Board of Trustees of the Issuer, or any duly constituted governing body charged with the responsibility of governing the Issuer.

“Bond Counsel” means an attorney at law or firm of attorneys who are of nationally recognized standing in matters pertaining to the tax-exempt nature of interest on obligations issued by states or their political subdivisions, duly admitted to the practice of law before the highest court of any state of the United States of America.

“Book-Entry Form” or “Book-Entry System” means, with respect to the Series 2016 Notes, a form or system, as applicable, under which (i) the ownership of beneficial interests in Series 2016 Notes and bond service charges may be transferred only through a book entry, and (ii) physical Series 2016 Note certificates in fully registered form are registered only in the name of a Depository or its nominee as holder, with the physical Series 2016 Note certificates “immobilized” in the custody of the Depository.

“Business Day” means any day other than a Saturday, a Sunday, a day on which banking institutions in the State, the State of New York, or any state in which the Principal Corporate Trust Office of the Trustee or the Paying Agent/Registrar is located are closed or a day on which the New York Stock Exchange is closed.

“Certificate,” “Statement,” “Request,” “Direction” and “Order” of the Issuer means, respectively, a written certificate, statement, request, direction or order signed in the name of the Issuer by its Chair, Secretary or such other person as may be designated and authorized in writing signed by its Chair and forwarded to the Trustee to sign for the Issuer or in the name of the Issuer by an Authorized Representative of the Issuer. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If

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and to the extent required by Section 1.02, each such instrument shall include the statements provided for in Section 1.02.

“Closing Date” or “Dated Date” means, with respect to the Series 2016 Notes, ______, 2016.

“Code” means the Internal Revenue Code of 1986, as it may be amended, if applicable. Any reference to a provision of the Code shall include the applicable regulations of the Department of the Treasury promulgated or proposed with respect to such provision.

“Construction Fund” means the fund by that name established pursuant to Section 5.02 of the Indenture.

“Cost of Issuance Fund” shall mean the separate trust fund so designated that is created and established in Section 5.05 of the Indenture.

“Costs of Issuance” means any items of expense directly or indirectly payable or reimbursable by the Issuer and directly or indirectly attributable to the authorization, sale and issuance of the Series 2016 Notes, including, but not limited to, printing costs; costs of preparation and reproduction of documents; initial fees and charges of the Trustee; legal fees and charges, if any; underwriting discount or fees paid to the Original Purchaser in connection with the initial offering and sale of the Series 2016 Notes; the Issuer fees and direct out-of-pocket expenses incurred in issuing the Series 2016 Notes; letter of credit fees and municipal bond insurance premiums, if any (but such fees or premiums shall not be treated as Costs of Issuance to the extent such fees and premiums are for the payment of the reasonable costs of a transfer of credit risk under the Code and do not reflect indirect payment of additional Costs of Issuance); fees and disbursements of financial advisers, consultants and professionals; and costs of credit ratings.

“Default Event” or “Event of Default” means any of the events specified in Section 7.02 of the Indenture.

“Defeasance Obligations” means any of the following obligations:

(a) United States Government Obligations that are not subject to redemption in advance of their maturity dates; or

(b) obligations of any state or political subdivision of any state, the interest on which is excluded from gross income for federal income tax purposes and which meet the following conditions:

(1) the obligations are (i) not subject to redemption prior to maturity or (ii) the trustee for such obligations has been given irrevocable instructions concerning their calling and redemption and the Issuer of such obligations has covenanted not to redeem such obligations other than as set forth in such instructions;

(2) the obligations are secured by cash or United States Government Obligations that may be applied only to principal of, premium, if any, and interest payments on such obligations;

(3) such cash and the principal of and interest on such United States Government Obligations serving as security for the obligations, plus any cash in the escrow fund, are sufficient to meet the liabilities of the obligations;

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(4) such cash and United States Government Obligations serving as security for the obligations are held in an escrow fund by an escrow agent or a trustee irrevocably in trust;

(5) such cash and United States Government Obligations serving as security for the obligations, are not available to satisfy any other claims, including those against the trustee or escrow agent; and

(6) the obligations are rated in the highest rating category by Moody’s Investors Service, Inc. (presently “Aaa”) or Standard & Poor’s Ratings Services (presently “AAA”).

“Depository” means DTC or any other securities depository selected by the Issuer which agrees to follow the procedures required to be followed by such securities depository in connection with the Series 2016 Notes.

“Disbursing Agreement” means the Construction Loan Disbursing Agreement dated as of ______1, 2016, between the Issuer, the Trustee and ______.

“Electronic Means” shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Trustee, or another method or system specified by the Trustee as available for use in connection with its services hereunder.

“Eligible Funds” means any moneys on deposit with the Trustee which are (i) Series 2016 Note proceeds, (ii) USDA Direct Loan Proceeds and the proceeds of general obligation bonds or notes issued by the Issuer for the purpose of refunding the Series 2016 Notes as required by Section 5.11, (iii) amounts so on deposit for a period of 91 consecutive days during which no petition in bankruptcy under the U.S. Bankruptcy Code has been filed by or against the Issuer, and no similar proceedings have been instituted against the Issuer under state insolvency or other laws affecting creditors’ rights generally or (iv) any moneys with respect to which an unqualified opinion, acceptable to the Rating Service which has issued a rating on the Series 2016 Notes, from nationally recognized bankruptcy counsel has been received by the Trustee to the effect that payments to any holder of a Series 2016 Note with such moneys would not constitute voidable preferences under Section 547 of the U.S. Bankruptcy Code, or similar state or federal laws with voidable preference provisions in the event of the filing of a petition for relief under the U.S. Bankruptcy Code, or similar state or federal laws with voidable preference provisions by or against the Issuer or Lakewood.

“Facilities” or “Pledged Facilities” means the Main Campus, the Senior Campus, the Senior Living Facilities and the Satellite Clinics.

“Federal Bankruptcy Code” means United States Code, Title 11 Bankruptcy, as amended.

“Financed Facilities” means the healthcare facilities owned by the Issuer and leased to Lakewood, financed or refinanced by the Series 2016 Notes, comprised of the Main Campus and the clinic located in Pillager, Minnesota.

“Fiscal Year” shall mean the fiscal year of the Issuer commencing on the first day of January of a year and ending on the 31st day of December of that year, or such other period as is established from time to time for accounting purposes of the Issuer.

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“Fund” or “Funds” shall mean any one or more, as the case may be, of the separate trust funds created and established in Article V of the Indenture.

“Immediate Notice” means notice by telephone or electronic mail to such telephone number or address as the addressee shall have directed in writing, promptly followed by written notice by first class mail postage prepaid to such address as the addressee shall have directed in writing; provided, however, that if any Person required to give an Immediate Notice shall not have been provided with the necessary information as to the telephone, telecopier number or electronic mail address of an addressee then Immediate Notice shall mean notice by overnight courier service or by first class mail postage prepaid.

“Indenture” means the Indenture of Trust, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture.

“Independent Accountant” means a certified public accountant or firm of certified public accountants selected by the Issuer, which certified public accountant or firm of certified public accountants must have no specific interest, direct or indirect, in the Issuer, and, in the case of an individual, must not be a director, officer or employee of the Issuer and, in the case of a firm, must not have a partner, director, officer or employee who is a director, officer or employee of the Issuer.

“Intercreditor Agreement” means the Intercreditor and Parity Agreement dated as of ______1, 2016, between the Trustee and the Parity Noteholder.

“Interest Fund” means the fund by that name established pursuant to Section 5.03 of the Indenture.

“Interest Payment Date” means (with respect to the Series 2016 Notes) the first day of each June 1 and December 1 (or, if such day is not a Business Day, on the next succeeding Business Day), commencing June 1, 2017.

“Lakewood” means Lakewood Health System, a Minnesota nonprofit corporation.

“Lease” means that certain Lease dated as of March 31, 1997, as amended and restated through the date hereof, between the Issuer and Lakewood.

“Main Campus” means the 25 bed critical access hospital and a health clinic located in Staples, Minnesota, owned by the Issuer and leased to Lakewood.

“Maturity Date” means December 1, 2018.

“Moody’s” or the “Rating Service” shall mean Moody’s Investors Service, Inc.

“Mortgaged Property” means the real property legally described on Exhibit A to the Note Mortgage.

“Net Revenues” means all income and receipts of whatsoever nature, derived in any manner from the Pledged Facilities, including but not limited to operating income, investment income, rents, issues, profits, insurance proceeds and condemnation awards, but excluding grants, gifts, bequests, and proceeds of loans, and excluding proceeds of any taxes levied by the Issuer, less all claims which, according to generally accepted accounting principles, constitute current, reasonable and necessary costs of operation and maintenance of the Pledged Facilities, including ordinary repairs and all costs to operate the health care business at the Pledged Facilities but excluding interest and depreciation.

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“Note Mortgage” means the Mortgage Agreement dated the date hereof from the Issuer and Lakewood to the Trustee.

“Note Register” means the registration books of the Issuer kept by the Trustee to evidence the registration and transfer of Series 2016 Notes.

“Note Registrar” means the Trustee, as keeper of the Note Register.

“Note Resolution” means, with respect to the Series 2016 Notes, the resolution adopted by the Board of Trustees of the Issuer on ______, 2016, authorizing the issuance of the Series 2016 Notes and the execution of the Indenture and documents related thereto.

“Note Security Agreements” means the Series A Note Security Agreement and the Series B Note Security Agreement.

“Officer’s Certificate” or “Certificate of the Issuer” shall mean a certificate signed by an Authorized Representative of the Issuer.

