$29,765,000 City of Pottsville Hospital Authority Health Center

Transcription

NEW ISSUE: Book-Entry Only
RATINGS: Not Rated
In the opinion of Stevens & Lee, P.C., Reading, Pennsylvania, Bond Counsel, assuming continuing compliance by the Issuer and the Members of the Obligated
Group with certain covenants to comply with provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and all regulations applicable thereunder,
interest on the Series 2014 Bonds is not includable in gross income under Section 103(a) of the Code, and interest on the Series 2014 Bonds is not an item of tax
preference for purposes of the federal individual or corporate alternative minimum taxes; except as set forth under the heading “TAX EXEMPTION” in this Limited
Offering Memorandum. Other provisions of the Code may affect the purchasers and holders of the Series 2014 Bonds. See “TAX EXEMPTION” herein for a brief
description of these provisions. Under the laws of the Commonwealth of Pennsylvania, the Series 2014 Bonds and interest on the Series 2014 Bonds shall be free from
taxation for state and local purposes within the Commonwealth of Pennsylvania, but this exemption does not extend to gift, estate, succession or inheritance taxes or
any other taxes not levied directly on the Series 2014 Bonds or the interest thereon. Under the laws of the Commonwealth of Pennsylvania, profits, gains or income
derived from the sale, exchange or other disposition of the Series 2014 Bonds are subject to state and local taxation within the Commonwealth of Pennsylvania.
$29,765,000
City of Pottsville Hospital Authority
Health Center Revenue Bonds
(Schuylkill Health System Project) Series of 2014
Due: July 1, as shown on inside cover
First Interest Payment: July 1, 2014
Dated: Date of Delivery
Interest Payable: January 1 and July 1
The City of Pottsville Hospital Authority (the “Issuer”) is issuing its Health Center Revenue Bonds (Schuylkill Health System Project) Series of 2014 (the “Series 2014
Bonds”), pursuant to a Trust Indenture, dated as of April 1, 2014 (the “Bond Indenture”), with The Bank of New York Mellon Trust Company, N.A., Pittsburgh, Pennsylvania,
as trustee (the “Bond Trustee”). The Series 2014 Bonds are payable solely from, and secured equally by, payments to be received by the Issuer pursuant to a Loan Agreement,
dated as of April 1, 2014 (the “Loan Agreement”), between the Issuer and the Obligated Group (as defined herein), and a 2014 Master Note (as defined herein) issued by
the Obligated Group under a Master Trust Indenture, dated as of April 1, 2014, as supplemented by Supplemental Master Trust Indenture No. 1, dated as of April 1, 2014
(as supplemented, the “Master Indenture”), between the Obligated Group currently consisting of Schuylkill Health System, a Pennsylvania non-profit corporation (“SHS”),
Schuylkill Medical Center – South Jackson Street, a Pennsylvania non-profit corporation (“SMC-SJ”), Schuylkill Medical Center – East Norwegian Street, a Pennsylvania
non-profit corporation (“SMC-EN”) and Schuylkill Rehabilitation Center, Inc., a Pennsylvania non-profit corporation (“SRC” and, together with SHS, SMC-SJ and SMC-EN,
the “Obligated Group”) and The Bank of New York Mellon Trust Company, N.A., Pittsburgh, Pennsylvania, as master trustee, and from certain funds held under the Bond
Indenture, all as more fully described herein.
The Series 2014 Bonds are issuable as fully registered bonds in denominations of $100,000 or any integral multiple of $5,000 in excess thereof, and are subject to
optional, extraordinary optional, special and mandatory redemption prior to maturity. See “THE SERIES 2014 BONDS – Redemption Provisions” herein. The Series 2014
Bonds, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company or DTC, New York, New York. Individual purchases of
the Series 2014 Bonds will be made in book-entry form only. Principal of and interest and premium, if any, on the Series 2014 Bonds will be payable by the Bond Trustee to
the registered owners, which will be Cede & Co., as long as DTC is the Securities Depository. Subsequent disbursements of principal, premium and interest will be made by
Participants in DTC to the Beneficial Owners of the Series 2014 Bonds.
THE SERIES 2014 BONDS WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS.
THE SERIES 2014 BONDS ARE BEING OFFERED ONLY TO QUALIFIED INSTITUTIONAL BUYERS WITHIN THE MEANING OF RULE 144A UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
THE PURCHASE OF THE SERIES 2014 BONDS IS AN INVESTMENT SUBJECT TO A HIGH DEGREE OF RISK, INCLUDING THE RISK OF NONPAYMENT
OF PRINCIPAL AND INTEREST. SEE “BONDHOLDERS’ RISKS” HEREIN FOR A DISCUSSION OF SUCH FACTORS THAT SHOULD BE CONSIDERED, IN
ADDITION TO THE OTHER MATTERS SET FORTH HEREIN, IN EVALUATING THE INVESTMENT QUALITY OF THE SERIES 2014 BONDS.
The Series 2014 Bonds are special, limited obligations of the Issuer and do not constitute a debt or liability of
the City of Pottsville, Schuylkill County, Pennsylvania, the Commonwealth of Pennsylvania or of any political
subdivision of the Commonwealth. Neither the credit nor the taxing power of the City, the Commonwealth or
of any political subdivision thereof is pledged for payment of the principal or redemption price of, or interest
on the Series 2014 Bonds. The Issuer has no taxing power.
This cover page contains information for general reference only. It is not intended as a summary of this transaction. Investors are advised to read the entire Limited
Offering Memorandum to obtain information essential to making an informed investment decision.
___________________________________________________
PRINCIPAL AMOUNTS, MATURITIES, INTEREST
RATES, YIELDS, PRICES AND CUSIPS
(see inside cover page)
____________________________________________________
The Series 2014 Bonds are offered by the Underwriter, subject to prior sale, to withdrawal or modification of the offer without any notice, and to the approval of legality
of the Series 2014 Bonds by Stevens & Lee, P.C., Reading, Pennsylvania, Bond Counsel to the Issuer. Certain legal matters will be passed upon for the Issuer by its counsel,
Williamson Friedberg & Jones, LLC, Pottsville, Pennsylvania. Certain legal matters will be passed upon for the Obligated Group by its counsel, Stevens & Lee, P.C., Reading,
Pennsylvania, and for the Underwriter by its counsel, Ballard Spahr LLP, Philadelphia, Pennsylvania. It is expected that the Series 2014 Bonds in definitive form will be
available for delivery to DTC in New York, New York, on or about April 30, 2014.
The date of this Limited Offering Memorandum is April 10, 2014.
PRINCIPAL AMOUNTS, MATURITIES, INTEREST
RATES, YIELDS, PRICES AND CUSIPS
$29,765,000
Dated: Date of Delivery
Maturity
(July 1)
2023
2024
Due: As shown below
Principal
Amount
$2,570,000
2,725,000
Interest
Rate
6.00%
6.00
Yield
6.15%
6.25
Price
98.950
98.128
CUSIP No.
738431AB1
738431AC9
$11,635,000 5.75% Term Bond due July 1, 2022; Yield 5.90%; Price 99.029%; CUSIP No. 738431AA3
$12,835,000 6.50% Term Bond due July 1, 2028; Yield 6.75%†; Price 97.730%; CUSIP No. 738431AD7

Copyright 2012, American Bankers Association. CUSIP data herein are provided by Standard & Poor’s CUSIP Service Bureau, a division of The
McGraw-Hill Companies, Inc. The CUSIP numbers listed above are being provided solely for the convenience of Bondholders only at the time of
issuance of the Series 2014 Bonds and none of the Issuer, the Obligated Group or the Underwriter makes any representation with respect to such
numbers or undertake any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to
being changed after the issuance of the Series 2014 Bonds as a result of the procurement of secondary market portfolio insurance or other similar
enhancement by investors that is applicable to all or a portion of certain maturities of the Series 2014 Bonds.
†
Price/yield to first optional call date.
No dealer, broker, salesperson or other person has been authorized by the Issuer, the Obligated Group or PNC
Capital Markets LLC, as underwriter (the “Underwriter”), to give any information or to make any representations with
respect to the Series 2014 Bonds, other than those in this Limited Offering Memorandum, and if given or made, such
other information or representations must not be relied upon as having been authorized by any of the foregoing. This
Limited Offering Memorandum does not constitute an offer to sell or the solicitation of any offer to buy, nor shall there
be any sale of the Series 2014 Bonds by any person in any state in which it is unlawful for such person to make such
offer, solicitation or sale.
Each person receiving this Limited Offering Memorandum acknowledges that (i) such person is a Qualified
Institutional Buyer as defined in Rule 144A promulgated under the Securities Act of 1933, as amended (the “Securities
Act”) and in APPENDIX C hereto, and has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the Series 2014 Bonds, (ii) such person has been afforded an opportunity to
request from the Obligated Group and to review, and has received, all additional information considered by it to be
necessary to verify the accuracy of, or to supplement, the information contained herein, (iii) such person has not relied
on the Underwriter or any person affiliated with the Underwriter in connection with its investigation of the accuracy of
such information or its investment decision, and (iv) no person has been authorized to give any information or to make
any representation concerning the Obligated Group or the Series 2014 Bonds (other than as contained herein and
information given by duly authorized officers and employees of the Obligated Group in connection with investors’
examination of the Obligated Group and the terms of the offering, and, if given or made, any such other information or
representation should not be relied upon as having been authorized by the Obligated Group or the Underwriter).
The information set forth under the captions “THE ISSUER” and “LITIGATION – The Issuer” has been
furnished by the Issuer. The information set forth in APPENDIX F has been furnished by DTC. All other information
in this Limited Offering Memorandum has been obtained from the Obligated Group and other sources that are believed
to be reliable, but is not to be construed as a representation of the Underwriter. The information and expressions of
opinion in this Limited Offering Memorandum are subject to change without notice, and neither the delivery of this
Limited Offering Memorandum, nor any sale made hereunder, shall under any circumstances create any implication that
there has been no change in the affairs of the Issuer, DTC or the Obligated Group since the date of this Limited Offering
Memorandum.
THE UNDERWRITER HAS PROVIDED THE FOLLOWING SENTENCE FOR INCLUSION IN THIS
LIMITED OFFERING MEMORANDUM: THE UNDERWRITER HAS REVIEWED THE INFORMATION IN
THIS LIMITED OFFERING MEMORANDUM IN ACCORDANCE WITH, AND AS PART OF, ITS
RESPONSIBILITIES TO INVESTORS UNDER FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS
AND CIRCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITER DOES NOT GUARANTEE THE
ACCURACY OR COMPLETENESS OF SUCH INFORMATION.
THE SERIES 2014 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
NOR HAS THE BOND INDENTURE OR THE MASTER INDENTURE BEEN QUALIFIED UNDER THE TRUST
INDENTURE ACT OF 1939, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE
REGISTRATION OR QUALIFICATION OF THE SERIES 2014 BONDS IN ACCORDANCE WITH APPLICABLE
PROVISIONS OF THE SECURITIES LAWS OF THE STATES, IF ANY, IN WHICH THE SERIES 2014 BONDS
HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR
QUALIFICATION IN CERTAIN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION
THEREOF.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2014 BONDS AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
_____________________________
CAUTIONARY STATEMENTS REGARDING PROJECTIONS, ESTIMATES AND OTHER
FORWARD-LOOKING STATEMENTS IN THIS LIMITED OFFERING MEMORANDUM
_____________________________
Certain statements included or incorporated by reference in this Limited Offering Memorandum constitute
projections or estimates of future events, generally known as forward-looking statements. These statements are
generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words.
These forward-looking statements include, among others, the information under the caption “BONDHOLDERS’
RISKS” in the forepart of this Limited Offering Memorandum and certain information in APPENDIX A to this Limited
Offering Memorandum.
The achievement of certain results or other expectations contained in these forward-looking statements
involves known and unknown risks, uncertainties and other factors which may cause actual results, performances or
achievements described to be materially different from any future results, performance or achievements expressed or
implied by these forward-looking statements. The Obligated Group does not plan to issue any updates or revisions to
those forward-looking statements if or when changes in their expectations, or events, conditions or circumstances on
which these statements are based occur.
TABLE OF CONTENTS
Page
INTRODUCTORY STATEMENT ............................................................................................................................... 1 Purpose of this Limited Offering Memorandum ............................................................................................. 1 The Issuer ........................................................................................................................................................ 1 The Obligated Group ....................................................................................................................................... 2 Purpose of the Series 2014 Bonds ................................................................................................................... 2 Master Indenture ............................................................................................................................................. 2 Security for the Series 2014 Bonds ................................................................................................................. 3 Risk Factors ..................................................................................................................................................... 4 THE ISSUER................................................................................................................................................................. 4 PLAN OF FINANCE .................................................................................................................................................... 4 ESTIMATED SOURCES AND USES OF FUNDS ..................................................................................................... 6 THE SERIES 2014 BONDS.......................................................................................................................................... 6 General ............................................................................................................................................................ 6 Payment of Principal and Interest.................................................................................................................... 7 Redemption Provisions ................................................................................................................................... 7 Transfer and Exchange .................................................................................................................................. 10 BOOK-ENTRY ONLY SYSTEM .............................................................................................................................. 10 General .......................................................................................................................................................... 10 Limitations .................................................................................................................................................... 10 SECURITY FOR THE SERIES 2014 BONDS........................................................................................................... 11 General .......................................................................................................................................................... 11 Issuer Not Generally Liable on the Series 2014 Bonds ................................................................................. 12 The Loan Agreement ..................................................................................................................................... 12 The 2014 Master Note and the Master Indenture .......................................................................................... 12 Debt Service Reserve Fund ........................................................................................................................... 13 Debt Service Coverage Ratio Covenant ........................................................................................................ 14 Liquidity Covenant ........................................................................................................................................ 15 Mortgage ....................................................................................................................................................... 15 Security and Enforceability ........................................................................................................................... 16 ANNUAL DEBT SERVICE REQUIREMENTS ........................................................................................................ 19 BONDHOLDERS’ RISKS .......................................................................................................................................... 19 LITIGATION .............................................................................................................................................................. 61 The Issuer ...................................................................................................................................................... 61 The Obligated Group ..................................................................................................................................... 61 LEGAL MATTERS .................................................................................................................................................... 62 TAX EXEMPTION ..................................................................................................................................................... 62 Tax Laws ....................................................................................................................................................... 63 Original Issue Discount ................................................................................................................................. 64 INDEPENDENT AUDITORS .................................................................................................................................... 64 i
FINANCIAL STATEMENTS ..................................................................................................................................... 65 UNDERWRITING ...................................................................................................................................................... 65 NO RATING ............................................................................................................................................................... 65 FINANCIAL ADVISOR ............................................................................................................................................. 65 CERTAIN RELATIONSHIPS AMONG THE PARTIES .......................................................................................... 66 CONTINUING DISCLOSURE................................................................................................................................... 66 MISCELLANEOUS .................................................................................................................................................... 66 APPENDIX A
APPENDIX B
APPENDIX C
APPENDIX D
APPENDIX E
APPENDIX F
APPENDIX G
The Obligated Group
Consolidated Financial Statements and Supplementary Information of Schuylkill Health
System and Controlled Entities for the years ended June 30, 2013 and 2012
Definitions of Certain Terms and Summary of Documents
Form of Continuing Disclosure Agreement
Proposed Form of Approving Opinion of Bond Counsel
Information Regarding Book-Entry Only System
Form of Investor Letter
ii
LIMITED OFFERING MEMORANDUM
$29,765,000
INTRODUCTORY STATEMENT
The descriptions and summaries of the various documents hereinafter set forth do not purport to
be comprehensive or definitive, and reference is made to each document for the complete details of all
terms and conditions. All statements are qualified in their entirety by reference to each document. Certain
capitalized terms used herein are defined in APPENDIX C hereto. See APPENDIX C hereto for
summaries of the Master Indenture, the Supplemental Master Trust Indenture No. 1, the Bond Indenture
and the Loan Agreement (each as defined herein).
Purpose of this Limited Offering Memorandum
This Limited Offering Memorandum, including the cover page and the Appendices hereto (the
“Limited Offering Memorandum”), is provided to furnish information with respect to the issuance and
sale of the $29,765,000 Health Center Revenue Bonds (Schuylkill Health System Project) Series of 2014
(the “Series 2014 Bonds”) of the City of Pottsville Hospital Authority (the “Issuer”), pursuant to a Trust
Indenture, dated as of April 1, 2014 (the “Bond Indenture”), between the Issuer and The Bank of New
York Mellon Trust Company, N.A., as trustee (the “Bond Trustee”). The Series 2014 Bonds will be
secured under the provisions of the Bond Indenture and a Loan Agreement, dated as of April 1, 2014 (the
“Loan Agreement”), between the Issuer and Obligated Group (as defined herein) and by a Master Note
(City of Pottsville Hospital Authority) Series of 2014 (the “2014 Master Note”), issued pursuant to and
secured by the Master Trust Indenture, dated as of April 1, 2014, as supplemented by Supplemental
Master Trust Indenture No. 1, dated as of April 1, 2014 (collectively, the “Master Indenture”), between
the Obligated Group currently consisting of Schuylkill Health System, a Pennsylvania non-profit
corporation (“SHS” or the “System”), Schuylkill Medical Center – South Jackson Street, a Pennsylvania
non-profit corporation (“SMC-SJ”), Schuylkill Medical Center – East Norwegian Street, a Pennsylvania
non-profit corporation (“SMC-EN”) and Schuylkill Rehabilitation Center, Inc., a Pennsylvania non-profit
corporation (“SRC” and, together with SHS, SMC-SJ and SMC-EN, the “Obligated Group”) and The
Bank of New York Mellon Trust Company, N.A., as master trustee (the “Master Trustee”).
The Issuer
The Issuer was created by action of the City Council of the City of Pottsville, Schuylkill County,
Pennsylvania, pursuant to the Pennsylvania Municipality Authorities Act, 53 Pa.C.S. §5601 et seq., as
amended and supplemented (the “Authorities Act”). The Issuer is a body corporate and politic and an
instrumentality of the Commonwealth of Pennsylvania (the “Commonwealth”). The Issuer is empowered
under the Authorities Act, among other things, to issue its revenue bonds to finance and refinance various
types of facilities, including hospitals and health centers. See “THE ISSUER” herein. The Series 2014
Bonds are limited obligations of the Issuer. The Issuer has no taxing power.
1
The Obligated Group
SHS, SMC-SJ, SMC-EN and SRC are currently the only members of the Obligated Group (the
“Obligated Group”) created pursuant to the Master Indenture described herein. Each Member of the
Obligated Group is a Pennsylvania nonprofit corporation exempt from federal income tax pursuant to
Section 501(a) of the Code, as an organization described in Section 501(c)(3) of the Code. Based on
determination letters received from the Internal Revenue Service, each Member of the Obligated Group
has been recognized as other than a private foundation pursuant to Section 509(a)(1) of the Code. SHS
currently serves as the Obligated Group Agent on behalf of the Obligated Group. The primary function of
SHS is to establish and maintain a health care system consisting of the SMC-SJ, SMC-EN and SRC and
affiliated entities.
For further information concerning the existing facilities, services and operations of the Obligated
Group, including certain financial information, see APPENDIX A hereto.
APPENDIX B HERETO CONTAINS THE AUDITED FINANCIAL STATEMENTS OF THE
SYSTEM AND ITS CONTROLLED ENTITIES FOR THE YEARS ENDED JUNE 30, 2013 AND
2012. SUCH CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE MEMBERS OF THE
OBLIGATED GROUP AS WELL AS CONTROLLED ENTITIES THAT ARE NOT MEMBERS OF
THE OBLIGATED GROUP. See APPENDIX B hereto.
Purpose of the Series 2014 Bonds
The proceeds of the sale of the Series 2014 Bonds will be loaned by the Issuer to the Obligated
Group pursuant to the Loan Agreement. The proceeds of the Series 2014 Bonds, along with other
available moneys, will be used to (i) refund certain outstanding Hospital Revenue Bonds that have been
issued by the Issuer for the benefit of the Obligated Group, (ii) refund a loan evidenced by that certain
promissory note dated August 5, 2009, by and between SMC-EN and Rural Housing Service, U.S.
Department of Agriculture, (iii) finance the construction and acquisition of capital projects as more
specifically described herein, (iv) fund a debt service reserve fund for the Series 2014 Bonds, and (v) pay
expenses incurred in connection with the issuance of the Series 2014 Bonds. See the information under
the captions “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS.”
Master Indenture
The Obligated Group entered into the Master Indenture in order to have flexibility to incur debt of
different structures as needed to finance or refinance the facilities of the Obligated Group and for other
lawful corporate purposes. The Master Indenture, also, provides for other entities to join with the
Obligated Group from time to time in the future in pooling credit resources to achieve lower borrowing
costs by becoming jointly and severally liable with the then-current Members of the Obligated Group (as
defined therein) for the payment of debt incurred and the performance of all covenants contained in the
Master Indenture. The Members of the Obligated Group (herein, the “Members”) may issue, from time to
time, Master Notes under the Master Indenture pursuant to related supplemental indentures.
The Series 2014 Bonds are secured by the 2014 Master Note issued pursuant to Supplemental
Master Trust Indenture No. 1, dated as of April 1, 2014.
Future Members of the Obligated Group, if any, will be jointly and severally liable with the
Obligated Group for the payment of the 2014 Master Note and any additional Master Notes issued under
the Master Indenture.
2
Currently, SHS, SMC-SJ, SMC-EN and SRC are the only members of the Obligated Group. See
“SECURITY FOR THE SERIES 2014 BONDS” herein and the summary of certain provisions of the
Master Indenture in APPENDIX C hereto.
The 2014 Master Note is a joint and several obligation of the Obligated Group, secured by a
pledge of and security interest in the Gross Revenues of the Obligated Group. “Gross Revenues” means
all net receipts, revenues and other operating and non-operating income of the Members of the Obligated
Group, including but not limited to, all rates, fees and charges fixed, charged and collected for services
rendered by or on behalf of the Members of the Obligated group or arising in any other manner from or
on account of the operation of the Property or other facilities of the Obligated Group and from any other
source, Accounts (including accounts receivable), contract rights, general intangibles, payment
intangibles, investment property, instruments, chattel paper, other rights to the payment of money, all
unrestricted income from the investment of funds of the Members of the Obligated Group, and any gains
from the sale or other disposition of capital assets, including all proceeds (whether cash proceeds or
noncash proceeds) of any of the foregoing including, without limitation, proceeds of insurance payable by
reason of loss or damage to the foregoing property and of eminent domain or condemnation awards, all as
defined in the Pennsylvania Uniform Commercial Code, with certain exclusions as described in the
Master Indenture.
Each of SMC-SJ and SMC-EN, to further secure the 2014 Master Note, together with any other
Master Notes issued and outstanding under the Master Indenture has delivered an Open-End Mortgage
and Security Agreement in favor of the Master Trustee, as mortgagee, with respect to certain properties
described therein.
As described in the summary of the Master Indenture in APPENDIX C, the Master Indenture
imposes certain limits on the incurrence of additional indebtedness by the Members of the Obligated
Group.
Security for the Series 2014 Bonds
Pledged Revenues. The Series 2014 Bonds are limited obligations of the Issuer, issued under and
secured by the Bond Indenture. The Series 2014 Bonds are payable from loan payments to be made by the
Obligated Group, as borrower, under the Loan Agreement and from payments by the Obligated Group
pursuant to the 2014 Master Note issued and secured under the Master Indenture. The 2014 Master Note
is issued in a principal amount equal to the principal amount of the Series 2014 Bonds, and delivered to
the Bond Trustee, as assignee of the Issuer under the Bond Indenture. All payments received on the 2014
Master Note will be credited against the Obligated Group’s repayment obligations under the Loan
Agreement.
The Loan Agreement is a general obligation of the Obligated Group.
Debt Service Reserve Fund. As additional security for the Series 2014 Bonds, a debt service
reserve fund (the “Reserve Fund”) will be established pursuant to the Bond Indenture and will be funded
from the proceeds of the Series 2014 Bonds. The Reserve Fund is required to be funded in an amount
equal to the Required Reserve Amount. See “SECURITY FOR THE SERIES 2014 BONDS – Debt
Service Reserve Fund.” See also “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF
DOCUMENTS – The Bond Indenture” in Appendix C hereto.
3
Risk Factors
There are certain risks involved in the purchase of the Series 2014 Bonds. See the information
under “BONDHOLDERS’ RISKS” herein.
THE SERIES 2014 BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE ISSUER AND
DO NOT CONSTITUTE A DEBT OR LIABILITY OF THE CITY OF POTTSVILLE, SCHUYLKILL
COUNTY, PENNSYLVANIA, THE COMMONWEALTH OF PENNSYLVANIA OR ANY OTHER
POLITICAL SUBDIVISION THEREOF. NEITHER THE GENERAL CREDIT OF THE ISSUER NOR
THE CREDIT OR TAXING POWER OF THE CITY OF POTTSVILLE, SCHUYLKILL COUNTY,
PENNSYLVANIA, THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL
SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE SERIES 2014 BONDS. THE
ISSUER HAS NO TAXING POWER.
THE ISSUER
The Issuer is a body corporate and politic created pursuant to a resolution of the City Council of
the City of Pottsville, Schuylkill County (the “City”), under the Authorities Act. The Issuer is authorized
under the Authorities Act to finance projects for hospitals and health centers.
The liability of the Issuer with respect to the Series 2014 Bonds is limited to the amounts received
or receivable from the Obligated Group pursuant to the Loan Agreement and the 2014 Master Note, and
amounts held in the funds established under the Master Indenture and Bond Indenture (except the Rebate
Fund) and all income and receipts derived therefrom.
The governing body of the Issuer is a Board consisting of up to nine (9) members appointed by
the City Council of the City. Members of the Board are appointed for staggered terms and may be
reappointed.
The Issuer is empowered to issue, has issued and expects in the future to issue revenue bonds for
other ventures unrelated to the Obligated Group and any future Member of the Obligated Group. Each of
such series of revenue bonds will be payable from and secured by the revenues and/or assets of such
ventures and will not be payable from or secured by amounts held in the funds established under the Bond
Indenture, the income and receipts therefrom or amounts paid or payable by the Obligated Group or other
future Members of the Obligated Group under the Loan Agreement or the Master Indenture, as
applicable, or the Gross Revenues of the Obligated Group. The Issuer from time to time also may enter
into refinancing transactions for obligations previously issued. The Issuer has never been in default under
any of its obligations.
Other than the description of the Issuer provided under this caption, under the sub-caption
“INTRODUCTORY STATEMENT-The Issuer” and the information with respect to the Issuer under
“LITIGATION” herein, the Issuer has not prepared or reviewed and expresses no opinion with respect to
the accuracy or completeness of any of the information set forth in this Limited Offering Memorandum.
PLAN OF FINANCE
The proceeds of the Series 2014 Bonds, together with other available moneys, will be used to (i)
refund all of the Issuer’s Hospital Revenue Bonds (The Pottsville Hospital and Warne Clinic Project)
Series of 1998 (the “1998 Bonds”), (ii) refund a loan evidenced by that certain promissory note dated
August 5, 2009, by and between SMC-EN and Rural Housing Service, U.S. Department of Agriculture
(the “HUD Loan”), (iii) finance the construction and acquisition of capital projects, (iv) fund a debt
4
service reserve fund for the Series 2014 Bonds, and (v) pay expenses incurred in connection with the
issuance of the Series 2014 Bonds. The refunding of the 1998 Bonds and the HUD Loan shall be
collectively known as the “Refunding Project.”
If the Underwriter and the Obligated Group are unable to secure a sufficient amount of purchasers
of the Series 2014 Bonds to fully fund the Refunding Project, the Issuer and the Obligated Group, in
compliance with the conditions set forth in the Bond Purchase Agreement (as defined herein), will not
deliver for purchase any of the Series 2014 Bonds.
Refunding Project
1998 Bonds
All of the outstanding 1998 Bonds will be currently refunded by the Series 2014 Bonds. A
portion of the proceeds derived from the sale of the Series 2014 Bonds will be deposited, together with
available amounts currently on deposit in the debt service fund and debt service reserve fund for the 1998
Bonds, with The Bank of New York Mellon Trust Company, N.A., as successor trustee for the 1998
Bonds. The 1998 Bonds will be called for redemption on May 1, 2014 (the “Redemption Date”) at a
redemption price equal to 100% of the par amount of the 1998 Bonds to be redeemed, plus accrued
interest to the Redemption Date.
The 1998 Bonds were issued for the benefit of The Pottsville Hospital and Warne Clinic in order
to (i) advance refund the Issuer’s Hospital Revenue Bonds (The Pottsville Hospital and Warne Clinic
Project) Series of 1994; (ii) provide for a debt service reserve fund for the 1998 Bonds; and (iii) pay the
costs and expenses of issuance of the 1998 Bonds.
USDA Loan
The USDA Loan will be refunded with a portion of the proceeds of the Series 2014 Bonds. The
USDA Loan financed the costs of the purchase and installation of information technology equipment for
SMC-EN in order to upgrade systems and consolidate information with SMC–SJ.
Capital Projects
A portion of the proceeds of the Series 2014 Bonds will be applied for and toward costs of: (a)
designing, acquiring, constructing, renovating, improving, installing and equipping various capital
projects of the Obligated Group, including, but not limited to, renovations, improvements and additions to
the neurology suite, the fluoroscopy room, the blood draw room and the radiology room at SMC-EN, and
renovations, improvements and additions to the main lobby and the elevators at SMC-SJ, and (b)
acquiring various capital equipment for use in or in connection with the facilities of the Obligated Group,
including but not limited to, information technology, HVAC units, fire alarms and other utilities.
5
ESTIMATED SOURCES AND USES OF FUNDS
The estimated proceeds of the Series 2014 Bonds (exclusive of investment earnings), along with
other available moneys, and the estimated uses of such funds are shown below:
Sources of Funds
Principal Amount of Series 2014 Bonds
Equity Contribution of the Obligated Group
$29,765,000.00
214,296.55
Certain Available Moneys1
3,453,060.30
Less Original Issue Discount
(482,327.35)
TOTAL SOURCES
$32,950,029.50
Uses of Funds
Refunding of 1998 Bonds2
$23,157,644.58
Refunding of USDA Loan2
1,009,434.41
2
Capital Project Costs
5,000,000.00
Deposit to Debt Service Reserve Fund
2,976,500.00
Costs of Issuance
3
806,450.51
TOTAL USES
$32,950,029.50
_____________________________________
1
These moneys represent certain available amounts currently on deposit with the trustee for the 1998 Bonds in the debt
service fund and debt service reserve fund.
2
See “PLAN OF FINANCE” herein.
3
Includes Underwriter’s discount, financial advisory fees, certain fees and expenses of various legal counsel and
accountants, the Bond Trustee, the Master Trustee, the cost of printing and other fees and costs associated with the
transaction.
THE SERIES 2014 BONDS
The following is a summary of certain provisions of the Series 2014 Bonds. Terms not otherwise
defined in the following summary have the meanings assigned thereto in APPENDIX C hereto. So long
as DTC acts as securities depository for the Bonds, as described under the caption “BOOK-ENTRY
ONLY SYSTEM” herein, all references herein to “Bondholder” or “Bondholders” and to “owners” and
“holders” of Series 2014 Bonds shall be deemed to refer to Cede & Co., as nominee for DTC, and not to
DTC Participants, Indirect Participants or Beneficial Owners (as said terms are hereinafter defined).
General
The Series 2014 Bonds will be issued in the aggregate principal amount described on the cover
page of this Limited Offering Memorandum and will be issued in the denomination of $100,000 or any
integral multiple of $5,000 in excess thereof (“Authorized Denominations”). The Series 2014 Bonds will
be dated the date of delivery, and will bear interest from such date payable on each January 1 and July 1
commencing July 1, 2014. Interest on the Series 2014 Bonds shall accrue on the basis of a year of 360
days with twelve 30-day months.
6
The Depository Trust Company, or DTC, will act as the initial securities depository for the Series
2014 Bonds. Ownership interests in the Series 2014 Bonds may be purchased in book-entry form only.
See the information herein under the caption, “BOOK-ENTRY ONLY SYSTEM.” The information
under this caption, “THE SERIES 2014 BONDS” is subject in its entirety to the provisions described
below under the caption, “BOOK-ENTRY ONLY SYSTEM” while the Series 2014 Bonds are in the
book-entry only system.
Payment of Principal and Interest
The Series 2014 Bonds will be issued as fully registered bonds without coupons, and when
issued, will be registered in the name of Cede & Co., as nominee of DTC. Individual purchases of
interests in the Series 2014 Bonds will be made in book-entry form only, in Authorized Denominations as
described herein under the caption, “THE SERIES 2014 BONDS – General.” Purchasers of such
interests will not receive certificates representing their interests in the Series 2014 Bonds. For a
description of matters pertaining to transfers and exchanges while in the book-entry only system, see the
information herein under the caption, “BOOK-ENTRY ONLY SYSTEM.”
So long as Cede & Co. is the registered owner of the Series 2014 Bonds, the Bond Trustee will
pay interest on the Series 2014 Bonds to DTC, which will remit interest payments to the Beneficial
Owners of the Series 2014 Bonds. See the information under the caption, “BOOK-ENTRY ONLY
SYSTEM.”
Principal of and premium, if any, and interest on the Series 2014 Bonds will be paid by the Bond
Trustee by check mailed to the respective Holders thereof on the applicable Record Date at their
addresses as they appear as of the close of business on the applicable Record Date in the books kept by
the Bond Trustee, as bond registrar. The Record Date for any Interest Payment Date is the fifteenth day
of the calendar month immediately preceding such Interest Payment Date.
In the case of any Holder of Series 2014 Bonds in an aggregate principal amount in excess of
$1,000,000 as shown on the bond register maintained by the Bond Trustee who, prior to the Record Date
for such Series 2014 Bonds next preceding any Interest Payment Date, shall have provided the Bond
Trustee with written wire transfer instructions, interest payable on such Series 2014 Bonds shall be paid
in accordance with the wire transfer instructions provided by the Holder of such Series 2014 Bond.
Redemption Provisions
Mandatory Sinking Fund Redemption.
The Series 2014 Bonds maturing on July 1, 2022 are subject to mandatory sinking fund
redemption in part, by lot, on July 1 in the years and amounts set forth below at a redemption price equal
to 100% of the principal amount of the Series 2014 Bonds being redeemed plus accrued interest to the
date of redemption:
7
Year
(July 1)
2017
2018
2019
2020
2021
2022*
____________________
*Maturity.
Amount
$865,000
1,870,000
2,035,000
2,160,000
2,285,000
2,420,000
The Series 2014 Bonds maturing on July 1, 2028 are subject to mandatory sinking fund
redemption in part, by lot, on July 1 in the years and amounts set forth below at a redemption price equal
to 100% of the principal amount of the Series 2014 Bonds being redeemed plus accrued interest to the
date of redemption:
Year
(July 1)
2025
2026
2027
2028*
____________________
*Maturity.
Amount
$2,900,000
3,100,000
3,310,000
3,525,000
Optional Redemption. The Series 2014 Bonds maturing on July 1, 2028 are subject to optional
redemption by the Issuer, at the written direction of the Obligated Group, in whole or in part, at any time
on or after July 1, 2024, in such order of maturity as the Issuer may choose at the direction of the
Obligated Group, and within a maturity by lot as selected by the Bond Trustee, at a redemption price
equal to 100% of the principal amount thereof to be redeemed, plus accrued but unpaid interest to the
redemption date.
Extraordinary Optional Redemption. The Series 2014 Bonds (or portions of any such Series
2014 Bonds) are subject to extraordinary optional redemption in whole or in part at any time, at the option
of the Issuer, at the direction of the Obligated Group, in the event of any damage to, or destruction or
condemnation of, any part of the Facilities to the extent that the proceeds of any insurance or
condemnation award relating thereto are not applied to the repair, reconstruction or restoration of the
Facilities and the Obligated Group elects to use such unapplied proceeds for optional redemption. Any
amounts deposited in the Bond Fund representing proceeds of insurance or condemnation awards will be
used by the Bond Trustee at the written direction of the Obligated Group to redeem Series 2014 Bonds on
the earliest possible date after giving the required notice of redemption. If called for such redemption, the
Series 2014 Bonds may be redeemed at a redemption price equal to the principal amount of each such
Series 2014 Bond to be redeemed, without premium, plus accrued interest thereon to the redemption date.
Special Redemption. The Series 2014 Bonds are subject to special redemption prior to maturity
in whole at any time at the option of the Issuer as directed by the Obligated Group, if, as a result of a
statutory or regulatory requirement or a determination by a court of competent jurisdiction in a suit to
which the Obligated Group is a party, the Obligated Group shall be legally required or in good faith
believes that it may be required, as a result of being a party to the Loan Agreement, to perform any
8
medical or surgical procedure or to otherwise operate the Facilities in a manner in which the Obligated
Group believes to be contrary to the principles and beliefs of the Roman Catholic Church. If called for
special redemption, the Series 2014 Bonds may be redeemed at a redemption price equal to the principal
amount of the Series 2014 Bonds outstanding, without premium, plus accrued interest thereon to the
redemption date.
Defeasance of Bond Indenture Not a Termination of Redemption Rights. No defeasance of the
lien of the Bond Indenture or deposit of funds for the payment of particular Series 2014 Bonds at maturity
or upon mandatory sinking fund redemption will terminate or otherwise limit the Issuer’s or Obligated
Group’s other redemption rights (optional, extraordinary or mandatory), unless the Issuer, upon direction
of the Obligated Group, expressly waives such rights in a writing filed with the Bond Trustee.
Notice of Redemption. In the event any of the Series 2014 Bonds are called for redemption, the
Bond Trustee will give notice, in the name of the Issuer, of the redemption of such Series 2014 Bonds,
which notice must (i) specify the Series 2014 Bonds to be redeemed, the redemption date, the redemption
price, and the place or places where amounts due upon such redemption will be payable (which will be
the Principal Office of the Bond Trustee) and, if less than all of the Series 2014 Bonds are to be
redeemed, the numbers of the Series 2014 Bonds, and the portions of the Series 2014 Bonds, so to be
redeemed, (ii) state any condition to such redemption, and (iii) state that on the redemption date, and upon
the satisfaction of any such condition, the Series 2014 Bonds to be redeemed will cease to bear interest.
CUSIP number identification will accompany all redemption notices. Such notice may set forth any
additional information relating to such redemption.
Such notice will be given by mail, postage prepaid, at least 20 days but not more than 60 days
prior to the date fixed for redemption to each Holder of Series 2014 Bonds to be redeemed at its address
shown on the registration books kept by the Bond Trustee; provided, however, that failure to give such
notice to any Holder or any defect in such notice will not affect the validity of the proceedings for the
redemption of any of the other Series 2014 Bonds.
Any Series 2014 Bonds and portions of Series 2014 Bonds which have been duly selected for
redemption and which are paid in accordance with the Bond Indenture will cease to bear interest on the
specified redemption date.
With respect to any optional redemption of Series 2014 Bonds, if at the time of mailing such
notice of redemption, there shall not have been deposited with the Bond Trustee moneys sufficient to
redeem all the Series 2014 Bonds called for redemption, such notice may state that the redemption is
conditional, that is, subject to the deposit of the redemption moneys with the Bond Trustee not later than
the redemption date, and such notice will be of no effect unless such moneys are so deposited.
Redemption of Portion of Series 2014 Bonds. The Series 2014 Bonds will be redeemed in part
only in Authorized Denominations. If less than all of the Series 2014 Bonds are called for redemption,
the Obligated Group will select the maturities of the Series 2014 Bonds to be redeemed and, if less than
all of the Series 2014 Bonds within a maturity are called for redemption, the Bond Trustee will select the
portions thereof within such maturity in such manner as the Bond Trustee in its discretion may deem fair
and appropriate, and the remaining Series 2014 Bonds that have not been so called for redemption will be
in Authorized Denominations. However, so long as the only owner of the Series 2014 Bonds is DTC,
such selection within a maturity be made by DTC. If a portion of a Series 2014 Bond is called for
redemption, a new Series 2014 Bond in the principal amount equal to the unredeemed portion thereof will
be issued to the Holder upon surrender thereof.
9
Purchase in Lieu of Redemption. Pursuant to the Bond Indenture, the Issuer irrevocably grants to
the Obligated Group the option to purchase, at any time and from time to time, any Series 2014 Bond
which is to be redeemed pursuant to the optional redemption provisions of the Bond Indenture on the
dates of such redemption and at a purchase price equal to the redemption price therefor. In order for the
Obligated Group to exercise such option, the Obligated Group must notify the Bond Trustee not less than
ten Business Days prior to the proposed redemption date that amounts available to pay the redemption
price of such Series 2014 Bonds are to be applied to purchase such Series 2014 Bonds in lieu of
redemption. No notice other than the notice of redemption need be given in connection with any such
purchase in lieu of redemption. On the day fixed for redemption, following the receipt of a Favorable
Opinion of Bond Counsel, the Bond Trustee will purchase the Series 2014 Bonds to be redeemed in lieu
of such redemption and, following such purchase, the Bond Trustee will cause such Series 2014 Bonds to
be registered in the name of or upon direction of the Obligated Group and deliver them to or as directed
by the Obligated Group. No purchase of Series 2014 Bonds pursuant to these provisions will operate to
extinguish the indebtedness of the Issuer evidenced thereby.
Transfer and Exchange
Upon surrender of a Series 2014 Bond at the designated corporate trust office of the Bond
Trustee, as bond registrar, together with an assignment duly executed by the Bondholder or his or her
attorney or legal representative in such form and with such guaranty of signature as shall be satisfactory
to the Bond Trustee, a Series 2014 Bond may be exchanged for fully registered Series 2014 Bonds of the
same interest rate and maturity, aggregating in amount the then unpaid principal amount of the Series
2014 Bonds surrendered, of Authorized Denominations.
The Series 2014 Bonds are being offered and sold only to “qualified institutional buyers,” as
defined in Rule 144A under the Securities Act of 1933, and therefore the Series 2014 Bonds are subject to
resale restrictions. See “BONDHOLDERS’ RISKS – Transferability of Series 2014 Bonds” and
APPENDIX G – “Form of Investor Letter.”
BOOK-ENTRY ONLY SYSTEM
General
The Depository Trust Company, or DTC, New York, New York, will act as securities depository
for the Series 2014 Bonds. The Series 2014 Bonds 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 bond certificate will be issued for the Series 2014
Bonds of each maturity in the aggregate principal amount of such Series 2014 Bonds and will be
deposited with DTC. For additional information regarding DTC and its book-entry only system, see
APPENDIX F hereto.
Limitations
For so long as the Series 2014 Bonds are registered in the name of DTC or its nominee, Cede &
Co., the Issuer and the Bond Trustee will recognize only DTC or its nominee, Cede & Co., as the
registered owner of Series 2014 Bonds for all purposes, including payments, notices and voting.
Because DTC is treated as the registered owner of the Series 2014 Bonds for substantially all
purposes under the Bond Indenture, Beneficial Owners may have a restricted ability to influence in a
timely fashion remedial action or the giving or withholding of requested consents or other directions. In
addition, because the identity of Beneficial Owners is unknown to the Issuer, DTC and the Bond Trustee,
10
it may be difficult to transmit information of potential interest to Beneficial Owners in an effective and
timely manner. Beneficial Owners should make appropriate arrangements with their broker or dealer
regarding distribution of information regarding the Series 2014 Bonds that may be transmitted by or
through DTC.
Under the Bond Indenture, payments made by the Bond Trustee to DTC or its nominee shall
satisfy the Issuer’s obligations under the Bond Indenture, the Obligated Group’s obligations under the
Loan Agreement and the Obligated Group’s obligations under the 2014 Master Note, as applicable, to the
extent of the payments so made.
Neither the Issuer, the Obligated Group nor the Bond Trustee shall have any responsibility or
obligation with respect to:

the accuracy of the records of DTC, its nominee or any DTC Participant or Indirect
Participant with respect to any beneficial ownership interest in any Series 2014 Bonds;

the delivery to any DTC Participant or Indirect Participant or any other Person, other than
a Holder, as shown in the bond register, of any notice with respect to any Series 2014
Bond including, without limitation, any notice of redemption with respect to any Series
2014 Bond;

the payment to any DTC Participant or Indirect Participant or any other Person, other
than a Holder, as shown in the bond register, of any amount with respect to the principal
of, premium, if any, or interest on, or the redemption price of, any Series 2014 Bond; and

the selection of the Beneficial Owners to receive payment in the event of any partial
redemption of the Series 2014 Bonds.
Prior to any discontinuation of the book-entry only system with respect to the Series 2014 Bonds
as hereinabove described, the Issuer and the Bond Trustee may treat DTC as, and deem DTC to be, the
absolute owner of the Series 2014 Bonds for all purposes whatsoever, including, without limitation:

the payment of interest on the Series 2014 Bonds or the redemption price of a Series 2014
Bond;

giving notices of redemption and other matters with respect to the Series 2014 Bonds;

registering transfers of the Series 2014 Bonds; and

the selection of Series 2014 Bonds for redemption.
SECURITY FOR THE SERIES 2014 BONDS
General
The Series 2014 Bonds are special, limited obligations of the Issuer payable solely from
payments made by the Obligated Group and received by the Issuer under the Loan Agreement, from
payments made by the Obligated Group on the 2014 Master Note and from certain funds held under the
Bond Indenture.
11
THE PURCHASE OF THE SERIES 2014 BONDS IS AN INVESTMENT SUBJECT TO A
HIGH DEGREE OF RISK, INCLUDING THE RISK OF NONPAYMENT OF PRINCIPAL AND
INTEREST. SEE “BONDHOLDERS’ RISKS” HEREIN FOR A DISCUSSION OF SUCH FACTORS
THAT SHOULD BE CONSIDERED, IN ADDITION TO THE OTHER MATTERS SET FORTH
HEREIN, IN EVALUATING THE INVESTMENT QUALITY OF THE SERIES 2014 BONDS.
Issuer Not Generally Liable on the Series 2014 Bonds
Neither the credit nor the taxing power of the Commonwealth of Pennsylvania, the City of
Pottsville, the County of Schuylkill or of any other political subdivision of the Commonwealth is pledged
for payment of the principal or redemption price of, or interest on the Series 2014 Bonds, nor shall the
Series 2014 Bonds be or be deemed an obligation of the Commonwealth of Pennsylvania or any political
subdivision of the Commonwealth. The Issuer has no taxing power.
The Loan Agreement
The Loan Agreement provides that the Obligated Group shall repay the loan of the proceeds of
the Series 2014 Bonds by making payments to the Bond Trustee in amounts sufficient to pay the principal
of, premium, if any, and interest on the Series 2014 Bonds when due. The Loan Agreement is the
unsecured general obligation of the Obligated Group. The Issuer will pledge and assign certain of its
rights, including the right to receive loan payments under the Loan Agreement, to the Bond Trustee as
security for the Series 2014 Bonds.
The 2014 Master Note and the Master Indenture
Pursuant to the Master Indenture, the Obligated Group will issue the 2014 Master Note to the
Issuer, which will assign it (except for its rights to certain fees and indemnification payments) to the Bond
Trustee, as the assignee of the Issuer, to evidence and secure the Obligated Group’s payment obligations
under the Loan Agreement. The 2014 Master Note will be issued in a principal amount equal to the
original aggregate principal amount of the Series 2014 Bonds. Payments under the 2014 Master Note are
scheduled to be made at the times and in the amounts required to pay debt service on the Series 2014
Bonds and will be credited against the applicable loan payment obligations of the Obligated Group under
the Loan Agreement.
The 2014 Master Note will constitute the obligation of the Obligated Group, and the joint and
several obligation of any future Member of the Obligated Group, and will be payable in all events,
notwithstanding the expiration, invalidity or termination of the Loan Agreement.
The Master Indenture permits other entities, under certain conditions, to become Members of the
Obligated Group, and to have additional Master Notes issued thereunder on behalf of such Members. The
Master Indenture further permits any affiliate of any Member or Members of the Obligated Group, which
satisfies certain conditions, to become a Restricted Affiliate (collectively, the “Combined Group”).
Restricted Affiliates will agree to transfer monies to the Obligated Group to make payments on the Master
Notes under certain circumstances and to the extent such transfers would not violate applicable federal
and state law. Any future Member of the Combined Group must agree to comply with all covenants and
agreements set forth in the Master Indenture and for the payment of all Master Notes and other Master
Indenture obligations, including the 2014 Master Note to the extent provided in the Master Indenture.
The Master Indenture also permits Members to withdraw from the Obligated Group, and Restricted
Affiliates to withdraw from the Combined Group, upon compliance with certain specified conditions.
Upon any such withdrawal, the withdrawing Member will no longer be obligated or liable with respect to
12
the 2014 Master Note. As of the date of issuance of the Series 2014 Bonds, there will be no Restricted
Affiliates.
Each entity that becomes a member of the Combined Group agrees, under the Master Indenture,
to subject themselves to certain operational and financial restrictions contained therein. Each entity that
becomes a member of the Combined Group hereafter will covenant to comply with such restrictions as
well. The operational and financial restrictions contained in the Master Indenture relate primarily to debt
service coverage requirements, the incurrence of additional indebtedness, directly or by guaranteeing the
debt of others, the ability to transfer assets, including both tangible and intangible assets, the ability to
create additional liens and the ability to effect mergers and consolidations.
The 2014 Master Note will be secured by the Gross Revenues of the Obligated Group on a parity
with all other Master Notes which may be issued under the Master Indenture.
Debt Service Reserve Fund
The Bond Indenture creates and establishes with the Bond Trustee a Debt Service Reserve Fund
(the “Reserve Fund”) with respect to the Series 2014 Bonds. Moneys on deposit in the Reserve Fund will
be used to provide a reserve for the payment of the principal of and interest on the Series 2014 Bonds.
See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF DOCUMENTS – The Bond
Indenture” in Appendix C hereto.
Payments into the Reserve Fund. Pursuant to the Bond Indenture, the Reserve Fund is required
to be funded in an amount equal to the Required Reserve Amount. In addition, there will be deposited into
the Reserve Fund all moneys required to be transferred thereto pursuant to the Bond Indenture, and all
other moneys received by the Bond Trustee when accompanied by written directions that such moneys
are to be paid into the Reserve Fund. There will also be retained in the Reserve Fund all interest and other
income received on investments of Reserve Fund moneys in the Reserve Fund to the extent provided in
the Bond Indenture.
Use of Moneys in the Reserve Fund. Except as provided in the Bond Indenture, moneys in the
Reserve Fund will be used solely for the payment of the principal of and interest on the Bonds in the
event moneys in the Bond Fund are insufficient to make such payments when due and payable.
Valuation; Remaining Funds. The Reserve Fund shall be valued initially upon issuance of the
Series 2014 Bonds and thereafter semi-annually on each January 1 and July 1, beginning on July 1, 2014.
Qualified Investments then constituting part of the Reserve Fund shall be valued at the then fair market
value thereof. If on any valuation date the amount in the Reserve Fund, as so valued, is less than the
Required Reserve Amount, the Bond Trustee shall give notice of such deficiency to the Obligated Group
and the Issuer; provided, however, that failure to give such notice or any defect therein shall not affect the
obligations of the Issuer and the Obligated Group to make good the deficiency in the Reserve Fund as
described herein.
On or before the first day of each month following (1) any withdrawal of money from the
Reserve Fund to eliminate any deficiency in the Bond Fund, or (2) any valuation date on which the value
of the Reserve Fund is less than the Required Reserve Amount, the Bond Trustee, after having made or
made provision for the transfers and deposits provided for in the Bond Indenture, shall transfer to the
Reserve Fund an amount equal to the additional payments made by the Obligated Group to restore the
value of the Reserve Fund as required by the Loan Agreement until the value of the Reserve Fund is not
less than the Required Reserve Amount.
13
If on any valuation date the amount on deposit in the Reserve Fund, valuing any securities therein
at current market value, exceeds the Required Reserve Amount, the Bond Trustee shall notify the Issuer
and the Obligated Group of such excess and (1) to the extent that such value is in excess of the Maximum
Annual Debt Service Requirements on the Series 2014 Bonds, shall, upon the written direction of the
Obligated Group, (a) invest such excess in Qualified Investments that the Obligated Group certifies
constitute obligations the interest on which is excluded from gross income for federal income tax
purposes under Section 103 of the Code and which are not specified private activity bonds (within the
meaning of Section 57(a)(5)(C) of the Code) or (b) restrict the yield on the investment of such excess so
that the yield thereon, as computed by the Obligated Group in accordance with Section 148 of the Code
and applicable Treasury Regulations, does not exceed the “yield” on the Series 2014 Bonds (unless the
Bond Trustee shall have received an opinion from Bond Counsel to the effect that such investment in
tax-exempt obligations and such restriction upon investment yield is not required to preserve the
tax-exempt status of the Series 2014 Bonds), or (2) at the written request of the Obligated Group, shall
transfer such excess as provided in the following paragraph.
If on any date the amount on deposit in the Reserve Fund exceeds the Required Reserve Amount,
the Bond Trustee, upon the written request of the Obligated Group, shall transfer such excess to the Bond
Fund or to the Obligated Group, provided, however, that if any amounts to be transferred to the Obligated
Group represent original proceeds of the Series 2014 Bonds, such transfer shall be made only upon
receipt by the Bond Trustee of an opinion of nationally recognized bond counsel to the effect that such
transfer is permitted by the Act and will not adversely affect the tax-exemption of interest on the Series
2014 Bonds.
Debt Service Coverage Ratio Covenant
So long as any Master Notes are Outstanding under the Master Indenture, in each Fiscal Year, the
Obligated Group is required to maintain a Debt Service Coverage Ratio of at least 1.10 to 1.00. The
measurement date for testing the Debt Service Coverage Ratio is the last day of each Fiscal Year,
commencing with the Fiscal Year ending June 30, 2014. See APPENDIX C hereto for a definition of
Debt Service Coverage Ratio. If the Debt Service Coverage Ratio in any Fiscal Year is less than 1.10 to
1.00, the Obligated Group Agent, at the expense of the Obligated Group, within 210 days after the close
of such Fiscal Year, must engage a Management Consultant to make recommended changes in rates, fees,
and charges or expenses, or in such other affairs, that will restore the Debt Service Coverage Ratio in the
following Fiscal Year to the required level or, if in the opinion of the Management Consultant the
attainment of such level is impracticable, to the highest level attainable. Subject to any contractual
commitments or Legal Restrictions to which each Member or SHSMG may be subject, (i) each Member
must implement such changes to the fullest extent practicable (as determined by the Governing Body of
such Member) and permitted by law and (ii) if applicable, SHS shall cause SHSMG to implement such
changes to the fullest extent practicable (as determined by SHS) and permitted by law. This covenant
does not prohibit any Member or SHSMG from serving indigent residents to the extent required for it to
continue its qualification as a tax-exempt organization or from serving any other class or classes of
residents without charge or at reduced rates so long as such service does not prevent the Obligated Group
from satisfying the other requirements of this covenant.
The failure of the Obligated Group to maintain a Debt Service Coverage Ratio of at least 1.10 to
1.00 is not an Event of Default under the Master Indenture if a Management Consultant is so retained and
the recommendations of such Management Consultant are so implemented as set forth in the Master
Indenture and the Obligated Group maintains a Debt Service Coverage Ratio of at least 1.00 to 1.00.
1.00 shall be an Event of Default under the Master Indenture, and in such event, the Obligated Group
14
Agent, at the expense of the Obligated Group, shall within 180 days after the close of such Fiscal Year,
engage a new Management Consultant to make recommended changes in rates, fees, and charges or
expenses, or in such other affairs, that will restore the Debt Service Coverage Ratio in the following
Fiscal Year to a level in excess of 1.00 to 1.00 and shall implement the recommendations of such
Management Consultant as set forth in the first paragraph of this subsection.
Liquidity Covenant
So long as any Master Notes are Outstanding under the Master Indenture, in each Fiscal Year, the
Obligated Group shall maintain Days Cash on Hand of at least 15. The measurement date for testing
Days Cash on Hand shall be the last day of each Fiscal Year, commencing with the Fiscal Year ending
June 30, 2014. If Days Cash on Hand in any Fiscal Year shall be less than 15, the Obligated Group
Agent, at the expense of the Obligated Group, within 210 days after the close of such Fiscal Year, shall
engage a Management Consultant to make recommended changes in rates, fees, and charges or expenses,
or in such other affairs, that will restore the Days Cash on Hand in the following Fiscal Year to the
required level or, if in the opinion of the Management Consultant the attainment of such level is
impracticable, to the highest level attainable. Subject to any contractual commitments or Legal
Restrictions to which each Member may be subject, each Member shall implement such changes to the
fullest extent practicable (as determined by the Governing Body of such Member) and permitted by law.
This liquidity covenant shall not be construed to prohibit any Member from serving indigent residents to
the extent required for it to continue its qualification as a tax-exempt organization or from serving any
other class or classes of residents without charge or at reduced rates so long as such service does not
prevent the Obligated Group from satisfying the requirements of this liquidity covenant.
The failure of the Obligated Group to maintain Days Cash on Hand of at least 15 shall not be an
Event of Default under the Master Indenture if a Management Consultant is so retained and the
recommendations of such Management Consultant are so implemented as set forth in the paragraph
above.
“Days Cash on Hand” is defined in the Master Indenture to mean the number determined as of
June 30 of each fiscal year by dividing (A) the sum of the amount of the Obligated Group’s unrestricted
cash, investments and board designated funds (excluding amounts held in the Debt Service Reserve Fund
created under a Related Bond Indenture, amounts held in a debt service or bond fund for the accumulation
of payments on the outstanding obligations of the Obligated Group and the proceeds of any Short-Term
Indebtedness of the Obligated Group) by (B) the quotient of (i) operating expenses of the Obligated
Group for such Fiscal Year less, to the extent included in such operating expenses, any bad debts, all
depreciation, and all amortization on the outstanding obligations of the Obligated Group payable during
such Fiscal Year divided by (ii) the number of calendar days in such fiscal year
Mortgage
As further security for the obligation under the Master Indenture to make payment on account of
the 2014 Master Note and all other Master Notes that may be hereafter issued under the Mater Indenture,
each of SMC-SJ and SMC-EN, as mortgagor, has heretofore executed and delivered to the Master
Trustee, as mortgagee, an Open-End Mortgage and Security Agreement (collectively, the “Mortgage”)
with respect to certain real property interests held by each of SMC-SJ and SMC-EN (collectively, the
“Mortgaged Premises”). The Mortgaged Premises consist, generally, of approximately 32 acres situated
in Pottsville, Pennsylvania, Schuylkill County, improved with buildings having approximately 628,000
square feet together with related parking, including a three-story parking garage that serves patients and
visitors of SMC-EN, and certain ancillary support buildings. The approximate market value of the
Mortgaged Premises may be less than the aggregate principal amount of the 2014 Master Note.
15
Further, the Mortgaged Premises are designed and suited for the specific purpose of rendering acute
health care services and are not comprised of general purpose buildings. For the foreseeable future, it is
likely that proceeds from any foreclosure on the Mortgage would be significantly less than the principal
amount of the 2014 Master Note.
The land on which the facilities of SRC (the “SRC Property”) are located is subject to a ground
lease with SMC-SJ, as ground lessor. The SRC Property is not part of the Mortgaged Premises and does
not secure the Obligated Group’s obligations under the Master Indenture.
Security and Enforceability
Bankruptcy. In the event any Member files for protection from creditors under the United States
Bankruptcy Code, the rights and remedies of the Holders of the Series 2014 Bonds would be subject to
various provisions of the United States Bankruptcy Code. If a Member were to commence a proceeding
in bankruptcy, payments made by that Member during the 90-day period immediately preceding such
commencement (or, under certain circumstances, during the preceding one-year period) may be voided as
preferential transfers to the extent such payments allow the recipients thereof to receive more than they
would have received in the event of the liquidation of such Member. Security interests and other liens
granted by such Member to the Bond Trustee or the Master Trustee and perfected during such preference
period also may be voided as preferential transfers to the extent such security interest or other lien secures
obligations that arose prior to the date of such grant or perfection.
A bankruptcy filing would operate as an automatic stay of the commencement or continuation of
any judicial or other proceeding against such Member and its property and as an automatic stay of any act
or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various
other actions to enforce, maintain or enhance the rights of the Bond Trustee and the Master Trustee. If
the bankruptcy court so ordered, the property of such Member, including such Member’s Gross Revenues
and the proceeds thereof, could be used for the financial rehabilitation of such Member despite any
security interest of the Bond Trustee or the Master Trustee therein. The rights of the Bond Trustee and
the Master Trustee to enforce their respective interests and other liens could be delayed during the
pendency of the rehabilitation proceeding.
Such Member could also file a plan for the adjustment of its debts in any such proceeding which
could include provisions modifying or altering the rights of creditors generally, or any class of them,
secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or
knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent
provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are
conditions that the plan be feasible and that it shall have been accepted by each class of claims impaired
thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more
than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be
confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting
creditors impaired thereunder and does not discriminate unfairly. Any such plan could adversely affect
the Owners and Beneficial Owners of the Series 2014 Bonds.
In the event of bankruptcy of a Member, there is no assurance that certain covenants, including
tax covenants, contained in the Bond Indenture, the Loan Agreement or the Master Indenture and certain
other documents would survive. Accordingly, such Member, as debtor in possession, or a bankruptcy
trustee could take action which might adversely affect the exclusion of interest on the Series 2014 Bonds
from gross income for federal income tax purposes.
16
In addition, the bankruptcy of a health plan or physician group that is a party to a significant
managed care arrangement with one or more Obligated Group, or that of any significant contract payor
obligated to any one or more Obligated Group, could have material adverse effects on the Obligated
Group.
Enforceability of the Master Indenture, the Loan Agreement and the 2014 Master Note. The
legal right and practical ability of the Bond Trustee to enforce rights and remedies under the Loan
Agreement and of the Master Trustee to enforce its rights and remedies under the Master Indenture and
the 2014 Master Note may be limited by laws relating to bankruptcy, insolvency, reorganization,
fraudulent conveyance or moratorium and by other similar laws affecting creditors’ rights. The state of
insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of guaranties or
obligations issued by one corporation in favor of another corporation’s creditors or of a corporation’s
obligation to make debt service payments on behalf of another corporation is unsettled. In particular,
such obligations may be voidable under the federal Bankruptcy Code or applicable state fraudulent
conveyance laws if the obligation is incurred without “fair” and/or “fairly equivalent” consideration to the
obligor and the incurrence of the obligation renders the corporation insolvent. The standards for
determining the fairness of consideration and the manner of determining insolvency are not clear and may
vary under the federal Bankruptcy Code, state fraudulent conveyance statutes and applicable cases.
Consequently, the Bond Trustee’s and the Master Trustee’s ability to enforce the rights and remedies
under the Loan Agreement, the Master Indenture and the 2014 Master Note against any Member that
would be rendered insolvent thereby could be subject to challenge. In addition, enforcement of such
rights and remedies will depend upon the exercise of various remedies specified by such documents,
which, in many instances, may require judicial actions that are subject to discretion and delay, that
otherwise may not be readily available or that may be limited by certain legal principles, including
fraudulent conveyance or moratorium and other similar laws.
These limitations on the enforceability of the obligations of the Obligated Group on the 2014
Master Note also apply to their obligations on all Master Notes. If the obligation of a Member to make
payment on a Master Note is not enforceable, and payment is not made on such Master Note when due in
full, then Events of Default will arise under the Master Indenture.
A Member may not be required to make payments on or provide amounts for the payment of a
Master Note, including the 2014 Master Note, issued by or for the benefit of another entity if and to the
extent that any such payment or transfer would render such Member insolvent or would conflict with or
not be permitted by or would be subject to recovery for the benefit of other creditors of such Member
under applicable fraudulent conveyance, bankruptcy, insolvency, moratorium or other similar laws
affecting the enforcement of creditors’ rights. There is no clear precedent in the law as to whether
payments on Master Notes (including the 2014 Master Note) by a Member may be voided by a trustee in
bankruptcy in the event such Member filed for bankruptcy protection and a trustee was appointed, or by
third party creditors in an action brought pursuant to state fraudulent conveyance statutes. Under the
United States Bankruptcy Code, a trustee in bankruptcy and, under state fraudulent conveyance statutes, a
creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other
bases therefor, (1) the guarantor has not received fair consideration or reasonably equivalent value in
exchange for the guaranty and (2) the guaranty renders the guarantor insolvent, as defined in the United
States Bankruptcy Code or state fraudulent conveyance statutes, or the guarantor is undercapitalized.
Under such principles, the obligor on a Master Note (including the 2014 Master Note) that secures related
bonds (including the Series 2014 Bonds) not issued for the direct benefit of such obligor may be
considered a guarantor.
Application by courts of the tests of “insolvency,” “reasonably equivalent value” and “fair
consideration” has resulted in a conflicting body of case law. If a judicial action were brought to compel
17
a Member to make a payment on a Master Note (including the 2014 Master Note), a court might not
enforce such payment in the event it is determined that sufficient consideration for the Member’s
obligation was not received, or that the incurrence of such obligation has rendered or will render the
Member insolvent, or the Member is or will thereby become undercapitalized.
In addition, state courts have common law authority and authority under state statutes to
terminate the existence of a not-for-profit or nonprofit corporation or undertake supervision of its affairs
on various grounds, including a finding that the not-for-profit or nonprofit corporation has insufficient
assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry
out such purposes. Such action may arise on the court’s own motion or pursuant to a petition of the state
attorney general or other persons who have interests different from those of the general public, pursuant
to the common law and statutory power to enforce charitable trusts and to see to the application of their
funds to their intended charitable uses.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
18
ANNUAL DEBT SERVICE REQUIREMENTS
The following table sets forth, for each fiscal year ending June 30, the amounts required to be
made available for the payment of interest when due and of principal at maturity or upon mandatory
redemption for the Series 2014 Bonds and debt service payments on other long-term debt of the Obligated
Group.
Fiscal Year
Ending June 30
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
TOTAL
Series 2014 Bonds
Principal
Interest
$1,219,050
1,820,988
1,820,988
$865,000
1,796,119
1,870,000
1,717,488
2,035,000
1,605,219
2,160,000
1,484,613
2,285,000
1,356,819
2,420,000
1,221,550
2,570,000
1,074,875
2,725,000
916,025
2,900,000
740,025
3,100,000
545,025
3,310,000
336,700
3,525,000
114,563
$29,765,000 $17,770,047
Total Debt
Service
Other
Outstanding
Debt†
Aggregate Debt
Service
$1,219,050
1,820,988
1,820,988
2,661,119
3,587,488
3,640,219
3,644,613
3,641,819
3,641,550
3,644,875
3,641,025
3,640,025
3,645,025
3,646,700
3,639,563
$47,535,047
$4,161,541
3,572,665
3,244,282
2,249,013
981,467
57,007
$14,265,975
$4,161,541
4,791,715
5,065,270
4,070,001
3,642,586
3,644,495
3,640,219
3,644,613
3,641,819
3,641,550
3,644,875
3,641,025
3,640,025
3,645,025
3,646,700
3,639,563
$61,801,022
BONDHOLDERS’ RISKS
The purchase of the Series 2014 Bonds involves investment risks that are discussed throughout
this Limited Offering Memorandum. Prospective purchasers of the Series 2014 Bonds should evaluate all
of the information presented in this Limited Offering Memorandum. This section on Bondholders’ Risks
focuses primarily on the general risks associated with hospital or health system operations; whereas
APPENDIX A describes the Obligated Group specifically. These should be read together.
General
The Series 2014 Bonds are payable solely from the Trust Estate. No representation or assurance
can be made that revenues will be realized by the Obligated Group in amounts sufficient to make the
payments under the Loan Agreement or the 2014 Master Note and thus, to pay principal of, redemption
premium and interest on the Series 2014 Bonds. Future economic and other conditions, including
†