“Opinion of Bond Counsel” means a written opinion of Bond Counsel selected by the Issuer.

“Original Purchaser” means the original purchaser of the Series 2016 Notes.

“Outstanding,” when used as of any particular time with reference to Series 2016 Notes, means (subject to the provisions of Section 11.09) all Series 2016 Notes theretofore, or thereupon, being authenticated and delivered by the Paying Agent/Registrar under the Indenture except (1) Series 2016 Notes theretofore canceled by the Paying Agent/Registrar or surrendered to the Paying Agent/Registrar for cancellation; (2) Series 2016 Notes with respect to which all liability of the Issuer shall have been discharged in accordance with Section 10.01, including Series 2016 Notes (or portions of Series 2016 Notes) referred to in Section 11.10, and (3) Series 2016 Notes for the transfer or exchange of or in lieu of or in substitution for which other Series 2016 Notes shall have been authenticated and delivered by the Paying Agent/Registrar pursuant to the Indenture.

“Owner” or “Note Owner,” or “Noteholder,” or “Holder” whenever used herein with respect to a Series 2016 Note, means the person in whose name such Series 2016 Note is registered on the registration books maintained by the Paying Agent/Registrar.

“Parity Noteholder” means The First National Bank of Deerwood.

“Parity Notes” means the $5,093,625 Medical Facilities Gross Revenue Note, Series 2003A, dated September 15, 2003, the $612,000 Medical Facilities Gross Revenue Note, Series 2003B, dated December 17, and the $7,846,511.57 Medical Facility Mortgage Revenue Notes, Series 2013.

“Parity Notes Mortgage” means that certain Amended and Restated Statutory Mortgage dated April 24, 2013, in favor of the Parity Noteholder, as amended through the date hereof.

“Paying Agent/Registrar” means the Trustee, or its successor, acting as paying agent, authenticating agent and registrar hereunder.

“Person” or “person” means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

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“Pledged Facilities” or “Facilities” means the Main Campus, the Senior Campus, the Senior Living Facilities and the Satellite Clinics.

“Principal Corporate Trust Office” means, with respect to the Trustee and the Paying Agent/Registrar, the office designated by the Trustee and the Paying Agent in writing to the other parties to be the operative office of such party for purposes of the transactions contemplated by the Indenture.

“Project Costs” means: (i) all costs and expenses of every nature incurred in the acquisition, construction, erection, equipment and furnishing of the 2016 Project; (ii) the cost of any title opinions or, title insurance and mortgage registration taxes; (iii) the cost of all utility facilities connected with the Project; (iv) any and all expenses incurred by the Issuer including those prior to the issuance of the Series 2016 Notes, for planning, development and design, any and all expenses for architects’ and engineering fees, the fees and expenses of employees and regularly employed consultants, surveys, attorneys’ fees, and other items necessary to the commencement of construction of the Project; (v) Costs of Issuance; (vi) capitalized interest on the Series 2016A Notes; and (vii) all other expenses, fees, costs and outlays as being necessary or incident to the acquisition, installation, construction and completion of the Project.

“Qualified Investments” means securities which are:

(i) Direct and general obligations of the United States of America, or obligations that are unconditionally guaranteed as to principal and interest by the United States of America, including (in the case of direct and general obligations of the United States of America) evidences of direct ownership of proportionate interests in future interest or principal payments of such obligations. Investments in such proportionate interests must be limited to circumstances wherein (a) a bank or trust company acts as custodian and holds the underlying United States obligations; (b) the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor of the underlying United States obligations and (c) the underlying United States obligations are held in safekeeping in a special account, segregated from the custodian’s general assets, and are not available to satisfy any claim of the custodian, any person claiming through the custodian, or any person to whom the custodian may be obligated. The obligations described in this paragraph are hereinafter called “United States Obligations”.

(ii) Obligations issued or guaranteed by the following instrumentalities or agencies of the United States of America:

(a) Federal Home Loan Banks;

(b) Government National Mortgage Association;

(c) Federal Home Loan Mortgage Corporation;

(d) Federal Housing Administration; and

(e) Federal National Mortgage Association.

(iii) Direct and general long-term obligations of any state, to the payment of which the full faith and credit of the state is pledged and that are rated “Aaa” by Moody’s at the time of purchase.

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(iv) Direct and general short-term obligations of any state, to the payment of which the full faith and credit of the state is pledged and that are rated in the highest rating category by Moody’s.

(v) Interest-bearing demand or time deposits or other deposit products issued by state banks or trust companies or national banking associations that are members of the Federal Deposit Insurance Corporation (“FDIC”), including the Trustee and its affiliates. These deposits must (a) be continuously and fully insured by FDIC and be with banks whose debt is rated at least “P-1” or “Aa” by Moody’s, or (b) be secured by United States Obligations and (if such deposits have maturities of not more than 365 days) be with banks the short-term debt of which is rated at least “P-1” or “Aa” by Moody’s or (if such deposits have maturities of more than 365 days) be with banks the long-term debt of which is rated “Aa” or better by Moody’s. The United States Obligations must be held by the Trustee (who shall not be the provider of the collateral), or by any Federal Reserve Bank or Depositary, as custodian for the Trustee. The Trustee shall have a perfected first lien in the United States Obligations serving as collateral, such collateral shall be free from all third-party liens and claims.

(vi) Repurchase agreements entered into with financial institutions such as banks or trust companies organized under state law or national banking associations, insurance companies, or government bond dealers reporting to, trading with, and recognized as a primary dealer by, the Federal Reserve Bank of New York and a member of the Security Investors Protection Corporation (“SPIC”) or with a dealer or parent holding company, in each such case the debt of which is rated at least “Aa3” or “P-1” by Moody’s. Such repurchase agreements shall be (except repurchase agreements with institutions whose debt or commercial paper is “Aaa” or “P-1” by Moody’s) collateralized by obligations described in (i) or (ii) above, and the provisions of the repurchase agreement shall meet the following additional criteria:

(a) the Trustee (who shall not be the provider of the collateral) or a third party acting solely as agent for the Trustee has possession of such collateral;

(b) failure to maintain the requisite collateral levels will require the Trustee to liquidate such collateral;

(c) the Trustee has a perfected, first priority security interest in such collateral; and

(d) such collateral is free and clear of third-party liens.

(vii) Pre-refunded municipal obligations rates “Aaa” by Moody’s at the time of purchase and meeting the following conditions:

(a) the municipal obligations are (i) not to be redeemed prior to maturity or the Trustee has been given irrevocable instructions concerning their calling and redemption and (ii) the Issuer has covenanted not to redeem such municipal obligations other than as set forth in such instructions;

(b) the municipal obligations are secured by cash or United States Obligations that may be applied only to interest, principal, and premium payments of such municipal obligations;

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(c) the principal of and interest on the United States Obligations (plus any cash in the escrow fund) are sufficient to meet the liabilities on the municipal obligations;

(d) the United States Obligations serving as security for the municipal obligations are held by an escrow agent or trustee; and

(e) the United States Obligations (plus any cash in the escrow fund) are not available to satisfy any other claims, including those against the trustee or escrow agent.

(viii) Prime commercial paper of a United States corporation, finance company or banking institution if such commercial paper is rated at least “P-1” by Moody’s and “A-1+” by S&P and if such commercial paper is stated to mature in not more than 270 days.

(ix) Shares of a diversified open-end management investment company (as defined in the Investment Company Act of 1940) or shares in a regulated investment company (as defined in Section 851(a) of the Internal Revenue Code of 1986, as amended) that is (A) a money market fund that has been rated in the highest rating category by Moody’s or (B) money market accounts of the Trustee or of any state or federal bank the debt of which is rated at least “P-1” or “Aaa” by Moody’s or the debt of whose bank holding company parent is rated at least “P-1” or “Aaa” by Moody’s, including funds for which the Trustee or an affiliate receives and retains a fee for services provided to the fund, whether as a custodian, transfer agent, investment advisor or otherwise.

(x) any other lawful investment authorized by Minnesota Statutes, Chapter 118A with a rating equal to the highest rating issued by each rating agency then rating the Series 2016 Notes, including an investment agreement with an investment agreement provider whose obligations have such a rating.

“Rebate Fund” means the fund established by Section 5.07 hereof.

“Record Date” means, with respect to the Series 2016 Notes, the fifteenth (15th) day of each May and November (whether or not such day is a Business Day).

“Refunding Project” means the refunding of the Series 2004 Bonds.

“Responsible Officer” means, when used with respect to the Trustee, any vice president, assistant vice president, senior associate, associate or other officer of the Trustee within the corporate trust office specified in Section 11.07 (or any successor corporate trust office) customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the corporate trust office specified in Section 11.07 because of such person’s knowledge of and familiarity with the particular subject and having direct responsibility for the administration of the Indenture.

“S&P” means Standard & Poor’s Ratings Services, a division of McGraw Hill Issuer, Inc., its successors and assigns.

“Satellite Clinics” means the health clinics located in Motley, Pillager and Browerville, Minnesota, owned by the Issuer and leased to Lakewood.

“Senior Campus” means a 100-bed skilled nursing facility, a 10-bed inpatient geriatric psychiatric unit and administrative offices for the Issuer and Lakewood located in Staples, Minnesota, owned by the

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Issuer and leased to Lakewood.

“Senior Living Facilities” means a 40-unit independent living facility known as the Pines and a 25-unit assisted living facility known as the Manor located in Staples, Minnesota

“Series A Note Security Agreement” means the Security Agreement dated the date hereof from the Issuer and Lakewood to the Trustee, securing the Series 2016A Notes.

“Series B Note Security Agreement” means the Security Agreement dated the date hereof from the Issuer and Lakewood to the Trustee, securing the Series 2016B Notes.

“Series 2004 Bonds” means the Issuer’s $32,000,000 General Obligation Health Care Facility Revenue Bonds (Lakewood Health System), Series 2004, currently outstanding in the principal amount of $______.

“Series 2016 Bonds” means the Issuer’s $______General Obligation Health Care Facility Revenue Refunding Bonds (Lakewood Health System), Series 2016.

“Series 2016 Notes” or “Notes” means the Series 2016A Notes and the Series 2016B Notes.

“Series 2016A Notes” means the Issuer’s Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016A in the aggregate principal amount of $______.

“Series 2016B Notes” means the Issuer’s General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016B in the aggregate principal amount of $______.

“Series 2016B Tax Levy Account” shall have the meaning set forth in Section 5.11.

“State” means the State of Minnesota.

“Supplemental Indenture” means any indenture hereafter duly authorized and entered into between the Issuer and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized hereunder.

“Tax-Exempt Organization” means a nonprofit corporation organized under the laws of one of the states of the United States or the District of Columbia which is an organization described in Section 501(c)(3) of the Code and exempt from federal income taxes under Section 501(a) of the Code.

“Trust Estate” means the trust estate pledged by the Issuer and described in the Granting Clauses of the Indenture.

“Trustee” means The Bank of New York Mellon Trust Company, N.A., or its successor, as Trustee hereunder as provided in Section 8.01.

“Trustee Local Time” means the local time of the Principal Corporate Trust Office of the Trustee.

“2016 Project” means the renovation and expansion of the Financed Facilities including emergency care expansion space to the hospital and completion of an in-house fixed MRI suite, and expansion of medical clinics located at 653 Pillsbury Street N, Pillager, MN and 49725 County 83, Staples, Minnesota, and including related parking.

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“United States Government Obligations” means bonds, notes, certificates of indebtedness, treasury bills or other securities constituting direct obligations of, or obligations the principal of and interest on which are fully and unconditionally guaranteed as to full and timely payment by, the United States of America, including evidences of a direct ownership interest in future interest or principal payments on obligations issued or guaranteed by the United States of America (including the interest component of obligations of the Resolution Funding Corporation), or securities which represent an undivided interest in such obligations, which obligations are rated in the highest rating category by a nationally recognized rating service, and such obligations are held in a custodial or trust account for the benefit of the Issuer.

“USDA Direct Loan” means the loan of funds from the USDA-RD to the Issuer in the future in a principal amount currently estimated to be $______.

“USDA Direct Loan Proceeds” means the proceeds received by the Issuer from the USDA Direct Loan.

“USDA Loan Commitment Documents” means the Letter of Conditions dated September 6, 2016, and the Letter of Commitment for Permanent Financing, dated ______, 2016.

“USDA-RD” means the United States Department of Agriculture acting through the United States Department of Agriculture-Rural Development, its successors and assigns

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SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

Summarized below are certain provisions of the Indenture. This summary does not purport to be complete, and is qualified by reference to the Indenture.

Establishment of Funds and Accounts

The Indenture establishes the following special trust funds and accounts:

(a) Construction Fund; (b) Refunding Fund; (c) Interest Fund; (d) Bond Sinking Fund; (e) Cost of Issuance Fund; (f) Rebate Fund; and (g) Series 2016B Tax Levy Account.

All such Funds and Accounts are held by the Trustee.

General Application of Note Proceeds

The proceeds from the sale of the Series 2016A Notes shall be deposited as follows: (a) to the credit of the Capitalized Interest Account of the Interest Fund the sum of $______to pay capitalized interest on the Series 2016A Notes; (b) to the credit of the Construction Fund, the sum of $______; and (c) to the credit of the Cost of Issuance Fund, the sum of $______.

The proceeds from the sale of the Series 2016B Notes shall be deposited as follows: (a) to the credit of the Refunding Fund, the sum of $______; and (b) to the credit of the Cost of Issuance Fund, the sum of $______. In addition, on the Closing Date, there shall be deposited to the credit of the Capitalized Interest Account of the Interest Fund from funds of the Issuer not constituting proceeds of the Notes, the sum of $______to pay capitalized interest on the Series 2016B Notes

Construction Fund

There will be deposited to the credit of the Construction Fund Series 2016A Note proceeds and all investment earnings attributable to the Construction Fund. Moneys in the Construction Fund shall be used to pay Project Costs of the 2016 Project.

Moneys held in the Construction Fund shall be disbursed for the payment of Project Costs in accordance with the provisions of the Disbursing Agreement and subject to the approval of USDA-RD. Any amounts remaining on deposit in the Construction Fund after completion of the 2016 Project shall at the direction of the Issuer be deposited in the Bond Sinking Fund for future payments of principal and interest on the Notes or applied to the acquisition and installation of additions, improvements and expansion of the Financed Facilities.

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Refunding Fund

Moneys in the Refunding Fund shall be immediately transferred to U.S. Bank National Association. as paying agent with respect to the Series 2004 Bonds, to be applied to the defeasance and redemption of the Series 2004 Bonds.

Interest Fund

Initial deposits to the Interest Fund and the Capitalized Interest Account, a separate account established within the Interest Fund, shall be made pursuant to the Indenture. Amounts on deposit in the Capitalized Interest Fund will be held to pay interest on the Series 2016 Notes as follows:

Series 2016A Notes Series 2016B Notes Interest Payment Date Amount Amount

In addition, there shall be deposited into the Interest Fund, as and when received all moneys received by the Trustee under and pursuant to any of the provisions of the Indenture which are required or which are accompanied by direction that such moneys are to be paid into the Interest Fund. Money on deposit in the Interest Fund, other than income thereon which is to be transferred to other funds created pursuant to the Indenture, must be used to pay interest on the Series 2016 Notes as it becomes due.

Bond Sinking Fund

There shall be deposited into the Bond Sinking Fund, as and when received, all moneys received by the Trustee under and pursuant to any of the terms of the Indenture which are required or which are accompanied by directions that such moneys are to be deposited in the Bond Sinking Fund.

There shall be deposited into the Bond Sinking Fund the USDA Direct Loan Proceeds on or before the Maturity Date to pay principal of the Series 2016 Notes on the Maturity Date or earlier redemption date, if any.

Money on deposit in the Bond Sinking Fund, other than income earned thereon which is to be transferred to other funds created under the Indenture, shall be applied by the Trustee to pay principal on the Series 2016 Notes as it becomes due and to redeem the Series 2016 Notes in accordance with the provisions of the Indenture.

Cost of Issuance Fund

On the date of delivery of the Series 2016 Notes there will be deposited in the Cost of Issuance Fund the amount of moneys necessary to pay the cost of issuance of the Series 2016 Notes. The Trustee will from time to time pay out, or permit the withdrawal of, moneys from the Cost of Issuance Fund to pay any Costs of Issuance, free and clear of any lien or pledge or assignment in trust created by the Indenture, for the purpose of paying in the manner authorized in the Indenture, any Costs of Issuance of the Series 2016 Notes, upon receipt by the Trustee of a written requisition of the Issuer.

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Rebate Fund

The Indenture requires the Trustee to establish a separate trust account designated as the “Rebate Fund” to be utilized for the collection and payment of earnings from any Fund or Account established under the Indenture subject to the rebate requirements of the Code. To the extent that any investment earnings are generated in excess of the yield permitted by the Code, the Issuer will direct the Trustee to remit any such excess to the United States of America.

Series 2016B Tax Levy Account

In the Indenture, the Issuer has covenanted that it will levy general ad valorem taxes on all taxable property in the taxing jurisdiction of the Issuer, when required to meet any deficiency in amounts pledged to the payment of debt service on the Series 2016B Notes. The proceeds of any such tax levy will be deposited in a separate account, designated the “Series 2016B Tax Levy Account,” and amounts on deposit therein shall be applied to the payment of principal of and interest on the Series 2016B Notes when due to the extent amounts on deposit in the Interest Fund and Bond Sinking Fund are insufficient therefor.

Investment of Funds

The Indenture permits investments of moneys by the Trustee at the written direction of an Authorized Representative of the Issuer (which may include electronic mail or facsimile authorization), in Qualified Investments which in all cases shall mature not later than the date when the amounts will foreseeably be needed for purposes set forth in the Indenture and, to the extent applicable, which are permissible investments pursuant to Minnesota Statutes Chapter 118A, as amended from time to time, or other applicable law. Investments are deemed to be a part of the Fund or Account for which purchased. All income in excess of the requirements of the funds or accounts shall be deposited in the Construction Fund. For the purpose of determining the amount in any fund, all Qualified Investments credited to such fund shall be valued at fair market value.

Covenants

Covenant to Enter into USDA Direct Loan. The Issuer covenants to and for the benefit of the holders of the Series 2016 Notes to proceed with the construction of the Project with due diligence to completion, to refund the Series 2004 Bonds, to comply with the terms and conditions of the USDA Loan Commitment Documents and to enter into the USDA Direct Loan and deposit the USDA Direct Loan Proceeds to the Bond Sinking Fund if and when received to be used to pay the Series 2016

Compliance with Laws; Operation and Maintenance. The Issuer shall faithfully and punctually perform all duties with reference to the Pledged Facilities required and provided by the Constitution and laws of the State. The Issuer agrees to pay or cause Lakewood to pay all expenses of the operation and maintenance of the Pledged Facilities, including adequate insurance thereon and insurance against all liability for injury to persons or property arising from its operation as hereinafter provided, and all taxes and special assessments levied upon or with respect to the Pledged Facilities.