Includes debt obligations associated with outstanding capital leases.
Totals may not add due to rounding.
19
inflation, demand for health care services, the ability of the Obligated Group and any future Member of
the Obligated Group to provide the services required or requested by patients, physicians’ confidence in
the Obligated Group and any future Member of the Obligated Group, economic developments in their
respective service areas, employee relations and unionization, competition, the level of rates or charges,
increased costs, availability of professional liability insurance, hazard losses, third-party reimbursement
and changes in governmental regulation may adversely affect revenues and expenses and, consequently,
payment of amounts due on or with respect to the Series 2014 Bonds.
The practical realization of any rights upon any default under the Loan Agreement and the Master
Indenture will depend upon the exercise of various remedies specified in these instruments, as restricted
by federal and state laws. The federal bankruptcy laws may have an adverse effect on the ability of the
Bond Trustee and the Holders of the Series 2014 Bonds and the Master Trustee to enforce their claim to
liens granted by the Bond Indenture or the Master Indenture.
The operations of the health care industry and the ownership and organization of individual
participants therein, including the Obligated Group, have been subject to increasing scrutiny by federal,
state and local governmental agencies. In response to perceived abuses and actual violations of the terms
of existing federal, state and local health care payment programs, these agencies have increased their
audit and enforcement activities, and federal and state legislation has been considered or enacted
providing for or expanding existing civil and criminal penalties against certain activities. In addition,
federal, state and local agencies have increased their scrutiny of transactions involving not-for-profit, taxexempt organizations and are focusing in particular upon limitations on the use of charitable assets and
revenues.
The Master Indenture contains few limitations or conditions upon transactions involving
Members of the Obligated Group. A governmental agency may determine that a transaction may have
violated applicable laws and may proceed to enjoin the transaction or impose civil or criminal penalties,
notwithstanding the fact that the transaction may have been permitted by the Master Indenture.
Violations of these laws may have a material adverse effect on the operations and financial condition of
the Obligated Group.
Certain of the factors that could affect the Series 2014 Bonds and the future financial condition of
the Obligated Group are described below. This discussion of risk factors is not, and is not intended to be,
exhaustive.
Factors That Could Affect the Future Financial Condition of the Obligated Group
The future financial condition of the Obligated Group and its ability to pay its obligations under
the Master Indenture could be affected adversely by, among other things, legislation, regulatory actions,
economic conditions, increased competition from other health care providers, changes in the demand for
health care services, demographic changes, malpractice claims, other litigation, nurse staffing and medical
malpractice insurance costs.
General: Adequacy of Revenue
Each Member of the Obligated Group is a health care provider that derives significant portions of
its revenues from Medicare, Medicaid, Blue Cross, HMOs and other third-party payor programs. The
Obligated Group is subject to governmental regulation applicable to health care providers and the receipt
of future revenues by the Obligated Group is subject to, among other factors, federal and state policies
affecting the health care industry and other conditions which are impossible to predict. Such conditions
may include limits on increasing charges and fees charged by the Obligated Group, changes in federal and
20
state laws and regulations affecting payments for health services, the continued increase in managed care
or development of new third-party payment policies which reduce revenues, unanticipated competition
from other health care providers, and changes in demand for health services. The receipt of future
revenues by the Obligated Group is also subject to demand for Obligated Group services, the ability to
provide the services required by patients, physicians’ relationships with the Obligated Group, Obligated
Group management capabilities, economic developments in the service area, the Obligated Group’s
ability to control expenses, maintenance by the Obligated Group of relationships with HMOs and other
third-party payor programs, competition, rates, costs, third-party reimbursement, legislation and
governmental regulation, receipt of private contributions, the continued funding by the Commonwealth of
Pennsylvania (the “Commonwealth”) for medically indigent patient care, future economic conditions, and
other conditions which are impossible to predict.
No assurances can be given that patient utilization or revenues available to the Obligated Group
from its operations will remain stable or increase. The Obligated Group expects that it will experience
increases in operating costs due to inflation and other factors. There is no assurance that cost increases
will be matched by increased patient revenue in amounts sufficient to generate an excess of revenues over
expenses.
The risk factors discussed below should be considered in evaluating the ability of the Obligated
Group to make payments in amounts sufficient to meet its obligations under the Bond Indenture. This
discussion is not, and is not intended to be, exhaustive of all possible risks.
Impact of Market Turmoil
Over the past three to four years, the economies of the United States and other countries have
experienced severe disruption, prompting a number of banks and other financial institutions to seek
additional capital, including capital provided through the federal government, to merge, and, in some
cases, to cease operations. These events collectively have led to significant reductions in lending capacity
and the extension of credit, erosion of investor confidence in the financial sector, and historically aberrant
fluctuations in interest rates. This disruption of the credit and financial markets has led to volatility in the
securities markets, significant losses in investment portfolios, increased business failures and consumer
and business bankruptcies, and is a major cause of the current economic recession.
In 2008 and 2009, federal legislation was enacted and regulatory and other initiatives were
implemented by agencies of the Federal government and the Federal Reserve Board with the objective of
stabilizing the financial markets by enhancing liquidity, providing additional capital to the financial sector
and improving the performance and efficiency of credit markets. Other legislation is pending or under
active consideration by Congress, and additional regulatory action is being considered by various Federal
agencies and the Federal Reserve Board and foreign governments are implementing actions, all of which
are intended to continue and strengthen efforts to restore the domestic and global credit markets. It is
unclear whether these legislative, regulatory and other governmental actions will have the positive effect
that is intended.
The health care sector has been adversely affected by these developments. The consequences of
these developments have generally included realized and unrealized investment portfolio losses, reduced
investment income, limitations on access to the credit markets, and difficulties in remarketing revenue
bonds subject to tender.
The economic recession may also adversely affect the operations of the Obligated Group as a
result of, among other factors, increases in the amount of uncollectible accounts, the number of uninsured
patients or if persons that would otherwise use their facilities and services choose to defer elective
21
medical procedures. Economic conditions are also adversely affecting revenue available to states and
increasing expenses under various state programs, including Medicaid.
Health Care Industry Factors Affecting the Combined Group
The health care industry is highly dependent on a number of factors that may limit the ability of
the Combined Group to comply with certain provisions in the Master Indenture, effectively limiting the
ability of the Obligated Group to meet its obligations under the Master Indenture, several of which are
beyond their control. Among other things, participants in the health care industry (such as the Obligated
Group) are subject to significant regulatory requirements of federal, state and local governmental agencies
and independent professional organizations and accrediting bodies, technological advances and changes
in treatment modes, various competitive factors and changes in third-party reimbursement programs.
Health Care Reform
On March 23, 2010, President Obama signed into law H.R. 3590, entitled the “Patient Protection
and Affordable Care Act”, and on March 30, 2010, President Obama signed into law H.R. 4872, entitled
“The Health Care and Education Reconciliation Act of 2010”. Both of these laws are collectively
referred to as the “Health Care Reform Act.”
The changes to various aspects of the healthcare system in the Healthcare Reform Act are far
reaching and include, among many others, substantial adjustments to Medicare reimbursement,
establishment of individual mandates for healthcare coverage, extension of coverage to certain
populations primarily through the expansion of Medicaid and private insurance, provision of incentives
for employer-provided healthcare insurance and increased oversight provisions. The provisions of the
Healthcare Reform Act which encourage or mandate healthcare coverage for individuals can be expected
to reduce the amount of uncompensated care the Obligated Group provides; however, the revisions to the
Medicare reimbursement program could reduce revenues.
Some of the provisions of the Health Care Reform Act took effect immediately, while others will
be phased in over time, ranging from one year to ten years. Most of the significant healthcare coverage
reforms begin in 2014. Health Care Reform Act also requires the promulgation of substantial regulations
with significant effects on the healthcare industry.
The Health Care Reform Act reforms the sources and methods by which consumers will pay for
healthcare for themselves and their families. The Health Care Reform Act also places new requirements
on employers related to the provision of health insurance for their employees and dependents. These
reforms are expected to expand the base of consumers of healthcare services. One of the primary goals of
the Health Care Reform Act is to provide or make available, or subsidize the premium costs of, healthcare
insurance for consumers who are currently uninsured (or underinsured) and who fall below certain
income levels. The Health Care Reform Act proposes to accomplish that objective through various
provisions, including:
•
creating state organized insurance markets (referred to as exchanges) in which
individuals and small employers can purchase healthcare insurance for themselves
and their families or their employees and dependents,
•
providing subsidies for premium costs to individuals and families based upon their
income relative to federal poverty levels,
22
•
mandating that individual consumers obtain and certain employers provide a
minimum level of healthcare insurance, and providing for penalties or taxes on
consumers and employers that do not comply with these mandates,
•
establishing insurance reforms that expand coverage generally through such
provisions as prohibitions on denials of coverage for pre-existing conditions and
elimination of lifetime or annual cost caps, and
•
expanding existing public programs, including Medicaid for individuals and families.
To the extent all or any of those provisions produce the intended result, an increase in utilization of
healthcare services by those who are currently avoiding or rationing their healthcare can be expected and
bad debt expenses may be reduced.
Some of the specific provisions of the Health Care Reform Act that may affect hospital
operations, financial performance or financial conditions are described below. This listing is not
comprehensive. Health Care Reform Act is complex and comprehensive, and includes myriad new
programs and initiatives and changes to existing programs, policies, practices and laws.
•
With varying effective dates, the annual Medicare market basket updates for many
providers, including inpatient and outpatient hospital services, will be adjusted based
on a ten year average of national productivity and will be reduced by specified
percentages each year.
•
Commencing for hospital discharges beginning on or after October 1, 2014, Medicare
disproportionate share payments to hospitals (“DSH”) will be reduced to 25 percent
of the amount the hospital previously would have received under the statutory
formula for Medicare DSH in effect prior to the Health Care Reform Act reductions.
The remaining 75 percent of Medicare DSH funds that would otherwise have been
paid to the hospitals will become available for HHS to distribute to hospitals for
uncompensated care based on their share of insured low income days reported to
CMS.
•
Reductions to the Medicaid DSH payments, which are paid to the states for
distribution to the hospitals, were also scheduled to commence on October 1, 2013.
The Medicaid DSH reduction have been delayed until fiscal year 2016 under the
Bipartisan Budget Act of 2013. Originally, CMS proposed Medicaid DSH payment
reductions of $500 million for fiscal year 2014 and $600 million for fiscal year 2015.
However, due to the delay, the DSH payment reduction will roughly double to
approximately $1.2 billion for fiscal year 2016. The DSH payment reductions are
also extended through 2023.
•
Commencing October 1, 2010 through September 30, 2019, payments under the
“Medicare Advantage” programs (Medicare managed care) have been or will
continue to be reduced, which may result in increased premiums or out-of-pocket
costs to Medicare beneficiaries enrolled in Medicare Advantage plans and may also
lead to decreased payments to providers by managed care companies operating
Medicare Advantage programs.
•
States will have the option to expand Medicaid programs to a broader population,
with incomes up to 133% of federal poverty levels.
23
•
Beginning with hospital discharges after October 1, 2012, Medicare reduces
payments to hospitals found to have a high rate of preventable readmissions for
certain conditions; this information has been made available to the public.
•
Commencing in federal fiscal year 2015, Medicare payments to certain hospitals that
fall into the top 25% of national risk-adjusted hospital acquired conditions rates will
be reduced by 1%. Commencing in federal fiscal year 2011, federal payments to
states for Medicaid services related to hospital-acquired conditions are prohibited.
•
In 2013, Medicare commenced the value-based purchasing program. This program
provides incentive payments to hospitals based on their performance on certain
quality and efficiency measures. This program is funded with 1% reductions in base
operating diagnosis-related group (DRG) payments for fiscal year 2013 (increasing to
2% by fiscal year 2017).
•
In order to reduce waste, fraud, and abuse in public programs, Health Care Reform
Act provides for provider enrollment screening, enhanced oversight periods for new
providers and suppliers, and enrollment moratoria in areas identified as being at
elevated risk of fraud in all public programs. It also requires Medicare and Medicaid
program providers and suppliers to establish compliance programs. The Health Care
Reform Act requires the development of a database to capture and share healthcare
provider data across federal healthcare programs and provides for increased penalties
for fraud and abuse violations, and increased funding for anti-fraud activities.
•
The Health Care Reform Act establishes an Independent Payment Advisory Board to
develop proposals to improve the quality of care and to recommend proposals to limit
Medicare spending growth. Beginning January 15, 2019, if the Medicare spending
growth rate exceeds the target recommended by the Independent Payment Advisory
Board, then the Independent Payment Advisory Board is required to develop
proposals to reduce the growth rate and require the Secretary of the U.S. Department
of Health and Human Services (“HHS”) to implement those proposals, unless
Congress enacts legislation related to the proposals.
•
The Health Care Reform Act imposes substantial new data reporting obligations on
hospital initiatives to improve the quality of care, reduce errors and improve health
outcomes. Health care insurers now are required to include quality improvement
covenants in their contracts with hospital providers, and will be required to report
their progress on such actions to HHS. Commencing January 1, 2015, health care
insurers participating in the health insurance exchanges will be allowed to contract
only with hospitals that have implemented programs designed to ensure patient safety
and enhance quality of care.
•
The Health Care Reform Act immediately imposed additional requirements upon
nonprofit hospitals to maintain their tax-exempt status, including obligations to adopt
and publicize a financial assistance policy; limit charges to patients who qualify for
financial assistance to the lowest amount charged to insured patients; and control the
billing and collection processes. Additionally, effective for tax years commencing
January 1, 2013, tax-exempt hospitals must conduct a community needs assessment
at least once every three taxable years and adopt an implementation strategy to meet
those identified needs. Failure to satisfy these conditions may result in the imposition
of fines and the loss of tax-exempt status.
24
Broadly speaking, the provisions of the Health Care Reform Act that encourage or mandate
healthcare coverage for individuals can be expected to increase demand for health care and reduce the
amount of uncompensated care that the Obligated Group provides. However, revisions to the Medicare
reimbursement program could reduce revenues. Therefore, the impact of the Health Care Reform Act on
the operations of the Obligated Group cannot be currently ascertained, and it may have a material impact,
either positive or negative, on the Obligated Group’s operations.
On June 28, 2012, the Supreme Court of the United States issued its opinion regarding several
challenges to the Health Care Reform Act and specifically addressed: (i) the constitutionality of the
mandate on individuals to obtain health insurance; (ii) the constitutionality of the Medicaid expansion;
and (iii) whether the Anti-Injunction Act, which requires a tax to be assessed and collected before it can
legally be challenged, bars the Supreme Court from hearing the case until a penalty for violation of the
individual health insurance mandate is imposed. The Supreme Court held that the Anti-Injunction Act
did not preclude the Court from hearing challenges to the Health Care Reform Act. The Court further
held that the individual mandate for individuals to buy health insurance is a constitutional exercise of
Congress’s power to levy taxes. However, the Court found that the provision of the Health Care Reform
Act that requires states to expand Medicaid to all people with income below 133% of the poverty level or
lose the states’ existing Medicaid funds, is an improper exercise of Congress’ spending powers under the
Constitution and amounted to coercion. The Court held that this requirement was severable from the rest
of the law; therefore the additional Medicaid funds may still be made available to states which agree to
the expansion of their Medicaid programs, but Congress cannot withhold all Medicaid funds from those
states that opt out of the expansion. As a result, some states have elected not to expand their Medicaid
program, which may affect the number of uninsured people to whom the Obligated Group provides care.
Pennsylvania Governor Tom Corbett has conditioned Pennsylvania’s expansion of the Medicaid program
in accordance with the Health Care Reform Act on HHS approval of certain waivers of Medicaid’s
requirements (See “Healthy Pennsylvania” below). The ultimate outcomes of legislative attempts to
repeal or amend the Health Care Reform Act and other legal challenges to the Health Care Reform Act
are unknown and their impact on the Obligated Group operations cannot be determined.
The Obligated Group is analyzing the Health Care Reform Act and will continue to do so in order
to assess its effects on current and projected operations, financial performance and financial condition.
However, management of the Obligated Group cannot predict with any reasonable degree of certainty or
reliability any interim or ultimate effects of the legislation.
Overview of Medicare and Medicaid Program. Medicare and Medicaid are the commonly
used names for health care reimbursement or payment programs governed by certain provisions of the
federal Social Security Act Amendments of 1965. The federal government, the largest health care
purchaser in the country, uses reimbursement as a key tool to implement health care policies, to allocate
health care resources and to control utilization, facility and provider development and expansion, and
promote the use and development of health technology. These programs reflect the national policy that
persons who are aged and persons who are poor should be entitled to receive medical care regardless of
ability to pay. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or
older, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient
hospital, home health, nursing home care and certain other services, and Medicare Part B covers certain
physicians services, medical supplies and durable medical equipment. Medicare Part C, the Medicare
Advantage program (formerly known as the Medicare+Choice Program) enables Medicare beneficiaries
who are entitled to Part A and are enrolled in Part B to choose to obtain their benefits through a variety of
private, managed care, risk-based plans.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (“MMA”) was signed into law. This law provides for Medicare Part D, under which outpatient
25
prescription drug benefits are available to Medicare beneficiaries. MMA also enhanced the Medicare Part
C managed care programs. The private Medicare Part D plans are funded through premium payments
from enrolled Medicare beneficiaries and subsidies from the federal government. Enrollment is available
on an ongoing and intermittent basis. While participation in the program is voluntary, those who wait to
enroll beyond their initial point of eligibility are penalized with additional surcharges which increase over
time. The Health Care Reform Act includes changes to the Medicare Part D program, including the
gradual reduction of the cost sharing burden by beneficiaries under Medicare Part D (the so-called “donut
hole”). Although Medicare Part D reimbursement does not cover inpatient prescriptions, changes in
enrollment or program administration could affect the Obligated Group’s revenue. Going forward, an
expansion of coverage for outpatient pharmaceutical therapy may reduce the Obligated Group’s
admissions or shift the characteristics of those patients that are admitted.
Medicaid is designed to pay providers for care given to the indigent and other persons who
qualify based on certain conditions. Medicaid is funded by federal and state appropriations and is
administered by an agency of the applicable state. Under the Health Care Reform Act, states have the
option to expand Medicaid eligibility to cover individuals with income under 133% of the Federal
Poverty Level (“FPL”). Current federal Medicaid participation is capped at 100% of FPL.
Conditions of Participation. Hospitals must comply with standards called “Conditions of
Participation” in order to be eligible for Medicare and Medicaid reimbursement. HHS’s Centers for
Medicare and Medicaid Services (“CMS”) is the federal agency responsible for ensuring that hospitals
meet the regulatory Conditions of Participation. Generally, under Medicare rules, hospitals accredited by
the Joint Commission (a private nonprofit corporation that accredits health care programs and providers in
the United States) are deemed to meet the Conditions of Participation. Failure to maintain Joint
Commission accreditation or to otherwise comply with the Conditions of Participation could have a
materially adverse effect on the continued participation in the Medicare and Medicaid programs, and
ultimately on the revenues of the Obligated Group. The Medicare Improvements for Patients and
Providers Act of 2008 revised hospital accreditation standards, revoking the exclusive deeming authority
of the Joint Commission. While each hospital certified by the Joint Commission will continue to be
certified for the duration of its accreditation, the process going forward has been opened to competition
between accrediting organizations. It is not clear what effect, if any, this legislation will have on the
Obligated Group’s accreditation in the future.
CMS issued a final rule reforming the Conditions of Participation for hospitals and critical access
hospitals, which became effective July 16, 2012. The revised Conditions of Participation are an attempt to
increase the flexibility and eliminate the burden of certain elements of the Conditions of Participation.
The Obligated Group cannot anticipate the effect of the reformed Conditions of Participation on the
Obligated Group and its affiliates but continues to analyze the full impact of the final regulation to
maintain compliance with the Conditions of Participation.
Medicare. Medicare is administered by CMS which delegates to the states the process for
certifying those organizations to which CMS will make payment. HHS’s rule-making authority is
substantial and the rules are extensive and complex. Substantial deference is given by courts to rules
promulgated by HHS.
Medicare claims are processed by non-government organizations or agencies that contract to
serve as the fiscal agent between providers and the federal government to locally process Medicare’s
Part A and Part B claims. These claims processors are known as “Medicare Administrative Contractors”
or “MACs”. They apply the Medicare coverage rules to determine the appropriateness of claims. CMS
selects organizations (generally insurance companies) to act as MACs in various states or regions, and
enters into a “prime contract” with each. Most Medicare hospital services are provided through a fixed
26
rate per case program under the reimbursement methods described below. Some Medicare recipients,
however, enroll in Medicare Advantage managed care plans, which reimburse providers on a
contractually determined basis. Health care providers that participate in the Medicare program must
agree to be bound by the terms and conditions of the program such as meeting the quality standards for
rendering covered services and adopting and enforcing policies to protect patients from certain
discriminatory practices.
The Health Care Reform Act introduces changes to the Medicare program that are estimated by
the Congressional Budget Office to reduce the cost of the program over the next ten years by
approximately $455 billion. The Health Care Reform Act reduces cost sharing by Medicare beneficiaries
for certain preventive services and wellness visits and expands coverage for these services. In addition,
the Health Care Reform Act includes programs that link Medicare payments for hospitals and physicians
with quality outcomes and the development of new patient care models that stress primary care and
community-based care. The objective of these programs is to manage chronic diseases better and to
reduce inpatient admissions and other high cost care provided by health care facilities, such as hospitals
and nursing homes. While additional governmental reporting, oversight and audits are a certainty, it is
difficult to determine what effect the health care reform legislation and its implementation will ultimately
have on the financial or operating condition of the Obligated Group or its competitors in the future.
On March 1, 2013, CMS announced reductions in Medicare provider rates beginning with
services provided on or after April 1, 2013 as a result of the federal government’s sequestration order
required by the Budget Control Act of 2011. The cut is capped at 2% for payments made for services
provided by physicians and hospitals under Parts A and B of Medicare, as well as monthly payments to
Medicare private insurers and Part D prescription drug plans for each year of sequestration.
On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013,
which impacts the Medicare and Medicaid programs. The Bipartisan Budget Act’s major Medicare and
Medicaid provisions include a short-term Medicare physician fee schedule patch (See “Physician
Payments” below), reductions in Medicaid DSH payments, and, unless additional Congressional action is
taken, an extension of the Medicare sequestration through 2023. Additionally, the 2% cap on Medicare
provider payment cuts will be raised to 2.9% for the first six months of fiscal year 2023, and then drop to
1.11% for the second half of fiscal year 2023.
Obligated Group Inpatient Services. Medicare payments for operating expenses incurred in the
delivery of inpatient hospital services and inpatient psychiatric services are based on a prospective
payment system (“PPS”) which essentially pays hospitals a fixed amount for each Medicare in-patient
discharge based upon patient diagnosis and certain other factors used to classify each patient into a
Diagnosis Related Group (“DRG”), or more recently Medical Severity DRGs or “MS-DRGs”. Each MSDRG is given a relative value from which a fixed payment can then be established. With limited
exceptions, such payments are not adjusted for actual costs, variations in intensity of illness, or length of
stay. MS-DRG rates are adjusted annually by the use of an “update factor” based on the projected
increase in a market basket inflation index which measures changes in the costs of goods and services
purchased by hospitals, but the adjustments historically have not kept pace with inflation.
If a hospital treats a patient and incurs less cost than the applicable MS-DRG-based payment, the
hospital will be entitled to retain the difference. Conversely, if a hospital’s cost for treating the patient
exceeds the DRG-based payment, the hospital generally will not be entitled to any additional payment.
CMS continually attempts to adjust reimbursements to better reflect hospital costs rather than charges. If
a case is unusually complex or expensive, it may qualify for an “outlier” payment, which is added to the
MS-DRG-adjusted base rate payment. There can be no assurance that payments under the PPS will be
sufficient to cover all actual costs of providing inpatient hospital services to Medicare patients. The MS-
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DRG system has undergone changes to increase and refine the classifications system, with certain
classifications receiving increases in payment and others a decrease. There can be no assurance that
payments under PPS will be sufficient to cover all actual costs of providing in-patient hospital services to
Medicare patients.
Since 2001, SMC-SJ has been considered a rural referral center (“RRC”). As a RRC, SMC-SJ has
been able to use this status to successfully be granted Medicare Geographical reclassifications by the
federal government to other Urban Core Based Statistical Areas (CBSA’s) since 2001. The
reclassifications have entitled SMC-SJ to receive additional reimbursement in the form of a higher MSDRG base payment rate ranging annually from $500,000 to $1,250,000 over the past decade.
Additionally, since 2011 SMC-EN has been considered a Medicare dependent hospital (“MDH”). As a
MDH, SMC-EN receives additional reimbursement in the form of a higher MS-DRG base payment of
approximately $2,500,000 annually. There can be no assurance that SMC-SJ and SMC-EN will maintain
its respective RRC status and MDH status in the future. Any loss of such status would have a material
adverse effect on the System’s financial condition.
Medicare and Medicaid currently make additional payments to hospitals that serve a
disproportionate share of low income patients. Beginning in fiscal year 2014 and 2016, the Health Care
Reform Act incrementally decreases the Medicare and Medicaid payments for disproportionate share
hospitals by $36 billion over a ten year period, based on an assumption that the law’s new individual
coverage and Medicaid expansion provisions will substantially reduce uncompensated care provided by
hospitals. Such payment decreases would occur even if a state fails to opt in to the expanded Medicaid
program, in which event certain hospitals may receive lower reimbursements without the benefit of
additional insured adults under an expanded Medicaid program.
The Obligated Group's revenues from the Medicare and Medicaid DSH programs will be
impacted by these Health Care Reform Act changes. The amount and materiality of the financial impact
of these changes to the DSH program cannot be known at this time. It will depend on the amount of
uncompensated care the Obligated Group's hospitals continue to provide, notwithstanding the availability
of coverage under the American Health Care Exchange.
The Health Care Reform Act continues and expands earlier Congressional measures taken to
address the growing cost of the Medicare and Medicaid programs. CMS periodically promulgates
regulations, such as its annual inpatient PPS rules, to adjust the rates paid to hospitals based on its
continuing experience with hospital operating and capital costs, and to implement various quality
improvement, patient safety and fraud and abuse programs. For example the annual inpatient PPS rules
for federal fiscal years 2008 and 2009 included, and then expanded, a list of preventable conditions or
consequences (so-called “never events”) for which Medicare would not pay any additional costs of
treatment. CMS also reduces payments to hospitals that do not successfully report quality measures
adopted under the program by two percent from the percentage increase that would otherwise apply to
their payment rates. The Health Care Reform Act expands programs to improve the quality of care, with
reductions in reimbursements in future years for excessive readmissions, medical errors and preventable
conditions such as hospital acquired infections. Depending on the mix of future services delivered, the
overall result of these changes to the inpatient PPS reimbursement rules may be to reduce Medicare
reimbursement to the Obligated Group and its affiliates.
The final inpatient PPS rule effective October 1, 2013, clarified that an inpatient Medicare Part A
stay will be presumed to be appropriate if the length of stay is greater than “two-midnights”, among other
criteria. It is unclear what effect this rule will have on the Obligated Group’s inpatient revenues.
28
Obligated Group Outpatient Services. Medicare hospital outpatient services are also
reimbursed on a prospective payment basis. Under the outpatient PPS methodology, procedures,
evaluations and management services, and drugs and devices in outpatient departments are classified into
one of approximately 750 groups called Ambulatory Payment Classifications (“APC”). Services
provided within an APC are similar clinically and in terms of the resources they require. Each APC is
assigned a weight derived from the median hospital cost of the services in the group relative to the median
hospital cost of the services included in the APC for mid-level clinic visits. CMS determines the portion
of the median labor related hospital costs and adjusts those costs for variations in hospital labor costs
across geographic regions.
Payment rates for each APC are calculated by multiplying the relative weight for an APC by a
conversion factor to arrive at a dollar figure. Outpatient PPS includes additional adjustments for
transitional pass-through payments and outlier payments. Transitional pass-through payments are costs
associated with new technology items (drugs, biologicals and medical devices) that were not reflected in
the data that CMS used to calculate PPS payment rates, and are intended to allow for adequate payment of
new and innovative technology until there is enough data to incorporate the costs for these items into the
base APC group.
APCs include payment for related ancillary services provided in conjunction with the procedure
or medical visit. Although hospitals may receive payment for more than one APC for an encounter,
payment for multiple surgical APC procedures are subject to substantial discounting.
CMS makes annual changes to its policies and payment structure with respect to outpatient
services in response to an increase in amounts paid for outpatient services delivered to Medicare patients.
For example, CMS adjusted the market basket update in 2007 and tied rate increases to additional quality
measure reporting requirements applicable to outpatient services beginning in 2009. CMS also revised
the APC structure, expanding a hospital’s ability to be reimbursed for infusion services. In exchange,
CMS reduced per diem payments to hospital outpatient departments for the delivery of partial
hospitalization services. Additionally, CMS adjusted the reimbursement rates for Ambulatory Surgery
Centers to reflect the reimbursement for equivalent procedures being delivered in hospital outpatient
departments. Overall, these changes to the outpatient prospective payment system may result in
decreased reimbursement for services, depending on the service mix that the Obligated Group can expect
to deliver in the future.
Outpatient renal dialysis services are reimbursed on the basis of prospective reimbursement,
though different rates are paid for hospital-based and free-standing facilities, and are adjusted for
geographic differences in labor costs. This composite rate is the same regardless of whether the treatment
is furnished in the facility or in the patient’s home to incentivize home dialysis, and must be accepted by
the facility as payment in full for covered outpatient dialysis.
Under outpatient PPS, a hospital with costs exceeding the applicable payment rate would incur
losses on such services provided to Medicare beneficiaries. There can be no assurance that outpatient
PPS payments will be sufficient to cover all of the Obligated Group’s actual costs of providing hospital
outpatient services to Medicare patients.
Physician Payments. Payment for physician fees is covered under Part B of Medicare. Under
Part B, physician services are reimbursed in an amount equal to the lesser of actual charges or the amount
determined under a fee schedule known as the “resource-based relative value scale” or “RBRVS”.
RBRVS sets a relative value for each physician service; that value is then multiplied by a geographic
adjustment factor and a nationally-uniform conversion factor to determine the amount Medicare will pay
for each service.
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The relative values for physician services contained in the RBRVS are based on a work
component intended to reflect the time and intensity of effort required to provide the service; a practice
expense component which includes costs such as office rents, allied health support salaries, equipment
and supplies; and a component for the cost of malpractice insurance.
The Medicare Physician Fee Schedule (“MPFS”) covers payments for more than 7,000 types of
services in physician offices, hospitals, and other settings based on a formula. The 2009 MPFS,
published in November 2008, included a number of substantive reimbursement rules for physicians,
including the final anti-markup rule, e-prescribing incentives, quality reporting measures and the
expansion of tele-health coverage reimbursement. The anti-markup rule provides that, if a physician,
other supplier or related party orders a diagnostic test that is either purchased from an outside supplier or
performed at a location other than the referring physician’s office, the physician or other supplier is
limited to billing the lowest of the “net charge” paid for the test; the physician’s or other supplier’s actual
charge; or the Medicare Fee Schedule amount. The anti-markup rule’s adoption may negatively affect
revenues or result in false claims liability for the Obligated Group that bills Medicare and provides for the
reading and interpretation of such diagnostic tests. CMS has also adopted limits on reimbursement for
multiple imaging procedures.
Medicare requires CMS to adjust the MPFS payment rates annually based on a formula known as
the sustainable growth rate (SGR) to ensure that the yearly increase in the expense per Medicare
beneficiary does not exceed the growth in GDP. In each of the past several years, the annual SGR
calculation has yielded a reduction in physician payments, but Congress has taken legislative action each
year to prevent such reductions from taking effect. On January 2, 2013, President Obama signed the
American Taxpayers Relief Act of 2012, which prevented the scheduled physician fee cut from taking
place but left the annual physician fee update at 0%. This law maintains current funding levels through
December 31, 2013.
The Bipartisan Budget Act of 2013 blocks the scheduled physician fee cut for 2014 and replaces
it with a 0.5% increase for services provided through March 31, 2014. The temporary increase is
intended to provide Congress with additional time to provide Congress with additional time to finalize
pending legislation that would permanently repeal the SGR formula and replace it with a period of stable
payment followed by reimbursement linked to quality of care.
Obligated Group Capital Expenditures. Medicare payments for capital costs are based upon a
PPS system similar to that applicable to operating costs. Payment for capital related costs for all hospitals
will be determined based on a standardized amount referred to as the federal rate. Payments for capital
costs are calculated by multiplying the federal rate by the DRG weight for each discharge and by a
geographical adjustment factor. The payments are subject to further adjustment by a disproportionate
share hospital factor that contemplates the increased capital costs associated with providing care to low
income patients, and an indirect medical education factor that contemplates the increased capital costs
associated with medical education programs.
There can be no assurance that payments under the PPS inpatient capital costs regulations will be
sufficient to fully reimburse Obligated Group for its capital expenditures.
Outlier Payments. As noted above, hospitals are eligible to receive additional payments under
the inpatient PPS for individual cases incurring extraordinarily high costs. Historically, the amount of an
outlier payment was based, in part, on the hospital charges for a particular case as compared to that
hospital’s cost-to-charge ratio. As the hospital specific cost-to-charge ratio was calculated based on the
most recently settled cost report, it was typically many months or years old and out of date.
30
Following an audit of aggressive pricing strategies at one of the nation’s largest hospital chains,
and a determination that some hospitals might be manipulating current hospital charge data to maximize
reimbursement from Medicare under the outlier payment provisions, the Office of the Inspector General
of HHS (“OIG”) began investigating past outlier billing practices, and CMS amended the regulations on
how outlier payments were to be calculated in the future. The methodology for calculating outlier
payments went into effect in August 2003. It was designed to prevent hospitals from manipulating the
outlier formula to maximize reimbursement and allows for recovery of overpayments in certain cases.
The OIG continues to scrutinize outlier payments in an effort to determine whether outlier
payments to the hospitals were paid in accordance with Medicare regulations or whether such payments
were the result of potentially abusive billing practices. While the Obligated Group believes that it has
calculated its outlier payments appropriately, there can be no assurance that the Obligated Group will not
become the subject of an investigation or audit with respect to its past outlier payments, or that such an
audit would not have a material adverse impact on the Obligated Group. Moreover, there can be no
assurance that any future revisions to the formula for calculating outlier payments will not reduce the
payments to the Obligated Group, or that any such reduction will not have a material adverse impact on
the Obligated Group.
Medicare Managed Care Program. Every individual entitled to Medicare Part A benefits, and
who is enrolled in Medicare Part B, with the exception of individuals who suffer from End Stage Renal
Disease, may elect coverage under either the traditional Medicare fee for service program (Parts A and B)
or a Medicare managed care (Part C) program, known as the Medicare Advantage Program. The
Medicare Advantage program is designed to expand the number and types of private regional plans
available to beneficiaries as an alternative to traditional Parts A and B Medicare coverage. Payments for
Medicare Advantage plans are based on competitive bids to the government rather than administered
pricing.
Public and private health maintenance organizations, preferred provider organizations, fee for
service and medical savings account plans may qualify as authorized Medicare Advantage plans. With
limited exceptions, Medicare Advantage plans are risk-bearing programs that accept a fixed annual
amount from CMS in return for providing beneficiaries with a defined level of benefits (basic or basic
plus supplemental), either directly or through arrangements with other providers. All Medicare
Advantage plans are required to provide coverage, even if out of network, for emergency services, renal
dialysis services provided while the enrollee was temporarily outside of the plan’s service area, post
stabilization care services (under limited circumstances) and services for which coverage was denied but,
following appeal by the enrollee, were determined to be covered services. Providers wishing to
participate in Medicare Advantage plans are subject to specific requirements concerning enrollee
protection and accountability.
The shift of Medicare eligible beneficiaries from traditional Part A and Part B coverage to Part C
Medicare Advantage programs was intended to increase competitive pressure to improve benefits, reduce
premiums and generate cost reductions. However, because the cost to the Medicare Advantage program
was on average 114% higher than traditional Medicare, the Health Care Reform Act changed some of the
Medicare Advantage payment methodologies and began paying bonuses to plans that achieve certain
quality metrics in 2012. Reductions in the Medicare Part C program may have an impact on
reimbursement from these insurance plans, which in turn may have a material negative impact upon the
revenue of the Obligated Group and its affiliates.
New Models for Care Under Health Care Reform. Section 3022 of the Health Care Reform
Act directed the Secretary of HHS (the “Secretary”) to establish a Medicare shared savings program that
promotes accountability for the care of Medicare beneficiaries and encourages coordination of care and
31
other efficiencies through entities called Accountable Care Organizations (ACOs). Under this shared
savings program, Medicare providers are offered a financial incentive to band together in an ACO with
the shared goals of improving the quality of care provided to Medicare beneficiaries and coordinating
care to achieve cost savings. If the ACO realizes savings in Medicare expenditures above an expenditure
benchmark established by CMS for the group, and meets or exceeds quality performance standards
established by the Secretary, it will be paid a share of Medicare’s savings. ACOs that do not meet the
quality performance thresholds for all proposed measures are not eligible for shared savings, regardless of
how much costs were reduced. The shared savings program began operating January 1, 2012. To date,
the hospitals included in the Obligated Group have not elected to join or form a Medicaid ACO.
The Secretary released the final regulations on ACOs on October 20, 2011. The regulations set
forth governance standards for the ACOs, application requirements and acceptance standards, and options
for sharing in any savings or losses. ACOs are required to enter into a three-year agreement with HHS
that includes an estimated expenditure benchmark based on the per-beneficiary expenditures in the three
years immediately prior to the agreement under Medicare Parts A and B for the beneficiaries assigned to
the ACO. Each ACO will have a minimum of 5000 Medicare beneficiaries that are assigned to the ACO
by the Secretary based on their utilization of primary care services rendered by ACO physicians.
Beneficiaries will still have the freedom to seek care from providers outside of their assigned ACO.
In the initial three-year term, the ACO may elect to operate under a one-sided shared savings
model (Track 1) where the ACO is not responsible for any portion of losses for the first three years.
Track Two is a two-sided risk model where the ACO shares in both savings and losses throughout the
three year term.
Several other federal agencies announced guidance and regarding ACOs. CMS and the HHS OIG
jointly outlined waivers of certain federal laws-the physician self-referral law, the anti-kickback statute,
and certain provisions of the civil monetary penalty law-in connection with the shared savings program.
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) released a joint statement
entitled “Proposed Statement of Enforcement Policy Regarding Accountable Care Organizations
Participating in the Medicare Shared Savings Program” (the Antitrust Policy Statement) and the IRS also
simultaneously released a notice assuring tax-exempt organizations that participation in an ACO with forprofit entities will not jeopardized the organization’s tax-exempt status or result in unrelated business
income tax if the certain requirements are met.
Although the Obligated Group has a well-established infrastructure for cost containment and
electronic medical records, and has significant experience in the management of chronic diseases that
make it well suited to participate in the shared savings program, it is unclear what effect these proposed
regulations will have on the Obligated Group and its revenues in the future should the Obligated Group
choose to participate in the shared savings program.
Audits, Exclusions, Fines and Enforcement Actions. Providers participating in Medicare are
subject to audits and retroactive audit adjustments by fiscal intermediaries under the Medicare program.
From an audit, a fiscal intermediary may conclude that a patient discharge has been claimed under an
incorrect MS-DRG, that services may not have been provided under the direct supervision of a physician
(to the extent so required), that a patient should not have been characterized as an inpatient, that certain
services provided prior to admission as an inpatient should not have been billed as outpatient services,
that certain outpatient services were subjected to quantity limits or should have been bundled with the
outpatient APC payment, or that certain required procedures or processes were not satisfied. As a
consequence, payments may be retroactively disallowed. Under certain circumstances, payments made
may be determined to have been made as a consequence of improper claims subject to the federal False
Claims Act or other federal statutes, subjecting the hospital to civil or criminal sanctions.
32
The federal government uses a national recovery audit contractor (“RAC”) program to identify
overpayments and underpayments to providers under the Medicare program. The RAC auditors are
compensated on a contingent fee basis. Audits typically result in far more overpayments than
underpayments. Medicare contractors will recoup RAC identified overpayments unless appeals are filed
timely. RAC assessments against the Obligated Group are anticipated; however, the outcome of such
assessments are unknown and cannot be reasonably estimated. The Health Care Reform Act expands the
scope of the RAC program to include Medicare Parts C and D and Medicaid.
Medicaid Reimbursement
Medicaid is a jointly funded federal and state health insurance program for certain low-income
and medically needy people. Under federal guidelines, each state establishes eligibility standards, scope
of services, payment rates for services, and an administrative framework for management of the program.
The Pennsylvania Department of Public Welfare (“DPW”) administers the Medicaid program in the
Commonwealth.
In July 2010, the Pennsylvania General Assembly passed and then Governor Ed Rendell signed
into law, Act 49 of 2010, the Medical Assistance Payment Modernization Act (Act 49). Act 49 was
designed to address the fact that Medical Assistance has historically paid low rates to Pennsylvania
hospitals, about 75 cents for each dollar a hospital spent on inpatient care and about 54 cents for each
dollar spent on outpatient care. Because Medical Assistance has not paid adequate rates, other health
insurers were left to make up the shortfall left by Medical Assistance’s lower payment rates, having the
effect of creating a hidden tax on citizens through higher insurance premiums.
Act 49 modernizes Pennsylvania’s inpatient fee for service hospital payment system by
establishing a uniform base rate for all hospitals using the most current cost information, and makes
adjustments for differences in regional labor costs, teaching programs, and Medical Assistance volume.
Act 49 also establishes enhanced hospital payments through the state’s Medical Assistance managed care
program, and secures additional matching Medicaid funds through the establishment of the Quality Care
Assessment (QCA). The QCA is a tax on hospital net inpatient revenues that allows the state to access
additional federal dollars. The tax rate for fiscal year 2013 was 3.22%. Act 49 also replaced the current
clinical classification system with a new clinical classification system (APR-DRG) in which payments
more accurately reflect the levels of service and patient needs unique to Medical Assistance patients. Act
55 of 2013 reauthorized this assessment for an additional three (3) years, commencing July 1, 2013.
The Health Care Reform Act allows states the option to expand Medicaid eligibility to cover
individuals with household income up to 133% of the FPL. The federal government is responsible for the
cost of this coverage expansion in the initial years. In addition, for fiscal year 2013 and 2014, the Health
Care Reform Act establishes a floor for Medicaid primary care physician reimbursement of 100 percent
of Medicare rates. Thereafter, each state will share in the financial burden of the expanded coverage.
Pennsylvania did not elect to expand Medicaid in 2014 and is currently seeking a waiver and approval
from federal officials to implement its own plan starting Jan. 1, 2015.
Inpatient Services. Since July 1984, Medicaid payment for acute care services in the
Commonwealth has been based on a prospective payment system similar to the federal Medicare MS
DRG-based prospective payment system explained above. As discussed above, Act 49 overhauled the
DRG system used for Medicaid reimbursement.
Capital Expenditures. Payment for capital costs (including depreciation and interest, but
excluding such costs for moveable equipment) has been integrated into a comprehensive prospective
payment system for both capital costs and operating costs of providing inpatient services. There is no
33
assurance that Medicaid reimbursement levels for capital depreciation and interest will be adequate to
satisfy the capital requirements of the Obligated Group.
Outpatient Services. Medicaid generally pays for hospital outpatient services rendered based on
the lower of the usual charge to the general public for the same service or the Medicaid maximum
allowable fee, or the upper limit established by Medicare or Medicaid.
Inpatient Mental Health and Rehabilitation Services. Medicaid provides payment for
inpatient mental health and rehabilitation services rendered to eligible recipients by private psychiatric
hospitals and rehabilitation distinct part units at a per diem rate. Beginning January, 2014, the Health
Care Reform Act mandates coverage of certain mental health services in the plan offered on the public
exchange.
HealthChoices. In February 1997, the Commonwealth began a new program for Medicaid
recipients called HealthChoices. The HealthChoices program requires Medicaid recipients in certain
regions of the Commonwealth to enroll in managed care plans. HealthChoices currently serves
approximately 900,000 recipients across the Commonwealth and has replaced the ACCESS Plus
program.
Under HealthChoices, Medicaid recipients enroll in managed care programs. Like any private
managed care plan, HealthChoices’ programs attempt to negotiate lower fee schedules with their
contracted health care providers. There can be no assurance that the Obligated Group will be successful
in contracting with the assigned managed care organizations or that the reimbursements from these
managed care organizations will be sufficient to cover the costs of delivering care to Pennsylvania’s
Medicaid recipients at the Obligated Group going forward. ACCESS Plus participants are under the care
of a Primary Care Practitioner of their own choosing.
Other DPW Funding. Also, as a result of the national class action tobacco settlement, DPW has
created an uncompensated care pool to provide grants to hospitals that meet certain levels of
uncompensated care. DPW began funding these grants in 2002. There can be no assurance that this
resource will be available at current levels, if at all, in the future.
Audits, Exclusions, Fines and Enforcement Actions. Continuing the trend of enhanced
program integrity enforcement under the Health Care Reform Act, RAC audits were extended to
Medicaid providers beginning in April 2011. CMS issued the final rule implementing Medicaid RAC
audits on September 16, 2011 and states were required to implement the RAC programs by January 1,
2012. It is unknown what, if any, impact Medicaid RAC reviews will have on the revenues of the
Obligated Group.
Healthy Pennsylvania. On September 17, 2013, Governor Corbett unveiled his "Healthy
Pennsylvania" plan to address health care access, quality, and affordability. The plan has three main
components:

A restructuring of the current Medicaid system with a scaled back benefit plan, new cost
sharing, and a work search requirement.

New health care coverage for 520,000 additional Pennsylvanians who would be given
financial support (premium assistance) to purchase a commercial health insurance
product on the insurance exchange. An additional 90,000 people who are deemed to be
medically fragile would have the option to enroll in the existing Medicaid program.
34