The Issuer shall procure and maintain or cause Lakewood to procure and maintain all necessary licenses and permits and, if appropriate, maintain accreditation of the Pledged Facilities. The Issuer will operate or cause Lakewood to operate the Pledged Facilities as a revenue-producing facility in an efficient and economical manner and will keep and maintain the same in good repair and working order. The Issuer will use the Pledged Facilities for purposes authorized by law and will not install, use, operate or maintain the Pledged Facilities improperly, carelessly, in violation of the applicable law or in a manner contrary to that contemplated by the Indenture.

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Tax Covenants. The Issuer covenants for the benefit of the Owners from time to time of the Series 2016 Notes that it will not take any action that would impair the exclusion of interest on the Series 2016 Notes from gross income for federal income tax purposes. The Issuer further covenants for the benefit of the Owners from time to time of the Series 2016 Notes that it will not knowingly act so as to cause the proceeds of the Series 2016 Notes, any moneys derived, directly or indirectly, from the use or investment thereof and any other moneys on deposit in any fund or account maintained in respect of the Series 2016 Notes (whether such moneys were derived from the proceeds of the sale of the Series 2016 Notes or from other sources) to be used in a manner which would cause the Series 2016 Notes to be treated as “arbitrage bonds” within the meaning of Section 148 of the Code.

Insurance. The Issuer shall maintain, or cause to be maintained, at its sole cost and expense, except as hereinafter provided, insurance with respect to the Pledged Facilities, the operation thereof and its business, or to self-insure, against such casualties, contingencies and risks (including but not limited to medical malpractice, public liability and employee dishonesty) in such amounts not less than is customary in the case of entities engaged in the same or similar activities and similarly situated and as, in the judgment of the Issuer, is adequate to protect the Pledged Facilities, its operations and businesses.

Agreement to Acquire and Construct 2016 Project. The Issuer agrees that it will proceed with all reasonable dispatch to substantially complete the 2016 Project in accordance with the Plans and Specifications defined in the Disbursing Agreement no later than March 31, 2018. Except as otherwise specifically prohibited by the Indenture, the Issuer may from time to time make changes or modifications to the 2016 Project and Plans and Specifications if approved by USDA-RD; provided, however, that in no event shall any such change or modification cause any default to arise under the Indenture; and provided further that no such change or modification shall jeopardize the excludability of interest on the outstanding Series 2016A Notes from gross income for purposes of Federal income taxation.

Supplemental Indentures Not Requiring Consent of Holders

The Issuer may, and, subject to the provisions of the Indenture, the Trustee and the Issuer shall, from time to time and at any time, without the consent of or, except as provided below, notice to the Holders enter into Supplemental Indentures as follows:

(a) to cure any formal defect, omission, inconsistency or ambiguity in the Indenture;

(b) to grant to or confer or impose upon the Trustee for the benefit of the Holders any additional rights, remedies, powers, authority, security, liabilities or duties which may lawfully be granted, conferred or imposed and which are not contrary to or inconsistent with the Indenture as theretofore in effect;

(c) to add to the covenants and agreement of, and limitations and restrictions upon, the Issuer in the Indenture other covenants, agreements, limitations and restrictions to be observed by the Issuer which are not contrary to or inconsistent with the Indenture as theretofore in effect;

(d) to confirm, as further assurance, any pledge under, and the subjection to any claim, lien or pledge created or to be created by, the Indenture;

(e) to authorize different Authorized Denominations of the Series 2016 Notes and to make correlative amendments and modifications to the Indenture regarding exchangeability of Series 2016 Notes of different Authorized Denominations, redemptions of portions of Series 2016 Notes of particular Authorized Denominations and similar amendments and modifications of a technical nature;

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(f) to modify, alter, supplement or amend the Indenture in such manner as shall permit the qualification hereof under the Trust Indenture Act of 1939, as from time to time amended;

(g) to provide for the procedures required to permit any Holder, at its option, to utilize an uncertificated system of registration of its Note;

(h) to modify, alter, amend or supplement the Indenture in any other respect which, in the judgment of the Trustee, is not materially adverse to the Holders and which does not involve a change which requires the consent of the Holders as set forth in the Indenture.

Before the Issuer and the Trustee shall enter into any Supplemental Indenture pursuant to the Indenture, there shall have been delivered to the Trustee an Opinion of Bond Counsel (upon which the Trustee shall be entitled to exclusively rely) stating that such Supplemental Indenture is authorized or permitted by the Indenture and the Act, complies with their respective terms, will, upon the execution and delivery thereof, be valid and binding upon the Issuer in accordance with its terms and will not adversely affect the exemption from federal income taxation of interest on the Series 2016 Notes.

Supplemental Indentures with Consent of Holders

Except for any Supplemental Indenture entered into pursuant to the Indenture not requiring consent of the Holders, the Holders of not less than a majority in aggregate principal amount of the Series 2016 Notes then Outstanding shall have the right from time to time to consent to and approve the execution and delivery by the Issuer and the Trustee of any Supplemental Indenture deemed necessary or desirable by the Issuer for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in the Indenture; provided, however, that, unless approved in writing by the Holders of all the Series 2016 Notes, nothing herein contained shall permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal of, or premium, if any, or interest on, any Note, a change in the terms of the purchase of Series 2016 Notes, or a reduction in the principal amount or redemption price of any Note or a change in the method of determining the rate of interest thereon, or (ii) the creation of a claim or lien upon, or a pledge of, the Gross Revenues or the Permanent Financing ranking prior to or on a parity with the claim, lien or pledge created by the Indenture, or (iii) a preference or priority of any Series 2016 Notes over any other Series 2016 Notes, or (iv) a reduction in the aggregate principal amount of Series 2016 Notes the consent of the Holders of which is required for any such Supplemental Indenture.

Defaults and Remedies

The Indenture declares each of the following events to be an “Event of Default”:

(a) payment of any installment of interest payable on any of the Series 2016 Notes shall not be made when the same shall become due and payable either at maturity, by proceedings for redemption, upon acceleration, through failure to make any payment to any fund under the Indenture or otherwise; or

(b) payment of the principal payable on any of the Series 2016 Notes shall not be made when the same shall become due and payable, either at maturity, by proceedings for redemption, upon acceleration, through failure to make any payment to any fund under the Indenture or otherwise; or

(c) the Issuer shall default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Series 2016 Notes or in the Indenture or any agreement supplemental hereto to be performed on the part of the Issuer, and

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such default shall continue for the period of thirty (30) days after written notice specifying such default and requiring the same to be remedied shall have been given to the Issuer by the Trustee at its discretion or upon the written request of the Holders of not less than 100 percent in aggregate principal amount of the Series 2016 Notes then Outstanding; provided however, if such default can be cured but cannot be cured within such 30 days, it shall not constitute a default hereunder if the Issuer takes action to cure such default within such 30 days and diligently pursues such action until such default is cured; or

(d) any action or inaction by the Issuer which results in the interest on the Series 2016 Notes being includable in gross income of the recipients thereof for federal income tax purposes; or

(e) if the Issuer shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the institution of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or arrangement under the Federal Bankruptcy Code or any other similar applicable federal or state law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or trustee or assignee in bankruptcy or insolvency of it or its properties, or shall make assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally as they become due; or

(f) if an event of default shall occur and be continuing under the Note Mortgage or the Note Security Agreements; or

(g) the occurrence of a default or an event of default with respect to the Parity Notes or the Series 2016 Bonds.

Acceleration of Maturity; Rescission and Annulment

If an Event of Default occurs and is continuing, and (i) if such Event of Default arises under clause (a) or (b) set forth above, the Trustee shall declare, and (ii) in every other case, the Holders of not less than 100% in principal amount of the Series 2016 Notes Outstanding, may declare, or may direct the Trustee to declare, the principal of all the Series 2016 Notes to be due and payable immediately, by a notice in writing to the Issuer and to the Trustee if given by Noteholders, and upon any such declaration such principal shall become immediately due and payable.

Remedies; Rights of Noteholders

Upon the occurrence of any Event of Default, the Trustee may exercise one or more of the following remedies: (a) a proceeding in law or in equity by suit, action or mandamus to enforce and compel performance of the duties set forth in the Indenture or (b) exercise remedies available under the Note Mortgage, the Note Security Agreement or Intercreditor Agreement.

If any Event of Default shall have occurred, and if it shall have been requested so to do by the Holders of not less than 100% in the principal amount of Series 2016 Notes then outstanding and shall have been indemnified as provided in the Indenture, the Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the Indenture as the Trustee shall deem most expedient in the interests of the holders of Series 2016 Notes; provided, however, that the Trustee shall have the right to decline to comply with any such request if the Trustee shall be advised by counsel (who may be its own counsel) that the action so requested may not lawfully be taken or the Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of Series 2016 Notes not parties to such request.

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No remedy by the terms of the Indenture conferred upon or reserved to the Trustee (or to the holders of Series 2016 Notes) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the holders of Series 2016 Notes hereunder now or hereafter existing at law or in equity or by statute.

No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient.

No waiver of any default or Event of Default, under the Indenture, whether by the Trustee or by the holders of Series 2016 Notes, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon.

Direction of Proceedings by Noteholders

Except as otherwise provided in the Indenture, the holders of a majority in aggregate principal amount of Series 2016 Notes then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Indenture; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of the Indenture.

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SUMMARY OF CERTAIN PROVISIONS OF THE MORTGAGE

Summarized below are certain provisions of the Mortgage. This summary does not purport to be complete, and is qualified by reference to the Mortgage.

General

As additional security for the payment of all amounts payable by the Issuer and Lakewood (together, “Mortgagor”) with respect to the Series 2016A Notes, and performance of each covenant, agreement or condition of Mortgagor relating to the Series 2016A Notes set forth in the Indenture, the Mortgagor, by the Mortgage, will grant to the Trustee a mortgage on and security interest in the Mortgaged Property subject to certain specified Permitted Encumbrances.

The Mortgaged Property includes the Land; all buildings, structures, improvements and appurtenances now standing or at any time hereafter constructed or placed upon the Land (hereinafter, the “Facilities”); the reversion or reversions, remainder or remainders, in and to the Land and each and every part thereof; all proceeds of any taking of or damage to, or any sale in lieu of a taking of, any portion of the Facilities under or pursuant to the power of condemnation or eminent domain, and all insurance proceeds from damage to the Facilities; all leases of all or any portion of the Facilities; and all rents, income, receipts, revenue and benefits arising from the use and occupation of the Facilities, whether accruing before or after foreclosure of the Mortgage or during the period of redemption thereof.

Permitted Encumbrances

The Permitted Encumbrances which are applicable to the Mortgaged Property are as follows:

(a) liens for taxes and special assessments which are not then delinquent, or if then delinquent are being contested in accordance with the Indenture;

(b) utility, access and other easements and rights-of-way, restrictions, restrictive covenants and exceptions that the Mortgagor certifies to the Mortgagee will not interfere with or impair the operation of the Mortgaged Property, or, if it is not being operated, the operation for which it was designed or last modified;

(c) any mechanic’s, laborer’s, materialman’s, supplier’s, or vendor’s lien or right in respect thereof if payment is not yet due under the contract in question or if such lien is being contested in accordance with the Indenture;

(d) such minor defects, irregularities, encumbrances, easements, rights-of-way and clouds on title as normally exist with respect to properties similar in character to the Land and which the Mortgagor certifies do not materially impair the property affected thereby for the purpose for which it was intended;

(e) zoning laws;

(f) liens arising in connection with workers’ compensation, unemployment insurance, taxes, assessments, statutory obligations or liens, social security legislation, undetermined liens and charges incidental to construction, or other similar charges arising in the ordinary course of operation and not overdue or, if overdue, being contested in accordance with the Indenture, and such other liens and charges at the time required by law as a condition precedent to the transaction of the business of the Mortgagor or the exercise of any privileges or licenses necessary to the Mortgagor;

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(g) inferior liens as provided in connection with the incurrence of permitted subordinate indebtedness;

(h) parity liens to secure permitted parity indebtedness; and

(i) the Parity Notes Mortgage; and

(i) exceptions, easements, restrictions and encumbrances shown as of the date of the Mortgage on Exhibit B thereto.

Events of Default; Remedies

Subject to the terms of the Intercreditor Agreement, if an Event of Default as defined in the Indenture has occurred and be continuing, the Trustee, as mortgagee, will be entitled to exercise any or all of the remedies set forth or provided in the Indenture, including, but not limited to, petitioning a court of competent jurisdiction for the appointment of a receiver to take possession of and manage and operate the assets of the Mortgagor for the benefit of the Holders of the Bonds then Outstanding and including but not limited to declaring all outstanding indebtedness under the Indenture immediately due and payable without notice, and the Trustee is authorized and empowered at its option, to (1) proceed to protect and enforce its rights by a suit or suits in equity or at law for the specific performance of any covenant or agreement contained in the Mortgage, in the Indenture or in any other instrument which refers to or secures the Indenture, or in aid of the execution of any right, power or remedy granted in said documents, or for the foreclosure of the Mortgage, or for damages, or to collect the indebtedness secured thereby, or for the enforcement of any other appropriate legal, equitable, statutory or contractual remedy, and will be entitled to the appointment of a receiver to operate and protect the Mortgaged Property and to collect rents due under any lease, and/or (2) sell the Mortgaged Property, or any portion thereof, at public auction in one or more parcels, at the Mortgagee’s option, and convey the same to the purchaser in fee simple, as the statute in such case provides, the Mortgagor to remain liable for any deficiency, if permitted by law. Further, the Trustee, in exercising its rights, shall also have, without limitation, all of the rights and remedies provided by the Minnesota Uniform Commercial Code, including the right to proceed under the Minnesota Uniform Commercial Code provisions governing default as to any fixtures which may be included in the Mortgaged Property and separately from the real estate included in the Mortgaged Property, or to proceed as to any or all of such property in accordance with its rights and remedies in respect of said real estate. If the Trustee elects to proceed separately as to any such property, the Mortgagor agrees to make such property available to the Trustee at a place or places reasonably acceptable to the Trustee, and, if any notification of intended disposition of any of such property is required by law, such notification will be deemed commercially reasonable and reasonably and properly given if mailed at least ten (10) days before such disposition in the manner provided in the Indenture.

Assignment of Rents and Revenues

As additional security for the debt secured by the Mortgage, the Mortgagor bargains, sells, assigns and sets over unto the Trustee all rents, profits and other income or revenue of any kind which, whether before or after foreclosure or during the full statutory period of redemption, if any, shall accrue and be owing for the use or occupation of the Mortgaged Property or any part thereof.

Grant of Easements, Licenses, Etc.

The Mortgagor may at any time or times grant to itself or others easements, licenses, rights of way and other rights or privileges in the nature of easements with respect to the Land, free from the lien of the Mortgage, or the Mortgagor may release existing easements, licenses, rights of way and other rights or privileges with or without consideration, and the Trustee will execute and deliver any instrument

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necessary or appropriate to confirm and grant or release any such easement, license, right of way or privilege; provided, however, that prior to any such grant or release there has been supplied to the Trustee a certificate of the Mortgagor and a certificate of an Independent Management Consultant to the effect that:

(a) such grant or release is not detrimental to the proper operation of the Facilities, and

(b) such grant or release will not impair the operating unity or the efficiency of the Facilities on the Land or materially and adversely affect the character thereof.

Tie-In Walls

The Mortgagor may, at its own expense:

(a) connect or “tie-in” walls (including use of existing walls for the support of future adjacent buildings) and utilities and other facilities located on the Land to other structures erected on the Land or on real property adjacent to or near the Land or partly on such adjacent real property and partly on the Land; or

(b) in connection with the expansion or improvement of any building on the Land, tear down any wall of such building and build an addition to such building (either on the Land or on real property adjacent thereto or partly on such adjacent real property and partly on the Land); provided, however, that, prior to any such expansion, addition, improvement, tearing down or connection with the “tie-in” walls, utilities and other facilities, the Trustee has approved the same in writing based on a certification and opinion of an Independent Architect that the same will not impair the operating unity or the efficiency of the Facilities on the Land or adversely affect the character thereof, and based on an Opinion of Counsel stating that all party-wall agreements, easements, cross-easements or other instruments relating to such expansion, addition, improvement, tearing down or connection with the “tie-in” walls, utilities and other facilities, which are necessary or desirable to define the relative rights of the owners and encumbrances of the same therein, and to fully preserve the security of the Mortgage, have been duly executed, delivered and recorded, to which Opinion of Counsel copies of all such instruments will be attached. The Trustee shall release from the lien of the Mortgage any interest in the Mortgaged Property, or join in any such party-wall agreements, easements, cross-easements or other agreements, to the extent necessary to effect the purpose of Section 4.3.

Release of Mortgaged Property

The Mortgagor shall have the right, from time to time, to sell, encumber or otherwise dispose of and obtain a release from the Mortgage of any part of the Land if the release will not materially impair the revenue producing ability of the Facilities, the structural integrity of the remaining Facilities or the usefulness of the remaining portion of the Facilities for these purposes and will not inhibit adequate means of ingress to or egress from the remaining portion of the Facilities, and the Mortgagor shall, from time to time, release from the Mortgage such part of the Land so sold, encumbered or disposed of, including subdivision and release as a separate parcel, but only upon receipt by the Mortgagee of the following:

(1) A request for such release from the Mortgagor;

(2) A certificate of the Mortgagor stating or setting forth in substance as follows:

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(a) the square footage or acreage of Land to be released;

(b) the calculation of the release price, which shall be the value of the property to be released as valued in an appraisal addressed to the Mortgagee by an AIA appraiser dated not more than one (1) year prior to the release date;

(c) that the Land to be released is not necessary for the total operating unity and efficiency of the Facilities for the purpose for which it was intended;

(d) that the release will not materially impair the revenue producing ability of the Facilities, the structural integrity of the Facilities or the usefulness of the Facilities for these purposes and will not inhibit adequate means of ingress to or egress from the Facilities;

(e) that there exists no Event of Default under the Indenture or related documents; and

(f) that all conditions precedent in the Mortgage provided for relating to such release have been complied with;

(3) A survey prepared by a registered land surveyor describing and showing the Land, after giving effect to such release and a site plan which indicates the position of all buildings to be built on such released Land;

(4) Cash equal to the release price as certified pursuant to (2)(b) above;

(5) An opinion of Independent Counsel stating that the certificates, opinions and other instruments and cash which have been or are therewith delivered to and deposited with the Mortgagee conform to the requirements of the Mortgage and that, upon the basis of such application, the property may be properly released from the lien of the Mortgage and that all conditions precedent therein provided for relating to such release have been satisfied; and

(6) a date-down endorsement to the mortgagee’s policy of title insurance issued in connection with the financing insuring the Land, as amended, and providing affirmative coverage for the appurtenant easements and including the same endorsements as the original policy.