Incentives to increase the supply of health care providers through additional funding to
community health centers, additional physician loan forgiveness in rural areas,
telemedicine, and the continued expansion of electronic health records.
Healthy Pennsylvania also contains proposed reforms to the Medicaid program. The proposed
reforms include: (i) aligning Medicaid benefits with private, commercial insurance and the federal
standards for essential health benefits, (ii) mental health parity and preventative care, (iii) implementing a
revised cost-sharing model for current adult Medicaid recipients, and (iv) job training and work search
requirements, with limited exceptions, for all unemployed working-age Medicaid beneficiaries.
Legislative approval is required for many of the reforms proposed by Healthy Pennsylvania. It is
uncertain whether the Pennsylvania legislature will adopt all the proposed reforms.
State Children’s Health Insurance Program
The State Children’s Health Insurance Program (“SCHIP”) provides federal matching funds to
states that cover 65% to 84% of the costs of health care coverage, primarily for low-income children.
CMS administers SCHIP, but each state creates its own program based on minimum federal guidelines, or
the state may apply for a waiver, which allows the state to create its own program using the federal funds,
but often with different criteria for eligibility.
Each state must periodically submit its SCHIP plan to CMS for review to determine if it meets
the federal requirements. If a state does not meet the federal requirements, it may lose its federal funding
for its program. From time to time Congress and/or the President seek to expand or contract SCHIP. The
Health Care Reform Act authorized an extension of the SCHIP program through September 30, 2015.
The loss of federal approval for a state’s program or a reduction in the amounts available under SCHIP
could have an adverse impact on the financial condition of the Obligated Group and its affiliates.
Beginning in 2014, children whose family income is between 100% and 133% of the FPL will be
eligible for Medicaid. Those currently covered by SCHIP will transition to Medicaid, but states retain the
ability to claim the enhanced SCHIP matching rate. Recently, the federal government granted Governor
Corbett’s request to delay the switch until 2015.
Pennsylvania’s CHIP program fully covers children and teens in households with income levels
up to 200% of FPL, and subsidizes insurance coverage in households with income levels up to 300% of
FPL. The Pennsylvania legislature approved an increase in the CHIP budget by $9.5 million as part of
the 2013-14 budget.
While generally considered to be beneficial for both patients and providers because it reduces the
number of uninsured children, it is difficult to assess the fiscal impact of SCHIP payments on the
Obligated Group and its affiliates.
Third-Party Reimbursement
A significant portion of the net patient service revenue of the clinical component of the Obligated
Group is received from commercial insurance payors, which provide third-party reimbursement for
patient care on the basis of various formulae. Renegotiations of such formulae and changes in such
reimbursement systems may reduce such third-party reimbursements to the Obligated Group. The
reimbursement currently paid by these payors is likely to be subject to more restrictions in the future, and
there can be no assurance that such payments will be adequate to cover the cost of care for the
beneficiaries in the future.
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Certain private insurance companies contract with hospitals on an exclusive or preferred provider
basis, and some insurers have introduced plans known as preferred provider organizations (“PPOs”).
Under these plans, there may be financial incentives for subscribers to use only those hospitals and
physicians which contract with the plans. Under an exclusive provider plan, which includes most health
maintenance organizations (“HMOs”), private payors limit coverage to those services provided by
network hospitals and physicians. With this contracting authority, private payors may direct patients
away from hospitals not in the network by denying coverage for services provided by them.
Most PPOs and HMOs currently pay hospitals on a discounted fee-for-service basis or on a
discounted fixed rate per day of care. The discounts offered to HMOs and PPOs may result in payment at
less than actual cost, and the volume of patients directed to a hospital under an HMO or PPO contract
may vary significantly from projections. Therefore, the financial consequences of such arrangements
cannot be predicted with certainty and may be different from current or prior experience. Some HMOs
offer or mandate a “capitation” payment method under which hospitals are paid a predetermined periodic
rate for each enrollee in the HMO who is “assigned” to, or otherwise directed to receive care at, a
particular hospital. In a capitation payment system, the hospital assumes an insurance risk for the cost
and scope of care given to such HMO’s enrollees. If payment under an HMO or PPO contract is
insufficient to meet the hospital’s costs of care, or if use by enrollees materially exceeds projections, the
financial condition of the hospital may be adversely affected.
There is no assurance that contracts of the Obligated Group or its physicians with Blue Cross
plans, HMOs, PPOs or other payors will be maintained or that other similar contracts will be obtained in
the future, or that payments from such payors will be sufficient to cover all of the costs of the Obligated
Group or its physicians in providing hospital services to their beneficiaries. Failure to execute and
maintain such contracts could have the effect of reducing the patient base or gross revenues of the
Obligated Group. Conversely, participation may maintain or increase the patient base, but may result in
reduced payments.
The Obligated Group also may be affected by the financial instability of HMOs and other thirdparty payors with which the Obligated Group contracts and/or from which it receives reimbursement for
furnished health care services. For example, if the regulators place a financially-troubled HMO into
rehabilitation under State law, or if a third-party payor files for protection under the federal bankruptcy
laws, it is unlikely that health care providers will be reimbursed in full for services furnished to enrollees
of the HMO or third-party payor. Also, health care providers may be required by law or court order to
continue furnishing health care services to the enrollees of an insolvent HMO or third-party payor, even
though the providers may not be reimbursed in full for such services.
Increasingly, physician practice groups, independent practice associations and other physician
management companies have become a part of the process of negotiating payment rates to hospitals by
managed care plans. This involvement has taken many forms but typically increases the competition for
limited payment resources from managed care plans. For example, it is increasingly common for
managed care plans to enter into contracts with physicians that may give physicians incentives in patient
care decisions which may result in reduced admissions and procedures for the Obligated Group.
Any new payment methods implemented by the Medicare and Medicaid programs in response to
the Health Care Reform Act provisions are likely to drive similar changes in the private payer market.
Programs designed to encourage coordination of care, value-based purchasing and quality outcomes will
likely evolve in the private payer market.
Effect of Health Care Reform on the Insurance Market. The Health Care Reform Act
includes insurance market reforms that, among other things, require individual and group health insurance
36
plans to offer coverage (including renewability) on a guaranteed basis. The Health Care Reform Act
prohibits pre-existing conditions limitations, certain coverage limitations, lifetime and annual dollar limits
for essential health benefits, and requires coverage of certain preventive health benefits. Beginning in
2014, every individual will be required to enroll in a health plan through an employer, a federal
government health program such as Medicare, Medicaid or Tricare, or purchase insurance through a
health insurance exchange established by the state or run by the federal government. Pennsylvania has
opted to allow the federal government to run its health insurance exchange. Individuals who do not enroll
for coverage, and employers with over fifty full-time employees who do not offer affordable and adequate
coverage, will be subject to tax penalties beginning in 2014. The Obama administration announced in
July 2013 that it will delay enforcement of the employer mandate until 2015. It is unclear at this time
what impact this delay will have on Health Care Reform.
The Health Care Reform Act establishes the criteria for new Qualified Health Plans (“QHPs”)
that may participate in the state run exchanges. A QHP must meet certain minimum essential coverage
requirements. Minimum essential coverage requirements may be offered at one of four levels of
coverage: bronze, silver, gold or platinum. Each QHP must agree to offer at least one plan at the silver
and gold level. The Health Care Reform Act sets forth the minimum coverage offered under each plan
level and limits the variations in premiums that may be charged for exchange coverage on the basis of age
and tobacco use. A QHP must also be certified by each exchange through which the plan is offered, must
be licensed in each state where it offers insurance, and the QHP must limit cost sharing with the insured.
Under the Health Care Reform Act, individuals with family income under 400% of the FPL will
be eligible for subsidized premiums, deductibles and co-pays for exchange plan coverage. Initially, only
individuals and small employers will be able to access coverage through the exchanges. By 2017, large
employers will also be able to use the exchanges to provide employer-based coverage to their employees.
Although existing health insurance plans may continue to offer coverage as grandfathered plans in the
individual and group markets, enrollment in such plans will be limited to those who were currently
enrolled and their families. New employees and their families will still be allowed to enroll in
grandfathered employer-sponsored coverage. At this time, it is not possible to project what impact the
exchanges will have on competition in the insurance markets, the cost of coverage for employers,
reimbursement rates for hospitals and physicians or the number of uninsured patients that the Obligated
Group will still need to treat.
Uncompensated Care
Although the Obligated Group attempts to assure payment or reimbursement for most of the care
it renders, it provides a substantial amount of uncompensated care to indigents. Obligations to provide
uncompensated care can arise from laws and regulations that may require the Obligated Group to provide
care without regard to a patient’s ability to pay for such care. Increased unemployment or other adverse
economic conditions could increase the proportion of patients who are unable to pay all or any of the
costs of their care.
While the Health Care Reform Act should reduce uncompensated care by expanding health care
coverage to a larger portion of the population, improvements to coverage and access will not be available
immediately. Current reimbursement for Medicaid services does not always cover the cost of care and
the expansion of the Medicaid program will not eliminate entirely the uncompensated care provided by
the organization. In addition, the Medicaid program is dependent on the continued ability of federal and
state funding, which could be curtailed in the future in response to growing budget deficits at all
governmental levels. The continued availability, comprehensiveness of coverage and adequacy of
reimbursement for care for the indigent and disabled cannot be assured in the future.
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Regulatory Environment
The Obligated Group and the health care industry in general are subject to regulation by a number
of governmental agencies, including those that administer the Medicare and Medicaid programs, federal,
state and local agencies responsible for administration of health care planning programs, and other
federal, state and local governmental agencies. These laws and regulations require that hospitals meet
various detailed standards relating to the adequacy of medical care, equipment, personnel, information
technology, patient confidentiality, operating policies and procedures, maintenance of adequate records,
utilization, rate setting, compliance with building codes and environmental protection laws, and numerous
other matters. Failure to comply with applicable regulations can jeopardize a hospital’s licenses, ability
to participate in the Medicare and Medicaid programs, and ability to operate as a hospital. These laws
and regulations, as well as similar laws and regulations now in effect, and the adoption of additional laws
and regulations in these and other areas could have an adverse effect on the Obligated Group’s ability to
generate revenues in sufficient amounts to timely pay the Bonds. Some of these laws and regulations are
discussed below.
Federal False Claims Act and Civil Money Penalties Law. There are multiple federal laws
concerning the submission of inaccurate or fraudulent claims for reimbursement and errors or
misrepresentations on cost reports by hospitals and other providers. The coding, billing and reporting
obligations of Medicare providers are extensive, complex and highly technical. In some cases, errors and
omissions by billing and reporting personnel may result in liability under the federal False Claims Act or
similar laws, exposing a health care provider to civil and criminal monetary penalties, as well as exclusion
from participation in the Medicare and Medicaid programs.
The federal False Claims Act prohibits knowingly presenting a false or fraudulent claim for
payment to the United States or to a contractor of the United States government. Recent legislation has
classified the failure to return any overpayment to a federal program as a false claim for purposes of
assessing liability under the False Claims Act. This statute is violated if a person acts with actual
knowledge, or in deliberate ignorance or reckless disregard of the falsity of the claim. Penalties under the
False Claims Act include fines of up to $11,000 per claim, plus treble damages potentially resulting in
penalties for ongoing claims submission errors in the range of millions of dollars. Anyone who
knowingly makes a false statement or representation in any claim to the Medicare or Medicaid programs
may also be subject to criminal penalties, including fines and imprisonment.
The False Claims Act includes “whistleblower” provisions under which anyone who believes that
a person is violating the False Claims Act can file a sealed complaint against that person in the name of
the United States government. The nature of the allegations is not revealed to the target during the time
the Justice Department investigates the complaint and determines whether to join in the suit. If the Justice
Department decides not to join in the suit, the original complainant can nonetheless proceed. In either
event, if the case is successful, the whistleblower is entitled to between 15% and 30% of the proceeds of
any fines or damages paid. Although the False Claims Act has been in effect for many years, in recent
years there has been a significant increase in the number of whistleblower allegations filed under the Civil
False Claims Act, a large number of which involve the health care and pharmaceutical industries.
In 2009, President Obama signed into law the Fraud Enforcement Recovery Act (“FERA”) which
authorized increased funding for fraud investigation and prosecution, and expanded the scope of the False
Claims Act. A health care provider now may face severe penalties for the knowing retention of
government overpayments even though the provider or contractor made no false or improper claim for
such payments. Under FERA, the False Claims Act now applies even if a false claim was not submitted
directly to the government. In addition, FERA enhances whistleblowers’ ability to investigate alleged
False Claims Act violations and provides them enhanced protections.
38
In addition, the Civil Money Penalties Law under the Social Security Act (“CMP Law”) provides
for the imposition of civil money penalties against any person who submits a claim to Medicare,
Medicaid or any other federal health care program that the person knows or should know is for items or
services not provided as claimed, is false or fraudulent, is for services provided by an unlicensed or
uncertified physician or by an excluded person, or represents a pattern of claims that are based on a
billing code higher than the level of service provided or are for services that are not medically necessary.
Penalties under the CMP Law include up to $50,000 for each item or service claimed, and damages of up
to three times the amount claimed for each item or service, and exclusion from participation in the federal
health care programs.
The threats of large monetary penalties and exclusion from participation in Medicare, Medicaid
and other federal health care programs, and the significant costs of mounting a defense, create serious
pressures on providers who are targets of false claims actions or investigations to settle. Therefore, an
action under the False Claims Act or CMP Law could have an adverse financial impact on the Obligated
Group, regardless of the merits of the case.
State False Claims Act. The federal government provides financial incentives for states that
pass their own version of a false claims act, with the primary purpose of reducing fraud in state Medicaid
programs. At this time, Pennsylvania does not have its own false claims act but members of the
Pennsylvania General Assembly have introduced legislation that would create a Pennsylvania False
Claims Act as recently as June 10, 2013. The impact of this legislation on the Obligated Group is
unknown.
“Fraud and Abuse” Laws and Regulations. Federal law (known as the Anti-Kickback Law)
prohibits the knowing and willful offer, solicitation, payment or receipt of remuneration in exchange for
or as an inducement to make or influence a referral of a patient for goods or services, or the purchase,
lease, order or arrangement for the provision of goods or services, that may be reimbursed under
Medicare, Medicaid or other health benefit programs funded by the federal government. The scope of the
Anti-Kickback Law is very broad, and it potentially implicates many practices and arrangements common
in the health care industry, including space and equipment leases, personal services contracts, purchase of
physician practices, joint ventures, and relationships with vendors. Penalties for violation of the AntiKickback Law include criminal prosecution, civil penalties of up to $50,000 and damages of up to three
times the amount of the illegal remuneration, as well as exclusion from the federal health care programs.
Federal safe harbor regulations describe certain arrangements that will be exempt from
prosecution or other enforcement action under one of the federal laws prohibiting referrals in exchange
for remuneration. In the fall of 2006, CMS added two new safe harbors to the existing anti-kickback
regulations. One safe harbor protects certain arrangements involving the distribution of electronic
prescribing technology to physicians and the other protects the provision of information technology
necessary to create electronic health records. The new rule with respect to prescribing technology
classifies technology necessary and used solely to receive and transmit any prescription information as
protected non-monetary remuneration. The final safe harbor involving electronic health records software
protects arrangements the provide physicians with information technology and training services necessary
and used predominantly to create, maintain, transmit, or receive electronic health records.
The Health Care Reform Act amended the intent requirement to provide that a person need not
have actual knowledge of the Anti-Kickback law or specific intent to commit a kickback violation, to
violate the statute. Penalties for the failure to grant timely access to HHS were also added by the Health
Care Reform Act.
39
As the exceptions are narrowly drawn, there can be no assurances that the Obligated Group will
not be found to be in violation of the Anti-Kickback Law. If such a violation were found, any sanctions
imposed could have a material adverse effect upon the future operations and financial condition of the
Obligated Group.
Restrictions on Referrals. Current federal law (the “Stark Law”) prohibits a physician who has
a financial relationship with an entity that provides certain health services from referring Medicare and
Medicaid patients to that entity for the provision of such health services, with limited exceptions. These
restrictions currently apply to referrals for a number of health services and goods, including clinical
laboratory services, physical therapy services, occupational therapy services, radiology or other diagnostic
services, durable medical equipment, radiation therapy services, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient
prescription drugs, and inpatient and outpatient hospital services. The Stark Law also prohibits an entity
that receives a prohibited referral from filing a claim or billing for the services arising out of that
prohibited referral.
The Stark Law strictly prohibits specific referral arrangements and the accompanying claims for
payment from Medicare or Medicaid by the provider unless an exception applies. Sanctions for violations
of the Stark Law include refunds of the amounts collected for services rendered pursuant to a prohibited
referral, civil money penalties of up to $15,000 for each claim arising out of such referral, plus up to three
times the reimbursement claimed, and exclusion from the Medicare and Medicaid programs. The Stark
Law also provides for a civil penalty of up to $100,000 for entering into an arrangement with the intent of
circumventing its provisions. In addition, knowing violation of the Stark Law may also serve as the basis
for liability under the False Claims Act. The types of financial arrangements between a physician and an
entity that trigger the self-referral prohibitions of the Stark Law are broad, and include ownership and
investment interests and compensation arrangements.
As required under the Health Care Reform Act, CMS released a protocol under which health care
providers can make self-disclosures of actual and potential Stark violations, with reduced penalties for
self-disclosed violations. CMS released this protocol on September 23, 2010.
Although the Stark Law only applies to Medicare, a number of states have passed similar statutes
pursuant to which similar types of prohibitions are made applicable to all other health plans or third-party
payors. Pennsylvania currently has a disclosure law, Act 1988-66, that requires an osteopathic physician
referring a patient for health-related services (tests, pharmaceuticals, appliances or devices) to a facility or
entity in which he has an ownership interest to disclose that interest prior to making the referral, and to
notify the patient of his freedom to choose an alternate provider. Ownership interests include proprietary
or beneficial interests through which the physician earns or has the potential to earn income, or which
produce a direct or indirect economic benefit. The Pennsylvania General Assembly has introduced a state
self-referral law in various sessions but has not yet adopted such legislation. However, should the state
assembly choose to enact a state self-referral law in the future, the Obligated Group and its providers will
be required to comply.
Because of the complexity of the Stark Law and the evolving nature of quality improvement and
cost-reduction efforts, there can be no assurances that the Obligated Group will not violate the Stark Law.
If such violation were found to have occurred, any sanctions imposed could have a material adverse effect
upon the future operations and financial condition of the Obligated Group.
Expanded Enforcement Activity under HIPAA. Congress enacted The Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”) in August 1996 as part of a broad health care
reform effort. Among other things, HIPAA established a program administered jointly by the Secretary
40
of HHS and the United States Attorney General designed to coordinate federal, state and local law
enforcement programs to control fraud and abuse in connection with the federal health care programs. In
addition, HIPAA also increased funding for health care fraud enforcement activity, enabling the OIG to
substantially expand its investigative staff and the Federal Bureau of Investigation to increase the number
of agents assigned to health care fraud. The result has been a dramatic increase in the number of civil,
criminal and administrative prosecutions for alleged violations of the laws relating to payment under the
federal health care programs, including the Anti-Kickback Law and the False Claims Act. This expanded
enforcement activity, together with the whistleblower provisions of the False Claims Act, have
significantly increased the likelihood that all health care providers, including the Obligated Group, could
face inquiries or investigations concerning compliance with the many laws governing claims for payment
and cost reporting under the federal health care programs.
HIPAA’s Administrative Simplification Provisions. In addition to the expanded enforcement
activity noted above, the “Administrative Simplification” provisions of HIPAA mandate the use of
uniform standard electronic formats for certain administrative and financial health care transactions, the
adoption of minimum security standards for individually identifiable health information maintained or
transmitted electronically, and compliance with privacy standards adopted to protect the confidentiality of
personal health information. The Administrative Simplification provisions apply to health care providers,
health plans, and health care clearinghouses, and their agents and subcontractors referred to as Business
Associates (collectively, the “Covered Entities”). HHS recently issued final regulations strengthening
many aspects of the privacy and security rules under HIPAA so that they are more aligned with the Health
Information Technology for Economic and Clinical Health Act (“HITECH Act”). The final rules change
certain requirements for covered entities and establish rules that now apply directly to their vendors that
handle protected health information (PHI) and qualify as business associates under HIPAA. A Covered
Entity and its business associates must make reasonable efforts to use, disclose and request only the
minimal amount of protected health information needed to accompany the intended use. HIPAA
confidentiality provisions extend not only to patient medical records, but also to a wide variety of
healthcare clinical and financial settings where patient privacy restrictions often impose new
communication, operational, accounting and billing restrictions. These confidentiality provisions add
costs and create potentially unanticipated sources of legal liability.
Various requirements of HIPAA apply to virtually all health care organizations, and significant
civil and criminal penalties may result from a failure to comply with the Administrative Simplification
regulations. Compliance requires changes in information technology platforms, major operational and
procedural changes in the handling of data, and vigilance in the monitoring of ongoing compliance with
the various regulations. The financial costs of compliance with the Administrative Simplification
regulations are substantial.
The HITECH Act. The American Recovery and Reinvestment Act of 2009 (“ARRA”)
appropriated approximately $20 billion for the development and implementation of health information
technology standards and the adoption of electronic health care records. The law also significantly
expanded the HIPAA privacy and security provisions applicable to Covered Entities and their business
associates. The law provides that individuals be notified when there is a breach of their unsecured
electronic personal health information, increases civil monetary and criminal penalties for HIPAA
violations, and authorizes the state attorneys general to enforce its provisions. Each Covered Entity must
report any breach involving over 500 individuals in a state to HHS and the local media. All other
breaches must be reported annual to HHS. The financial costs of continuing compliance with HIPAA and
the Administrative Simplification regulations are substantial and will increase as a result of the ARRA
amendments.
41
ARRA also includes HITECH Act, which contains a number of provisions that affect HIPAA’s
privacy regulations that provide generally that Covered Entities must keep a person’s personal health
information private. The HITECH Act limits a Covered Entity’s discretion in determining what health
care information about a person may be properly disclosed under the HIPAA privacy regulations.
Covered Entities that use an “electronic health record” are required to account for disclosures of
information that are currently not subject to the accounting requirements, including disclosures for
treatment, payment and health care operations. 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 of HHS is charged with developing guidance and
implementing regulations for these requirements.
The HITECH Act includes provisions requiring Covered Entities to agree to a patient request to
restrict disclosure of information to a health plan, if the information pertains solely to an item or service
for which the provider was paid out of pocket in full. The HITECH Act also includes a prohibition on the
payment or receipt of remuneration in exchange for protected health information without specific patient
authorization, except in limited circumstances, and places additional restrictions on the use and
disclosures of protected health information for marketing communications and fundraising
communications.
In the event of an unauthorized disclosure of protected health information, Covered Entities now
are required to notify the affected individuals, HHS and sometimes the media of the unauthorized
disclosure, depending on the nature of the breach, the type of unauthorized disclosure and its scope.
The HITECH Act revises the civil monetary penalties associated with violations of HIPAA, and
provides state attorneys general with authority to enforce the HIPAA privacy and security regulations in
some cases, through a damages assessment of $100 per violation or an injunction against the violator.
The revised civil monetary penalties range: (a) in the case of violations due to willful neglect, from a
minimum of $10,000 or $50,000 per violation depending on whether the violation was corrected within
30 days of the date the violator knew or should have known of the violation, and (b) in the case of all
other violations, from a minimum of $100 to $1,000 per violation.
Covered entities and business associates were required to be compliant with the HIPAA final
regulations by September 23, 2013. The Obligated Group is actively engaged in continuing compliance
efforts with HIPAA and HITECH regulations. However, no guarantee can be made that the Obligated
Group will remain HIPAA compliant in the future.
Coding Changes. Effective October 1, 2014, the coding standards used by health care providers
and payers to classify diseases and causes of death are changing. These changes may be costly to
physicians and hospitals and will require significant planning, training and updates to the software and
systems of hospitals at substantial cost to the hospital and providers.
Emergency Medical Treatment and Active Labor Act. In 1986, Congress enacted the
Emergency Medical Treatment and Active Labor Act (“EMTALA”), in response to allegations of
inappropriate hospital transfers of indigent and uninsured emergency patients. EMTALA imposes strict
requirements on hospitals in the treatment and transfer of patients with emergency medical conditions.
EMTALA requires hospitals to provide a medical screening examination to any individual who
comes to the hospital’s emergency department for treatment, without regard to ability to pay, to determine
whether the individual suffers from an emergency medical condition within the meaning of EMTALA. A
participating hospital may not delay providing a medical screening examination in order to inquire about
42
method of payment or insurance status. If an emergency medical condition is present, the hospital must
provide such additional medical examination and treatment as may be required to stabilize the emergency
medical condition. If the hospital deems it in the best interest of the individual to transfer the individual
to another medical facility, the treating physician must execute a transfer certificate complying with the
standards of EMTALA and must provide a medically appropriate transfer.
In regulations, CMS has extended the application of EMTALA beyond the hospital emergency
department to any individual who is on hospital property and requests an examination or treatment,
including individuals who are anywhere on the hospital’s main campus, in a hospital owned ambulance,
or in a facility off the main campus that has been determined by CMS to be a department of the hospital.
Off-campus departments might include, for example, urgent care centers, primary care clinics and
physical therapy and radiology facilities. These regulations have been narrowed somewhat to clarify that
while off-campus departments are obligated to comply with EMTALA, hospitals are not required to
locate additional personnel to off-campus departments to be on standby for possible emergencies. Rather,
in those cases where the necessary emergency personnel are not routinely present on site, appropriate
protocols for the handling of emergency cases (for example, contact with the main hospital campus for
direction, or transfer to an appropriate facility), must be established.
EMTALA imposes significant costs on hospitals, including the costs of treatment of individuals
who may not be able to pay for such services, costs of development and implementation of protocols
concerning medical screening examinations and stabilization and appropriate transfers and, in some cases,
costs associated with assuring on-call availability of specialty physicians. In addition, the expansion of
the requirements of EMTALA to off-campus departments may result in significant costs in the training of
personnel and the development of protocols for screening, stabilization and transportation of patients.
If a hospital violates EMTALA, whether knowingly and willfully or negligently, it is subject to a
civil money penalty of up to $50,000 per violation. Failure to satisfy the requirements of EMTALA may
also result in termination of the hospital’s provider agreement with Medicare. In addition, EMTALA
creates a private cause of action for individuals who suffer personal harm as a result of an EMTALA
violation, and for any hospital that suffers financial loss as a result of another hospital’s violation of
EMTALA. Enforcement activity with respect to EMTALA violations has increased dramatically in
recent years, and because of the broad interpretation of the reach of EMTALA, there can be no assurance
that the Obligated Group will not have been found to have violated EMTALA, and if such a violation
were found, that any sanctions imposed would not have a material adverse effect upon the future
operations and financial condition of the Obligated Group.
Quality Reporting and Compliance Requirements. The Deficit Reduction Act of 2005
(“DRA”) imposed significant new quality reporting initiatives for hospitals. The Obligated Group is
required to submit quality performance measures; the penalty for hospitals not reporting quality measures
is a two percentage point reduction in the market basket update for that fiscal year. The Health Care
Reform Act expands those reporting obligations.
The DRA established requirements for states participating in the Medicaid program to impose
obligations on health care providers and others that receive at least $5 million annually in Medicaid
payments to establish written policies and procedures to educate their employees (and certain contractors
and agents) and to provide detailed information about the federal False Claims Act, the federal Program
Fraud Civil Remedies Act, various other federal and state laws pertaining to civil or criminal penalties for
false claims and statements, any whistleblower protections provided under such laws, the role of such
laws in preventing and detecting fraud, waste and abuse, and the provider (or other party’s) policies and
procedures that are in place for the prevention and detection of fraud, waste and abuse. Additionally,
covered health care providers and other applicable parties are required to make specific revisions to their
43
existing employee handbooks to incorporate the above items, and to specifically disseminate pertinent
information regarding these items to all employees and certain categories of contractors and agents
making sure that covered contractors and agents agree to the adoption of certain policies and procedures.
These DRA mandates went into effect on January 1, 2007. Because compliance with these DRA
requirements is a condition of payment under Medicaid, providers and other covered parties that do not
adequately update their compliance policies, handbooks and other training materials or otherwise abide by
these requirements run the risk of losing their entitlement to receive Medicaid reimbursements to which
they otherwise would be entitled and/or risk potential liability under the False Claims Act and other
federal and state fraud and abuse authorities.
Environmental Laws Affecting Health Care Facilities. Hospitals are subject to a wide variety
of federal, state and local environmental and occupational health and safety laws and regulations that
address, among other things, hospital operations or facilities and properties owned or operated by
hospitals. In their role as owners and/or operators of properties or facilities, hospitals 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 hospital
operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous,
infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants, or
contaminants. For these reasons, hospital 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 and/or increase
their cost; may result in legal liability, damages, injunctions or fines; or may trigger investigations,
administrative proceedings, penalties or other governmental agency actions. There can be no assurance
that the Obligated Group will not encounter such risks in the future, and such risks may result in material
adverse consequences to the operations or financial condition of the Obligated Group.
Transparency in Pricing. The Health Care Reform Act requires hospitals to establish and make
public a list of the hospital’s standard charges for items and services, including MS-DRGs. A 2006
executive order was issued requiring the same public reporting of cost and quality data at four federal
agencies. CMS also has made “outcomes” reporting a condition of Medicare participation. These
requirements are examples of a trend in which hospitals will be required to divulge proprietary
information to the general public in order to participate in federal health care programs. The disclosure of
proprietary information may have a negative impact on the Obligated Group’s ability to gain advantages
in negotiations with payors. This, in turn, could negatively influence the Obligated Group’s revenues.
The Health Care Reform Act includes various public disclosure obligations for financial arrangements
between hospitals, physicians, imaging centers, and pharmaceutical and medical device manufacturers.
Due to the relative novelty of these disclosure requirements, it is impossible to predict the effect, if any,
that cost and outcomes reporting will have on the Obligated Group’s finances.
Future Federal Legislation. The Obligated Group anticipates that the federal government’s
health care reform initiatives will result in substantial new legislation, regulation, and other actions that
will continue the trend toward reduced reimbursement for hospital services and more pervasive regulation
of operations. At present, no determination can be made concerning whether, or in what form, such
legislation could be introduced and enacted into law. Similarly, the impact of future cost control
programs and future regulations upon the forecasted financial performance of the Obligated Group cannot
be determined at this time.
Any future changes to the Medicare and Medicaid programs could result in substantial reductions
in the amounts of public and private payments to hospital providers in the future, which could
substantially reduce the revenues available to the Obligated Group. Any reduction in the levels of
44
payment in these government payment programs could substantially adversely affect the Obligated
Group’s financial condition and its ability to fulfill its obligations.
Medical Care Availability and Reduction of Error Act. In March 2002, the Commonwealth of
Pennsylvania enacted the Medical Care Availability and Reduction of Error Act (the “Mcare Act”). The
Mcare Act includes significant patient safety initiatives, professional liability tort reforms, professional
liability insurance reforms, and administrative requirements that imposes numerous burdens on health
care providers in the Commonwealth.
Under the Mcare Act, hospitals are required to develop and implement patient safety plans,
appoint patient safety officers, form patient safety committees, and engage in mandatory reporting of
serious events, incidents, and infrastructure failures in the hospital. Furthermore, hospitals are required to
provide written notice to patients affected by serious events. Hospitals, ambulatory surgical centers, and
birth centers are subject to administrative fines of $1,000 per day for failure to comply with the patient
safety requirements of the Mcare Act. The administrative provisions under the Mcare Act require
physicians in the Commonwealth to report to the appropriate licensing board each time they are named in
a lawsuit, and provide for additional civil penalties of up to $10,000 for violations of the Mcare Act by
licensees.
The Mcare Act also eliminated the Pennsylvania Medical Professional Liability Catastrophe Loss
Fund (the “CAT Fund”) and established the Medical Care Availability and Reduction of Error Fund (the
“Mcare Fund”). The liabilities of the CAT Fund, which were estimated at over two billion dollars, were
transferred into the Mcare Fund and were paid through the imposition of annual assessments on health
care providers in the Commonwealth until all liabilities were satisfied. The Mcare Fund provides
coverage for professional liability claims in excess of a basic limit of insurance, and participation in the
Mcare Fund is mandatory for licensed health care providers. The System participates in the Mcare Fund
program and has elected to self-insure the underlying insurance required by the Mcare Act. The
administrative and financial burdens imposed on health care providers by the Mcare Act are substantial,
and there can be no assurance that compliance with the Mcare Act will not have a material adverse effect
upon the future operations and financial condition of the Obligated Group. Continued funding of the
Mcare program is uncertain.
Regulatory Inquiries
The laws and regulations governing federal reimbursement programs and the laws governing the
health care industry generally (such as the False Claims Act, the Civil Money Penalties Law, the AntiKickback Law and the Stark Law) are complex and subject to varying interpretations, and the Obligated
Group is subject to contractual reviews and program audits in the normal course of business. Penalties for
violations of federal regulations governing health care providers can be severe, including treble damages,
fines, and suspension from federal reimbursement programs such as Medicare and Medicaid. Federal
agencies have initiated nationwide investigations into several areas of concern, including, among others:
(i) teaching hospitals, (ii) home health care services, (iii) investigational devices, (iv) laboratory billing,
and (v) cost reporting. The Obligated Group expects that the level of review and audit to which it and
other health care providers are subject will increase. The Obligated Group has compliance programs that
are designed to detect and correct potential violations of laws and regulations applicable to its programs.
Regulatory authorities have discretion to assert claims for noncompliance with applicable requirements
based upon their interpretation of those requirements. Because these complex program requirements are
subject to varying interpretations and because, in some instances (e.g., the Anti-Kickback Law and the
Stark Law), there is little clear regulatory or judicial guidance, there can be no assurance that regulatory
authorities will not challenge the Obligated Group’s compliance with these requirements and assert
45
claims or penalties, and it is not possible to determine the impact (if any) any such claims or penalties
would have upon the Obligated Group.
Corporate Compliance
In contrast to a government-imposed corporate compliance plan that may be instituted pursuant to
the federal government’s investigation of a health care provider, a voluntary corporate compliance plan is
instituted by a health care provider to, among other things, put into place effective internal controls that
promote adherence to various federal and state laws regulating the health care industry. The Office of
Inspector General’s Compliance Program Guidance for Hospitals was released in February 1998 and
supplemented in January 2005. The OIG believes that the adoption and implementation of voluntary
compliance programs by hospitals significantly advances the prevention of fraud, abuse and waste in
federal, state and private health plans. In fact, the OIG may consider the existence of an effective
compliance plan that is instituted before a governmental investigation, when negotiating a settlement with
a health care provider.
Maintenance of Tax-Exempt Status
The Obligated Group and certain other affiliates (collectively referred to as the “Tax-exempt
Obligated Group Affiliates”) have been determined to be tax-exempt organizations described in
Section 501(c)(3) of the Code. Maintaining that status is contingent upon compliance with general rules
promulgated in the Code and related regulations regarding the organizations and operation of tax-exempt
entities, including their operation for charitable and educational purposes and their avoidance of
transactions that would cause their assets to inure to the benefit of private persons. The Internal Revenue
Service (“IRS”) has indicated that it intends to issue “compliance checks” relating to post-issuance
compliance of tax-exempt bonds issued for exempt organizations.
As tax-exempt organizations, the Tax-exempt Obligated Group Affiliates are limited in their use
of practice income, guarantees, reduced rent on medical office space, below-market rate interest loans,
joint venture programs and other means of recruiting and maintaining physicians. The IRS scrutinizes a
broad variety of contractual relationships commonly entered into by hospitals and affiliated entities and
has issued detailed hospital audit guidelines suggesting that field agents scrutinize numerous activities of
hospitals in an effort to determine whether any action should be taken with respect to limitations on, or
revocation of, their tax-exempt status of assessment of additional tax. The Tax-exempt Obligated Group
Affiliates conduct diverse operations involving private parties and have entered into arrangements,
directly or through affiliates, that are of the kind that the IRS has indicated that it will examine in
connection with audits of tax-exempt hospitals. Therefore, there can be no assurances that certain of their
transactions would not be challenged by the IRS.
The IRS has issued limited guidance that addresses joint ventures and other common
arrangements between exempt health care organizations and non-exempt individuals or entities. The Taxexempt Obligated Group Affiliates believe that their arrangements with private persons and entities are
generally consistent with guidance by the IRS, but there can be no assurance concerning the outcome of
an audit or other investigation given the limited authority interpreting the range of activities under taken
by the Tax-exempt Obligated Group Affiliates.
The IRS has taken the position that hospitals that are in violation of the Anti-Kickback Law may
also be subject to revocation of their federal tax-exempt status. As a result, tax-exempt entities such as
the Tax-exempt Obligated Group Affiliates that have, and will continue to have, extensive transactions
with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS.
46
On March 31, 2011, the IRS and OIG released guidance addressing the collaboration between
health care providers that will result from Health Care Reform initiatives, such as ACOs. The IRS has
assured tax-exempt organizations that participation in an ACO with for-profit entities will not jeopardize
the organization’s tax-exempt status and the OIG will create a waiver program for certain federal fraud
and abuse statutes that may be implicated by these arrangements.
Although the Tax-exempt Obligated Group Affiliates have covenanted to maintain their status as
tax-exempt organizations, loss of tax-exempt status would likely have a significant adverse effect on any
such organization and its operations. Any suspension, limitation or revocation of the tax-exempt status of
the Tax-exempt Obligated Group Affiliates or assessment of significant tax liability could have a material
adverse effect on the Tax-exempt Obligated Group Affiliates and might lead to the loss of tax exemption
of interest on the Series 2014 Bonds.
Various state and local governmental bodies in certain parts of the country have also challenged
the tax-exempt status of health care organizations and have sought to remove the exemption of property
from real estate taxes of part or all of the property of various nonprofit institutions on the grounds that a
portion of such property was not being used to further the charitable purposes of such organizations or
that the organizations did not provide sufficient care to indigent persons so as to warrant exemption from
taxation as a charitable institution. Several of these disputes have been determined in favor of the taxing
authorities or have resulted in settlements that are not favorable to the organization.
It is not possible to predict the scope or effect of future legislative or regulatory actions with
respect to taxation of exempt organizations. Since such actions and proposals have been made, they have
been vigorously challenged and contested. There can be, however, no assurance that future changes in
the laws and regulations of the federal, state or local governments will not materially and adversely affect
the operations and revenues of the Obligated Group by requiring it to pay income or real estate taxes.
There have also been numerous Congressional hearings in the past several years held by the
House Ways and Means Committee, the Senate Finance Committee and other committees investigating
various activities and practices of tax-exempt and other health care organizations, including hospital
pricing systems, hospital billing and collection practices, unaudited business income and prices charged to
uninsured patients. It cannot be determined at this time whether any legislation will be enacted in
response to congressional hearings and investigations and, if so, what form any such legislation would
take and what its impact would be on the Tax-exempt Obligated Group Affiliates.
Other legislative changes or judicial actions with respect to matters relating to the tax-exempt
status of nonprofit corporations, including the provision of free care to the indigent and the exemption
from property taxes of such corporations, could be enacted. There can be no assurance that the future
changes in federal, state or local laws, rules, regulations and policies governing tax-exempt entities will
not have adverse effects on the future operations of the Tax-exempt Obligated Group Affiliates.
Intermediate Sanctions
The Code Section 4958 (“Intermediate Sanctions”) imposes penalty excise taxes in cases where
an exempt organization is found to have engaged in an “excess benefit transaction” with a “disqualified
person”. Such penalty excise taxes may be imposed in lieu of revocation of exemption or in addition to
such revocation in cases where the magnitude or nature of the excess benefit calls into question whether
the organization has continued to function as a charity. The tax is imposed on the disqualified person
receiving the excess benefit. An additional tax may be imposed on any officer, director, trustee or other
person having similar powers or responsibilities who knowingly participated in the transaction willfully
or without reasonable cause.
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“Excess benefit transactions” include transactions in which a disqualified person receives
unreasonable compensation for services or receives other economic benefit from the organization that
exceeds fair market value. “Disqualified persons” include “insiders” such as board members and officers,
senior management, and members of the medical staff, who in each case are in a position to substantially
influence the affairs of the organization; their family members; and entities which are more than 35%
controlled by a disqualified person. The legislative history sets forth Congress’ intent that compensation
of disqualified persons shall be presumed to be reasonable if it is: (1) approved by disinterested members
of the organization’s board or compensation committee; (2) based upon data regarding comparable
compensation arrangements paid by similarly situated organizations; and (3) adequately documented by
the board or committee as to the basis for its determination. A presumption of reasonableness will also
arise with respect to transfers of property between the exempt organization and disqualified persons if a
similar procedure with approval by an independent board is followed.
Intermediate Sanction penalties can also be assessed in situations where the exempt organization,
or an entity controlled by the organization, provides an economic benefit to a disqualified person without
maintaining contemporaneous written substantiation of the organization’s intent to treat the benefit as
compensation. If the written contemporaneous substantiation requirements are not satisfied and unless
the organization can establish that it provided the economic benefit in exchange for consideration other
than the performance of services (i.e., a bona fide loan), the IRS shall deem such transactions as an
“automatic” excess benefit transaction without regard to whether: (1) the economic benefit is reasonable;
(2) any other compensation the disqualified person may have received is reasonable; or (3) the aggregate
of the economic benefit and any other compensation the disqualified person may have received is
reasonable. There is no defense to the assessment of automatic excess benefit penalties.
The imposition of penalty excise tax in lieu of revocation based upon a finding that an exempt
organization engaged in an excess benefit transaction is likely to result in negative publicity and other
consequences that could have a material adverse effect on the operations, property, or assets of the
organization.
Other Legislative and Regulatory Actions
The Obligated Group is subject to regulation, certification and accreditation by various federal,
state and local government agencies and by certain nongovernmental agencies such as the Joint
Commission. No assurance can be given as to the effect on future hospital operations of existing laws,
regulations and standards for certification or accreditation or of any future changes in such laws,
regulations and standards.
Legislative proposals which could have an adverse effect on the Obligated Group include: (a)
any change in the taxation of not-for-profit corporations or in the scope of their exemption from income
or property taxes; (b) limitations on the amount or availability of tax-exempt financing for charitable
organizations described in Section 501(c)(3) of the Code; (c) regulatory limitations affecting the ability of
the Obligated Group to undertake capital projects or develop new services; and (d) a requirement that notfor-profit health care institutions pay real estate property tax and sales tax on the same basis as for-profit
entities.
Antitrust
The Obligated Group, like other providers of health care services, is subject to antitrust laws.
Those laws generally prohibit agreements that restrain trade and prohibit the acquisition or maintenance
of a monopoly through anticompetitive practices. The legality of particular conduct under the antitrust
laws generally depends on the specific facts and circumstances and cannot be predicted in advance.
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Antitrust actions against health care providers have become increasingly common in recent years.
Antitrust liability can arise in a number of different contexts, including medical staff privilege disputes,
third party payor contracting, joint ventures and affiliations between health care providers, and mergers
and acquisitions by health care providers. Actions can be brought by federal and state enforcement
agencies seeking criminal and civil penalties and, in some instances, by private plaintiffs seeking damages
for harm from allegedly anticompetitive behavior.
Judicial decisions have permitted physicians who are subject to disciplinary or other adverse
actions by a hospital at which they practice, including denial or revocation of medical staff privileges, to
seek treble damages from the hospital under the federal antitrust laws. The Federal Health Care Quality
Improvement Act of 1986 provides immunity from liability for discipline of physicians by hospitals under
certain circumstances, but courts have differed over the nature and scope of this immunity. In addition,
hospitals occasionally indemnify medical staff members who incur costs as defendants in lawsuits
involving medical staff privilege decisions. Court decisions have also permitted recovery by competitors
claiming harm from a hospital’s use of its market power to obtain unfair competitive advantage in
expanding into ancillary health care businesses. Antitrust liability in any of these contexts can be
substantial, depending upon the facts and circumstances involved.
In 1993, the United States Department of Justice and the Federal Trade Commission issued
“Statements of Antitrust Enforcement Policy in the Health Care Area”, and these statements have been
revised from time to time. The statements generally describe certain analytical principles which the
agencies will apply to certain factual situations and also establish certain “antitrust safety zones”.
Conduct within the safety zones will not be challenged by the agencies, absent extraordinary
circumstances. Many activities frequently engaged in by health care providers fall outside of the zones
but are not challenged, and failure to fall within a safety zone does not mean that a participant will be
investigated or prosecuted, or even that the activity violated the antitrust laws. A new safety zone is
proposed related to the formation of ACOs as discussed earlier. There can be no assurance that federal or
state enforcement authorities or private parties will not assert that the Obligated Group, or any transaction
in which it is involved, is in violation of the antitrust laws.
Licensing, Surveys and Accreditations
Health care facilities, including the Obligated Group, are subject to numerous legal, regulatory,
professional and private licensing, certification and accreditation requirements. Those requirements
include, but are not limited to, requirements relating to Medicare and Medicaid participation and
payment, state licensing agencies, private payors, the Joint Commission on Accreditation of Healthcare
Organizations, the National Labor Relations Board and other federal, state and local government
agencies. Renewal and continuance of certain of these licenses, certifications and accreditations is based
on inspections, surveys, audits, investigations or other reviews. These activities are generally conducted
in the normal course of business of health care facilities. Nevertheless, an adverse result could be the
cause of loss or reduction in a facility's scope of licensure, certification or accreditation or reduce
payments received. The Obligated Group currently expects to renew or maintain all currently held
licenses, certifications and accreditations. However, there can be no assurance that the requirements of
present or future laws, regulations, certifications, and licenses will not materially and adversely affect the
operations of the Obligated Group.
Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other
Performance Measures
Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health
services, private standard-setting organizations and accrediting agencies increasingly are using statistical
49
and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and
cost of health care services provided by hospitals and physicians. Published rankings (such as “score
cards”), “pay for performance”, “never-events” and other financial and non-financial incentive programs
are being introduced to affect the reputation and revenue of hospitals and the members of their medical
staffs and to influence the behavior of consumers and providers such as the Obligated Group. Currently
prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient
satisfaction and investment in health information technology. Measures of performance set by others that
characterize a hospital negatively may adversely affect its reputation and financial condition.
Medical Professional Liability Insurance Market
Deteriorating underwriting results have generated substantial premium increases and coverage
reductions in the medical professional liability insurance marketplace in recent years. A rise in claim
severity nationwide coupled with the lower investment returns available to insurers have resulted in
substantial reductions in medical professional liability insurance capacity. Several major medical
professional liability insurance carriers have been forced into rehabilitation and/or liquidation, or have
voluntarily withdrawn from this line of business. The insurance carriers who are still writing medical
professional liability coverage are requiring substantial premium increases, reductions in the breadth of
coverage afforded by the policy(ies), more stringently enforced policy terms, and increases in required
deductibles or self-insured retentions. Health care entities that have self-funded programs are also
experiencing similar difficulties with respect to fronting carriers, reinsurance on their captive insurance
companies and/or with respect to insurance placements excess of the primary coverage layers.
Furthermore, insurance carrier insolvencies are forcing health care providers to either repurchase
insurance coverage from new carriers at substantially higher rates, or self-insure exposures for which they
had previously purchased insurance.
The effect of these developments has been to increase the operating costs of hospitals, including
those of the Obligated Group. In addition, the dramatic increase in the cost of professional liability
insurance may have the effect of causing established physicians to leave the most heavily affected
geographical regions, including Pennsylvania, and of preventing new physicians from establishing their
practices in the Obligated Group’s region. There can be no assurance that the unpredictability and
increasing severity of jury awards and claims payouts, the reduction of coverage availability, and/or the
rising cost of professional liability insurance coverage will not adversely affect the operations or financial
condition of the Obligated Group.
Insurance Coverage Limits
The Obligated Group may be required to maintain prescribed levels of professional liability and
property hazard insurance. The Obligated Group believes that present insurance coverage limits are
sufficient to cover any reasonably anticipated malpractice or property hazard exposures. No assurance
can be given, however, that the Obligated Group will always be able to procure or maintain such levels of
insurance in the future.
The Obligated Group is occasionally named as a defendant in malpractice actions and there
remains a risk that individual or aggregate judgments or settlements will exceed the Obligated Group’s
coverage limits, or that some allegations or damages will not be covered by the Obligated Group’s
existing insurance coverage. To the extent that the professional liability insurance coverage maintained
by the Obligated Group is inadequate to cover settlements or judgments against them, claims may have to
be discharged by payments from current funds and such payments could have a material adverse impact.
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Labor and Employment Issues
The Employee Free Choice Act (“EFCA”) was re-introduced in the House and Senate in March
2009. EFCA seeks to amend the National Labor Relations Act (“NLRA”). Among other changes to the
NLRA, it would authorize the National Labor Relations Board (“NLRB”) to certify a union as the
exclusive bargaining representative of employees based on valid authorization cards signed by a majority
of employees in the proposed bargaining unit alone (known as the “card check” process). The card check
provisions mandate recognition of the union if more than 50 percent of the workers in the bargaining unit
sign authorization cards. Secret ballot elections, now used to determine a union’s majority status, would
become largely obsolete.
Due to changes in the United States Congress in the 2010 mid-term elections, term elections and
lack of action on the bill since that time, passage of EFCA is unlikely. In the wake of EFCA's demise, in
late 2011, the NLRB sought through proposed regulations to change the process for representation case
petitions and pre-election procedures, but the NLRB recently withdrew the regulations after a federal
district court struck them down. If EFCA is revived or the NLRB revisits its regulatory agenda, nurses
and other health care workers may be encouraged to organize and seek a collective bargaining agreement.
These activities may result in substantial increases over the current labor costs of the Obligated Group.
Since 2009, there also have been a number of wage and hour lawsuits filed against health systems
claiming that the health systems have failed to compensate employees for time spent working before and
after their scheduled shifts and during uncompensated meal breaks. The lawsuits have not succeeded on
the merits, but have caused health systems to incur significant defense costs. A handful of health systems
have settled these lawsuits for significant sums.
Technology and Services
Scientific and technological advances, new procedures, drugs and appliances, preventive
medicine, occupational health and safety and outpatient healthcare delivery may reduce utilization and
revenues of the Obligated Group in the future. Technological advances in recent years have accelerated
the trend toward the use by hospitals of sophisticated, and costly, equipment and services for diagnosis
and treatment. The acquisition and operation of certain equipment or services may continue to be a
significant factor in hospital utilization, but the ability of the Obligated Group to offer such equipment or
services may be subject to the availability of equipment or specialists, governmental approval, the ability
to finance such acquisitions or operations, or reimbursement at levels sufficient to support the cost of such
equipment or services.
Fluctuations in Market Value of Investments
Earnings on its investments have historically provided the Obligated Group an important source
of cash flow and capital appreciation to support its programs and services, to finance its capital
expenditure investments and to build its cash reserves. No assurances can be given that the market value
of the Obligated Group’s investments will continue to grow, or even remain at its current level and there
is risk that it may actually decline at some time in the future.
Enforceability of Certain Covenants
The Obligated Group is obligated to exercise all control it may have over its subsidiaries to cause
them to pay, loan or otherwise transfer to the Obligated Group amounts necessary to pay debt service on
the Series 2014 Bonds as the same becomes due and payable. The agreement by the Obligated Group
may not be enforceable to the extent such funds (i) are requested to make payments on any Bonds which
51
are issued for a purpose not consistent with the charitable purposes of the affiliate from which such
payment is required or which are issued for the benefit of any entity other than a tax-exempt organization;
(ii) are requested to be made from any property which is donor restricted or which is subject to a direct or
express trust which does not permit the use of such property for such payments; or (iii) would result in the
cessation or discontinuation of any material portion of the health care or related services previously
provided by the affiliate from which such payment is required. Due to the absence of clear legal
precedent in this area, the extent to which the property of any affiliates of the Obligated Group currently
falls within the categories referred to above cannot be determined and could be substantial.
There is no clear precedent in the law as to whether transfers from an affiliate in order to pay debt
service on bonds issued for the benefit of another affiliate may be voided by a trustee in bankruptcy in the
event of a bankruptcy of the transferring affiliate or pursuant to state fraudulent conveyances statutes.
Under the United States Bankruptcy Code, a trustee in bankruptcy and, under certain state fraudulent
conveyances statutes, a creditor of a related guarantor may avoid any obligation incurred by a related
guarantor, if, among other factors, (i) the guarantor has not received fair consideration or reasonably
equivalent value in exchange for the guaranty, and (ii) the guaranty renders the guarantor insolvent, as
defined in the United States Bankruptcy Code or certain state fraudulent conveyances statutes, or the
guarantor is undercapitalized.
consideration” has resulted in a conflicting body of case law. It is possible that, in an action to force one
affiliate of the Obligated Group to pay debt service on bonds issued for the benefit of the Obligated Group
or for another affiliate of the Obligated Group, a court might not enforce such a payment in the event it is
determined that the affiliate is analogous to a guarantor, that fair consideration or reasonably equivalent
value of such guarantee was not received and that the incurrence of such obligation has rendered and will
render the transferring affiliate insolvent or the transferring affiliate is or will thereby become
undercapitalized.
There exists common law authority and authority under state statutes for the ability of the courts
to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various
grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable
purposes. Such a court action may arise on the court’s own motion or pursuant to a petition of a state
attorney general or such other persons who have interests different from those of the general public,
pursuant to the common law and statutory power to enforce charitable trusts and to see to the application
of their funds to their intended charitable uses.
Factors Affecting Real Estate Tax Exemption
In recent years various State and local legislative, regulatory and judicial bodies have reviewed
the exemption of nonprofit corporations from real estate taxes. Various State and local government
bodies have challenged with increasing frequency and success the tax-exempt status of such institutions
and have sought to remove the exemption of property from real estate taxes of part or all of the property
of various nonprofit institutions on the grounds that a portion of such property was not being used to
further the charitable purposes of the institution. Several of these disputes have been determined in favor
of the taxing authorities or have resulted in settlements. No assurance can be given that the Obligated
Group will retain its real estate tax exemptions without challenge throughout the term of the Series 2014
Bonds.
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Charity Care: Litigation Related to Charity Care
Hospitals are permitted to acquire tax-exempt status because the provision of health care has
historically been treated as a “charitable” enterprise. Consistent with this status, federal and state tax
authorities are beginning to demand that tax-exempt hospitals justify their favored treatment by providing
more charitable care and other community benefits. In addition, challenges to the tax-exempt status of
hospitals are being made by private parties. Recently, there have been a series of class action lawsuits
filed against non-profit hospitals on the judicially unprecedented theory that these hospitals breached
contracts with federal and state governments by not providing sufficient public benefit to justify their taxexempt status. These claims target the practice of certain non-profit hospitals of charging uninsured
patients more for services than uninsured patients and aggressively seeking payment from these uninsured
patients for these services. To date, all proceedings in federal court have either been dismissed or
remanded to state courts, where several cases are currently pending. To date, at the state court level, there
has been only one case in which a written opinion has been issued that is favorable to these claims. In
that case, an Illinois state court denied defendant hospitals’ motions to dismiss and allowed these claims
to proceed to resolve the factual issues underlying the challenged practices.
Certain Business Transactions
Physician Relations. The primary relationship between a hospital and physicians who may
practice at the Obligated Group is through the Obligated Group’s organized medical staff. Medical staff
bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her
privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff
membership or certain clinical privileges, or who have membership or privileges curtailed, denied or
revoked often file legal actions against hospitals. Such action may include a wide variety of claims, some
of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital
governing body to adequately oversee the conduct of the medical staff may result in hospital liability to
third parties. All hospitals, including the Obligated Group, are subject to such risk.
Physician Contracting. The Obligated Group may contract with physician organizations (such as
independent physician associations and physician-hospital organizations) to arrange for the provision of
physician and ancillary services. Because physician organizations are separate legal entities with their
own goals, obligations to shareholders, financial status, and personnel, there are risks involved in
contracting with the physician organizations.
The success of the Obligated Group will be partially dependent upon its ability to attract
physicians to join the physician organizations and to participate in its networks, and upon the ability of
the physicians, including the employed physicians, to perform their obligations and deliver high quality
patient care in a cost-effective manner. There can be no assurance that the Obligated Group will be able
to attract and retain the requisite number of physicians, or that physicians will deliver high quality health
care services. Without paneling a sufficient number and type of providers, a Member could fail to be
competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until its
panel provided adequate access to patients. Such occurrences could have a material adverse effect on the
business or operations of the Obligated Group.
Affiliations, Merger, Acquisition and Divestiture. The Obligated Group evaluates and pursues
potential acquisition, merger and affiliation candidates as part of the overall strategic planning and
development process. As part of this ongoing planning and property management functions, the
Obligated Group reviews the use, compatibility and business viability of its operations, and from time to
time the Obligated Group may pursue changes in the use of, or disposition of, its facilities. Likewise, the
Obligated Group occasionally receives offers from, or conducts discussions with, third parties about the
53
potential acquisition of operations and properties which may become subsidiaries or affiliates of the
Obligated Group in the future, or about the potential sale of some of the operations or property which are
currently conducted or owned by the Obligated Group. Discussions with respect to affiliation, merger,
acquisition, disposition or change of use of facilities are held from time to time with other parties. These
may be conducted with acute care hospital facilities and may be related to potential affiliation with the
Obligated Group. As a result, it is possible that the current organization and assets of the Obligated
Group may change from time to time.
In addition to relationships with other hospitals and physicians, the Obligated Group may
consider investments, ventures, affiliations, development and acquisition of other health care-related
entities. These may include home health care, long-term care entities or operations, infusion providers,
pharmaceutical providers, and other health care enterprises that support the overall operations of the
Obligated Group. Because of the integration and consolidation occurring throughout the health care field,
management will consider these arrangements if there is a perceived strategic or operational benefit for
the Member. Any initiative may involve significant capital commitments and/or capital or operating risk
(including, potentially, insurance risk) in a business in which the Obligated Group may have less
expertise than in its current operations. There can be no assurance that these projects, if pursued, will not
lead to material adverse consequences to the Obligated Group.
Acquisition and Construction Risk
Acquisition and construction of the Capital Projects is subject to the usual risks associated with
such projects, including, but not limited to, delays in issuance of required building permits or other
necessary approvals or permits, strikes, shortages of materials and adverse weather conditions. Such
events could result in delaying completion of the Capital Projects. Management of the Obligated Group
anticipates that all required permits will be obtained in due course. It is anticipated that the proceeds from
the sale of the Series 2014 Bonds, together with certain funds of the Obligated Group, will be sufficient to
complete the Capital Projects. However, cost overruns may occur due to change orders and other factors.
In addition, the date of substantial completion may be extended by reason of changes authorized by the
Obligated Group, delays due to acts or neglect of the Obligated Group or by independent contractors
employed by the Obligated Group or by labor disputes, fire, unusual delay in transportation, adverse
conditions not reasonably anticipated, unavoidable casualties or any causes beyond the control of the
contractors. Cost overruns and delays in completion of construction of the Capital Projects could
materially adversely affect the financial condition of the Obligated Group.
Security and Enforceability
Enforceability of the Master Indenture and the 2014 Master Note
The Obligated Group has made, and any future Member of the Obligated Group will make, a
covenant in the Master Indenture to make payments when due on the 2014 Master Note. If other entities
become Members of the Obligated Group, those future Members of the Obligated Group will be jointly
and severally liable for the payments due on the 2014 Master Note and the other Master Notes issued
from time to time under the Master Indenture. The enforceability of these joint and several obligations is
uncertain. As a consequence, the property of the Members of the Obligated Group that are not the
beneficiaries of the proceeds of the Series 2014 Bonds may not be available to make such payments.
Counsel to the Obligated Group will render an opinion concurrently with the delivery of the
Series 2014 Bonds to the effect that the Master Indenture and the 2014 Master Note are enforceable
against the Obligated Group in accordance with their terms. However, such opinion will be qualified as
to the joint and several obligations of the Members of the Obligated Group to make payments of debt
54
service on the 2014 Master Note. In the opinion of counsel to the Obligated Group, such joint and several
obligations may not be enforceable against a Member of the Obligated Group that did not receive Series
2014 Bond proceeds or directly benefit from the issuance of the Series 2014 Bonds under any of the
following circumstances:

To the extent payments on the 2014 Master Note are requested to be made from assets of
such Member 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 payments.

If the purpose of the debt created and evidenced by the 2014 Master Note is not
consistent with the charitable purposes of such Member, or if the debt was incurred or
issued for the benefit of an entity other than a nonprofit corporation which is exempt
from federal income taxes under Sections 501(a) and 501(c)(3) of the Internal Revenue
Code and is not a “private foundation” as defined in Section 509(a) of the Internal
Revenue Code.

To the extent payments on the 2014 Master Note would result in the cessation or
discontinuation of any material portion of the health care or related services previously
provided by such Member.

If and to the extent payments are requested to be made pursuant to any loan violating
applicable usury laws.
These limitations on the enforceability of a Member of the Obligated Group’s joint and several
obligations on the 2014 Master Note also apply to their obligations on all other Master Notes. If the
obligation of a particular Member of the Obligated Group to make payment on a Master Note is not
enforceable, and payment is not made on such Master Note when due in full, an Event of Default will
occur under the Master Indenture.
A Member of the Obligated Group may not be required to make payments on or provide amounts
for the payment of a Master Note, including the 2014 Master Note, issued by or for the benefit of another
entity if and to the extent that any such payment or transfer would render such Member insolvent or
would conflict with or not be permitted by or would be subject to recovery for the benefit of other
creditors of such Member under applicable fraudulent conveyance, bankruptcy, insolvency, moratorium
or other similar laws affecting the enforcement of creditors’ rights. There is no clear precedent in the law
as to whether payments on Master Notes (including the 2014 Master Note) by a Member of the Obligated
Group may be voided by a trustee in bankruptcy in the event such Member filed for bankruptcy protection
and a trustee was appointed, or by third party creditors in an action brought pursuant to state fraudulent
conveyances statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under state
fraudulent conveyance statutes, a creditor of a related guarantor, may avoid any obligation incurred by a
related guarantor if, among other bases therefor, (1) the guarantor has not received fair consideration or
reasonably equivalent value in exchange for the guaranty and (2) the guaranty renders the guarantor
insolvent, as defined in the United States Bankruptcy Code or state fraudulent conveyances statutes, or
the guarantor is undercapitalized or it intended or expected to incur debts that it could not pay as they
became due. Under such principles, the obligor on a Master Note (including the 2014 Master Note) that
secures Related Bonds (including the Series 2014 Bonds) not issued for the direct benefit of such obligor
may be considered a guarantor.
consideration” has resulted in a conflicting body of case law. If a judicial action were brought to compel
a Member of the Obligated Group to make a payment on a Master Note (including the 2014 Master Note),
55
a court might not enforce such payment in the event it is determined that sufficient consideration for the
Member’s obligation was not received, or that the incurrence of such obligation has rendered or will
render the Member insolvent, or the Member is or will thereby become undercapitalized or it intended or
expected to incur debts that it could not pay as they became due.
In addition, state courts have common law authority and authority under Pennsylvania statutes to
terminate the existence of a not-for-profit or nonprofit corporation or undertake supervision of its affairs
on various grounds, including a finding that the not-for-profit or nonprofit corporation has insufficient
assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry
out such purposes. Such action may arise on the court’s own motion or pursuant to a petition of the
Pennsylvania Attorney General or other persons who have interests different from those of the general
public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the
application of their funds to their intended charitable uses.
Pledge of Gross Revenues
All Master Notes issued under the Master Indenture, including the 2014 Master Note, will be
secured by a security interest in the Gross Revenues of the Obligated Group. Notwithstanding the pledge
of Gross Revenues, the Members of the Obligated Group may sell or otherwise transfer Gross Revenues
in accordance with the provisions of the Master Indenture.
Certain Matters Relating to Enforceability of the Pledge of Gross Revenues
The enforceability of the security interest in Gross Revenues may be limited by a number of
factors, including: (i) provisions prohibiting the direct payment of amounts due to health care providers
from Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an
express provision permitting assignment of receivables due under the contracts between a Member of the
Obligated Group and third-party payors, and present or future legal prohibitions against such assignment;
(iii) certain judicial decisions which cast doubt on the right of the Master Trustee, in the event of the
bankruptcy of a Member of the Obligated Group, to collect and retain accounts receivable from Medicare,
Medicaid and other governmental programs; (iv) commingling of proceeds of accounts receivable with
other moneys of a Member of the Obligated Group not so pledged under the Master Indenture; (v)
statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; (vii)
constructive trusts or equitable or other rights impressed or conferred thereon by a federal or state court in
the exercise of its equitable jurisdiction; (viii) federal bankruptcy laws which may affect the
enforceability of the Master Indenture, the Loan Agreement or the security interest in the Gross Revenues
which are earned by a Member of the Obligated Group within 90 days preceding the commencement of
bankruptcy proceedings by or against such Member of the Obligated Group and during the pendency of
such proceedings; (ix) rights of third parties in Gross Revenues converted to cash and not in the
possession of the Master Trustee; and (x) claims that might arise if appropriate financing or continuation
statements are not filed in accordance with the Uniform Commercial Code, as from time to time in effect.
Facilities
The health care facilities of the Obligated Group are not general purpose buildings and may not
be suitable for industrial or commercial use. Consequently, if an event of default were to occur and the
Bond Trustee or the Master Trustee were in a position to sell or lease the facilities as a result of the
exercise of available remedies, it could be difficult to find a buyer or lessee. As a result, the Bond Trustee
or the Master Trustee may not obtain an amount sufficient to satisfy obligations on the Series 2014 Bonds
or the 2014 Master Note, whether pursuant to a judgment against the Obligated Group or otherwise.
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Amendments to Master Indenture, Bond Indenture and Loan Agreement
The Bond Indenture designates the Bond Trustee as the holder of the related 2014 Master Note.
Certain amendments to the Master Indenture may be made with the consent of the owners of not less than
a majority of the aggregate principal amount of the outstanding Master Notes, including the 2014 Master
Note. Such percentage may be composed wholly or partially of the owners of Master Notes other than
the 2014 Master Note. Such amendments may adversely affect the security of holders of the 2014 Master
Note and the owners of the Series 2014 Bonds.
Availability of Remedies
The remedies available to the Bond Trustee, the Master Trustee and the owners of the Series 2014
Bonds upon an event of default under the Bond Indenture, the Master Indenture and the Loan Agreement
are in many respects dependent upon judicial actions which are often subject to discretion and delay.
Under existing constitutional and statutory law and judicial decisions, including, specifically, the
Bankruptcy Code, and other similar laws and equitable principles affecting the enforcement of creditors’
rights such as insolvency, reorganization, moratorium or fraudulent conveyance, the remedies provided in
the Bond Indenture, the Master Indenture and the Loan Agreement may not be readily available or may be
limited. The various legal opinions to be delivered concurrently with the delivery of the Series 2014
Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by
general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws affecting
the rights of creditors’ generally and laws relating to fraudulent conveyances.
Bankruptcy
In the event a Member of the Obligated Group files for protection from creditors under the United
States Bankruptcy Code, the rights and remedies of the owners of the Series 2014 Bonds would be subject
to various provisions of the United States Bankruptcy Code. If a Member of the Obligated Group were to
commence a proceeding in bankruptcy, payments made by that Member of the Obligated Group during
the 90-day period immediately preceding such commencement (or, under certain circumstances, during
the preceding one-year period) may be voided as preferential transfers to the extent such payments allow
the recipients thereof to receive more than they would have received in the event of the liquidation of
such Member of the Obligated Group. Security interests and other liens granted by such Member to the
Bond Trustee or the Master Trustee and perfected during such preference period also may be voided as
preferential transfers to the extent such security interest or other lien secures obligations that arose prior to
the date of such grant or perfection.
A bankruptcy filing would operate as an automatic stay of the commencement or continuation of
any judicial or other proceeding against such Member of the Obligated Group and its property and as an
automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its
property as well as various other actions to enforce, maintain or enhance the rights of the Bond Trustee
and the Master Trustee. If the bankruptcy court so ordered, the property of such Member of the Obligated
Group, including its accounts receivable and the proceeds thereof, could be used for the financial
rehabilitation of such Member of the Obligated Group despite any security interest of the Bond Trustee
therein. The rights of the Bond Trustee and the Master Trustee to enforce their respective interests and
other liens could be delayed during the pendency of the rehabilitation proceeding.
Such Member of the Obligated Group could also file a plan for the adjustment of its debts in any
such proceeding which could include provisions modifying or altering the rights of creditors generally, or
any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who
had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor
57
to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met,
among which are conditions that the plan be feasible and that it either shall have been accepted by each
class of claims impaired thereunder or, if the plan is not so accepted, the court shall have determined that
the plan is fair and equitable with respect to each class of nonaccepting creditors impaired thereunder and
does not discriminate unfairly. A class of claims has accepted the plan if at least two-thirds in dollar
amount and more than one-half in number of the class cast votes in its favor.
In the event of bankruptcy of a Member of the Obligated Group, there is no assurance that certain
covenants, including tax covenants, contained in the Bond Indenture, the Loan Agreement or the Master
Indenture and certain other documents would survive. Accordingly, such Member of the Obligated
Group, as debtor in possession, or a bankruptcy trustee could take action which might adversely affect the
exclusion of interest on the Series 2014 Bonds from gross income for federal income tax purposes.
In addition, the bankruptcy of a health plan or physician group that is a party to a significant
managed care arrangement with one or more Members of the Obligated Group, or that of any significant
contract payor obligated to any one or more Members of the Obligated Group, could have material
adverse effects on the Obligated Group.
Additional Debt; Permitted Encumbrances
The Master Indenture permits the issuance of additional Master Notes on a parity with the 2014
Master Note and also permits incurrence of additional Debt by the Obligated Group. The Master
Indenture provides that, subject to the provisions of the Master Indenture, no Member of the Obligated
Group shall create or incur or permit to be created or incurred or to exist any lien on any Property of a
Member of the Obligated Group to secure Debt except Permitted Encumbrances. Under the definition of
Permitted Encumbrances, the Obligated Group could place significant encumbrances on its Property. The
Property subject to such liens could consist in part or in whole of cash, marketable securities, accounts
receivable or health care facilities. See the definition of “Permitted Encumbrances” in APPENDIX C
hereto.
The Mortgage
The value of the Mortgaged Premises is likely to be less than the aggregate outstanding principal
amount of all Master Notes issued and outstanding under the Master Indenture. The value of the
Mortgage will depend on the ability of the Master Trustee to operate or sell the Mortgaged Premises in
the event of a foreclosure of the Mortgage. The Mortgaged Premises consists of special purpose facilities
and generally would not be suitable for any use other than healthcare. If the Mortgaged Premises cannot
be operated profitably, it is unlikely that it would have substantial market value. No environmental study
or appraisal has been made of the Mortgaged Premises in connection with the granting of the Mortgage.
In the event of a bankruptcy proceeding, the value of the Mortgaged Premises will depend upon the
court’s determination of such value. Consequently, upon an event of default under the Master Indenture,
no assurance can be given that the Master Trustee will be able to lease or sell the Mortgaged Premises to
third parties or that the amount recovered by the Master Trustee in foreclosure proceedings would be
sufficient to pay the amounts due on all Master Notes issued and outstanding under the Master Indenture.
Tax Matters
Tax-Exempt Status of the Series 2014 Bonds
The Code imposes a number of requirements that must be satisfied for interest on state and local
obligations, such as the Series 2014 Bonds, to be excludable from gross income for federal income tax
58
purposes. These requirements include limitations on the use of bond proceeds, limitations on the
investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings
on bond proceeds be paid periodically to the United States, and a requirement that the issuers file an
information report with the IRS. The Obligated Group has agreed that it will comply with such
requirements. Failure to comply with the requirements stated in the Code and related regulations, rulings
and policies may result in the treatment of the interest on the Series 2014 Bonds as taxable. Such adverse
treatment may be retroactive to the date of issuance. See also “TAX EXEMPTION.”
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. In addition, in 2007 the
IRS sent approximately two hundred post-issuance compliance questionnaires to nonprofit corporations
that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various
requirements for maintaining the federal tax exemption of interest on their bonds. The questionnaire
included questions relating to the borrower’s (i) record retention, which the Internal Revenue Service has
particularly emphasized, (ii) qualified use of bond-financed property, (iii) arbitrage yield restriction and
rebate requirements, (iv) debt management policies and (v) voluntary compliance and education. On
September 11, 2008, the IRS issued an interim report analyzing the responses from the completed
questionnaires. The report indicates that there are significant gaps in the implementation by nonprofit
corporations of post-issuance and record retention procedures for tax-exempt bonds.
The IRS has also added a new schedule to IRS Form 990. This new schedule requests detailed
information related to all outstanding bond issues of nonprofit borrowers, including information regarding
operating, management and research contracts as well as private use compliance.
Although management of the Obligated Group believes that its expenditure and investment of
bond proceeds, use of property financed with tax-exempt debt and record retention practices have
complied with all applicable laws and regulations, there can be no assurance that the issuance of surveys
will not lead to an IRS review that could adversely affect the market value of the Series 2014 Bonds or of
any other outstanding tax-exempt indebtedness of the Obligated Group. Additionally, the Series 2014
Bonds or other tax-exempt obligations issued for the benefit of the Obligated Group, may be, from time to
time, subject to examinations by the IRS. Management of the Obligated Group believes that the Series
2014 Bonds and any other tax-exempt obligations issued for the benefit of the Obligated Group, properly
comply with the tax laws. In addition, Bond Counsel will render an opinion with respect to the taxexempt status of the Series 2014 Bonds, as described under the caption “TAX EXEMPTION.” No ruling
with respect to the tax-exempt status of the Series 2014 Bonds has been or will be sought from the IRS,
however, and the opinions of Bond Counsel are not binding on the IRS or the courts. There can be no
assurance that any Internal Revenue Service examination of the Series 2014 Bonds will not adversely
affect the market value of the Series 2014 Bonds. See “TAX EXEMPTION” below.
Transferability of Series 2014 Bonds
The Series 2014 Bonds are being offered and sold only to “qualified institutional buyers,” as
defined in Rule 144A under the Securities Act of 1933. Prospective purchasers are hereby notified that
the Series 2014 Bonds are subject to resale restrictions. Such restrictions include that no sale, pledge,
transfer or exchange may be made of the Series 2014 Bonds (1) except to investors that are reasonably
believed to be “qualified institutional buyers” within the meaning of Rule 144A under the Securities Act
of 1933, and (2) in a denomination of less than the Authorized Denomination. The initial purchaser of the
Series 2014 Bonds will be required to execute and deliver an Investor Letter, the form of which is
attached hereto as APPENDIX H – “Form of Investor Letter.”
59
Other Risks
Limited Secondary Market. There can be no guarantee that there will be a secondary market
for the Series 2014 Bonds or, if a secondary market exists, that such Series 2014 Bonds can be sold for
any particular price. Occasionally, because of general market conditions, lack of current information, the
absence of a credit rating for the Series 2014 Bonds or because of adverse history or economic prospects
connected with a particular issue or industry, secondary marketing practices in connection with a
particular issue are suspended or terminated. Additionally, prices of issues for which a market is being
made will depend upon then prevailing circumstances. Such prices could be substantially different from
the original purchase price
Other Risk Factors Generally Affecting Health Care Facilities. In the future, the following
factors, among others, may adversely affect the operations of the Obligated Group Affiliates to an extent
that cannot be determined at this time:
•
Hospitals are major employers, combining a complex mix of professional, quasi
professional, technical, clerical, housekeeping, maintenance, dietary and other types
of workers in a single operation. As with all large employers, the Obligated Group
Affiliates bear a wide variety of risks in connection with their employees. These
risks include strikes and other related work actions, contract disputes, discrimination
claims, personal tort actions, work-related injuries, exposure to hazardous materials
and other risks that may flow from the relationships between employer and employee
or between physicians, patients and employees. Many of these risks are not covered
by insurance, and certain of them cannot be anticipated or prevented.
•
Competition from other hospitals and other facilities now or hereafter located in the
respective service areas of the facilities operated by the Obligated Group Affiliates
may adversely affect revenues of the Obligated Group Affiliates. Development of
health maintenance and other alternative health delivery programs could result in
decreased usage of inpatient hospital facilities and other facilities operated by the
Obligated Group Affiliates.
•
Cost availability and sufficiency of any insurance such as medical professional
liability, directors’ and officers’ liability, property, automobile liability, worker’s
compensation and commercial general liability coverage that health care facilities of
a similar size and type generally carry.
•
Adoption of a national healthcare program.
•
Cost and availability of energy.
•
Potential depletion of the Medicare trust fund.
•
The occurrence of terrorist activities or natural disasters may damage some or all of
the facilities, interrupt utility service to some or all of the facilities or otherwise
impair the operation of some or all of the facilities operated by the Obligated Group
Affiliates or the generation of revenues from some or all of such facilities.
•
Scientific and technological advances, new procedures, drugs and appliances,
preventive medicine, occupational health and safety and outpatient health care
60
delivery may reduce utilization and revenues of the facilities. Technological
advances in recent years have accelerated the trend toward the use by hospitals of
sophisticated and costly equipment and services for diagnosis and treatment. The
acquisition and operation of certain equipment or services may continue to be a
significant factor in hospital utilization, but the ability of the Obligated Group
Affiliates to offer such equipment or services may be subject to the availability of
equipment or specialists, governmental approval or the ability to finance such
acquisitions or operations.
•
Reduced demand for the services of the Obligated Group Affiliates that might result
from decreases in population in their respective service areas.
•
Increased unemployment or other adverse economic conditions in the service areas of
the Obligated Group Affiliates which would increase the proportion of patients who
are unable to pay fully for the cost of their care.
•
Any increase in the quantity of indigent care provided which is mandated by law or
required due to increased needs of the community in order to maintain the charitable
status of the Obligated Group Affiliates.
•
Regulatory actions which might limit the ability of the Obligated Group Affiliates to
undertake capital improvements to their respective facilities or to develop new
institutional health services.
•
Imposition of wage and price controls for the health care industry.
•
Changes in the governmental requirements concerning how patients are treated.
These regulations are embodied in patients’ bills of rights and similar programs being
promulgated with greater frequency, and changes in licensure requirements. All of
these programs can increase the cost of doing business and consequently adversely
affect the financial condition of the Obligated Group.
LITIGATION
The Issuer
There is not now pending or, to the knowledge of the Issuer, threatened against the Issuer any
litigation restraining or enjoining the issuance or delivery of the Series 2014 Bonds or questioning or
affecting the validity of the Series 2014 Bonds or the proceedings or authority under which they are to be
issued. Neither the creation, organization or existence of the Issuer nor the title of any of the present
directors or other officials of the Issuer to their respective offices is being contested. There is no litigation
pending or, to its knowledge, threatened against the Issuer, which in any manner questions the right of the
Issuer to enter into the Bond Indenture or the Loan Agreement or to accept the 2014 Master Note in the
manner provided in the Bond Indenture and the Authorities Act.
The Obligated Group
The Obligated Group has advised that no litigation, proceedings or investigations are pending or,
to its knowledge, threatened against the Obligated Group except litigation, proceedings or investigations
involving claims which, if adversely determined, would not have a materially adverse effect on the
operation or condition, financial or otherwise, of the Obligated Group. No litigation, proceedings or
61
investigations are pending or, to the knowledge of the Obligated Group, threatened against the Obligated
Group which in any manner questions the right of such parties to enter into the transactions described
herein.
LEGAL MATTERS
All legal matters incidental to the authorization and issuance of the Series 2014 Bonds by the
Issuer are subject to the approval of Stevens & Lee, P.C., Reading, Pennsylvania, Bond Counsel to the
Issuer, whose approving opinion will be delivered with the Series 2014 Bonds. Certain legal matters will
be passed upon for the Issuer by its counsel, Williamson Freedburg & Jones LLC, Pottsville,
Pennsylvania. Certain legal matters will be passed upon for the Obligated Group by its counsel, Stevens
& Lee, P.C., Reading, Pennsylvania, and for the Underwriter by its counsel, Ballard Spahr LLP,
Philadelphia, Pennsylvania.
TAX EXEMPTION
In the opinion of Stevens & Lee, P.C., Bond Counsel, assuming continuing compliance by the
Issuer and the members of the Obligated Group with certain certifications and agreements relating to the
use of the Series 2014 Bond proceeds and covenants to comply with provisions of the Code and all
applicable regulations thereunder, now or hereafter enacted, interest on the Series 2014 Bonds is not
includable in gross income of the holders of the Series 2014 Bonds under Section 103(a) of the Code and
interest on the Series 2014 Bonds is not an item of tax preference for purposes of the federal individual
and corporate alternative minimum taxes, except as described below under the heading “Tax Laws”. The
tax exemption described above does not extend to corporations required to include interest on the Series
2014 Bonds in the calculation of alternative minimum taxable income within the meaning of Section 56
of the Code. Other provisions of the Code will affect certain purchasers and holders of the Series 2014
Bonds. See “Tax Laws” below.
The Issuer and the members of the Obligated Group will issue their respective certifications
regarding the facts, estimates and circumstances in existence on the date of delivery of the Series 2014
Bonds and regarding the anticipated use of the proceeds of the Series 2014 Bonds. In addition, the Issuer
and the members of the Obligated Group will certify that, on the basis of the facts, estimates and
circumstances in existence on the date of issuance of the Series 2014 Bonds, the Issuer and the members
of the Obligated Group did not reasonably expect to use the proceeds of the Series 2014 Bonds in a
manner that would cause the Series 2014 Bonds to (i) be or become “arbitrage bonds,” as defined in
Section 148 of the Code, or (ii) not be considered “qualified 501(c)(3) bonds” as defined in Section
145(a) of the Code.
Under the provisions of the Code, the Treasury Department is authorized and empowered to
promulgate regulations implementing the intent of Congress under the Code which could affect the tax
exemption and/or tax consequences of holding tax-exempt obligations, such as the Series 2014 Bonds. In
addition, legislation may be introduced and enacted in the future which could change the provisions of the
Code relating to the tax exempt bonds of a state or local government unit, such as the Issuer, or the
taxability of interest in general.
Proposals to alter or eliminate the exclusion of interest on tax-exempt bonds from gross income
for some Proposals to alter or eliminate the exclusion of interest on tax-exempt bonds from gross income
for some or all taxpayers have been made in the past and may be made again in the future. Future
legislation, if enacted into law, or clarification of the Code may cause interest on the Series 2014 Bonds to
be subject, directly or indirectly, to federal 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
62
future legislation or clarification of the Code could also affect the market price for, or the marketability
of, the Series 2014 Bonds. PROSPECTIVE PURCHASERS OF THE SERIES 2014 BONDS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING ANY PROPOSED FEDERAL TAX
LEGISLATION.
No representation is made or can be made by the Issuer or any other party associated with the
issuance of the Series 2014 Bonds as to whether or not any other legislation now or hereafter introduced
and enacted will be applied retroactively so as to subject interest on the Series 2014 Bonds to federal
income taxes or so as to otherwise affect the marketability or market value of the Series 2014 Bonds.
Under the laws of the Commonwealth of Pennsylvania, the Series 2014 Bonds and interest on the
Series 2014 Bonds shall be free from taxation within the Commonwealth of Pennsylvania, but this
exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied
directly on the Series 2014 Bonds or the interest thereon. Under the laws of the Commonwealth of
Pennsylvania, profits, gains or income derived from the sale, exchange or other disposition of the Series
2014 Bonds, are subject to State and local taxation within the Commonwealth of Pennsylvania.
Tax Laws
Numerous provisions of the Code affect the issuers of state and local government bonds, such as
the Issuer, and impair or restrict the ability of the Issuer to finance projects on a tax-exempt basis. Failure
on the part of the Issuer and the Obligated Group to comply with any one or more of such provisions of
the Code, or any regulations under the Code, could render amounts treated as interest on the Series 2014
Bonds includable in the gross income of the owners thereof for purposes of federal income tax
retroactively to the date of issuance of the Series 2014 Bonds. Among these provisions are more
restrictive rules relating to (a) investment of funds treated as proceeds of the Series 2014 Bonds, (b) the
advance refunding of tax-exempt bonds, and (c) the use of proceeds of the Series 2014 Bonds to benefit
private activities or activities not consistent with the charitable purposes of the members of the Obligated
Group. In addition, under the Code, the Issuer is required to file an information return with respect to the
Series 2014 Bonds and to “rebate” to the federal government certain arbitrage profits on an ongoing basis
throughout the term of the Series 2014 Bonds. Bond Counsel has not undertaken to determine (or to
inform any person) whether any action taken (or not taken) or events occurring (or not occurring) after the
date of issuance of the Series 2014 Bonds may affect the tax status of interest on the Series 2014 Bonds.
Prospective purchasers of the Series 2014 Bonds should be aware that (i) Section 265 of the Code
denies a deduction for interest on indebtedness incurred or continued to purchase or carry certain state or
local government bonds such as the Series 2014 Bonds, or in the case of a financial institution, that
portion of a financial institution’s interest expense allocated to interest on certain state or local
government bonds such as the Series 2014 Bonds, unless the issuer of the state or local government bonds
designates each of the bonds as a “qualified tax-exempt obligation” for the purpose and effect
contemplated by Section 265(b)(3)(B) of the Code (the Series 2014 Bonds are not and have not been
designated as “qualified tax-exempt obligations”), (ii) certain corporations must take into account
amounts treated as interest on certain state or local government bonds, such as the Series 2014 Bonds, in
determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed
on such corporations, (iii) with respect to insurance companies subject to the tax imposed by Section 831
of the Code, Section 832(b)(5)(B)(i) reduces the deduction for loss reserves by 15% of the sum of certain
items, including interest and amounts treated as such on certain state or local government bonds, such as
the Series 2014 Bonds, (iv) interest on certain state or local government bonds, such as the Series 2014
Bonds, earned by certain foreign corporations doing business in the United States could be subject to a
branch profits tax imposed by Section 884 of the Code, (v) if a Subchapter S corporation has passive
investment income (which passive investment income will include interest on state or local government
63
bonds, such as the Series 2014 Bonds) which exceeds 25% of such Subchapter S corporation’s gross
receipts and if such Subchapter S corporation has Subchapter “C” earnings and profits, then interest
income derived from state or local government bonds, such as the Series 2014 Bonds, may be subject to
federal income tax under Section 1375 of the Code, and (vi) Section 86 of the Code requires recipients of
certain Social Security and certain Railroad Retirement benefits to take into account, in determining gross
income, receipts or accruals of interest on certain state or local government bonds, such as the Series 2014
Bonds.
Original Issue Discount
The initial public offering of the Series 2014 Bonds (the “OID Bonds”) is less than the stated
redemption price thereof at maturity. The difference between the initial public offering price for any such
OID Bond and the stated redemption price at maturity is “original issue discount.” For federal income tax
purposes, original issue discount on an OID Bond accrues to original holders of the OID Bond over the
period of its maturity based on the constant yield method compounded annually as interest with the same
tax exemption and alternative minimum tax status as regular interest. The accrual of original issue
discount increases the holder’s tax basis in the OID Bond for determining taxable gain or loss on the
maturity, redemption, prior sale or other disposition of the OID Bond. Purchasers of the OID Bonds
should consult their tax advisors for an explanation of the accrual rules for original issue discount and any
other federal, state or local tax consequences of the purchase of OID Bonds with original issue discount.
THE ABOVE SUMMARY OF POSSIBLE TAX CONSEQUENCES IS NOT EXHAUSTIVE
OR COMPLETE. ALL PURCHASERS OF SERIES 2014 BONDS SHOULD CONSULT THEIR TAX
ADVISORS REGARDING THE POSSIBLE FEDERAL, STATE AND LOCAL INCOME TAX
CONSEQUENCES OF OWNERSHIP OF THE SERIES 2014 BONDS. ANY STATEMENT
REGARDING TAX MATTERS HEREIN CANNOT BE RELIED UPON BY ANY PERSON TO
AVOID TAX PENALTIES.
PROSPECTIVE PURCHASERS OF THE SERIES 2014 BONDS SHOULD CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL INCOME TAX
CONSEQUENCES OF OWNERSHIP OF THE SERIES 2014 BONDS AND ANY CHANGES IN THE
STATUS OF PENDING OR PROPOSED FEDERAL TAX LEGISLATION.
INDEPENDENT AUDITORS
The consolidated financial statements of the Schuylkill Health System and Controlled Entities for
the years ended June 30, 2013 and 2012, appearing in APPENDIX B to this Limited Offering
Memorandum, have been audited by ParenteBeard LLC, the System’s independent auditors (the
“Independent Auditors”), as stated in their report appearing in APPENDIX B.
SUCH FINANCIAL STATEMENTS CONTAIN THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE SCHUYLKILL HEALTH SYSTEM AND CONTROLLED ENTITIES THAT
ARE NOT MEMBERS OF THE OBLIGATED GROUP. AT THE TIME OF ISSUANCE OF THE
SERIES 2014 BONDS THE SYSTEM, SMC-SJ, SMC-EN AND SRC WILL BE THE ONLY
MEMBERS OF THE OBLIGATED GROUP UNDER THE MASTER INDENTURE. See the
Independent Auditors’ Report on Supplementary Information contained in APPENDIX B.
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FINANCIAL STATEMENTS
The System represents, as of the date hereof, that there has been no material adverse change in
the financial condition of the Obligated Group since June 30, 2013, which is the most recent fiscal year
for which audited consolidated financial statements are available.
There can be no assurance that the financial results achieved in the future will be similar to
historical results. Such future results will vary from historical results, and actual variations may be
material. The historical operating results of the members of the Obligated Group contained in this
Limited Offering Memorandum cannot be taken as a representation that the Obligated Group will be able
to generate sufficient revenues in the future to make principal and interest payments.
UNDERWRITING
The Series 2014 Bonds are being purchased by PNC Capital Markets LLC, as underwriter (the
“Underwriter”). The Underwriter has agreed to purchase the Series 2014 Bonds on a best efforts basis at
an aggregate purchase price of $28,985,022.65 (representing the aggregate principal amount of the Series
2014 Bonds of $29,765,000.00, less original issue discount of $482,327.35 and less an Underwriter’s
discount of $297,650.00), pursuant to a Bond Purchase Agreement (the “Bond Purchase Agreement”),
entered into by and between the Issuer and the Underwriter and approved by the Obligated Group. In
addition, the Obligated Group has agreed to pay for the out-of-pocket expenses of the Underwriter,
including the fees of their legal counsel. The Bond Purchase Agreement provides that the Underwriter
will purchase the Series 2014 Bonds but only to the extent that the sale of the Series 2014 Bonds to the
eventual investors is successfully arranged and that such sale shall result in a sufficient amount of
purchasers of the Series 2014 Bonds to fully fund the Refunding Project. The Bond Purchase Agreement
requires that the Obligated Group deliver to the Underwriter and the Issuer a letter of representation
containing the agreements of the Obligated Group to indemnify the Underwriter and the Issuer against
losses, claims, damages and liabilities to third parties arising out of any materially incorrect or incomplete
statements of information contained in this Limited Offering Memorandum pertaining to the Obligated
Group, its facilities or certain other matters. The Series 2014 Bonds will be initially offered only to
Qualified Institutional Buyers within the meaning of Rule 144A promulgated under the Securities Act.
The initial public offering price set forth on the front cover of this Limited Offering Memorandum may be
changed by the Underwriter, and the Underwriter may offer and sell the Series 2014 Bonds to certain
dealers (including dealers depositing Series 2014 Bonds into investment trusts) and others at prices lower
than the offering price set forth on the inside cover page.
NO RATING
The Obligated Group has not and does not contemplate making an application to any rating
agency for the assignment of a rating to the Series 2014 Bonds.
FINANCIAL ADVISOR
Financial S&lutions LLC, Reading, Pennsylvania, was engaged by the Obligated Group to
provide financial advisory services for the development and implementation of a capital financing plan
for the Obligated Group and to advise on the issuance of the Series 2014 Bonds.
65
CERTAIN RELATIONSHIPS AMONG THE PARTIES
Financial S&Lutions LLC, an affiliated business of Stevens & Lee, P.C., Bond Counsel to the
Issuer and Counsel to the Obligated Group, is serving as financial advisor to the Obligated Group in
connection with the preparation and issuance of the Series 2014 Bonds.
CONTINUING DISCLOSURE
Paragraph (b)(5) of Rule 15c2-12, requires, generally, that an underwriter may agree to purchase
municipal securities from an issuer only after the underwriter has reasonably determined that the issuer
and, in certain cases, others, have undertaken in a written agreement for the benefit of the holder of the
municipal securities to provide certain financial information and operating data on an annual basis and
prompt notice of certain events listed in Rule 15c2-12 to the MSRB in accordance with the Electronic
Municipal Market Access (“EMMA”) facility for municipal securities disclosure of the MSRB.
In order to assist the Underwriter in complying with Rule 15c2-12, the Obligated Group will enter
into a Continuing Disclosure Agreement (the “Undertaking”) for the benefit of the holders and beneficial
owners of the Series 2014 Bonds to file such information annually with and to provide notice of such
events to the MSRB in accordance with the EMMA system pursuant to the requirements of paragraph
(b)(5) of Rule 15c2-12. In addition, in the Undertaking, the Obligated Group will agree to provide its
quarterly financial information to the MSRB in accordance with the EMMA system. The form of the
Undertaking is attached as APPENDIX D to this Limited Offering Memorandum.
A failure by the Obligated Group to comply with the Undertaking will not constitute an Event of
Default under the Indenture or the Loan Agreement, and beneficial owners of the Series 2014 Bonds are
limited to the remedies described in the Undertaking. A failure by the Obligated Group to comply with
the Undertaking must be reported in accordance with Rule 15c2-12 and must be considered by any
broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2014
Bonds in the secondary market. Consequently, such failure may adversely affect the transferability and
liquidity of the Series 2014 Bonds and their market price.
SMC-SJ (formerly known as The Pottsville Hospital and Warne Clinic) on behalf of itself and
SRC (the “1998 Obligated Parties”) is currently a party to a continuing disclosure undertaking with
respect to the 1998 Bonds issued on its behalf (the “1998 Undertaking”), pursuant to which it has agreed
to file certain financial statements, financial information and operating data concerning the 1998
Obligated Parties (the “Annual Information”). Pursuant to the 1998 Undertaking, SMC-SJ is required to
file the Annual Information with the national recognized municipal securities repositories within onehundred twenty (120) days after the end of each fiscal year. The Annual Information for the fiscal year
ended June 30, 2009 was filed on December 23, 2009, 56 days after the required due date. The Annual
Information for the fiscal year ended June 30, 2010 was filed on October 26, 2011, 360 days after the
required due date. The Annual Information for the fiscal year ended June 30, 2011 was filed on
December 2, 2011, 35 days after the required due date. The Obligated Group intends to timely file with
EMMA the annual and quarterly financial information and other data required by the Undertaking.
MISCELLANEOUS
The references herein to the Authorities Act, the Master Indenture, the 2014 Master Note, the
Bond Indenture and the Loan Agreement are brief summaries of certain provisions thereof. Such
summaries do not purport to be complete and for full and complete statements of the provisions thereof
reference is made to the Authorities Act, the Master Indenture, the 2014 Master Note, the Bond Indenture
66
and the Loan Agreement. Copies of current drafts of such documents for the Series 2014 Bonds are on
file at the corporate trust office of the Bond Trustee in Pittsburgh, Pennsylvania.
The agreement of the Issuer with the holders of the Series 2014 Bonds is fully set forth in the
Bond Indenture, and neither any advertisement of the Series 2014 Bonds nor this Limited Offering
Memorandum is to be construed as constituting an agreement between the Issuer and the purchasers of its
Series 2014 Bonds. So far as any statements made in this Limited Offering Memorandum involving
estimates, projections or matters of opinion, whether or not expressly so stated, they are intended merely
as such and not as representations of fact.
Typically unrated bonds lack liquidity in the secondary market in comparison with rated bonds.
As a result of the foregoing, the Series 2014 Bonds are believed to bear interest at higher rates than would
prevail for bonds with comparable maturities and redemption provisions that have investment grade credit
ratings. Consequently, the Series 2014 Bonds should not be purchased by any investor who, because of
financial condition, investment policy, or otherwise, does not desire to assume, or have the ability to bear,
the risks inherent in an investment in the Series 2014 Bonds.
CUSIP identification numbers will be printed on the Series 2014 Bonds, but neither the failure to
print such numbers nor any error in the printing of such numbers shall constitute cause for a failure or
refusal by the purchaser thereof to accept delivery of and pay for the Series 2014 Bonds.
The attached APPENDICES A through G are integral parts of this Limited Offering
Memorandum and must be read together with all of the foregoing statements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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The Obligated Group has reviewed the information contained herein which relates to the
Obligated Group and its properties and operations, including the information in APPENDICES A and B
hereto, and has approved all such information for use within this Limited Offering Memorandum. The
Issuer has duly authorized the execution and delivery of this Limited Offering Memorandum.
CITY OF POTTSVILLE HOSPITAL AUTHORITY
By:
This Limited Offering Memorandum is approved:
SCHUYLKILL HEALTH SYSTEM,
as Obligated Group Agent
By:
/s/ John E. Simodejka
John E. Simodejka, President and CEO
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/s/ George F. Halcovage, Jr.
George F. Halcovage, Jr., Chairman
APPENDIX A
THE OBLIGATED GROUP
[ THIS PAGE INTENTIONALLY LEFT BLANK ]
GENERAL BACKGROUND AND HISTORY ........................................................................................... 3 General ...................................................................................................................................................... 3 History of SHS .......................................................................................................................................... 3 History of SMC-SJ .................................................................................................................................... 3 History of SMC-EN .................................................................................................................................. 4 CORPORATE ORGANIZATION ............................................................................................................... 5 Corporate Structure ................................................................................................................................... 5 The Obligated Group ................................................................................................................................ 5 Controlled Entities of the System and Joint Ventures .............................................................................. 6 MISSION, GOALS AND INITIATIVES ..................................................................................................... 7 Values and Mission Statement .................................................................................................................. 7 Community Services ................................................................................................................................. 7 Quality Assessment and Improvement /Initiatives ................................................................................... 8 Information Technology ........................................................................................................................... 8 GOVERNANCE AND MANAGEMENT.................................................................................................... 9 Board of Directors – SHS, SMC-EN and SMC-SJ ................................................................................... 9 Executive Management ........................................................................................................................... 10 Governance of SRC ................................................................................................................................ 12 Conflict of Interest Policy ....................................................................................................................... 12 Investment Policy.................................................................................................................................... 13 PERSONNEL ............................................................................................................................................. 13 Employment ............................................................................................................................................ 13 Benefits ................................................................................................................................................... 13 Labor Relations ....................................................................................................................................... 14 SERVICES.................................................................................................................................................. 14 Licensed and Staffed Beds ...................................................................................................................... 14 Services ................................................................................................................................................... 15 Highlights of System Services ................................................................................................................ 16 Accreditations, Memberships and Certifications .................................................................................... 17 MEDICAL STAFF ..................................................................................................................................... 18 Overview ................................................................................................................................................. 18 Active Medical Staff by Department ...................................................................................................... 18 Top Ten Admitting Physicians ............................................................................................................... 19 Physician Recruitment, Staffing and Other Initiatives ............................................................................ 19 AFFILIATIONS ......................................................................................................................................... 20 Geisinger Health System......................................................................................................................... 20 A-1
Lehigh Valley Health Network ............................................................................................................... 20 SERVICE AREA, DEMOGRAPHICS AND COMPETITION ................................................................. 21 Service Area ............................................................................................................................................ 21 Population, Employment and Income ..................................................................................................... 22 Competition............................................................................................................................................. 24 SELECTED UTILIZATION AND REVENUE SOURCE INFORMATION ........................................... 26 Utilization Statistics ................................................................................................................................ 26 Sources of Revenue................................................................................................................................. 27 SUMMARY FINANCIAL AND OPERATING INFORMATION ........................................................... 29 Consolidated Statement of Operations of the System ............................................................................. 30 Interim Consolidated Statement of Operations of the Obligated Group ................................................. 31 Interim Consolidated Balance Sheet of the Obligated Group ................................................................. 32 Historical Liquidity ................................................................................................................................. 33 Historical and Pro Forma Debt Service Coverage .................................................................................. 34 MANAGEMENT’S DISCUSSION – UTILIZATION AND FINANCIAL PERFORMANCE ................ 35 Fiscal Year Ended June 30, 2012 ............................................................................................................ 35 Fiscal Year Ended June 30, 2013 ............................................................................................................ 35 Seven-Month Period Ended January 31, 2014 of the Obligated Group .................................................. 36 INSURANCE.............................................................................................................................................. 38 LITIGATION .............................................................................................................................................. 38 A-2
GENERAL BACKGROUND AND HISTORY
General
Schuylkill Health System (“SHS” or the “System”) is a Pennsylvania nonprofit corporation that
was formed on August 1, 2008 and is a registered tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (the “Code”). Its primary service area includes Pottsville,
Pennsylvania and surrounding communities in Schuylkill County, Pennsylvania (the “County”). Its
general purposes are to promote and advance charitable health, scientific, social, and educational purposes
and to enhance the quality of life and benefit the inhabitants of the County and surrounding areas and,
among other things, to:
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Engage in activities related to the promotion of health in the System’s service area;
Work charitably to promote community health education, prevention of illness and
injury and provision of medical services to the diverse population of the service area;
Engage in any and all activities consistent with or in furtherance of the above
purposes; and
Without otherwise limiting its powers, engage in any lawful act or activity in
furtherance of its purposes and for which a nonprofit corporation may be formed in
Pennsylvania, and which may be undertaken by a corporation that is exempt from
taxation under Section 501(c)(3) of the Code.
The System is the sole member of Schuylkill Medical Center – South Jackson Street (“SMC-SJ”),
Schuylkill Medical Center – East Norwegian Street (“SMC-EN” and, together with SMC-SJ, the
“Medical Centers”), Schuylkill Heath System Medical Group, Inc., Schuylkill Health System
Development Corporation, and Schuylkill Rehabilitation Center, Inc. (“SRC”). In addition, the System
has a direct financial interest in Schuylkill Health System Medical Mall Limited Partnership through
which they are deemed to have control and, therefore, it is consolidated for financial reporting purposes.
The operations and activities of such organizations are briefly described under the heading
“CORPORATE ORGANIZATION.” SHS, SMC-SJ, the SMC-EN and the SRC are currently the only
members of the Obligated Group created under the Master Indenture described in this Limited Offering
Memorandum.
History of SHS
The System was established on August 1, 2008 through the affiliation of two hospitals formerly
known as Good Samaritan Regional Medical Center (“GSRMC”) and The Pottsville Hospital and Warne
Clinic (“PHWC”). Prior to such affiliation, there were four hospitals in the County. The boards of each
of GSRMC and PHWC determined that an affiliation was desirable for efficiency purposes and to better
serve the residents of the County. As a result of this affiliation, GSRMC is now known as Schuylkill
Medical Center – East Norwegian Street and PHWC is now known as Schuylkill Medical Center – South
Jackson Street. One of the two remaining hospitals, St. Catherine’s Medical Center, declared bankruptcy
and ceased operations in March 2012.
History of SMC-SJ
SMC-SJ began in 1893 when Samuel and Elizabeth Shippen, a brother and sister from
Philadelphia, began to plan and organize a hospital that would be created in memory of their father and
mother. Their parents had lived in Pottsville for more than 50 years and their father, John Shippen, had
been a prominent citizen and president of the Miners National Bank. They also knew that there was a
great need in the community for such an institution. The Pottsville area had many railroads, mines and
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supporting industries that employed residents that required the type of medical attention only available in
a hospital. With the assistance of a local attorney, Guy E. Farquhar and a group of community leaders and
concerned citizens, The Pottsville Hospital was founded and chartered on March 5, 1895 in the Schuylkill
County Court of Common Pleas as a 50-bed general hospital.
The first patient was accepted on July 23, 1895. This patient was a 12 year old girl. Within the
first week, five patients were admitted. During the first year of operation, 135 patients were cared for in
the hospital. The following year, 411 patients were admitted and each year, thereafter, demand for
services increased.
The Shippens contributed $30,000 to help finance the hospital’s creation and continued to support
the facility. Additionally, local churches, community organizations and individuals made contributions in
support of the new hospital. Funds were used to purchase a property known as the Laurer Mansion and 2
½ acres of adjoining ground so that the hospital would have at least three acres of land. During the 1960s,
the Lemos B. Warne Clinic merged with SMC-SJ.
Over the years, the hospital continued to grow and develop new services for the community. The
hospital also offered the latest medical technology which helped to attract medical and other professionals
to Pottsville and the County.
Today, SMC-SJ is a 205-bed general acute care hospital, licensed by the Pennsylvania
Department of Health and accredited by the Joint Commission.
History of SMC-EN
SMC-EN also has a long history of service dating back to its founding in 1920. The original
name was the A.C. Miliken Hospital, which was a 30-bed converted home, that was established by a
group of area physicians. In 1929 the hospital was placed with the Missionary Sisters of the Most Sacred
Heart of Jesus and became a Catholic facility. At this time, the facility was renamed The Good Samaritan
Hospital. In the following year, the hospital moved to more spacious accommodations in the Francis W.
Hughes Mansion and expanded to 60-patient beds. Good Samaritan Hospital remained at this location,
literally growing up around the original mansion. In 1980, the Daughters of Charity of St. Vincent
DePaul accepted the invitation to assume sponsorship of the hospital from the Missionary Sisters. The
Daughters’ sponsorship allowed Good Samaritan Hospital to remain a Catholic healthcare facility and
continue its mission of service to the sick and poor of the community. This affiliation also provided the
hospital with the benefits of being a member of the Ascension Health ministry. In 2008, the Good
Samaritan Hospital merged with SMC-EN. Through the years, SMC-EN added services to meet the
needs of the community. The focus was always to provide care to those in the community, to focus on the
poor and needy, and to provide medical care to the indigent.
Today, SMC-EN is a 126-bed general acute care hospital licensed by the Pennsylvania
Department of Health and accredited by the Joint Commission.
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CORPORATE ORGANIZATION
Corporate Structure
The Obligated Group
The following is a brief description of the activities and operations of the Obligated Group. The
members of the Obligated Group are the only entities obligated to make payments on the Series 2014
Bonds.
Schuylkill Health System
The System is a Pennsylvania nonprofit corporation exempt from federal income taxation as a
charitable organization described in Section 501(c)(3) of the Code. Its primary purpose is to promote the
health and welfare of the citizens of the County and surrounding areas.
Schuylkill Medical Center – South Jackson Street
SMC-SJ is a Pennsylvania nonprofit corporation exempt from federal income taxation as a
charitable organization described in Section 501(c)(3) of the Code. It is an acute care hospital located at
420 South Jackson Street, Pottsville, Pennsylvania, and serves patients in Pottsville and surrounding
communities in the County. SMC-SJ provides inpatient, outpatient and emergency services. Inpatient
units include medical, surgical, telemetry, maternity, pediatrics, behavioral health, transitional
rehabilitation and newborn nursery. Ancillary services include imaging, laboratory, pulmonary services,
respiratory services, EEG/EKG, surgical services, rehabilitation services, nutrition and sleep services.
The Emergency Department is open 24 hours a day, seven days a week.
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Schuylkill Medical Center – East Norwegian Street
SMC-EN is a Pennsylvania nonprofit corporation exempt from federal income taxation as a
charitable organization described in Section 501(c)(3) of the Code. It is an acute care hospital located at
700 East Norwegian Street, Pottsville, Pennsylvania, and serves patients in Pottsville and surrounding
communities in the County. SMC-EN provides inpatient, outpatient and emergency services. Inpatient
Units include medical, surgical, telemetry, behavioral health and acute rehabilitation. Ancillary services
include imaging, laboratory, pulmonary services, respiratory services, EEG/EKG, surgical services,
rehabilitation services, nutrition and wound care. The Emergency Department is open 24 hours a day,
seven days a week.
Schuylkill Rehabilitation Center, Inc.
SRC is a Pennsylvania nonprofit corporation exempt from federal income taxation as a charitable
organization described in Section 501(c)(3) of the Code. SRC is located in Pottsville, Pennsylvania and
provides outpatient rehabilitation services to patients in Pottsville, Pennsylvania and surrounding
communities in the County. SRC is accredited by the Commission on Accreditation of Rehabilitation
Facilities.
Controlled Entities of the System and Joint Ventures
The System serves as a member or shareholder of a number of subsidiary entities and has entered
into several joint ventures, none of which are members of the Obligated Group. These include the
following:
Schuylkill Health System Medical Mall Limited Partnership
The Schuylkill Health System Medical Mall Partnership is a Pennsylvania for-profit limited
partnership in which the Development Corporation is the general partner and SMC-EN is a limited
partner. The Partnership owns a medical office building located at 700 Schuylkill Manor Road,
Pottsville, Pennsylvania, which provides rental office space for healthcare related services, including
physician offices and ancillary services.
Schuylkill Health System Development Corporation
The Schuylkill Health System Development Corporation is a Pennsylvania for-profit corporation
that was created in order to pursue, implement and further the authorized activities and purposes of the
System.
Schuylkill Heath System Medical Group, Inc.
Schuylkill Health System Medical Group, Inc. is a Pennsylvania nonprofit corporation exempt
from federal income taxation as a charitable organization described in Section 501(c)(3) of the Code.
SMG is comprised of physicians working to promote community health through health education,
prevention of illness and injury, and provision of medical services to patients in Pottsville, Pennsylvania
and the surrounding communities.
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MISSION, GOALS AND INITIATIVES
Values and Mission Statement
All facilities and affiliated entities of the System operate with the same mission. The System’s
mission is to make a positive difference in the scope and quality of healthcare available for the County.
The System’s vision is to be the healthcare provider of choice for the County.
The values practiced by everyone associated with the System include:
To Serve:
Provide unparalleled service and ensuring the best possible healthcare
experience.
To Educate:
Continued commitment to educate nurses and other healthcare professionals.
To Care:
Treat all persons with both compassion and respect.
To Innovate:
Provide innovative solutions and adopt the latest technology and techniques.
To Act with Integrity:
Inspire confidence through words and actions.
Community Services
SHS’s mission has always included a responsibility to the community as its primary provider of
healthcare services. Outreach and other programs of general benefit include:
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Health fairs;
No cost and low cost screenings and clinics;
Sponsorship of various support groups;
Educational publications, programs and seminars ;
Annual Women’s Day;
Education programs for school groups; and
Training for various medical specialties and educational programs of study.
As one of the largest employers in the area, SHS is also committed to serving the community by
encouraging employee participation in clubs, organizations, and various community programs. The SHS
management team volunteers in various organizations outside of the System.
Over the past several years, SHS has provided approximately $6 million each year in subsidized
care to support the underserved and uninsured of the County. In addition, SHS invests over $300,000 per
year to provide a number of community education and other community benefit activities to support the
health and wellness of the community.
Community benefits and program initiatives were provided over the past three years in the areas
of autism awareness education, organ and tissue donation awareness, behavioral health, cancer,
cardiology, career exploration, diabetes, health education, injury prevention, neurology, orthopedics,
wellness and nutrition and women’s health.
In 2011, SHS began work on a Community Health Needs Assessment (the “Assessment”)
involving System staff, as well as community representatives of local school districts, business leaders,
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social service agencies, Pennsylvania Department of Health, clergy and community organizations. The
research and data analysis began in the Spring of 2011 and concluded in the Winter of 2012. The action
planning and report development was completed in Spring/Summer 2012 and a final report was approved
by the System Board of Directors in January 2013.
The Assessment included a detailed examination of the following areas:
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Demographics & Socio-Economic Indicators;
Access to Quality Health Care;
Chronic Disease;
Healthy Environment;
Healthy Mothers, Babies & Children;
Infectious Diseases;
Mental Health & Substance Abuse;
Physical Activity & Nutrition;
Tobacco Use; and
Unintentional Injury.
The community needs identified in the Assessment were then prioritized and assigned to either
System or community groups. The System is working on the following two initiatives that were
identified as part of the Assessment:
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
Access to Quality Health Care/Women’s Health – increase breast cancer awareness
and mammography rates to help decrease the breast cancer mortality rates.
Healthy Mothers, Babies & Children/Tobacco & Alcohol Use during Pregnancy –
decrease the number of County women who smoke during pregnancy.
Schuylkill County Vision has agreed to facilitate two other community issues that were identified
as part of the assessment. The community initiatives include:


Physical Activity & Nutrition/Obesity – educating county residents on the
importance that physical activity and proper nutrition have in controlling obesity and
the related health problems that are associated with obesity.
Unintentional Injuries/Motor Vehicles – the motor vehicle death rate in the County is
significantly higher than the average for Pennsylvania; educate County residents and
especially children on the importance of using seat belts and child safety seats.
Quality Assessment and Improvement /Initiatives
Quality Assessment and Improvement initiatives provide a comprehensive and integrated
approach to ensure that an optimal level of patient care is provided within the available resources of SHS
at a reasonable cost. SHS carefully tracks data in order to develop and monitor processes to produce
quality improvement in clinical care, patient satisfaction and cost effectiveness. SHS reports data to
multiple agencies including, but not limited to, Center for Medicare Services including Quality Net, Joint
Commission, Pennsylvania Healthcare Cost Containment Council, and the Pennsylvania Cancer Registry.
Information Technology
The American Recovery and Reinvestment Act of 2009 established one-time incentive payments
under the Medicare and Medicaid programs for hospitals that successfully demonstrate meaningful use of
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certified electronic health records (“EHR”) technology. The key component of receiving the EHR
incentive payments is “demonstrating meaningful use,” which means meeting a series of objectives. By
achieving these objectives, it demonstrates that the use of EHR technology is related to the improvement
of quality, efficiency and patient safety in the organization.
When SHS was formed in August 2008, one of the first actions taken by the Board was to
identify a common information technology vendor for all SHS facilities so that all SHS facilities could
“talk” to each other. It was also important that the technology chosen would also meet the meaningful
use criteria. Computer Programs & Systems, Inc. was the information technology vendor chosen for all
SHS facilities.
SMC-SJ and SMC-EN have successfully attested for meaningful use for both the Medicare and
Medicaid programs for all three years of Stage 1. In the State of Pennsylvania, SMC-SJ and SMC-EN
were in the first group of hospitals that successfully attested in Year 1. The following schedule indicates
the funds attested for Stage 1 of Meaningful Use:
Stage 1, Year 1
Stage 1, Year 2
Stage 1, Year 3
Medicare
$3,650,378
2,953,231
1,790,101
Medicaid
$750,525
450,315
150,105
For Stage 1, Year 3 meaningful use attestation, SHS received Medicare funds of $1,790,101 in
January 2014 and Medicaid funds of $150,105 in February 2014. SMC-SJ and SMC-EN are actively
working on the objectives necessary to successfully attest for Stage 2 meaningful use during 2014. The
funds received as described above in 2014 will be recorded as other operating revenues of SHS in fiscal
year 2014.
GOVERNANCE AND MANAGEMENT
Board of Directors – SHS, SMC-EN and SMC-SJ
SHS, SMC-EN and SMC-SJ are governed by a Board of Directors (the “Board”) consisting of
fifteen members.
Board members are elected to serve up to three consecutive 3-year terms and then must rotate off
the Board for at least one year before becoming eligible again for election. As of the date hereof, the
members and officers of the Board, year of appointment, expiration of current term and occupation of
each, are as follows:
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BOARD OF DIRECTORS
Year
Appointed
Term Expires
CEO, Extol International, Inc.
2008
June 30, 2015
Vice
Chairman
President, Empire Education
Group
2008
June 30, 2015
Debra C. Blaschak
Secretary
2008
June 30, 2017
E. Lori Smith
Treasurer
Owner, DCB Consulting
Services, Inc.
Certified Financial Planner,
Waddell & Reed
2012
June 30, 2017
Jeanne Boyer Porter
Director
Co-Owner, Boyer’s Food
Markets
2012
June 30, 2015
Sarah T. Casey
Director
Executive Director, Schuylkill
Women in Crisis
2008
June 30, 2015
Steven I. Field
Director
Owner of Weiner Iron and Metal
Corporation
2012
June 30, 2015
Rev. Harold Hand, Jr.
Director
Pastor of Trinity Lutheran
Church
2012
June 30, 2017
William L. Jones, III
Director
CPA, Jones & Co.
2008
June 30, 2016
William E. Kirwan,
CPA, Esq.
Director
CPA, St. Clair & Associates
2008
June 30, 2015
Cynthia Petchulis, RN
Director
Personal Care Home
Administrator
2012
June 30, 2016
Syed Shah, M.D.
Director
Physician, Internal Medicine
2008
June 30, 2017
Timothy F. Twardzik
Director
Retired Executive Vice
President & Co-Owner of
Ateeco, Inc.
2012
June 30, 2015
Robert M. Zimmerman,
Jr., D.O.
Director
Physician,
Obstetrics/Gynecology
2008
June 30, 2017
John E. Simodejka,
President/CEO
Director
President and CEO, Schuylkill
Health System
2008
By position
Name
Position
Occupation
Anthony Baran
Chairman
Franklin K.
Schoeneman
Standing committees which make frequent recommendations to the Board include the Executive
Committee, the Finance Committee, the Audit Committee, the Pension Committee, the Governance
Committee, the Compensation Committee, the Quality Committee and the Home Health Committee.
Executive Management
Under the direction of the Board, responsibility for all activities and employees of the System,
SMC-EN and SMC-SJ is delegated to the executive management staff. The following is a summary of
selected biographical information pertaining to the principal executive management personnel.
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John E. Simodejka - President and Chief Executive Officer. Mr. Simodejka has served as
President and Chief Executive Officer of the System since its formation in 2008. Having started his career
as Director of Respiratory Therapy, Cardio-Pulmonary Services and Risk Management for PHWC, he
possesses strong clinical, administrative and financial skills that have developed over his 35 years of
experience in both acute and long-term care facilities. He holds a Master of Business
Administration/Health Administration from St. Joseph’s University.
Mr. Simodejka is a Director on the Boards of SHS, SMC-SJ, SMC-EN, Schuylkill County
Society for Crippled Children, Schuylkill Economic Development Corporation and past board member of
the Hospital and Healthsystem Association of Pennsylvania. He also serves as President of PACE RRG,
Inc.
Diane Boris - Vice President Finance/Chief Financial Officer. Ms. Boris is the Vice President
Finance/Chief Financial Officer of the System and has served in this capacity since 2010. In this role, she
oversees all financial operations for both Medical Centers as well as all corporate entities of the System.
Ms. Boris is directly responsible for the Finance, Budgeting, Payroll, Accounts Payable, Third Party
Reimbursement, Materials Management, Patient Access, Patient Accounting and Billing, Information
Technology, Communications, Dental Clinic, Industramed/Injury Care, Veterans Clinic, and physician
practices departments. Ms. Boris also serves as the compliance officer for the System.
Ms. Boris is a graduate of Albright College with a Bachelor of Science in Accounting and a
graduate of St. Joseph’s University with a Master’s degree in Business Administration in Health
Administration. She is an active member of the Healthcare Financial Management Association and is a
member of the Board of the Schuylkill County Vision Organization.
Darnell Furer, RN – Vice President Patient Care Services/Chief Nursing Officer. Ms. Furer
currently serves as the Vice President Patient Care Services/Chief Nursing Officer for the System. Ms.
Furer was appointed Vice President of Patient Care Services in 2008. Ms. Furer brings over 40 years of
experience, which includes holding nursing administration roles at GSRMC. Ms. Furer obtained her
nursing diploma from the Polyclinic Medical Center, her Bachelor of Science in Nursing from Lebanon
Valley College and Master of Science in Nursing Administration from The Pennsylvania State
University.
Thomas A. Curry, M.D. – Vice President Medical Affairs for Clinical Effectiveness and
Documentation. Dr. Tom Curry is the Vice President Medical Affairs for Clinical Effectiveness and has
served in this capacity since 2012. In this role, he collaborates in the System's efforts in Care and
Utilization Management; supports the System’s Quality Program with particular focus on Hospital
Consumer Assessment of Healthcare Providers and Systems and readmissions and advises in the clinical
aspects of Business Development.
Previously Dr. Curry served in a variety of roles in the health insurance industry most recently as
Senior Medical Director of a regional health plan. He has extensive experience in provider network
management with a focus on profiling and pay for performance. He also led efforts in medical policy
development and credentialing.
He is Board Certified in Pediatrics and practiced pediatrics in solo, group and multi-specialty
settings. He served as Associate Editor of the textbook Pediatric Primary Care. Dr. Curry is a graduate
of the Perelman School of Medicine at the University of Pennsylvania.
Gabriel Kamarousky – Director, Business Development. Mr. Kamarousky is the Director of
Business Development at the System and he has served in this capacity since 2012. Mr. Kamarousky has
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more than 10 years’ experience in clinical care and advanced informatics. His prior positions in the
industry were focused on management of the clinical interface of imaging systems with the professional
provider community. Mr. Kamarousky’s role in the organization utilizes a data driven approach to focus
on and cultivate physician relationships; evaluate market opportunities; drive recruitment; and develop
service line strategies. Mr. Kamarousky graduated with a Bachelor of Science in Business Administration
in 2001 from Mansfield University and a Masters of Business Administration in 2012 from Alvernia
University and is an active member of the American College of Healthcare Executives.
Martin G. Treasure – Director, Human Services. Mr. Treasure has been Director of Human
Resources for the System since its formation in 2008. In this position his responsibilities include
employment and staffing, compensation, benefits, work environment, work rules and legal compliance,
training and development, discipline and discharge, employee relations, union relations, communications,
and employment separation.
Mr. Treasure holds a Master’s degree in Industrial Relations from St. Francis University, and
Bachelor of Science in Business Administration/Economics from Indiana University of Pennsylvania.
Mr. Treasure has over thirty years of human resource leadership in healthcare, food service,
manufacturing, and the bituminous coal industry covering both union and non-union organizations.
He is the former President of Appalachian Health Care Human Resource Society and Healthcare
Human Resources Association of Central Pennsylvania.
Governance of SRC
SRC is governed by a Board of Directors (“SRC Board”) consisting of six members. There are
currently no term limits for the elected board members. As of the date hereof, the members and officers
of the SRC Board, year of appointment and occupation of each, are as follows:
BOARD OF DIRECTORS
Year
Appointed
Name
Position
Occupation
Richard Gonzalez
Chairman
Sales, Chemical Adhesives
1996
Nancy Pauzer
Vice
Chairman
Former Nursing Home
Administrator/Consultant
2002
Judge Joseph F.
McCloskey
Director
Retired Judge
1998
Richard Rada
Director
Retired Public School
Superintendent
2000
John E. Simodejka
Director
President and CEO, Schuylkill
Health System
1990
Jack Wabby
Director
Retired Public High School
Administrator
2000
Conflict of Interest Policy
From time to time, the members of the Board may conduct business with organizations or
corporations with which one or more of the officers or members of the Board may be affiliated. The
Board has a conflict of interest policy which requires that any such duality of interest or possible
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conflict of interest on the part of any officer or director be disclosed and made a matter of record.
Each member of the Board is required to execute a conflict of interest disclosure statement, which will be
updated on an annual basis or as additional conflicting interests arise.
Investment Policy
SHS operates a Treasury Management Program to manage certain excess operating, funded
depreciation and pension funds. SHS’s policy outlines matters such as diversification requirements,
credit rating requirements and prohibited transactions and securities. SHS utilizes its Finance Committee
to establish and monitor more specific portfolio guidelines including asset allocation and performance
standards and monitoring. Under the policies and guidelines, funds are invested primarily in U.S.
Government obligations, corporate bonds and stocks, both domestic and international. As part of the
Treasury Management Program, SHS utilizes various professional investment managers. As of June 30,
2013, approximately 32% of SHS funds were held in accounts managed by external professional
investment managers. All current Board designated investments are in fixed income instruments and the
funds are readily available upon Board approval.
PERSONNEL
Employment
As of March 2014, the employee complement of SHS consisted of 1,219 full-time equivalents,
divided among the following classifications:
Physicians (8), Mid-Level Providers (130),
Professional/Technical/Administrative (640), Service/Skilled (112), and Registered Nurses (329).
Benefits
SHS offers a cafeteria benefit plan, group health insurance, dental, prescription and vision, as
well as group life and short-term disability insurance, and flexible spending accounts. Employees may
also elect voluntary life, an enhanced dental plan and long-term disability. SHS maintains a noncontributory, defined-benefit pension plan, which covers substantially all employees (the “Plan”).
Participants in the Plan are those employees whose age, hours worked and years of service meet the
requirements of the Plan. The funding policy is to contribute amounts to the Plan in conformity with the
required level of funding determined by the Plan’s actuary.
In January 2011, the System’s board approved the curtailment of the Plan. The System curtailed
the Plan by freezing the accrual of future benefits for all non-union employees as of January 1, 2011 and
for the employees of The Office and Professional Employees International Union as of May 31, 2011. In
accordance with generally accepted accounting principles, the System reduced the Plan’s projected
benefit obligation as of June 30, 2011 by $5,624,109 for this curtailment. During 2012, the remainder of
the Plan’s benefits were frozen, which was primarily plan benefits for the employees of the SEIU Health
Care Pennsylvania CTW, CLC (SEIU). With this final curtailment, the System reduced the Plan’s
projected benefit obligation as of June 30, 2012 by $1,515,355. The projected benefit obligation of the
Plan as of June 30, 2013 was $69,076,406 and recognized in the consolidated balance sheet. See
Appendix B to this Limited Offering Memorandum and footnote 14 therein for a more complete
discussion of the Plan.
The System also established a defined contribution plan in 2009 that is available to substantially
all employees. Pension expense was approximately $1,733,000 and $1,322,000 for the years ended June
30, 2013 and 2012, respectively.
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Labor Relations
SHS continually conducts extensive compensation market studies for all staff positions within the
organization. The purpose of these studies is to ensure SHS’ pay scales are competitive enabling it to
attract and retain employees. Appropriate increases are granted as a result.
SHS has also worked to improve employee morale and performance through employee
satisfaction surveys and employee evaluations. SHS has seen improvement in scores and ranking since
the base assessment year. The purpose of the surveys and the evaluations is to focus on the following
initiatives:



Encourage employees to work together to serve as stakeholders;
Promote an environment of clinical and professional excellence; and
Link SHS practices to strategic objectives and core values.
SHS has not experienced any nursing or other personnel shortages. The School of Nursing allows
the System to hire graduates from the nursing (RN) program to address staffing needs.
Registered nurses at SMC-SJ are covered by a collective bargaining agreement of a labor union.
A 3-year agreement was ratified by union membership in June 2011 and the System expects to begin
negotiating a contract extension with the union in April 2014. The Services/Skilled Maintenance
Workers at SMC-SJ ratified a 3-year contract in June 2012.
SERVICES
Licensed and Staffed Beds
The following summary reflects the general classification of licensed beds at the Medical Centers
as of June 30, 2013:
SMC-SJ
SMC-EN
Total
75
43
Medical/Surgical
118
25
43
Medical/Surgical with Telemetry
68
12
Intensive Care Unit
12
10
Critical Care Unit
10
12
Obstetrics
12
9
Pediatrics
9
18
Acute Rehabilitation Unit
18
10
Adolescent Behavior Health
10
36
Adult Behavioral Health
36
12
Senior Behavioral Health
12

Total
126
305
179
Source: System Management.