Simultaneously with the release of any real property as provided above, the cash, in the amount specified in (4) above, shall be used by the Mortgagee to prepay the Series 2016A Notes at the earliest possible date.

Concerning Insurance and Condemnation

With regard to damage or destruction or condemnation:

(1) if the Mortgaged Property is partially destroyed or damaged by fire or other casualty or the Mortgaged Property is condemned in part, the Mortgagor will promptly repair, rebuild, restore, or replace such property to such condition as existed before such occurrence, or to any other condition which (with such changes, alterations, and modifications, including the substitution and addition of other property as may be desired by the Mortgagor) will not materially impair the operating unity, productive capacity, or value of the Mortgaged Property, and will be suitable for continued operation of the Mortgaged Property for the purposes set forth

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in Minnesota Statutes, Chapter 447; and the Mortgagor will pay the costs thereof and be entitled to retain all net proceeds of insurance paid in respect of any claim resulting from any such loss or damage.

(2) if the Mortgaged Property is destroyed in whole, the insurance proceeds paid on account of such damage shall, within sixty (60) days, be applied to payment of the amounts due under the Notes, even if such amounts are not then due to be paid. The balance of insurance proceeds, if any, shall be the property of the Mortgagor.

(3) the Mortgage shall immediately attach to and constitute a lien or security interest against all additions, modifications, substitutions, and improvements to the Mortgaged Property made by the Mortgagor pursuant to the provisions of this section without further act or deed of the Mortgagor.

(4) if the Mortgaged Property is taken in its entirety, the Mortgagor shall prepay the Notes in accordance with its terms as soon as the Mortgagor receives the condemnation proceeds.

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SUMMARY OF CERTAIN PROVISIONS OF THE SERIES A NOTE SECURITY AGREEMENT

Summarized below are certain provisions of the Series A Note Security Agreement. This summary does not purport to be complete, and is qualified by reference to the Series A Note Security Agreement.

General

As additional security for the payment of all amounts payable by the Issuer and Lakewood (together, “Debtor”) with respect to the Series 2016A Notes, and performance of each covenant, agreement or condition of Debtor relating to the Series 2016A Notes set forth in the Indenture, the Debtor, by the Series A Note Security Agreement, will grant to the Trustee a security interest in the Collateral.

The Collateral

(i) Accounts. Any and all rights of Debtor to the payment of a monetary obligation, whether or not earned by performance, (i) for property that is located at or used in connection with operation of the Pledged Facilities that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of; (ii) for services rendered at the Pledged Facilities; (iii) for a policy of insurance issued or to be issued, including health-care-insurance receivables as defined in the Uniform Commercial Code in effect in Minnesota, as may be amended from time to time (hereinafter referred to as the “UCC”); (iv) for a secondary obligation incurred or to be incurred; or (v) arising out of the use of a credit or charge card or information contained on or for use with the card with respect to services rendered at the Pledged Facilities.

(ii) Deposit Accounts. Any and all rights and interests of Debtor in and to deposit accounts (as defined in the UCC) for funds generated at the Pledged Facilities, which includes any demand, time, savings, passbook, or similar account maintained with any organization engaged in the business of banking, including savings banks, savings and loan associations, credit unions, and trust companies.

(iii) Commercial Tort Claims. Any and all rights and interests of Debtor in and to commercial tort claims relating to the Pledged Facilities, as such term is defined in the UCC.

(iv) Inventory. Any and all of Debtor’s goods held as inventory at the Pledged Facilities, or whether now owned or hereafter acquired, including without limitation, any and all such goods held for sale or lease or being processed for sale or lease in Debtor’s business at the Pledged Facilities, as now or hereafter conducted, including all materials, goods, and work in process, finished goods, and other tangible property held for sale or lease or furnished or to be furnished under contracts of service or used or consumed in Debtor’s business at the Pledged Facilities, along with all documents (including documents of title) covering such inventory.

(v) Equipment. Any and all of Debtor’s goods held as equipment at the Pledged Facilities, including, without limitation, all machinery, tools, dies, furnishings, or fixtures, wherever located, whether now owned or hereafter acquired, and any computer programs embedded in such equipment and any supporting information provided in connection with a transaction relating to the computer program if the program is associated with equipment at the Pledged Facilities in a manner that it customarily is considered part of the equipment, or by becoming the owner of the equipment, a person acquires a right to use the program in connection

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with the equipment, together with all increases, parts, fittings, accessories, equipment, and special tools now or hereafter affixed to any part thereof or used in connection therewith.

(vi) Fixtures. Any and all of Debtor’s goods that are fixtures (as defined in the UCC) at the Pledged Facilities, whether now existing or hereafter acquired. These goods are or will become fixtures on the real property identified on Exhibit A attached to the Series A Note Security Agreement (“Real Property”).

(vii) Instruments and/or Documents. Any and all of Debtor’s rights and interests in instruments and/or documents (as such terms are defined in the UCC), and other writings of any type which evidence a right to the payment of money for services rendered at the Pledged Facilities and which are of a type that is transferred in the ordinary course of business by delivery with any necessary indorsement or assignment, whether now owned or hereafter acquired, including, without limitation, negotiable instruments, promissory notes (as defined in the UCC), documents of title owned or to be owned by Debtor, certificates of deposit, and all liens, security agreements, leases, and other contracts securing or otherwise relating to any of said instruments or documents.

(viii) Investment Property. Any and all of Debtor’s rights and interests in investment property (as defined in the UCC) derived from Revenues (hereinafter defined) generated at the Pledged Facilities including without limitation certificated and uncertificated securities, securities accounts, securities entitlements, commodity contracts, and commodity accounts.

(ix) Chattel Paper. Any and all of Debtor’s rights and interests in chattel paper, electronic chattel paper, and tangible chattel paper (as such terms are defined in the UCC) related to Debtor’s business at the Pledged Facilities, including security interests in software and license of software used in specific goods and leases of specific goods and license of software used in the goods.

(x) Letter of Credit Rights. Any and all of Debtor’s rights and interests in and to payment or performance under a letter of credit relating to the Pledged Facilities, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

(xi) Supporting Obligations. Any and all of Debtor’s rights and interests in and to a letter-of-credit right or secondary obligation that supports the payment or performance of any account, chattel paper, document, general intangible, instrument, or investment property (as such terms are defined in the UCC) arising out of Debtor’s business at the Pledged Facilities.

(xii) General Intangibles. Any and all of Debtor’s general intangible property, including payment intangibles (as defined in the UCC), whether now owned or hereafter acquired by Debtor or used in Debtor’s business at the Pledged Facilities currently or hereafter, including, without limitation, all patents, trademarks, service marks, trade secrets, copyrights and exclusive licenses (whether issued or pending), literary rights, contract rights and all documents, applications, materials and other matters related thereto, all inventions, all manufacturing, engineering and production plans, drawings, specifications, processes and systems, all trade names, goodwill and all chattel paper, documents, and instruments relating to such general intangibles.

(xiii) Net Revenues. All income and receipts of whatsoever nature, derived in any manner from the Pledged Facilities, including but not limited to operating income, investment income, rents, issues, profits, insurance proceeds and condemnation awards, but excluding grants,

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gifts, bequests, and proceeds of loans, and excluding proceeds of any taxes levied by the Issuer, less all claims which, according to generally accepted accounting principles, constitute current, reasonable and necessary costs of operation and maintenance of the Pledged Facilities, including ordinary repairs and all costs to operate the health care business at the Pledged Facilities but excluding interest and depreciation.

(xiv) Proceeds. All right, title and interest of Debtor in any and all proceeds and products of the types of property described in (i) through (xiii) above.

Ownership and Maintenance of the Collateral

Debtor shall keep all tangible Collateral in good condition, normal wear and tear and loss by fire or other casualty excepted. Except the parties holding interests pursuant to the Permitted Encumbrances, Debtor shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein adverse to Secured Party. Debtor shall keep the Collateral free from all liens and security interests, except those for Permitted Encumbrances.

Collateral Use

Debtor may retain possession of the Collateral (subject to the terms of the Series A Note Security Agreement and the Indenture) and may use the Collateral in the ordinary course of business and in a manner not inconsistent with the Series A Note Security Agreement and the Indenture. The Collateral shall be kept in good order and repair, ordinary wear and tear and loss by fire or casualty excepted, and Debtor will not permit waste or do anything to materially impair the value of the Collateral or use or permit others to use the Collateral in violation of any insurance policy covering the Collateral or any statute, ordinance or state or federal regulation. Debtor shall give the Secured Party prompt written notice of any damage, destruction, theft, loss or the occurrence of any event which materially impairs the value of the Collateral.

Disposition of the Collateral

Until an Event of Default (as defined in the Series A Note Security Agreement) has occurred and is continuing:

(i) Debtor may dispose of the Collateral as permitted in the following paragraphs as follows:

(1) in the ordinary course of business; or

(2) which is replaced with Collateral of equal or greater value and usefulness; or

(3) to any Person if prior to such sale, lease or other disposition there is delivered to the Secured Party a certificate of an authorized officer of the Debtor stating that, in the judgment of the signer, such Collateral has, or within the next succeeding 24 calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will not impair the structural soundness, efficiency or economic value of Pledged Facilities; or

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(4) upon fair and reasonable terms no less favorable to the Debtor, than would obtain in a comparable arm’s-length transaction, if following such transfer the proceeds received by the Debtor are applied to acquire additional Collateral or are applied to repay the principal of the Indebtedness of the Debtor; or

(5) to any person, if such Collateral consists solely of assets which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payment of the Indebtedness of the Debtor; or

(6) consisting of the existing facilities, including equipment, furnishings and fixtures, demolished or disposed as a result of the construction of the Project (as defined in the Indenture); or

(7) consisting of an amount in total, for any such twelve-month period, in excess of ten percent (10%) of the net book value of Debtor’s Tangible Assets.

(ii) Debtor will, at its own expense, collect, as and when due, all amounts due under the Accounts and Deposit Accounts (the “Accounts Collateral”), including, during the continuance of an Event of Default only, the taking of such action with respect to such collection as Secured Party may reasonably request or, in the absence of such request, as Debtor may deem advisable, and may grant, in the ordinary course of Debtor’s business, to any party obligated on any of the Accounts Collateral, any rebate, refund or adjustment to which such party may be lawfully entitled or in Debtor’s reasonable judgment is an appropriate settlement of an Account that would be otherwise difficult to collect, and may accept, in connection therewith, the lawful return of goods, the sale or lease of which shall have given rise to such Accounts Collateral.

During the existence of an Event of Default, Secured Party may at any time and at Debtor’s expense, notify any parties obligated on any of the Accounts Collateral to make payment directly to Secured Party of any amounts due or to become due thereunder and enforce collection of any of the Accounts Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise, extend or renew same for any period.

Parity Interest with Parity Notes

The security interest granted in the Collateral shall be on a parity basis with the security interest to be granted by Debtor in any of the Collateral as security for the Parity Notes (as defined in the Indenture) to the extent and as provided in the Intercreditor Agreement (as defined in the Indenture).

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SUMMARY OF CERTAIN PROVISIONS OF THE SERIES B NOTE SECURITY AGREEMENT

Summarized below are certain provisions of the Series B Note Security Agreement. This summary does not purport to be complete, and is qualified by reference to the Series B Note Security Agreement.

General

As additional security for the payment of all amounts payable by the Issuer and Lakewood (together, “Debtor”) with respect to the Series 2016B Notes, and performance of each covenant, agreement or condition of Debtor relating to the Series 2016B Notes set forth in the Indenture, the Debtor, by the Series B Note Security Agreement, will grant to the Trustee a security interest in the Collateral.

The Collateral

(i) Net Revenues. All income and receipts of whatsoever nature, derived in any manner from the Pledged Facilities, including but not limited to operating income, investment income, rents, issues, profits, insurance proceeds and condemnation awards, but excluding grants, gifts, bequests, and proceeds of loans, and excluding proceeds of any taxes levied by the Issuer, less all claims which, according to generally accepted accounting principles, constitute current, reasonable and necessary costs of operation and maintenance of the Pledged Facilities, including ordinary repairs and all costs to operate the health care business at the Pledged Facilities but excluding interest and depreciation.

(ii) Proceeds. All right, title and interest of Debtor in any and all proceeds and products of the types of property described in (i) above.

Collateral Use

Debtor may retain possession of the Collateral (subject to the terms of the Series B Note Security Agreement and the Indenture) and may use the Collateral in the ordinary course of business and in a manner not inconsistent with the Series B Note Security Agreement and the Indenture. The Collateral shall be kept in good order and repair, ordinary wear and tear and loss by fire or casualty excepted, and Debtor will not permit waste or do anything to materially impair the value of the Collateral or use or permit others to use the Collateral in violation of any insurance policy covering the Collateral or any statute, ordinance or state or federal regulation. Debtor shall give the Secured Party prompt written notice of any damage, destruction, theft, loss or the occurrence of any event which materially impairs the value of the Collateral.

Subordination of Security Interest

The security interest granted in the Collateral shall be on a subordinate basis to the security interest granted or to be granted by Debtor in any of the Collateral as security for the Series 2016A Notes or the Parity Notes (as defined in the Indenture), and on parity with the security interest granted by Lakewood to the Issuer, and by the Issuer to the holders of the General Obligation Health Care Facility Refunding Revenue Bonds (Lakewood Health System), Series 2016.

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APPENDIX G

FORM OF LEGAL OPINION

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FaegreBakerDanielsLLP

2200WellsFargoCenter90SouthSeventhStreet

MinneapolisMinnesota554023901 Phone+16127667000 Fax+16127661600

November ______, 2016

United Hospital District Todd, Morrison, Cass and Wadena Counties, Minnesota

United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota $______Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016A and $______General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016B

Ladies and Gentlemen:

We have acted as bond counsel to United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota (the “District”), in connection with the issuance by the District of its Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016A, in the aggregate principal amount of $______(the “Series 2016A Notes”) and its General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System Project), Series 2016B, in the aggregate principal amount of $______(the “Series 2016B Notes” and together with the Series 2016 A Notes, the “Series 2016 Notes”). The Series 2016 Notes are dated as of November __, 2016

We have examined such certified proceedings, documents and certifications of public officials as we deem necessary to render this opinion, including the forms of the Series 2016 Notes, a resolution of the Hospital Board of Trustees of the District adopted on September 29, 2016 (the “Bond Resolution”) and an executed counterpart of the Indenture of Trust, dated as of November 1, 2016 (the “Indenture”), between the District and The Bank of New York Mellon Trust Company, N.A., as trustee for the Notes (the “Trustee”). As to questions of fact material to our opinion, we have relied upon such certified proceedings, documents and certifications furnished to us without undertaking to verify such facts by independent investigation.

We have not been engaged or undertaken to verify the accuracy, completeness or sufficiency of the District’s Official Statement dated ______, 2016, or other offering material relating to the Series 2016 Notes, and we express no opinion relating thereto.

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Based on our examination, and assuming the genuineness of the signatures thereon and the accuracy of the facts stated therein, we are of the opinion, as of the date hereof, as follows:

1. The District is a municipal corporation and political subdivision duly organized and existing under the laws of the State of Minnesota.

2. The Indenture has been duly authorized, executed, and delivered by the District and, assuming due authorization, execution, and delivery by the Trustee, represents the valid and binding agreement of the District enforceable against the District in accordance with its terms.

3. The Series 2016A Notes have been duly authorized, executed and delivered by the District and are valid and binding special, limited obligations of the District. The Series 2016A Notes are payable as to principal and interest from proceeds of a certain USDA Loan, net revenues of the District’s health care facilities which are leased to and operated by Lakewood Health System, a Minnesota nonprofit corporation (“Lakewood”) and certain funds and investments held by the Trustee under the Indenture for payment or security for such Series 2016A Notes.

4. The Series 2016B Notes have been duly authorized, executed and delivered by the District and are valid and binding general obligations of the District. The Series 2016B Notes are payable as to principal and interest from proceeds of a certain USDA Loan, net revenues of the District’s health care facilities, certain funds and investments held by the Trustee under the Indenture for payment or security for such Series 2016B Notes, and the District is required to issue additional general obligations and to levy general ad valorem taxes on all taxable property in the District without limitation as to rate or amount, if necessary, to pay principal and interest when due. The pledge of net revenues to payment of the Series 2016B Bonds is subordinate to the pledge of net revenues to the Series 2016A Notes, and certain other outstanding obligations of the District.

5. The interest on the Series 2016 Notes is excludable from gross income for purposes of federal income taxation and from taxable net income of individuals, estates and trusts for purposes of Minnesota income taxation under present laws and rulings. Interest on the Series 2016 Notes is not an item of tax preference required to be included in the computation of “alternative minimum taxable income” for purposes of federal alternative minimum tax applicable to individuals and other taxpayers under Section 55 of the Internal Revenue Code of 1986 (the “Code”) or Minnesota alternative minimum tax applicable to individuals, trusts and estates. Interest on the Series 2016 Notes is includable in “adjusted current earnings” for the purpose of determining the “alternative minimum taxable income” of corporations under Section 55 of the Code and is subject to the Minnesota franchise tax imposed upon corporations, including financial institutions, measured by taxable income and the alternative minimum tax base.

The opinions set forth in the preceding paragraph are subject to the condition that the District and Lakewood comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Series 2016 Notes in order that interest thereon be, or continue to be, excludable from gross income and net taxable income for federal and state income tax purposes, respectively. The District and Lakewood have covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause the interest on the Series 2016 Notes to cease to be excludable from gross income and net taxable income for federal and state income tax purposes, respectively, retroactive to the date of issuance of the Series 2016 Notes. We express no opinion regarding any other federal or state tax consequences arising with respect to the Series 2016 Notes.

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In rendering the foregoing opinions, we have relied upon: (i) representations of the District and Lakewood as to the application of the proceeds of the Series 2016 Notes and the nature, use, cost, and economic life of the facilities financed or refinanced with the proceeds of the Series 2016 Notes, and (ii) the opinion of even date herewith of Fredrikson & Byron, P.A., Minneapolis, Minnesota, as counsel for Lakewood, as to certain matters, including that Lakewood is an organization described in Section 501(c)(3) of the Code and is exempt from Federal income taxation under Section 501(a) of the Code, that based on representations of Lakewood as to the facilities to be financed or refinanced with the proceeds of the Series 2016 Notes and the activities to be conducted by Lakewood in such facilities, no portion of the facilities financed or refinanced with the proceeds of Series 2016 Notes is to be used with respect to activities which constitute an unrelated trade or business of Lakewood within the meaning of Section 513(a) of the Code. Our opinions are subject to the qualifications and assumptions contained in that opinion.

It is to be understood that the rights of the holders of the Series 2016 Notes and the enforceability thereof may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may be subject to the exercise of judicial discretion in appropriate cases.

Very truly yours,

FAEGRE BAKER DANIELS LLP

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APPENDIX H

FORM OF CONTINUING DISCLOSURE CERTIFICATE

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[Form of]

CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the “Disclosure Certificate”) is executed and delivered by United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota, a political subdivision and municipal corporation of the State of Minnesota (the “District”) and Lakewood Health System (“Lakewood” and, together with the District, the “Obligated Persons”), in connection with the issuance of $______Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A (the “Series 2016A Notes”) and $______General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016B (the “Series 2016B Notes” and, together with the Series 2016A Notes, the “Series 2016 Notes, dated November __, 2016 (the “Dated Date”). The Series 2016 Notes are being issued pursuant to an Indenture of Trust dated as of November 1, 2016 (the “Indenture”) between the District and The Bank of New York Mellon Trust Company, N.A. as trustee.

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Obligated Persons for the benefit of the Holders and Beneficial Owners of the Series 2016 Notes and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12.

Section 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report of the District and Lakewood, provided by Lakewood on behalf of itself and the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Beneficial Owner” shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Series 2016 Notes (including persons holding Series 2016 Notes through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Series 2016 Notes for federal income tax purposes.

“Dissemination Agent” shall mean the Dissemination Agent, if any, designated in writing by the Lakewood and the District and the Dissemination Agent.

“EMMA” shall mean the MSRB’s Electronic Municipal Market Access system available at http://emma.msrb.org.

“Holders” shall mean the registered holders of the Series 2016 Notes, as recorded in the registration books of the Registrar.

“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.

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“Municipal Securities Rulemaking Board” or “MSRB” shall mean the Municipal Securities Rulemaking Board, 1300 I Street NW, Suite 1000, Washington, DC 20005.

“Participating Underwriter” shall mean any of the original underwriters of the Series 2016 Notes required to comply with the Rule in connection with offering of the Series 2016 Notes.

“Rule” shall mean Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“State” shall mean the State of Minnesota.

Section 3. Provision of Annual Reports.

(a) Not later than June 30 (the “Submission Deadline”) of each year following the December 31 of the prior year commencing with the fiscal year ending December 31, 2016, Lakewood shall, or shall cause the Dissemination Agent (if any) to, file on EMMA an electronic copy of the Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate in a format and accompanied by such identifying information as prescribed by the MSRB. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of Lakewood and Lakewood may be submitted separately from the balance of the Annual Report and later than the Submission Deadline if either of such audited financial statements are not available by that date. If the fiscal year of Lakewood or the District changes, Lakewood shall give notice of such change in the same manner as for a Listed Event under Section 5(c), and the Submission Deadline beginning with the subsequent fiscal year will become six months following the end of the changed fiscal year.

(b) If Lakewood and the District have designated a Dissemination Agent, then not later than fifteen (15) business days prior to the Submission Deadline, Lakewood, on behalf of itself and the District, shall provide the Annual Report to the Dissemination Agent.

(c) If Lakewood is unable to provide an Annual Report by the Submission Deadline, in a timely manner thereafter, Lakewood shall, or shall cause the Dissemination Agent (if any) to, file a notice on EMMA stating that there has been a failure to provide an Annual Report on or before the Submission Deadline.

Section 4. Content of Annual Reports. The Annual Report shall contain or include by reference the following:

(a) The audited financial statements of Lakewood for the prior fiscal year, prepared in accordance with generally accepted accounting principles promulgated by the Financial Accounting Standards Board as modified in accordance with the governmental accounting standards promulgated by the Governmental Accounting Standards Board or as otherwise provided under State law, as in effect from time to time, or, if and to the extent such audited financial statements have not been prepared in

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accordance with generally accepted accounting principles, noting the discrepancies therefrom and the effect thereof. If Lakewood’s audited financial statements are not available by the Submission Deadline, the Annual Report shall contain unaudited financial information (which may include any annual filing information required by State law) accompanied by a notice that the audited financial statements are not yet available, and the audited financial statements shall be filed on EMMA when they become available.

(b) The audited financial statements of the District for the prior fiscal year, prepared in accordance with generally accepted accounting principles promulgated by the Financial Accounting Standards Board as modified in accordance with the governmental accounting standards promulgated by the Governmental Accounting Standards Board or as otherwise provided under State law, as in effect from time to time, or, if and to the extent such audited financial statements have not been prepared in accordance with generally accepted accounting principles, noting the discrepancies therefrom and the effect thereof. If the District’s audited financial statements are not available by the Submission Deadline, the Annual Report shall contain unaudited financial information (which may include any annual filing information required by State law) accompanied by a notice that the audited financial statements are not yet available, and the audited financial statements shall be filed on EMMA when they become available.

(c) Tables, schedules or other information contained in Appendix A to the official statement for the Series 2016 Notes, under the following captions:

Largest Taxpayers

District Economic and Financial Information

(d) Tables, schedules or other information contained in Appendix B to the official statement for the Series 2016 Notes, under the following captions:

Utilization

Selected Financial Data (other than part year information)

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of Lakewood, the District or related public entities, which are available on EMMA or are filed with the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available on EMMA. Lakewood, on behalf of itself and the District, shall clearly identify each such other document so included by reference.

Section 5. Reporting of Significant Events

(a) Pursuant to the provisions of this Section 5, Lakewood, on behalf of itself and the District, shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2016 Notes:

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(1) Principal and interest payment delinquencies.

(2) Non-payment related defaults, if material.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

(6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security.

(7) Modifications to rights of security holders, if material.

(8) Bond calls, if material, and tender offers.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment of the securities, if material.

(11) Rating changes.

(12) Bankruptcy, insolvency, receivership or similar event of either Obligated Person.

Note to paragraph (12): For the purposes of the event identified in subparagraph (12), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of either Obligated Person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of either Obligated Person.

(13) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of either Obligated Person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

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(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material.

(b) If a Listed Event described in Section 5(a) paragraph (2), (7), (8) (but only with respect to bond calls under (8)), (10), (13) or (14) has occurred and Lakewood and the District have determined that such Listed Event is material under applicable federal securities laws, Lakewood, shall, on behalf of itself and the District, in a timely manner but not later than ten business days after the occurrence of such Listed Event, promptly file, or cause to be filed, a notice of such occurrence on EMMA, with such notice in a format and accompanied by such identifying information as prescribed by the MSRB.

(c) If a Listed Event described in Section 5(a) paragraph (1), (3), (4), (5), (6), (8) (but only with respect to tender offers under (8)), (9), (11) or (12) above has occurred Lakewood shall, on behalf of itself and the District, in a timely manner but not later than ten business days after the occurrence of such Listed Event, promptly file, or cause to be filed, a notice of such occurrence on EMMA, with such notice in a format and accompanied by such identifying information as prescribed by the MSRB. Notwithstanding the foregoing, notice of Listed Events described in Section (5)(a) paragraphs (8) and (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Series 2016 Notes pursuant to the Indenture.

Section 6. Termination of Reporting Obligation. The Obligated Persons’ obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2016 Notes or upon the Obligated Persons’ receipt of an opinion of nationally recognized bond counsel to the effect that, because of legislative action or final judicial action or administrative actions or proceedings, the failure of the Obligated Persons to comply with the terms hereof will not cause Participating Underwriter to be in violation of the Rule or other applicable requirements of the Securities Exchange Act of 1934, as amended.

Section 7. Dissemination Agent. The Obligated Persons may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or Annual Report prepared by Lakewood pursuant to this Disclosure Certificate. If a Dissemination Agent is appointed or engaged, Lakewood shall provide notice of such appointment or engagement to the Participating Underwriter.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Obligated Persons may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) (i) the amendment or waiver is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an Obligated Person with respect to the Series 2016 Notes, or the type of business conducted; (ii) the undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have

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complied with the requirements of the Rule at the time of the original issuance of the Series 2016 Notes, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (iii) the amendment or waiver either (1) is approved by the Holders in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Holders, or (2) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners; or

(b) the amendment or waiver is necessary to comply with modifications to or interpretations of the provisions of the Rule as announced by the Securities and Exchange Commission.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, Lakewood, on behalf of itself and the District, shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented. In addition, if the amendment relates to the accounting principles to be followed in preparing audited financial statements of Lakewood or the District, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(c), and (ii) the Annual Report for the year in which the change is made will present a comparison or other discussion in narrative form (and also, if feasible, in quantitative form) describing or illustrating the material differences between such audited financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Obligated Persons from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Obligated Persons choose to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the Obligated Persons shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 10. Default. In the event of a failure of the Obligated Persons to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Obligated Persons to comply with the obligations under this Disclosure Certificate. Direct, indirect, consequential and punitive damages shall not be recoverable by any person for any default hereunder and are hereby waived to the extent permitted by law. A default under this Disclosure Certificate shall not be deemed an event of default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the Obligated Persons to comply with this Disclosure Certificate shall be an action to compel performance.

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Section 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent, if any, shall have only such duties as are specifically set forth in this Disclosure Certificate, and Lakewood and the District agree to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The obligations of the Obligated Persons under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Series 2016 Notes.

Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Obligated Persons, the Dissemination Agent, if any, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Series 2016 Notes, and shall create no rights in any other person or entity.

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Dated: the Dated Date

UNITED HOSPITAL DISTRICT

By ______Chair, Hospital Board of Trustees

And by:______Secretary

LAKEWOOD HEALTH SYSTEM

By ______Chair, Board of Commissioners

And by:______

[Execution Page for Continuing Disclosure Certificate]

[THIS PAGE INTENTIONALLY LEFT BLANK]

United Hospital District, Todd, Morrison, Cass and Wadena Counties, Minnesota • Health Care Facilities Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016A and General Obligation Health Care Facilities Refunding Revenue Bond Anticipation Notes (Lakewood Health System), Series 2016B