Does not include 15 nursery bassinet beds or 11 beds in the licensed Transitional Care Unit.
A-14
Services
Schuylkill Medical Center – South Jackson Street
SMC-SJ provides inpatient, outpatient and emergency services. Inpatient units include medical,
surgical, telemetry, maternity, pediatrics, behavioral health, transitional rehabilitation and newborn
nursery. Ancillary services include imaging, laboratory, pulmonary services, respiratory services,
EEG/EKG, surgical services, rehabilitation services, nutrition and sleep services. The Emergency
Department is open 24 hours a day, seven days a week.
SMC-SJ provides the following services:
Anesthesia
Adolescent Behavior Health
Adult Behavior Health
The Birth Place/Maternity
Cardiac Rehabilitation
Case Management
Community Health Awareness
Diabetes Education
Emergency Room
Home Health
Imaging Services:
X-Ray
Diagnostic X-Ray
MRI
CT Scans
PET/CT
Interventional Radiology
Ultrasound
Nuclear Medicine
Digital Mammography
Bone Density (DXA) Scan
Intensive Care
Laboratory Medicine
Medical/Surgical
Neurology
Nutrition and Food Services
Occupational Medicine
Pain Management Services
Pastoral Care
Pathways
Pediatric Services
Rehabilitation:
Physical Therapy
Speech Therapy
Occupational Therapy
Sleep Disorders Center
Support Groups
Surgical Services:
Inpatient
Outpatient Surgery Center
Robotic Assisted Surgery
Transitional Rehabilitation Unit
Volunteer Services:
Adult
Junior
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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Schuylkill Medical Center – East Norwegian Street
SMC-EN provides inpatient, outpatient and emergency services. Inpatient units include medical,
surgical, telemetry, behavioral health and acute rehabilitation. Ancillary services include imaging,
laboratory, pulmonary services, respiratory services, EEG/EKG, surgical services, rehabilitation services,
nutrition and wound care. The Emergency Department is open 24 hours a day, seven days a week.
SMC-EN provides the following services:
Acute Rehabilitation
Advanced Wound Care
Anesthesia
Cardiopulmonary
Case Management
Community Health Awareness
Critical Care
Diabetes Education
Dental Services
Dialysis
Drug and Alcohol Counseling
Emergency Room
Geriatric Behavior Health
Imaging Services:
X-Ray
Diagnostic X-Ray
CT Scans
PET/CT
Interventional Radiology
Ultrasound
Laboratory Medicine
Medical/Surgical
Neurology
Nicotine Cessation
Nutrition and Wellness Center
Occupational Medicine
Pain Management Services
Pastoral Care
Rehabilitation:
Physical Therapy
Speech Therapy
Respiratory Therapy
Support Groups
Support Groups
Surgical Services:
Inpatient
Outpatient Surgery Center
Infusion Therapy
Telemetry
Veterans Administration Clinic
Volunteer Services:
Adult
Junior
Highlights of System Services
Key highlights regarding the System’s specialties are provided below:
Schuylkill Veterans Administration Clinic
The Schuylkill Veterans Administration Clinic (the “VA Clinic”) is located on the campus of
SMC-EN and works in conjunction with the United States Department of Veterans Affairs (the “VA
Department”) for patients serviced by the VA Department. Veterans may also utilize services of the VA
Clinic at Schuylkill Health Center North (described below).
Schuylkill Medical Center - Dental Clinic
The Schuylkill Medical Center - Dental Clinic is located on the campus of SMC-EN and provides
dental services to the uninsured and medical assistance population.
A-16
Center for Counseling Services
The Center for Counseling Services is located at the Schuylkill Healthplex (described below) and
provides outpatient drug and alcohol counseling and support services to residents of the County.
Schuylkill Health Medical Office Building
The Schuylkill Health Medical Office Building is located at 100 Schuylkill Medical Plaza,
Pottsville, Pennsylvania and provides physician services, preadmission testing, outpatient laboratory and
radiology.
Schuylkill Health Center North
Schuylkill Health Center North is located at 110 East Spruce Street, Frackville, Pennsylvania and
provides outpatient laboratory, physical therapy, radiology, counseling, and VA services in the northern
part of the County.
Schuylkill Health Center - Orwigsburg
Schuylkill Health Center – Orwigsburg is located at 6 South Greenview Road, Schuylkill Haven,
Pennsylvania and provides outpatient laboratory and physical therapy services in the southern part of the
County.
Schuylkill Medical Center - Women’s Imaging Center
The Schuylkill Medical Center - Women’s Imaging Center is located at 171 Red Horse Road,
Pottsville, Pennsylvania and provides digital mammography services, ultrasound imaging services
DexaScan bone density testing and a laboratory blood draw station.
Schuylkill Healthplex
The Schuylkill Healthplex is located at 502 South Second Street, St. Clair, Pennsylvania and
provides outpatient drug and alcohol counseling, and smoking cessation classes. Services are provided
through grant programs with the County Drug and Alcohol Commission, as well as with patients covered
by private insurance programs.
Joseph F. McCloskey School of Nursing
The Joseph F. McCloskey School of Nursing (the “School of Nursing”) is located on the campus
of SMC-SJ and is a full time, three year non-resident RN diploma nursing program. The School of
Nursing was established in 1895 and has over 2,000 graduates. Approximately 70% of the yearly
graduates of the School of Nursing accept employment with SHS. It is the primary educator of registered
nurses for Schuylkill and surrounding counties. The School of Nursing is approved by the Pennsylvania
State Board of Nursing and accredited by the Accreditation Commission for Education in Nursing
formerly the National League for Nursing Accrediting Commission.
Accreditations, Memberships and Certifications
The Medical Centers are accredited by The Joint Commission, the American College of
Radiology and the American Association of Blood Banks. SRC is accredited by the Commission on
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Accreditation of Rehabilitation Facilities. Each Medical Center is also licensed by the Pennsylvania
Department of Health and the Clinical Laboratory Improvement Amendments.
Memberships in the American Hospital Association, the Hospital Association of Pennsylvania,
VHA and numerous other organizations are maintained by each member of the Obligated Group. In
2013, each Medical Center was recognized as a Gold Plus Recipient from the American Heart
Association.
MEDICAL STAFF
Overview
Members of the medical staff at each Medical Center (collectively, the “Medical Staff”) are
appointed by the Board based on recommendations of the Credentials Committee. Members of the
Medical Staff are categorized as active, courtesy, consulting, honorary, affiliate and telemedicine.
Active staff members, who comprise 31% of the Medical Staff, are those who regularly admit
patients to one of the Medical Centers. Of the active staff, 82% are board certified. Members of the
courtesy staff admit fewer patients than active staff and are not eligible to vote or hold office. Honorary
staff members are retired members of the Medical Staff or are individuals with an outstanding
professional reputation The consulting staff consists of practitioners who possess an expertise or skill not
possessed by members of the active staff and whose expertise is requested by members of the active staff.
Practitioners who do not wish to establish an inpatient practice at the Medical Centers and who otherwise
meet the basic qualifications of membership are classified as affiliate staff. The telemedicine staff
consists of practitioners who consult and/or interpret studies done at the Medical Centers via high speed
electronic communication networks for ICU and radiology.
Active Medical Staff by Department
The following table identifies the active Medical Staff by department, number of members with
board certification, and employment status, as of March 2014.
Department
Department of Anesthesia
Department of Medicine/Family Practice
Department of OB/GYN
Department of Pediatrics
Department of Surgery
Department of Pathology
Department of Radiology
Department of Emergency Medicine
Total Active Medical Staff
Number of
Physicians
10
43
6
4
21
3
11
11
109
A-18
Board
Certified
8
39
6
4
20
3
8
1
89
Employed
Physicians
0
3
0
0
2
3
0
0
8
Top Ten Admitting Physicians
The following table lists the top ten physicians by specialty, age, number of admissions, and
percentage of admissions at the Medical Centers as of June 30, 2013.
Specialty
Internal Medicine
Internal Medicine
Psychiatry
Psychiatry
Pediatrics/Pediatric Hospitalist
Pediatrics/Pediatric Hospitalist
Physical Medicine/Rehab
Internal Medicine
Internal Medicine
Internal Medicine
Age
38
55
48
63
38
33
63
47
49
37
Top Ten Total
Total Admissions (Excludes Nursery)
# of
Admissions
1,281
900
603
581
470
453
434
425
383
352
% of Total
12.09%
8.49%
5.69%
5.48%
4.43%
4.27%
4.10%
4.01%
3.61%
3.32%
5,882
10,598
55.50%
100.00%
Physician Recruitment, Staffing and Other Initiatives
Recruitment
The Executive Committee, with management and Board member support, manages and maintains
an active physician recruitment program to ensure the adequacy and continuity of the Medical Staff.
Following a formal study of physician and specialty needs, and the incorporation of the System’s
expectations for service line expansions, the Medical Centers and Medical Staff recruited physicians for
the following specialties: orthopedic surgery, interventional radiology, psychiatry (adult and adolescent),
obstetrics/gynecology (recruited the only female obstetrician/gynecologist in the County), anesthesiology
(2), pediatric hospitalist (2), pathology (2) neurology (2) and physiatrist (rehabilitation specialist). Since
2009, thirteen physicians have been added as active staff at the Medical Centers and six members of the
active staff have retired or resigned.
The Medical Centers are actively recruiting physicians for the following specialties: orthopedic
surgery, gastroenterology, cardiology and spinals surgery.
Other Initiatives
Just as important as recruiting new physicians, it is important for SHS to create good relationships
with the physicians practicing within our service area. SHS has worked to create a team relationship with
all physicians practicing in the County. This has included providing educational sessions for physician
office staffs on the upcoming transition from ICD-9 to ICD-10 coding, education sessions for physicians
on the electronic health record and the changes that has created in hospital processes, and the objectives
of meaningful use.
SHS is working with local physician offices to allow for medical record integration of lab and
radiology results of patients to be electronically transferred from the System to the physician office
A-19
electronic health record. This will allow for timely result information for local physicians to be available
within the patient’s medical record in their own office. It will eliminate faxing and scanning of such
information between the hospital and the offices. It will also allow for more efficiencies in the offices
regarding the timeliness of the results. Testing of this integration began on February 11, 2014.
SHS also offers the da Vinci Robotic-Assisted Surgery as advanced technology that provides
surgeons with an alternative to both traditional open surgery and conventional laparoscopy. SHS offers
robotic surgery in the following specialties: general surgery, gynecology and urology.
Through February 2014, eight surgeons have been trained and performed 281 robotic-assisted
surgery procedures. The physician community feels that this technology is an important recruiting tool
for attracting new physicians.
AFFILIATIONS
Geisinger Health System
Geisinger Health System (“Geisinger”) opened a cancer center on the 3rd floor of SMC-EN in
June 2013. Geisinger invested $1.7 million in renovations to the floor for the cancer center. Geisinger
leases the space from SMC-EN and pays monthly rent to SMC-EN. The cancer center allows individuals
in the SHS service area to access lab and radiology services for cancer treatment.
Janet Weis Children’s Hospital at Geisinger also provides two full time Pediatric Hospitalists and
one Nurse Practitioner at SMC-SJ. Each of these physicians is under a contractual agreement with SMCSJ. These practitioners work with the SMC-SJ medical staff in providing inpatient pediatric care to the
County residents.
The Electronic Intensive Care Unit (EICU) program is operated at the Medical Centers in the
ICU/CCU units. Geisinger physicians monitor four beds at SMC-EN and four beds at SMC-SJ on a daily
basis. This program allows patients at the Medical Centers to stay within the Pottsville community for
care but still have access to specialists at Geisinger. Physicians at each of the Medical Centers work
directly with the Geisinger staff.
Lehigh Valley Health Network
The Lehigh Valley Health Network (“Lehigh Valley”) provides Teleburn/Telemedicine services
at the Medical Centers’ emergency rooms. This affiliation allows the emergency room physicians and
staff to confer with Lehigh Valley physicians regarding the care of patients and the ability to refer such
patients to Lehigh Valley if necessary.
SHS and Lehigh Valley have entered into a poison control contract for each of the emergency
rooms at the Medical Centers to allow for consultation on any poison control cases. SHS has also entered
into an agreement with Lehigh Valley for a Myocardial Infarction (MI) Acute program for the emergency
rooms at the Medical Centers. This affiliation allows for consultation with Lehigh Valley physicians on
treatment protocol and timely transfer from the emergency rooms to Lehigh Valley for Cardiac
Catheterizations.
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SERVICE AREA, DEMOGRAPHICS AND COMPETITION
Service Area
The System’s primary and secondary service area is the County in east central Pennsylvania (the
“Service Area”). The County is located approximately 100 miles equidistant from Philadelphia to the
southeast, New York City to the northeast and the Maryland border to the south and approximately 50
miles from Harrisburg to the southwest. The County has a consistent population of approximately
150,000 residents.
The primary service area is comprised of the City of Pottsville and the surrounding communities
and townships of Schuylkill Haven, Minersville, Shenandoah, Pine Grove, Mahanoy City, Orwigsburg,
St. Clair, Tremont, Port Carbon, New Philadelphia, Tamaqua, Frackville and Ashland. Historically, the
primary service area has provided the System with over 53% of the total admissions. The City of
Pottsville provides the largest single source of patients with approximately 27% of total admissions
during the last fiscal year.
The County is bounded on the north by Northumberland, Columbia and Luzerne Counties; on the
east by Carbon and Lehigh Counties; on the south by Berks County; and on the west by Lebanon and
Dauphin Counties. The Delaware and Susquehanna River Basins extend into the County, although its
largest river is the Schuylkill. Interstate Route 81 bisects the County which connects with Interstate 80 at
the northern tip of the County and Interstate 78 just south of the County.
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The System’s Service Area is depicted in the map below. The Medical Centers are located within
one-half mile of each other.
Population, Employment and Income
According to the U.S. Census Bureau, the County’s population decreased from 150,336 to
148,289 between 2000 and 2010 losing 2,047 residents or a decrease of 1.36 percent.
The unemployment rate for the County has been higher than that for the Commonwealth during
the period 2009 to 2013. According to the U.S. Bureau of Labor Statistics, as of August 2013, the
unemployment rate in the County was 8.9% as compared to 7.8% for the Commonwealth. According to
the U.S. Census Bureau, over the period of 2000-2010, the percentage increase in per capita income of
23.66% in the County was lower than the percentage increase in per capita income in the Commonwealth.
A-22
The ten largest industrial/manufacturing employers in the County and their approximate
employment are shown below:
Employer
Cargill Meat Solutions
Wal-Mart Associates, Inc.
Lowe’s Home Centers, Inc.
Sapa Industrial Extrusions, Inc.
Guilford Mills
Wegman’s Food Markets
Honeywell
OmNova
City Shirt Company
TransWestern Polymers, Inc.
Location
Service/Product
Employees
East Union Twp
Highridge/Pottsville
Highridge/Pottsville
Cressona
Pine Grove
Pottsville
Meat Packing
Distribution
Distribution Center
Aluminum Extrusions
Knit Fabrics
Food Manufacturing
and Distribution
Manufacturing
Polyvinyl Films
Uniform Shirts
Plastic Bags
1,000
950
710
654
600
531
Pottsville
Auburn
Frackville
Tamaqua
400
275
270
270
Source: Schuylkill Economic Development Corporation.
The following table identifies the top ten private employers in the County as of March 31, 2013:
Employer
Service/Product
Wal-Mart Associates, Inc.
Commonwealth of Pennsylvania
SMC-SJ
Lowe’s Home Centers, Inc.
Sapa Industrial Extrusions, Inc.
Schuylkill County
Jeld-Wen, Inc.
SMC-EN
Federal Government
Cargill Meat Solutions Corporation
Pottsville Area School District
Blue Mountain School District
Distribution
State Government
Health Care
Distribution Center
Aluminum Extrusions
County Government
Window/Door
Manufacturing
Health Care
Federal Government
Meat Packing
Public Education
Public Education
Source: Center for Workforce Information and Analysis – L&I, 1st Quarter 2013 (initial data). L&I does not report employee
numbers due to employer privacy.
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The County comprises the Pottsville Micropolitan Statistical Area. The following table shows the
latest non-farm employment statistics available from the Pennsylvania Department of Labor and Industry.
Number
Employed
Industry
Percent Number
Employed
Total Non-Farm
Total Private
53,000
44,900
100.00%
84.72%
Goods Producing Industries
Mining, Logging & Construction
Manufacturing
Total Goods Producing Industries
2,400
10,200
12,600
4.53%
19.25%
23.77%
Service Producing Industries
Transportation, Warehousing & Utilities
Wholesale & Retail Trade
Financial Activities
Professional & Business Services
Educational & Health Services
Leisure & Hospitality
Other Services
Government
Federal Government
State & Local Government
Total Service Producing Industries
6,000
7,400
1,300
3,600
8,700
3,100
1,800
11.32%
13.96%
2.45%
6.79%
16.42%
5.85%
3.40%
600
7,500
40,400
1.13%
14.15%
76.23%
TOTAL
53,000
100.00%
Source: Pennsylvania Department of Labor and Industry, November 2013 data.
Competition
The Medical Centers are the largest acute care providers in the Primary Service Area with a
leading market share. By service line, the Medical Centers maintain a leading market share in psychiatry,
rehabilitation care, obstetrics, and general medical/surgical.
The Medical Centers compete with one acute care hospital in the Primary Service Area. This
hospital, its size and admission statistics (excluding nursery and transitional beds) are listed in the table
below.
Distance from
the Medical
Centers (miles)
Number
of Staffed
Beds
Acute Care Hospital
St. Luke’s Miners Memorial
Medical Center – Coaldale, PA
19.0
Calendar Year
2013
2011
2012
2013
45
1,714
1,443
1,922
Source: Pennsylvania Department of Health Annual Hospital Questionnaire.
A-24
Number of Admissions
The table below illustrates the utilization statistics (excluding nursery beds) from providers in the
County and the surrounding counties as of the third fiscal quarter of 2013.
Utilization by Facility and Distance to Competition
Fiscal Year Ended June 30,
2011
52.3%
8.0%
7.2%
4.2%
2.8%
3.7%
Lehigh Valley
Geisinger Medical Center Danville
St. Luke's Miners Memorial Medical Center
St. Luke's Bethlehem
Milton S. Hershey Medical Center
2012
51.4%
8.6%
9.1%
5.2%
2.8%
4.5%
2013
(up to Q3)
49.2%
8.9%
9.9%
5.5%
3.1%
4.1%
Source: Pennsylvania Healthcare Cost Containment Council.
A-25
Distance
(miles)
45.00
43.75
20.00
53.00
49.00
SELECTED UTILIZATION AND REVENUE SOURCE INFORMATION
Utilization Statistics
The following table provides a summary of key utilization and other operating statistics for the
System for fiscal years ended June 30, 2010, 2011, 2012 and 2013 and, the seven months ended January
31, 2013 and 2014.
2010
2011
2012
2013
Seven Months
Ended January 31,
2013
2014
Inpatient
Admissions
- Med Surg Admissions
14,344
9,104
14,044
8.333
12,549
6,941
11,494
6,324
6,870
3,717
6,366
3,356
- ICU/CCU Admissions
801
1,158
1,086
1,137
659
658
- Pediatrics Admissions
370
243
149
67
40
47
- Obstetrics Admissions
1,066
1,060
1,051
903
569
539
- Psychiatric Admissions
1,392
1,477
1,482
1,394
867
779
431
144
441
299
446
347
435
338
256
196
257
207
- Nursery
1,036
1,033
1,047
896
566
523
Patient Days
73,914
72,486
67,259
61,108
36,680
33,297
5.15
5.16
5.36
5.32
5.34
5.23
202.50
198.59
184.27
167.42
170.60
154.90
61.00%
1.19
59.82%
1.27
55.50%
1.32
50.47%
1.34
51.39%
1.28
48.20%
1.41
1.11
1.17
1.28
1.28
1.34
1.30
1,935
1,987
3,322
3,790
2,249
1,878
43,582
42,566
44,415
46,559
27,763
26,442
172,492
158,698
158,911
157,445
92,699
94,919
4,432
4,774
4,298
3,668
2,239
1,986
8,308
12,740
8,125
12,899
8,152
12,450
7,604
11,272
4,362
6,601
4,356
6,342
- Rehabilitation
- TRU/SNF Unit
Average Length of Stay
Average Daily Census
Occupancy %
Case Mix Index – SMC-SJ
Case Mix Index – SMC-EN
Observation Cases
Outpatient
ER Visits
Other Outpatient Visits
Surgeries
Inpatient
Outpatient
Total Surgeries
A-26
Sources of Revenue
Payments are made to SHS on behalf of patients by the federal government under the Medicare
program administered by the Department of Health and Human Services, the Commonwealth of
Pennsylvania under the Medicaid program, commercial insurers, managed care programs, and by patients
on their own behalf.
The table below summarizes the percentage of net patient revenues of the System by source of
payment for the fiscal years ended June 30, 2010, 2011, 2012 and 2013.
Payor
2010
Medicare
Blue Cross
Commercial
Medicaid
Self-pay
Capitated
Total
38%
32%
18%
6%
6%
100%
2011
2012
38%
31%
19%
6%
6%
100%
39%
32%
17%
7%
5%
100%
2013
39%
31%
18%
6%
5%
1%
100%
Source: Audited Financial Statements.
The table below summarizes the percentage of gross patient revenues of the System by source of
payment for the fiscal years ended June 30, 2010, 2011, 2012 and 2013.
Payor
2010
Medicare
Blue Cross
Commercial
Medicaid
Self-pay
Capitated
Total
36%
24%
26%
10%
4%
100%
2011
2012
36%
25%
25%
10%
4%
100%
36%
25%
25%
11%
3%
100%
2013
39%
24%
25%
8%
3%
1%*
100%
Medicare
Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively
determined rates per discharge. Since 2001, SMC-SJ has been considered a rural referral center (“RRC”).
As a RRC, SMC-SJ has been able to use this status to successfully be granted Medicare Geographical
reclassifications by the federal government to other Urban Core Based Statistical Areas (CBSA’s) since
2001. The reclassifications have entitled the SMC-SJ to receive additional reimbursement in the form of
higher Diagnosis Related Group (“DRG”) base payment rate ranging annually from $500,000 to
$1,250,000 over the past decade. Additionally, since 2011 SMC-EN has been considered a Medicare

SHS receives a 1% capitation payment in connection with an agreement with the VA Department. This payment is
negotiated every three years and is treated as a capitated payment because SHS is paid a pre-determined amount for
each patient who receives treatment at the VA Clinic and is registered with the VA.
A-27
dependent hospital (“MDH”). As a MDH, SMC-EN receives additional reimbursement in the form of a
higher DRG base payment of approximately $2,500,000 annually. See “BONDHOLDERS’ RISKS –
Regulatory Environment - Medical Care Availability and Reduction of Error Act” in the front part of this
Limited Offering Memorandum for a more detailed discussion of the Medicare payments received by the
Obligated Group.
Medical Assistance
Inpatient acute care services rendered to Medical Assistance program beneficiaries are paid at
prospectively determined rates per discharge. Outpatient services are paid based on a published fee
schedule. SHS also provides a charity care program with eligibility criteria based on a percentage of the
Federal Poverty Guidelines.
Blue Cross
Inpatient services rendered to Blue Cross subscribers are paid based on a contracted rate which is
determined according to the DRG assigned for each subscriber’s hospital stay. Outpatient services related
to Blue Cross subscribers are paid based on a contracted rate using a negotiated fee schedule.
Health Maintenance Organization (HMOs) and Preferred Provider Organization (PPOs)
Inpatient acute care services rendered to subscribers of HMOs and PPOs are paid at various
contracted per case rates, depending upon the DRG assigned to each subscriber’s hospital stay.
Outpatient services rendered to emergency room patients are paid either by a discount from published
charges or by contracted rate schedules for some procedures Outpatient services rendered to surgical
patients are paid either by contracted rates per surgical procedure or on a discount from published
charges. Other non-emergency room or surgical services are paid based either on a discount from
published charges or by contracted rate schedules for some procedures.
SHS currently has contracts with the following payors:
Highmark/Blue Shield
Capital Blue Cross & Keystone Health Plan Central
Geisinger Health Plan
Community Care Behavioral Health
Aetna – HMO & PPO
United Healthcare
Health America/Health Assurance/Coventry
Amerihealth Mercy Health Plan
Cigna
Berkshire Health Partners
Tricare with HealthNet Federal Services
SHS does not currently receive any reimbursement from government established health insurance
exchanges. Any reimbursement received by SHS is as a result of private negotiations with the individual
payors
Other Payors
SHS also accepts several commercial insurance plans. Most commercial insurance plans
reimburse SHS directly and some may reimburse the beneficiary. Most commercial insurance claims are
A-28
paid through a contracted Third Party Administrator, and are granted a discount up to twenty-five (25%)
of charges. Patients carrying such insurance are responsible for any difference between the insurance
proceeds and the total SHS charges less any approved Third Party Administrator discount.
SHS also receives payments from the Commonwealth of Pennsylvania under the Medicaid
program. If the Commonwealth were to elect to expand its Medicaid eligibility, approximately 3,000
previously uninsured residents of Schuylkill County would benefit from such expansion. Upon such
election by the Commonwealth, each of SMC-SJ and SMC-EN would be reimbursed for services to these
residents at the Medicaid rate. See “BONDHOLDERS’ RISKS – Health Care Reform - Medicaid
Reimbursement” in the front part of this Limited Offering Memorandum for a more detailed discussion of
the Medicaid payments received by the Obligated Group.
SUMMARY FINANCIAL AND OPERATING INFORMATION
Below is a summary statement of operations and selected balance sheet information for the
System and the Obligated Group for each of the fiscal years in the four-year period ended June 30, 2013,
and for the seven-month period ended January 31, 2013 and, 2014. The summary information for each of
the fiscal years in the four-year period ended June 30, 2013 was derived from the independent auditors’
report on supplementary information in the audited consolidated financial statements prepared for the
Schuylkill Health System and Controlled Entities. The following summaries should be read in
conjunction with data included under the heading “MANAGEMENT’S DISCUSSION – UTILIZATION
AND FINANCIAL PERFORMANCE” as well as the audited consolidated financial statements, related
notes and supplementary information for fiscal years ended June 30, 2012 and 2013 provided in Appendix
B to the Limited Offering Memorandum. The summary information for the seven-month period ended
January 31, 2013 and 2014 was derived from unaudited financial statements prepared by the management
of the System. The unaudited statements include all adjustments, consisting of normal recurring accruals,
which management considers necessary for a fair presentation of the results of operations for those
periods. These unaudited statements are incomplete in that they omit statements of cash flows and all
footnotes required under accounting principles generally accepted in the United States of America.
Operating results for the seven-month period ended January 31, 2014 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
The Obligated Group accounted for approximately 98.08% of the total unrestricted revenues of
the System for the fiscal year ended June 30, 2013, and approximately 99.02% of the total assets of the
System as of June 30, 2013. The Obligated Group accounted for approximately 99.32% of the total
unrestricted revenues of the System for the fiscal year ended June 30, 2012, and approximately 98.92% of
the total assets of the System as of June 30, 2012. The Obligated Group accounted for approximately
99.87% of the total unrestricted revenues of the System for the fiscal year ended June 30, 2011, and
approximately 95.13% of the total assets of the System as of June 30, 2011. The Obligated Group
accounted for approximately 99.90% of the total unrestricted revenues of the System for the fiscal year
ended June 30, 2010, and approximately 94.87% of the total assets of the System as of June 30, 2010.
As noted under “CORPORATE ORGANIZATION – The Obligated Group,” the members of
the Obligated Group are the only entities obligated to make payments on the Series 2014 Bonds.
A-29
Consolidated Statement of Operations of the System
(Amounts shown in thousands)
Seven Months
Ended January 31,
(Unaudited)
2010
2011
2012
2013
2013
2014
REVENUE
Net patient service revenue
$157,501
$91,757
$88,994
(10,808)
(14,029)
(8,219)
(8,504)
138,856
146,181
143,472
83,538
80,491
3,952
8,133
3,549
6,754
5,083
4,242
189
123
31
88
134,864
147,112
149,761
150,314
88,621
84,733
Salaries and wages
68,382
69,122
69,333
70,572
41,694
42,033
Supplies and other expenses
24,129
22,880
22,006
21,450
12,548
12,614
Employee benefits
18,870
17,977
18,908
17,477
10,389
10,552
Personnel services
Provision for bad debts
Net patient service revenues less
provision for bad debts
Other operating revenues
Net assets released from
restrictions for operations
Total unrestricted revenues, gains,
and other support
$141,983
$149,025
(11,260)
(10,169)
130,723
$156,989
-
-
EXPENSES
14,425
12,612
13,079
13,514
7,871
7,347
Depreciation and amortization
8,305
9,075
8,808
8,615
5,035
5,259
Maintenance expense
6,388
6,491
6,384
6,321
3,699
3,627
Other expense
4,568
8,213
7,077
7,015
4,248
4,357
Interest
2,214
2,093
1,933
1,903
1,095
1,084
Insurance
1,811
1,859
1,804
1,912
1,085
1,074
Total Expenses
149,092
150,322
149,332
148,779
87,664
87,947
Operating Income (Loss)
(14,228)
(3,210)
429
1,535
957
(3,214)
368
189
682
(42)
159
404
(13,860)
(3,021)
1,111
1,493
1,116
(2,810)
(5,516)
13,659
(14,422)
5,983
-
-
838
(137)
(685)
(146)
-
-
-
-
27
-
-
-
312
1,282
181
559
361
61
$(18,226)
$11,783
$(13,788)
$8,171
$1,477
$(2,749)
Other Income (Loss)
Revenues in excess of (less than)
expenses
Pension Liability Adjustment
Postretirement Benefit Liability
Adjustment
Other Net Asset Activity
Net Assets Released from
Restrictions Used for Purchase of
Property and Equipment
Increase (decrease) in unrestricted
net assets

On June 30, 2013, the adopted the Accounting Standard Update (ASU) 2011-07, Presentation and Disclosure of Patient Service
Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, which requires the
reclassification of the provision for bad debts from an operating expense to a deduction from patient service revenue. All prior
periods were reclassified to conform to the new guidance.
A-30
Interim Consolidated Statement of Operations of the Obligated Group
(Unaudited)
Seven Months
Ended January 31,
2013
2014
REVENUE
Net patient service revenue
Provision for bad debts
Net patient service revenue less provisions for bad debts
$90,942
8,179
82,763
$87,998
8,456
79,542
4,791
3,919
Total unrestricted revenues, gains and other support
87,554
83,461
EXPENSES
Salaries and wages
Employee benefits
Personnel services
Maintenance expense
Other expense
Interest
Insurance
Total expenses
40,840
12,431
10,267
7,863
5,017
3,630
4,217
1,095
1,048
86,410
40,976
12,492
10,396
7,324
5,242
3,561
4,312
1,084
1,035
86,422
1,146
159
(2,961)
404
$1,305
$(2,557)
Operating Income (Loss)
Other income
Revenues in excess of (less than) expenses and increase (decrease)
in unrestricted net assets
A-31
Interim Consolidated Balance Sheet of the Obligated Group
(Unaudited)
Seven Months
Ended January 31,
2013
2014
Seven Months
Ended January 31,
2013
2014
Assets
Current Assets
Cash and cash equivalents
Assets whose use is limited
Accounts receivable:
Patients (net of estimated allowance for
doubtful collections of $50,744
in 2014 and $40,092 in 2013)
Other
Amounts due from affiliates
Estimated third-party payor settlements
Inventories of drugs and supplies
Prepaid expenses and other current assets
Liabilities and Net Assets
$ 3,012
805
$ 2,506
1,012
Current Liabilities
Borrowings under bank lines of credit
Current portion of long-term debt
Current maturities of obligation under
capital leases
Accounts payable, trade
Accrued expenses
Blue Cross current financing advance
$ 1,846
1,475
$ 2,914
1,555
2,567
10,163
6,831
899
3,591
9,206
7,418
899
23,781
25,583
Long-Term Debt
Hospital revenue bonds
Loan payable
Obligation under capital leases
22,578
1,998
5,753
21,046
694
7,550
Total long term debt
30,329
29,290
28,699
21,853
17,347
402
2,048
2,083
2,312
1,370
15,806
466
2,706
1,570
2,492
1,250
Total current assets
29,379
27,808
Assets Whose Use Is Limited
By Board for future capital improvements
Under trust indenture, held by trustee
Deferred compensation fund
6,126
2,997
694
5,722
2,828
804
Pension Liability
Total assets whose use is limited
9,817
9,354
2,366
2,229
Long-Term Investments
1,467
1,224
Other Liabilities
4,536
5,329
Investment in Pennsylvania Community
Hospital Association
89,711
84,284
3,732
3,832
(1,806)
409
5,070
2,679
120
5,808
3,673
8,607
Beneficial Interest in Perpetual Trusts
Trusts
Investment in Schuylkill Health System
Medical Mall Limited Partnership
Property and Equipment, Net
Other Assets
Deferred Financing Costs, Net
Total assets
Total current liabilities
Total liabilities
4,169
4,906
223
243
42,696
43,161
1,838
2,305
63
$ 93,384
58
$ 92,891
Net Assets (Deficit)
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
A-32
$ 93,384
$ 92,891
Historical Liquidity
The following table sets forth the Obligated Group’s days cash on hand as of June 30, 2010,
2011, 2012 and 2013. The amounts have been derived from the audited consolidated financial statements
and other supplementary information of the System, which appear in Appendix B of this Limited Offering
Memorandum.
Days Cash on Hand
2010
2011
2012
Unrestricted Cash and Investments
Cash and Cash Equivalents
Assets whose Use is Limited:
Current (Revenue Fund)
Under Trust Indenture, held by Trustee
By Board for future Capital Improvements
Unrestricted Cash and Investments
Total expenses
Less: Depreciation and amortization
Cash Expense per day
Days Cash on Hand
$2,040
$1,873
$2,948
$3,460
1,992
2,919
5,748
$12,699
2,079
2,837
2,915
$9,704
2,045
2,988
6,168
$14,149
2,150
2,795
5,202
$13,607
148,271
8,259
$139,840
149,576
9,043
$140,533
147,788
8,779
$139,009
146,973
8,586
$138,387
384
385
380
379
33.11
25.20
37.25
35.89
A-33
2013
Historical and Pro Forma Debt Service Coverage
The following table sets forth, for the fiscal years ended June 30, 2010, 2011, 2012 and 2013,
historical and pro forma debt service of Maximum Annual Debt Service of Outstanding long-term
indebtedness of the Obligated Group. The amounts have been derived from the audited consolidated
financial statements and other supplementary information of the System and other supplementary
information, which appear in Appendix B of this Limited Offering Memorandum. The pro forma
coverage has been calculated assuming the Series 2014 Bonds were issued.
Debt Service Coverage
2010
2011
2012
2013
Revenues in excess of (less than) expenses
Plus:
Depreciation and Amortization
Interest Expense
$(13,198)
$(2,465)
$1,675
$1,962
8,259
2,204
9,043
2,089
8,779
1,932
8,586
1,903
Net Revenues Available for Debt Service
$(2,735)
$8,667
$12,387
$12,451
Historical Maximum Annual Debt Service
(MADS)
$6,905
$7,156
$6,496
$6,736
Historical MADS Debt Service Coverage
Ratio
Pro Forma Maximum Annual Debt Service†
Pro Forma MADS Debt Service Coverage
Ratio
(0.40)
1.21
1.91
1.85
$5,065
(0.47)
$5,065
1.71
$5,065
2.45
$5,065
2.46

The debt service coverage ratio for fiscal year 2010 was negatively affected due to operating losses identified in
the chart on page A-29 titled “Consolidated Statement of Operations of the System” and thus resulted in a covenant
violation with respect to the 1998 Bonds. In order to remedy the violation, the System hired a management
consultant who reviewed and made recommendations to improve the financial position of the System. The System
incorporated the management consultant’s recommendations and made other strategic changes in order to meet the
debt service coverage ratio for fiscal year 2011.
†
The Series 2014 Bonds are issued in the principal amount of $29,765,000 with an average interest rate of 6.22%
with semi-annual interest and yearly principal payments commencing July 1, 2017 and amortizing over a 12-year
period. The pro forma maximum annual debt service excludes debt service on the 1998 Bonds and the USDA Loan
being refinanced with the proceeds of the Series 2014 Bonds.
A-34
MANAGEMENT’S DISCUSSION – UTILIZATION AND FINANCIAL PERFORMANCE
Fiscal Year Ended June 30, 2012
Operating Results: Operating income for the fiscal year ended June 30, 2012 was $0.4 million, as
compared to the operating loss of $3.2 million for the fiscal year ended June 30, 2011.
Revenues: Net patient service revenue less provision for bad debts totaled $146.2 million in fiscal
year 2012, an increase of $7.3 million over fiscal year 2011. The Medicare Case Mix at SMC-SJ
increased from 1.27 to 1.32 while the Medicare Case Mix at SMC-EN increased from 1.17 to 1.28.
During 2011, the Medicare Case Mix at the Medical Centers was identified as being low based on the
patient mix. In order to address this issue, SHS contracted with a revenue consulting group to review
medical records and clinical documentation processes and to educate physicians on documentation
requirements for reimbursement and audit purposes. The System also hired documentation specialists to
review patient records for appropriate and complete documentation and multidisciplinary rounds were
implemented to monitor progress of inpatients and to help ensure patients were discharged promptly.
Lastly, physicians and staff were educated on the different levels of care of patients and the requirements
for inpatients and observations.
Other Operating Revenue: Other operating revenue decreased by approximately $4.6 million in
2012 as compared to 2011 due to the Medical Centers receiving incentive payments for meeting
meaningful use objectives for Stage 1, Year 1 in June 2011. Stage 1, Year 2 payments were not received
until fiscal year 2013.
Volumes: In 2012, total admissions decreased 10.6% to 12,549 as compared to 14,044 in 2011.
Patient days decreased 7.2% from 72,486 days in 2011 to 67,259 days in 2012. Length of stay increased
from 5.16 days in 2011 to 5.36 days in 2012. Observation cases increased 67% from 1,987 in 2011 to
3,322 in 2012. Outpatient visits increased 0.1% from 158,698 in 2011 to 158,911 in 2012. Emergency
room visits increased 4.3% from 42,566 in 2011 to 44,415 in 2012.
Total Expenses: Total operating expenses in 2012 were $149.3 million, a 0.7% decrease
compared to total operating expenses of $150.3 million in 2011.
Salaries and Wages: Salaries and wages increased $0.2 million to $69.3 million in 2012 as
compared to 2011. An orthopedic surgeon was hired during fiscal year 2012 for the physician practice at
Schuylkill Sports & Orthopedics.
Employee Benefits: Employee benefits increased by 5.2% in 2012 as compared to 2011. During
2012, pension expense savings were realized with the freezing of the defined benefit plan; however, this
reduction in pension expense was offset by increased health insurance costs during the year based on
increased employee claims.
Other Expenses: Other expenses decreased by $1.1 million in 2012, a 13.8% decrease compared
to 2011. This decrease was due to the renegotiation of accounts receivable collection contracts for the
Medical Centers as well as a decrease in operating lease obligations.
Fiscal Year Ended June 30, 2013
Operating Results: Operating income for fiscal year 2013 was $1.5 million, as compared to the
operating income of $0.4 million for fiscal year 2012. Funds received for the meaningful use incentive
program contributed to the increase in operating income for fiscal year 2013.
A-35
Revenues: Net patient service revenue less provision for bad debts totaled $143.5 million in fiscal
year 2013, a decrease of $2.7 million, or 1.9%, compared to fiscal year 2012. The Medical Centers had a
decrease in total admissions of 8.49% from fiscal year 2012 to fiscal year 2013. The Medicare Case Mix
at SMC-SJ increased from 1.32 to 1.34 while the Medicare Case Mix at SMC-EN stayed constant at 1.28.
The revenue deductions write off increased from 59.4% in 2012 to 60.9% in fiscal year 2013.
Other Operating Revenue: Other operating revenue increased by approximately $3.2 million in
2013 as compared to 2012 because the Medical Centers received Stage 1, Year 2 meaningful use
incentive payments which was approximately $3.5 million from both Medicare and Medicaid.
Volumes: In 2013, total admissions decreased 8.4% to 11,494 as compared to 12,549 in 2012.
Patient days decreased 9.1% to 61,108 as compared to 67,259 in 2012. Length of stay decreased from
5.36 days in 2012 to 5.32 days in 2013. Observation cases increased 14.1% to 3,790 in 2013 as compared
to 3,322 in 2012. Outpatient visits decreased 0.9% to 157,445 in 2013 as compared to 158,911 in 2012.
Emergency room visits increased 4.8% to 46,559 in 2013 as compared to 44,415 in 2012. Renovations at
the SMC-EN emergency room resulted in increased visits.
Total Expenses: Total operating expenses in 2013 were $148.8 million, a 0.4% decrease
compared to the total operating expenses of $149.3 million in 2012.
Salaries and Wages: Salaries and wages increased $1.3 million, an increase of 1.9% when
compared to fiscal year 2012. Annual salary increases were given to all non-union and union staff.
Staffing was also increased at Schuylkill Sports & Orthopedics to include a physician assistant, nurse and
office manager.
Employee Benefits: Employee benefits decreased 7.6% from fiscal year 2012 due to the freezing
of the defined benefit pension plan at SMC-SJ and improved performance in the self-insured group health
insurance plan at each Medical Center.
Seven-Month Period Ended January 31, 2014 of the Obligated Group
Operating Results: Operating loss through the first seven months of fiscal year 2014 was $3.0
million, as compared to the operating income of $1.1 million for the first seven months of fiscal year
2013.
Revenues: Net patient service revenue less provision for bad debts totaled $79.5 million as of
January 31, 2014, a decrease of $3.3 million over the same seven month period in fiscal year 2013. The
Medical Centers had a decrease in total admissions of 7.3% from the first seven months of fiscal year
2013 to the first seven months of fiscal year 2014. The provision for bad debts increased 3.7% to $8.5
million as of January 31, 2014 as compared to the same seven month period in fiscal year 2013.
Other Operating Revenues: The Medical Centers received approximately $1.8 million in
Medicare meaningful use funds in January 2014 for successfully attesting to Year 3, Stage 1 of
meaningful use. These funds are included in other revenues for the first seven month period of fiscal year
2014. The Medical Centers received approximately $150,000 in Medicaid meaningful use funds in
February 2014.
Volumes: Admissions for the first seven months of fiscal year 2014 were 6,366 which is 7.3%
less than the same seven month period in fiscal year 2013. During December 2013 and January 2014,
there were approximately ten business days affected by inclement weather including snow, ice or below
A-36
normal temperatures. This was higher than normal for these months. Episodes of inclement weather have
a direct effect on voluntary admissions to the Medical Centers as well as outpatient services including
emergency room, radiology, laboratory, physical therapy and home health visits.
The average length of stay was 5.23 days. Outpatient services have seen an increase compared to
the same seven month period in fiscal year 2013. Outpatient surgeries were 4,356 which is in line with
the same seven month period in fiscal year 2013. Outpatient registrations were 94,919 which is a 2.4%
increase.
Total Expenses: Total operating expenses through the first seven months of fiscal year 2014
increased by 0.2% over the first seven months of fiscal year 2013. Obligations under capital leases
increased by $1.8 million to $7.6 million over the first seven months of fiscal year 2014 due to lease
obligations incurred for the capital projects including, replacement of telemetry equipment, a radiology
room upgrade and the addition of a da Vinci Robot for surgery.
Salaries and Wages: Salaries and wages for the first seven months of fiscal year 2014 increased
0.5% to $41.0 million from $40.8 million for the first seven months of fiscal year 2013. The number of
full-time equivalents decreased by 18.7 in the first seven months of fiscal year 2014.
Employee Benefits: Employee benefits for the first seven months of fiscal year 2014 increased by
1.3% or $129,000 from the first seven months of fiscal year 2013 due to an increase in employee health
insurance claims.
Supplies and Other Expenses: Supplies through the first seven months of fiscal year 2014
increased by $61,000 or 0.5% from the first seven months of fiscal year 2013 due to an increase in the
cost of orthopedic supplies.
Cost Savings and Expense Management: SHS management continuously monitors operational
performance. All department directors monitor expenses on a daily basis based on current census
activity. Approximately $1.8 million in expense savings have been identified over the past quarter and
will result in actual realized savings by no later than May 1, 2014. Contracts have been reviewed for
savings opportunities and several have been renegotiated with savings to be realized throughout 2014
(including housekeeping, dietary, biomedical equipment and rehabilitation services). Elevator contracts
have been consolidated among all SHS facilities to a single vendor for volume savings as well as ease of
operations. Medical gas and cylinder contracts have also been consolidated among all facilities to a single
vendor for financial savings as well as operational efficiencies.
Staffing in all areas is reviewed. As positions vacate, their need to the facility is evaluated and
many positions are not replaced if current census activity does not support the replacement. Fringe
benefits are being reviewed to identify areas of savings while still maintaining a level of benefits that
allows SHS to be a preferred employer within the County. Over the past few years, the System has
initiated the following to decrease benefit costs:



Freezing of defined benefit pension program and replacing with a defined
contribution pension program for eligible employees,
Home/Host Health Insurance Plan and review of eligible dependents, and
Adjustments to employee pharmacy program.
SHS is currently reviewing the health insurance and disability programs to identify additional
cost savings.
A-37
SHS is engaging a consulting group to assist in reviewing opportunities for improvement in the
evolving health care environment. This group will be reviewing the following strategic areas:



Revenue Cycle Improvement:
o All aspects of the revenue cycle will be reviewed including bad debt and
days in accounts receivable to identify strategies to increase cash collections
from insurance companies and individuals.
o Documentation improvement will be reviewed to ensure appropriate
documentation is available to maximize and justify the reimbursement.
Labor and Productivity Efficiencies:
o The efficiencies of the current workforce structure will be reviewed to
identify opportunities for consolidation of positions and increased
productivity of units.
Care Delivery:
o The delivery of care for both inpatients and outpatients will be reviewed in
light of the current health care environment.
o Average length of stay will be analyzed for opportunities to maximize care
but minimize the time in the facility for the patient.
o The current emergency room and operating room scenarios will be reviewed
for optimal care of the patient.
o All hospital services will be reviewed to determine opportunities to
consolidate services within the SHS facilities to allow for financial and
operational efficiencies.
While an operating loss is expected for Fiscal Year 2014, the Board, management and Medical Staff will
be working with the consulting group in reviewing these opportunities for improvement and expect to see
operating gains by Fiscal Year 2015.
INSURANCE
SHS maintains primary insurance coverage in compliance with the limits stated in the
Commonwealth of Pennsylvania, Medical Care Availability and Reduction of Error (“Mcare”) Act No. 13
of 2002, and has ongoing claims and risk management programs in accordance with the requirements of
Act No. 13. Excess coverage is provided through the Commonwealth of Pennsylvania Mcare Fund (as
further described in the Limited Offering Memorandum under the heading “BONDHOLDERS’ RISKS”)
as well as a commercial excess policy with excess limits of $15,000,000 per claim and $15,000,000
aggregate to respond to claims in excess of primary limits, thereby reducing the System’s maximum
exposure to loss. SHS also provides other insurance, including coverage for property, directors and
officers, workers compensation, and other liabilities with limits that are deemed reasonable and
customary for health care providers of comparable size and condition. See Note 16 to the audited
financial statements included in Appendix B to this Limited Offering Memorandum for additional
information.
LITIGATION
At any given time the Obligated Group has a number of lawsuits pending. In the opinion of
management there is no pending malpractice or other litigation pending or threatened against the
Obligated Group wherein an unfavorable decision would adversely affect its ability to carry out
obligations under the Bond Indenture, the Loan Agreement or the Master Indenture or would have a
material adverse impact on the financial position or operations of the Obligated Group.
A-38
APPENDIX B
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION OF
SCHUYLKILL HEALTH SYSTEM AND CONTROLLED ENTITIES
FOR THE YEARS ENDED JUNE 30, 2013 AND 2012
Schuylkill Health System and
Controlled Entities
Financial Statements and
Supplementary Information
June 30, 2013 and 2012
Schuylkill Health System and Controlled Entities
Table of Contents
June 30, 2013 and 2012
Page
Independent Auditors’ Report
1
Financial Statements
Consolidated Balance Sheet
3
Consolidated Statement of Operations
4
Consolidated Statement of Changes in Net Assets
5
Consolidated Statement of Cash Flows
6
Notes to Consolidated Financial Statements
7
Supplementary Information
Consolidating Schedules for 2013:
Balance Sheet
40
Statement of Operations
42
Statement of Changes in Net Assets
43
Consolidating Schedules for 2012:
Balance Sheet
44
Statement of Operations
46
Statement of Changes in Net Assets
47
Independent Auditors’ Report
Board of Directors
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Schuylkill Health System
and Controlled Entities (collectively, the “Corporation”), which comprise the consolidated balance
sheet as June 30 2013 and 2012, and the related consolidated statements of operations, changes
in net assets, and cash flows for the years then ended, and the related notes to the financial
statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of
America; this includes the design, implementation, and maintenance of internal control relevant to
the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated 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
consolidated 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 consolidated
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
1
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Schuylkill Health System and controlled entities as of June 30,
2013 and 2012, and the results of their operations, changes in net assets and cash flows for the
years then ended in accordance with accounting principles generally accepted in the United States
of America.
Emphasis of Matter
As disclosed in Note 2 to the consolidated financial statements, the Corporation adopted new
authoritative guidance for the presentation and disclosure of patient service revenue, provision for
bad debts, and the allowance for doubtful accounts in 2013. Our opinion is not modified with
respect to this matter.
Report on Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the consolidated financial
statements as a whole. The consolidating supplementary information presented on pages 40 to 47
is presented for purposes of additional analysis rather than to present the financial position, results
of operations, and changes in net assets of the individual entities and is not a required part of the
consolidated financial statements. Such information is the responsibility of management and was
derived from and relates directly to the underlying accounting and other records used to prepare the
consolidated financial statements. The information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and certain additional procedures,
including comparing and reconciling such information directly to the underlying accounting and
other records used to prepare the consolidated financial statements or to the consolidated financial
statements themselves, and other additional procedures in accordance with auditing standards
generally accepted in the United States of America. In our opinion, the information is fairly stated in
all material respects in relation to the consolidated financial statements as a whole.
Wilkes-Barre, Pennsylvania
October 15, 2013
2
Consolidated Balance Sheet
June 30, 2013 and 2012
2013
2012
2013
Assets
Current Assets
doubtful collections of $43,029,000
in 2013 and $38,027,000 in 2012)
Other
$
4,177,171
2,150,441
$
3,411,479
2,045,217
16,237,911
557,614
91,413
2,573,067
1,075,458
16,265,668
786,680
505,466
2,318,195
1,290,701
26,863,075
26,623,406
5,202,164
2,794,651
730,113
6,168,144
2,988,339
686,686
Total assets whose use is limited
8,726,928
9,843,169
1,486,061
1,428,574
Current Liabilities
Current maturities of obligation under capital leases
Accrued expenses
$
3,831,646
3,696,646
Beneficial Interest in Perpetual
Trusts
4,501,670
4,076,095
42,691,391
41,537,080
2,458,341
1,839,709
60,720
66,240
Other Assets
Deferred Financing Costs, Net
$
90,619,832
$
1,250,000
1,878,583
2,958,554
6,870,745
7,794,929
898,600
$
2,500,000
2,111,056
1,989,793
7,187,990
7,517,295
898,600
21,651,411
22,204,734
22,588,377
937,566
5,936,125
24,039,498
1,007,509
1,341,149
2,695,517
29,462,068
29,083,673
23,161,151
30,382,888
2,059,386
2,200,845
Other Liabilities
4,814,680
4,104,643
81,148,696
87,976,783
3,657,909
409,676
5,403,551
(4,523,140)
679,300
4,977,976
9,471,136
1,134,136
Long-Term Debt
Mortgage payable
Loan payable
Total long term debt
Pension Liability
Total assets
2012
Total liabilities
Unrestricted
Total net assets
89,110,919
See notes to consolidated financial statements
3
$
90,619,832
$
89,110,919
Consolidated Statement of Operations
Years Ended June 30, 2013 and 2012
Unrestricted Revenues, Gains, and Other Support
Patient service revenues (net of contractual allowance and discounts)
2013
2012
$ 157,500,891
(14,029,302)
$ 156,988,824
(10,808,311)
Net patient service revenues less provision for bad debts
Net assets released from restrictions for operations
Total unrestricted revenues, gains,
and other support
Expenses
Salaries and wages
Employee benefits
Personnel services
Maintenance expense
Other expenses
Interest
Insurance
Total
Operating income
Other Income (Loss)
Investment income
Other
Total other (loss) income
Revenues in excess of expenses
Postretirement Benefit Liability Adjustment
Net Assets Released from Restrictions Used
for Purchase of Property and Equipment
Increase (decrease) in unrestricted net assets
4
$
143,471,589
146,180,513
6,754,235
87,879
3,549,275
30,879
150,313,703
149,760,667
70,571,901
21,450,166
17,477,072
13,514,296
8,614,749
6,321,007
7,015,139
1,903,051
1,912,049
69,333,400
22,006,182
18,907,908
13,079,241
8,807,941
6,383,804
7,077,297
1,932,984
1,803,848
148,779,430
149,332,605
1,534,273
428,062
7,442
(48,992)
724,174
(42,287)
(41,550)
681,887
1,492,723
1,109,949
5,983,191
(14,421,644)
146,407
(684,631)
-
26,800
558,728
180,908
8,181,049
$ (13,788,618)
Consolidated Statement of Changes in Net Assets
2013
Unrestricted Net Assets
Revenues in excess of expenses
Pension liability adjustment
Postretirement benefit liability adjustment
Other net asset activity
Net assets released from restrictions for
purchase of property and equipment
$
1,492,723
5,983,191
146,407
-
2012
$
558,728
Decrease in temporarily
restricted net assets
Permanently Restricted Net Assets
Transfer from temporarily restricted net assets
Valuation gain (loss)
Increase in permanently
Increase (decrease) in net assets
Net Assets, Beginning
Net Assets, Ending
$
(13,788,618)
367,140
9,843
(87,879)
481,813
15,312
(510,000)
(30,879)
(558,728)
(180,908)
(269,624)
(224,662)
425,575
510,000
(22,707)
425,575
487,293
8,337,000
(13,525,987)
1,134,136
14,660,123
9,471,136
5
180,908
8,181,049
Temporarily Restricted Net Assets
Contributions
Investment income
Transfer to permanently restricted net assets
Net assets released from restrictions for operations
Net assets released from restrictions for purchase
of property and equipment
1,109,949
(14,421,644)
(684,631)
26,800
$
1,134,136
Consolidated Statement of Cash Flows
2013
Cash Flows from Operating Activities
Adjustments to reconcile increase (decrease) in net assets
to net cash provided by operating activities:
Amortization of bond discount
Gain on disposal of property and equipment
Restricted contributions and investment income
Net realized and unrealized losses (gains) on investments
Valuation (gain) loss
Changes in assets and liabilities:
Accounts receivable, patients
Other receivables
Other assets
Pension liability
Postretirement benefit liability
Accrued expenses and other liabilities
$
Net cash provided by operating activities
Cash Flows from Investing Activities
Net decrease in assets whose use is limited and investments
Increase in investment in Pennsylvania Community
Proceeds from sale of property and equipment
Purchases of property and equipment
Net cash used in investing activities
Cash Flows from Financing Activities
Restricted contributions and investment income
Repayment of bonds, mortgage payable, and capital lease obligations
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and Cash Equivalents, Beginning
8,337,000
2012
$ (13,525,987)
8,614,749
23,879
(9,542)
14,029,302
(376,983)
(5,983,191)
(146,407)
41,130
(425,575)
8,807,941
25,260
(88,451)
10,808,311
(497,125)
14,421,644
684,631
(624,598)
22,707
(14,001,545)
229,066
(254,872)
215,243
(618,632)
(365,879)
414,053
(1,238,546)
4,948
987,671
(11,052,034)
230,991
77,230
(469,158)
(1,586,305)
(4,728,702)
5,042,144
(3,463,866)
(58,995)
3,017,411
9,475,869
7,043,049
912,400
111,353
(135,000)
54,587
(2,942,677)
(150,000)
73,994
(1,612,156)
(2,110,690)
(1,576,809)
376,983
(6,976,470)
497,125
(4,567,038)
(6,599,487)
(4,069,913)
765,692
1,396,327
3,411,479
2,015,152
Cash and Cash Equivalents, Ending
$
4,177,171
$
3,411,479
Supplemental Disclosure of Cash Flow Information
Cash paid for interest
$
1,865,601
$
2,003,091
$
6,817,274
$
2,554,446
Capital lease obligations incurred for property and equipment
6
June 30, 2013 and 2012
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Schuylkill Health System (the “System”) is a not-for-profit corporation that was formed on
August 1, 2008. Its primary service area includes Pottsville, Pennsylvania and surrounding
communities in Schuylkill County, Pennsylvania. Its general purposes are to promote and
advance charitable health, scientific, social, and educational purposes and to enhance the
quality of life and benefit the inhabitants of Schuylkill County, Pennsylvania, and surrounding
areas and, among other things, to:
a) Engage in activities related to the promotion of health of people in the System’s
service area;
b) Work charitably to promote community health education, prevention of illness and
injury and provision of medical services to the diverse population of the service area;
c) Engage in any and all activities consistent with or in furtherance of the above
purposes; and
d) Without otherwise limiting its powers, engaging in any lawful act or activity in
furtherance of its purposes and for which a nonprofit corporation may be formed in
Pennsylvania, and which may be undertaken by a corporation that is exempt from
taxation under Section 501 (c)(3) of the Internal Revenue Code.
The System controls Schuylkill Medical Center, Inc. – South Jackson Street (“South Jackson
Medical Center”), Schuylkill Medical Center, Inc. – East Norwegian Street (“East Norwegian
Medical Center”), Schuylkill Health System Foundation (the “Foundation”), Schuylkill Medical
Group, Inc. (“SMG”), Schuylkill Development Corporation (the “Development Corporation”),
and Schuylkill Rehabilitation Center, Inc. (the “Center”). In addition, the System has a direct
financial interest in Schuylkill Health System Medical Mall Limited Partnership (the
“Partnership”) through which they are deemed to have control and, therefore, it is
consolidated for financial reporting purposes. The operations and activities of such
organizations are briefly described in the following paragraphs.
The South Jackson Medical Center and East Norwegian Medical Center (collectively, the
“Medical Centers”) are not-for-profit acute care hospitals located in Pottsville, Pennsylvania
serving patients in Pottsville and surrounding communities in Schuylkill County,
Pennsylvania.
The Foundation is a not-for-profit corporation that was established for the purpose of
soliciting contributions for the benefit of the System. During fiscal 2012, the Board of
Directors of the System approved the dissolution of the Foundation and the transfer of all
Foundation funds to East Norwegian Medical Center.
SMG is a not-for-profit corporation that is comprised of physicians working to promote
community health through health education, prevention of illness and injury, and provision of
medical services to patients in Pottsville and the surrounding communities.
7
June 30, 2013 and 2012
The Development Corporation is a for-profit corporation that was created in order to pursue,
implement, and further the authorized activities and purposes of the System.
The Center is a not-for-profit corporation located in Pottsville, Pennsylvania which provides
outpatient rehabilitation services to patients in its service area. Its primary service area
includes Pottsville, Pennsylvania and surrounding communities in Schuylkill County,
Pennsylvania.
The Partnership is a for-profit limited partnership in which the Development Corporation is
the general partner and East Norwegian Medical Center is a limited partner. The Partnership
owns a medical office building which provides rental office space for healthcare related
services, including physician offices and ancillary services.
Basis of Consolidation
The consolidated financial statements include the accounts of the System, the controlling
parent, the Medical Centers, the Foundation, SMG, the Development Corporation, the
Center, and the Partnership (collectively referred to as, the “Corporation”). All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments in highly liquid debt instruments purchased
with a maturity of three months or less, excluding assets whose use is limited and long-term
investments.
Assets whose use is limited include designated assets set aside by the Board of Directors
for future capital improvements, over which the Board retains control and may, at its
discretion, subsequently use for other purposes and assets held by a bond trustee under a
trust indenture. Amounts available to meet current liabilities have been reclassified as
current assets in the accompanying consolidated balance sheet.
8
June 30, 2013 and 2012
Patient Accounts Receivable
Accounts receivable, patients are reported at net realizable value. Accounts are written off
when they are determined to be uncollectible based upon management’s assessment of
individual accounts. In evaluating the collectibility of patient accounts receivable, the
Corporation analyzes its past history and identifies trends for each of its major payor
sources of revenue to estimate the appropriate allowance for doubtful accounts and
provision for bad debts. For receivables associated with services provided to patients who
have third-party coverage (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 Corporation analyzes contractual amounts due and provides an allowance for
doubtful accounts and a provision for bad debts, if necessary. For receivables associated
with self-pay patients (which includes both patients without insurance and insured patients
with deductible and copayment balances), the Corporation records a significant provision for
bad debts 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 billed rates and the amounts actually
collected after all reasonable collection efforts have been exhausted is charged off against
the allowance for doubtful accounts.
The Corporation’s allowance for doubtful accounts for self-pay patients was 95% of self-pay
accounts receivable at June 30, 2013 and 2012. In addition, the Corporation’s self-pay
account write-offs (net of recoveries) increased to $8,765,000 in 2013 from $3,812,000 in
2012. This significant increase in self-pay account write-offs is due to a number of factors
that have affected the Corporation in the same manner as has been the trend nationwide.
These factors include (1) the number of uninsured and under insured patients has increased
in the past few years, (2) the number of patients with insurances that have added co-pays
and deductibles to the plan design has increased in the past few years, and (3) the number
of patients insured by what are described as “high-co-pay and deductible plans” has also
increased in the past few years. The Corporation has not changed its financial assistance
policy in 2013 or 2012. The Corporation does not maintain a material allowance for doubtful
accounts from third-party payors, nor did it have significant write-offs from third-party payors.
Accounts Receivable, Other
Accounts receivable, other are reported at net realizable value. Accounts are written off
when they are determined to be uncollectible based upon management’s assessment of
individual accounts. The allowance for doubtful collections is estimated based upon a
periodic review of individual accounts. The allowance for doubtful collections was
approximately $501,000 at June 30, 2013 and $515,000 at June 30, 2012.
Inventories of Drugs and Supplies
Inventories of drugs and medical and surgical supplies are stated at the lower of cost or
market. Cost is determined on the first-in, first-out basis.
9
June 30, 2013 and 2012
Investments and Investment Risk
Investments in equity securities with readily determinable fair values and all investments in
debt securities are measured at fair value in the consolidated balance sheet. Cash and cash
equivalents and certificates of deposit are carried at cost which approximates fair value.
Investment income or loss (including realized gains and losses on investments, unrealized
gains and losses on investments, interest, and dividends) is included in the determination of
revenues in excess of expenses unless the income or loss is restricted by donor or law.
Donor restricted investment income is reported as an increase in temporarily restricted or
permanently restricted net assets depending on type of restriction. Interest income
is measured as earned on the accrual basis. Dividends are measured based on the exdividend date. Purchases and sales of securities and realized gains and losses are recorded
on a trade-date basis.
Although the Corporation’s assets are invested in a variety of financial instruments, the
related fair values, as reported in the consolidated financial statements, are subject to
various market risks including changes in the equity markets, the interest rate environment,
and general economic conditions. Due to the level of risk associated with certain investment
securities and the level of uncertainty related to changes in the fair value of investment
securities, it is reasonably possible that the fair value of investments reported in the
accompanying consolidated balance sheet could materially change in the near term.
Other Investment
The Corporation has a financial interest in Pennsylvania Community Hospital Association
which is recorded at cost based on the Corporation’s lack of control and ownership
percentage of less than 1%.
Split-Interest Agreements
Under the terms of perpetual trust agreements, the Corporation recorded assets and
recognized permanently restricted contributions at the fair value of the Corporation’s
beneficial interest in the perpetual trust assets. Income earned on the trust assets and
distributed to the Corporation is recorded as other operating revenue and temporarily
restricted investment income in the accompanying consolidated statements of operations
and changes in net assets depending on the terms of the trust agreements. Subsequent
changes in fair value are recorded as a valuation gain or loss in permanently restricted net
assets. The fair value of the Corporation’s beneficial interest in such perpetual trust assets
was $4,501,670 at June 30, 2013 and $4,076,095 at June 30, 2012.
10
June 30, 2013 and 2012
Property and Equipment
Property and equipment acquisitions are recorded at cost. Depreciation, including
amortization of equipment under capital lease, is computed using the straight-line method
over the shorter period of the lease term or the estimated useful life of each classification of
depreciable asset. Depreciation expense was $8,609,229 for the year ended June 30, 2013
and $8,802,421 for the year ended June 30, 2012.
Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted
support 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.
Impairment losses are recognized in the consolidated statement of operations as a
component of revenues in excess of expenses. The Corporation reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. If expected cash flows are less than the carrying
value of the asset, an impairment loss is recognized for the difference between the
estimated fair value and the carrying value of the asset. No such losses were recognized in
2013 and 2012.
Deferred Financing Costs
Costs incurred in connection with the issuance of hospital revenue bonds are being
amortized using the straight-line method over the term of the bonds. Amortization was
$5,520 for the years ended June 30, 2013 and 2012. Accumulated amortization was
$83,330 as of June 30, 2013 and $77,810 as of June 30, 2012.
Revenues in Excess of Expenses
The consolidated statement of operations includes the determination of revenues in excess
of expenses. Changes in unrestricted net assets which are excluded from the determination
of revenues in excess of expenses, consistent with industry practice, include the pension
liability adjustment, postretirement benefit liability adjustment, 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).
11
June 30, 2013 and 2012
Net Patient Service Revenues
The Corporation has agreements with third-party payors that provide for payments to the
Corporation at amounts different from its established rates. Payment arrangements include
prospectively determined rates per discharge, reimbursed costs, discounted charges, per
diem payments, and contracted amounts. The Corporation recognizes patient service
revenue associated with services provided to patients who have third-party payor coverage
on the basis of these established rates for the services rendered. For uninsured patients that
do not qualify for charity care, the Corporation recognizes revenues on the basis of its
standard rates, discounted in accordance with the Corporation’s policy. On the basis of
historical experience, a significant portion of the Corporation’s uninsured patients will be
unable or unwilling to pay for the services provided. Thus, the Corporation records a
significant provision for bad debts related to uninsured patients in the period the services are
provided. Patient service revenues, net of contractual allowances and discounts (but before
the provision of bad debts), recognized in 2013 and 2012 from these major payor sources,
are as follows:
Third-Party
Government
Payors
Patient service revenues
(net of contractual
allowance and
discounts)
$
68,871,629
June 30, 2013
Third-Party
Commercial
Self Pay
Payors
$
81,000,288
$
Total
All Payors
7,628,974
$ 157,500,891
8,388,937
$ 156,988,824
June 30, 2012
Patient service revenues
(net of contractual
allowance and
discounts)
$
70,655,035
$
77,944,852
$
Charity Care
The Corporation provides care to patients who meet certain criteria without charge or at
amounts less than its established rates. Because the Corporation does not pursue collection
of amounts determined to qualify as charity care, such amounts are not reported as
revenues. In addition, the Corporation provides its facilities, personnel, and services to the
community. The cost of these services has not been quantified for purposes of the financial
statements.
The Corporation maintains records to identify the level of charity care it provides. The costs
associated with the charity care services provided are estimated by applying a cost-tocharge ratio to the amount of gross uncompensated charges for the patients receiving
charity care. The level of charity care provided by the Corporation amounted to
approximately $626,000 in 2013 and $653,000 in 2012.
12
June 30, 2013 and 2012
Donor-Restricted Gifts
Unconditional promises to give cash and other assets are reported at fair value at the date
the promise is received. Conditional promises to give and indications of intentions to give
are reported at fair value at the date the gift is received. The gifts are reported as either
temporarily or permanently restricted support if they are received with donor stipulations that
limit the use of the donated assets. When a donor restriction expires, that is, when a
stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted
net assets are reclassified as unrestricted net assets and reported in the consolidated
statement of operations as net assets released from restrictions.
Income Taxes
The System, the Medical Centers, the Foundation, SMG, and the Center are not-for-profit
corporations as described in Section 501(c)(3) of the Internal Revenue Code and are
exempt from federal income taxes on their exempt income under Section 501(a) of the
Code.
The Corporation prescribes a recognition threshold of more-likely-than-not to be sustained
upon examination by the appropriate taxing authority in recording tax liabilities in the
financial statements. Measurement and recognition of the tax uncertainty occurs if the
recognition threshold has been met.
The Corporation’s federal Exempt Organization Returns of Income Tax and its Business
Income Tax Returns for the years ended prior to June 30, 2010 no longer remain subject to
examination by the Internal Revenue Service.
The Corporation’s policy is to recognize interest related to unrecognized tax benefits in
interest expense and penalties in supplies and expenses.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $261,759 for the year
ended June 30, 2013 and $256,385 for the year ended June 30, 2012.
Estimated Medical Malpractice Claims Liability
The provision for estimated medical malpractice claims includes estimates of the ultimate
costs for both reported claims and claims incurred but not reported, including costs
associated with litigating or settling claims. Anticipated insurance recoveries associated with
reported claims are reported in the Corporation’s balance sheet at net realizable value.
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by the Corporation 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 Corporation in perpetuity.
13
June 30, 2013 and 2012
Subsequent Events
The Corporation evaluated subsequent events for recognition or disclosure through
October 15, 2013, the date the consolidated financial statements were issued.
Reclassifications
Certain items relating to 2012 have been reclassified to conform to the 2013 reporting
format.
2. New Accounting Pronouncements
Net Patient Service Revenue and Allowance for Doubtful Accounts
The Corporation adopted new authoritative guidance on patient service revenue, provision
for bad debts, and the allowance for doubtful accounts for the year ended June 30, 2013.
The objective of the new guidance is to provide financial statement users with greater
transparency about a health care entity’s net patient service revenues and related allowance
for doubtful accounts.
The new authoritative guidance requires the following changes to existing accounting
practices:

Reclassification on the consolidated statement of operations of the provision for bad
debts from an operating expense to a deduction from patient service revenue, net of
contractual allowances and discounts;

Enhanced disclosure about policies for recognizing revenue and the provision for
bad debts by major payor source of revenue, and qualitative and quantitative
information about significant changes in the allowance for doubtful accounts related
to patient accounts receivable, including significant estimates and underlying
assumptions, self-pay write-offs, third-party write-offs, and uninsured transactions;
and

Disclosure of patient service revenue, net of contractual allowances and discounts,
by major payor source.
The new authoritative guidance also requires retrospective application related to
presentation in the statement of operations and prospective application to the disclosure
requirements.
As a result of adopting the new authoritative guidance, the Corporation reclassified its
provision for bad debts in the consolidated statement of operations for the year ended
June 30, 2012, decreasing total unrestricted revenues, gains, and other support and total
expenses by approximately $10,808,311. No other reclassifications or modifications have
been made to the Corporation’s 2012 consolidated financial statements as a result of
adoption.
14
June 30, 2013 and 2012
Fair Value Measurements
The Corporation adopted new and clarified guidance on fair value measurements (highest
and best use, equity instruments, managed net portfolio positions, and application of
premiums and discounts) and disclosure (quantitative information, valuation processes and
sensitivity of unobservable inputs, assets not in highest and best use, and assets not
measured at fair value) for the year ended June 30, 2013. The adoption of this guidance
required certain additional disclosures in the notes to the consolidated financial statements.
3. Net Patient Service Revenues
The Corporation has agreements with third-party payors that provide for payments to the
Corporation at amounts different from its established rates. A significant portion of the
Corporation's net patient service revenues are derived from these third-party payor programs. A
summary of the principal payment arrangements with major third-party payors follows:

Medicare - Acute care, rehabilitation, and outpatient services rendered to Medicare
program beneficiaries are paid at prospectively determined rates. These rates vary
according to patient classification systems that are based on clinical, diagnostic, and
other factors. Psychiatric services rendered to Medicare program beneficiaries are paid
based on a blending of a prospectively determined daily rate and a cost reimbursement
methodology subject to various limitations. Bad debts and medical education costs
related to Medicare beneficiaries are paid based on a cost reimbursement methodology
subject to various limitations. The Corporation’s Medicare cost reports have been settled
by the Medicare fiscal intermediary through June 30, 2009.

Medical Assistance - Inpatient acute care services rendered to Medical Assistance
program beneficiaries are paid at prospectively determined rates per discharge. These
rates vary according to a patient classification system that is based on clinical,
diagnostic, and other factors. Inpatient psychiatric and rehabilitation services rendered to
Medical Assistance program beneficiaries are paid at prospectively determined rates per
day. Outpatient services are paid based on a published fee schedule.

Blue Cross - Inpatient services rendered to Blue Cross subscribers are, generally, paid
at prospectively determined rates. These rates vary according to patient classification
systems that are based on clinical, diagnostic, and other factors. Outpatient services are,
generally, paid based on a percentage of established Hospital charges.
Net patient service revenues increased approximately $1,643,000 and $681,000, respectively
for the years ended June 30, 2013 and 2012, as a result of settlements and/or adjustments of
prior years’ cost reports with third-party payors.
The Corporation has also entered into agreements with certain commercial insurance carriers,
health maintenance organizations, and preferred provider organizations. The basis for payment
to the Corporation under these agreements includes prospectively determined rates per
discharge, discounts from established charges, and prospectively determined daily rates.
15
June 30, 2013 and 2012
Effective July 1, 2010, the Medical Centers are subject to Quality Care Assessments (the
“Assessment”) imposed by the Pennsylvania Department of Public Welfare (“DPW”) under
Pennsylvania Act 49 of 2010, which is 3.22% of net inpatient revenue from the Medical Centers
2008 fiscal year cost report. The Assessment was pursued by Pennsylvania in an effort to
increase the federal share of Medical Assistance funding under the Medicaid Modernization Act.
In turn, DPW provides additional reimbursement to the Hospital.
The Assessments totaled $2,426,260 and $2,429,395 for the years ended June 30, 2013 and
2012, respectively, which is included in supplies and expenses in the accompanying
consolidated statement of operations. Additional reimbursement received by the Hospital was
$2,773,068 and $2,624,595 for the years ended June 30, 2013 and 2012, respectively, which is
included in net patient service revenues.
4. Investments
Assets Whose Use is Limited
The composition of assets whose use is limited is set forth in the following table:
2013
By Board for future capital improvements:
Certificates of deposit
$
Subtotal
Under trust indenture, held by trustee (Note 8):
U.S. Treasury notes
Federal agency obligations:
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Accrued investment income
Subtotal
Under deferred compensation arrangement:
Large blend mutual fund
Subtotal
Total
Less funds held by trustee available to meet
current liabilities
Noncurrent portion of funds held by trustee
16
$
5,202,164
-
2012
$
5,680,942
487,202
5,202,164
6,168,144
2,218,654
669,208
2,113,131
727,153
452,819
587,048
1,008,000
9,363
609,712
599,024
972,684
11,852
4,945,092
5,033,556
100,272
629,841
155,309
531,377
730,113
686,686
10,877,369
11,888,386
2,150,441
2,045,217
8,726,928
$
9,843,169
June 30, 2013 and 2012
The composition of long-term investments is set forth in the following table.
2013
Total
2012
$
1,486,061
-
$
1,330,410
98,164
$
1,486,061
$
1,428,574
Unrestricted investment income and gains and losses for assets whose use is limited, longterm investments, and cash and cash equivalents are comprised of the following:
2013
Other income:
Interest and dividend income
Net unrealized (loss) gain on investments
Net realized gain on sales of investments
Total
17
$
48,572
(41,130)
-
$
7,442
2012
$
99,576
60,803
563,795
$ 724,174
June 30, 2013 and 2012
5. Fair Value Measurements and Financial Instruments
The Corporation measures its assets whose use is limited, investments, and beneficial interests
in perpetual trusts on a recurring basis in accordance with the fair value hierarchy. The financial
instruments were measured with the following inputs at June 30, 2013 and 2012:
Carrying
Value
Assets – Recurring fair
value measurements:
Investments and assets
whose use is limited
Cash and cash
equivalents
U.S. treasury notes
Federal agency
obligations:
Federal Home Loan
Bank
Federal Home Loan
Mortgage
Corporation
Federal National
Mortgage
Association
Large blend mutual
funds
$
9,016,514
669,208
2013
Quoted
Prices in
Active
Markets
(Level 1)
Fair
Value
$
9,016,514
669,208
$
Other
Observable
Inputs
(Level 2)
9,016,514
$
669,208
Unobservable
Inputs
(Level 3)
$
-
452,819
452,819
452,819
-
587,048
587,048
587,048
-
1,008,000
1,008,000
1,008,000
-
629,841
629,841
629,841
-
Subtotal
12,363,430
12,363,430
9,016,514
3,346,916
-
Beneficial interest in
perpetual trusts
4,501,670
4,501,670
-
-
4,501,670
$ 16,865,100
$ 16,865,100
$
9,016,514
$
3,346,916
$
4,501,670
Assets disclosed at fair
value
Cash and cash
equivalents
$
$
4,177,171
$
4,177,171
$
-
$
-
Liabilities disclosed at fair
value
Long-term debt and line of
credit (and excluding
capital lease obligations)
$ 26,654,526
$ 26,654,526
$
-
$ 26,654,526
$
-
Total
4,177,171
18
June 30, 2013 and 2012
Carrying
Value
Assets – Recurring fair
value measurements:
Investments and assets
whose use is limited
Cash and cash
equivalents
U.S. treasury notes
Federal agency
obligations:
Federal Home Loan
Bank
Federal Home Loan
Mortgage
Corporation
Federal National
Mortgage
Association
Large blend mutual
funds
$
9,291,644
585,366
727,153
2012
Quoted
Prices in
Active
Markets
(Level 1)
Fair
Value
$
9,291,644
585,366
727,153
$
Other
Observable
Inputs
(Level 2)
9,291,644
-
$
585,366
727,153
Unobservable
Inputs
(Level 3)
$
-
609,712
609,712
-
609,712
-
599,024
599,024
-
599,024
-
972,684
972,684
-
972,684
-
531,377
531,377
-
531,377
-
Subtotal
13,316,960
13,316,960
9,291,644
4,025,316
-
Beneficial interest in
perpetual trusts
4,076,095
4,076,095
-
-
4,076,095
$ 17,393,055
$ 17,393,055
$
9,291,644
$
4,025,316
$
4,076,095
Assets disclosed at fair
value
Cash and cash
equivalents
$
$
3,411,479
$
3,411,479
$
-
$
-
Liabilities disclosed at fair
value
Long-term debt and line of
credit (and excluding
capital lease obligations)
$ 30,999,212
$ 30,999,212
$
-
$ 30,999,212
$
-
Total
3,411,479
19
June 30, 2013 and 2012
Changes in the beneficial interest in perpetual trust assets in 2013 and 2012 were as follows:
2013
Beginning balance
$
Valuation gain (loss)
4,076,095
2012
$
425,575
Ending balance
$
4,501,670
4,098,802
(22,707)
$
4,076,095
The following is a description of the valuation methodologies used for assets measured at fair
value and for financial instruments disclosed at fair value. There have been no changes in
methodologies used at June 30, 2013 and 2012.
Cash and cash equivalents: The carrying amounts approximate fair value because of the short
maturity of this financial instrument.
Certificates of deposit, U.S. government and agency obligations: Valued at fair value based
upon quoted market prices, if available, or estimated using quoted market prices for similar
securities.
Beneficial interest in perpetual trusts: Valued at fair value that takes into consideration the
underlying principal for these assets and the Corporation’s interest in earnings of the trusts
which approximates fair value based on discounted cash flows.
Long-term debt and line of credit (and excluding capital lease obligations): Valued based on
current rates offered for similar issues with similar security terms and maturities, or estimated
using a discount rate that a market participant would demand.
20
June 30, 2013 and 2012
6. Property and Equipment and Accumulated Depreciation
Property and equipment and accumulated depreciation at June 30, 2013 and 2012 are as
follows:
2013
Land
Land improvements
Buildings
Major movable equipment (including equipment
under capital lease)
Construction in progress
$
Total
Less accumulated depreciation
Property and equipment, net
$
1,103,075
927,751
107,131,013
2012
$
1,114,475
908,133
106,563,405
67,454,243
1,457,115
59,557,071
644,084
178,073,197
168,787,168
135,381,806
127,250,088
42,691,391
$
41,537,080
The cost of equipment under capital leases was $19,069,531 and $13,167,236 at June 30, 2013
and 2012, respectively. Accumulated amortization was $11,262,656 and $9,039,114 as of
June 30, 2013 and 2012, respectively.
7. Hospital Revenue Bonds
A summary of the South Jackson Medical Center revenue bonds at June 30, 2013 and 2012 is
as follows:
2013
2012
Series of 1998 Bonds
Bonds due in varying annual installments through 2024,
plus interest at rates ranging from 5.50% to 5.625%
$
Less current maturities
Less unamortized bond discount
Long-term debt
$
21
24,210,000
$
25,610,000
1,475,000
1,400,000
146,623
170,502
22,588,377
$
24,039,498
June 30, 2013 and 2012
Scheduled principal repayments are as follows:
Years ending June 30:
2014
2015
2016
2017
2018
Thereafter
Total
$
1,475,000
1,555,000
1,640,000
1,735,000
1,825,000
15,980,000
$
24,210,000
In connection with the issuance of the Series of 1998 Bonds, South Jackson Medical Center
and the City of Pottsville Hospital Authority (the “Authority”) entered into a loan agreement
whereby the Authority loaned the proceeds of the Series of 1998 Bonds to South Jackson
Medical Center for refunding of outstanding 1994 Bonds, establishment of a Debt Service
Reserve Fund, and payment of certain costs of issuance relating to the Series of 1998 Bonds.
The Series of 1998 Bonds are secured by an assignment and pledge of the gross revenues of
South Jackson Medical Center and the Center (the “Obligated Group”).
The above agreements contain certain covenants, the most restrictive of which requires the
Obligated Group to maintain a long-term debt service coverage ratio of not less than 1.1. For
the years ended June 30, 2013 and 2012, the Obligated Group was in compliance with the longterm debt service coverage ratio.
Optional Redemption
The Series of 1998 Bonds maturing on July 1, 2018 and July 1, 2024 are subject to
redemption prior to maturity, by the Authority at the direction of the Hospital, as a whole or in
part at any time on or after July 1, 2008. Series of 1998 Bonds to be redeemed shall be from
the maturities specified by the Authority and within a maturity shall be by lot or in any
customary manner of selection as determined by the bond trustee. Any such redemption
shall be made at a redemption price equal to 100% of the principal amount to be so
redeemed, plus interest accrued to the redemption date.
8. Mortgage Payable
The Center entered into a $3,000,000 mortgage loan to finance the construction of a new
rehabilitation facility. Interest is payable at 3.88%. The loan matures in May 2019 and is secured
by a first mortgage on the Center’s facility. The Center paid off the outstanding principal and
interest on the loan during 2013. As of June 30, 2012, the outstanding balance was $1,332,293.
22
June 30, 2013 and 2012
9. Loan Payable
On August 5, 2009, East Norwegian Medical Center entered into a $2,734,220 loan agreement
with the United States Department of Agriculture to purchase an Information Technology
System. Interest is payable at 4.375%. The loan matures on August 5, 2016. As of June 30,
2013 and 2012, outstanding borrowings were $1,341,149 and $1,727,421, respectively.
Scheduled principal repayments as of June 30, 2013 are as follows:
2014
2015
2016
2017
Total
$
403,853
421,879
440,711
74,706
$
1,341,149
10. Bank Lines of Credit
In March 2010, South Jackson Medical Center entered into a revolving line of credit agreement
with a commercial bank for $1,500,000, with interest at 3.75% at June 30, 2013. This line of
credit expires on April 30, 2014. Borrowings under this line of credit were $750,000 at June 30,
2013 and $1,500,000 at June 30, 2012.
In March 2010, East Norwegian Medical Center entered into a revolving line of credit with a
commercial bank for $1,000,000, with interest at 3.75% at June 30, 2013. This line of credit
expires on April 30, 2014. Borrowings under this line of credit were $500,000 at June 30, 2013
and $1,000,000 at June 30, 2012.
The revolving line of credit agreements are secured by deposits with the commercial bank with
which the agreements exist. The Foundation is guarantor under the above agreements.
11. Obligation Under Capital Leases
The Hospital is renting equipment under the terms of agreements accounted for as capital
leases. The future minimum lease payments and the present value of the net minimum lease
payments under the terms of the capital lease agreements are as follows as of June 30, 2013:
2014
2015
2016
2017
2018
$
Total minimum lease payments
3,242,097
2,421,826
2,098,529
1,429,789
325,025
9,517,266
Less amount representing interest
622,587
Present value of net minimum lease payments
23
$
8,894,679
June 30, 2013 and 2012
The present value of the net minimum lease payments has been classified as follows in the
accompanying consolidated balance sheet at June 30, 2013 and 2012 as follows:
2013
Long-term debt
Total
2012
$
2,958,554
5,936,125
$
1,989,793
2,695,517
$
8,894,679
$
4,685,310
12. Accrued Expenses
Accrued expenses as of June 30, 2013 and 2012 consist of the following:
2013
Paid time off
Salaries, wages, and benefits
Accrued interest
Accrued post-retirement benefit obligation –
current portion
Other
Total
$
3,433,465
3,504,933
674,560
2012
$
169,333
12,638
$
7,794,929
3,130,181
3,493,416
712,010
165,466
16,222
$
7,517,295
13. Self-Insurance Plan
The Corporation maintains a self-insurance program for its employee health coverages. The
Corporation accrues the estimated costs of incurred and reported and incurred and unreported
claims, after consideration of its stop-loss insurance coverages, based upon data provided by
the third-party administrator of the program and its historical claims experience. The
Corporation’s estimated self-insured health insurance liability at June 30, 2013 and June 30,
2012 was approximately $975,000 and $875,000, respectively and is included in accounts
payable in the consolidated balance sheets.
14. Pension Plan
SHS sponsors a defined benefit pension plan (the “Plan”) for eligible employees of South
Jackson Medical Center and the Center.
In January 2011, the Corporation’s board approved the curtailment of the Plan. The Corporation
curtailed the plan by freezing the accrual of future benefits for all non-union employees as of
January 1, 2011 and for the employees of The Office and Professional Employees International
Union (OPEIU) as of May 31, 2011. In accordance with generally accepted accounting
principles, the Corporation reduced the Plan’s projected benefit obligation as of June 30, 2011
by $5,624,109 for this curtailment. During 2012, the remainder of the Plan’s benefits were
frozen, which was primarily plan benefits for the employees of the SEIU Health Care
Pennsylvania CTW, CLC (SEIU). In accordance with generally accepted accounting principles,
the Corporation reduced the Plan’s projected benefit obligation by $1,515,355 as of June 30,
2012 for this curtailment.
24
June 30, 2013 and 2012
The following table sets forth the change in benefit obligation, the fair value of plan assets, and
the amounts recognized in the consolidated balance sheet:
2013
Change in projected benefit obligation:
Benefit obligation, beginning of period
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Curtailment
$
71,244,807
2,986,203
(3,290,758)
(1,863,846)
-
2012
$
56,426,134
514,315
3,192,439
14,359,039
(1,731,765)
(1,515,355)
Benefit obligation, end of year
69,076,406
71,244,807
Change in plan assets:
Fair value of plan assets, beginning of period
Actual return on plan assets
Employer contributions
Benefits paid
42,190,135
5,179,299
2,143,097
(1,863,846)
37,602,212
709,518
5,610,170
(1,731,765)
47,648,685
42,190,135
(21,427,721)
(29,054,672)
Fair value of plan assets, end of year
Funded status, end of year
Accumulated benefit obligation
$
69,076,406
$
71,244,807
The accrued pension cost at June 30, 2013 and 2012 is comprised of the following:
Defined benefit pension plan funded status,
end of year
2013
2012
$ (21,427,721)
$ (29,054,672)
(1,733,430)
(1,328,216)
$ (23,161,151)
$ (30,382,888)
Defined contribution plan,
employer contribution due September 15
Total
The following table sets forth the components of net periodic pension cost of the Plan:
2013
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
$
Net periodic pension cost
$
25
2,986,203
(3,252,746)
765,880
499,337
2012
$
514,315
3,192,439
(3,354,699)
1,067,221
$
1,419,276
June 30, 2013 and 2012
The Corporation intends to contribute approximately $705,000 to the plan in 2014.
The measurement date used to determine pension plan asset and benefit obligation information
was June 30.
A net actuarial loss of $25,059,726 represents the previously unrecognized components of net
periodic pension cost included in unrestricted net assets at June 30, 2013. During the year
ended June 30, 2013, the net actuarial loss decreased by $5,983,191 net of amortization of
$765,880.
The estimated amortization of net actuarial loss expected to be recognized in net periodic
pension cost in 2014 is $591,000.
The weighted-average assumptions used in computing the Corporation’s benefit obligation for
the plan at June 30, 2013 and 2012 are as follows:
Discount rate
Rate of compensation increase
2013
2012
5.00 %
N/A
4.25 %
N/A
The weighted-average assumptions used in the measurement of net periodic pension cost in
2013 and 2012 are as follows:
2013
Discount rate
Expected long-term return on plan assets
2012
4.25 %
7.75
-
5.75 / 4.50 %
8.50 / 7.75
2.00
The rates above for 2012 related to the discount rate and expected long-term return on plan
assets are split to reflect the rate at the beginning of fiscal year 2012 and the rate as of the date
of curtailment of the plan.
The following table sets forth the actual asset allocation and target asset allocation for plan
assets:
2013
Cash and equivalents
Equity securities
Fixed income
Real estate
Other
Total
26
2012
1 %
52
23
24
- %
51
25
24
100 %
100 %
Target
Asset
Allocation
- %
40 - 60
25 - 40
5 - 15
5 - 15
June 30, 2013 and 2012
The composition of plan assets at June 30, 2013 is set forth in the following table:
Risk
Tolerance
Equity mutual funds:
SEI Large cap disciplined equity 295
SEI Small/mid cap equity 296
SIIT World equity ex-us fund class A
Med
High
High
Amount
$
Total
11,747,363
3,424,932
7,255,701
22,427,996
Fixed income mutual funds:
SEI Core fixed income fund #285
SEI Institutional investment trust high yield bond
SEI Institutional investor fund long duration bond
SIIT Emerging markets debt fund
Low
Med
Med
Med
992,987
2,080,307
6,267,333
1,427,101
Total
10,767,728
Balanced mutual fund,
SIIT Dynamic asset allocation fund
Common and collective funds:
SEI Special situations collective fund
Cash pending SEI CORE property collective
investment fund
SEI Structured Credit collective fund
Med
2,398,190
Med
3,165,340
Low
High
3,466,012
5,023,419
Total
11,654,771
Money market funds,
SEI Daily income prime oblig
400,000
Total
$
27
47,648,685
June 30, 2013 and 2012
The composition of plan assets at June 30, 2012 is set forth in the following table:
Risk
Tolerance
SEI Large cap disciplined equity 295
SIIT World equity ex-us fund class A
Med
High
High
Amount
$
Total
10,025,679
2,841,942
6,595,965
19,463,586
SEI Institutional investment trust high yield bond
SEI Institutional investor fund long duration bond
Low
Med
Med
Med
941,581
1,923,924
5,989,697
1,446,871
Total
10,302,073
SEI Opportunity collective escrow
SEI Special situations collective fund
Cash pending SEI CORE property collective
investment fund
SEI Structured Credit collective fund
Med
2,180,854
Low
Med
31,823
2,868,461
Low
High
3,200,000
4,143,338
Total
10,243,622
Total
$
42,190,135
Investment objectives for the plan assets are to:
-
Maximize the investment return with the least amount of risk through a combination of
capital appreciation and income, and
-
Comply with the Employee Retirement Income Security Act of 1974 (“ERISA”) by
investing the funds in a manner consistent with ERISA’s fiduciary standards.
The expected long-term rate of return on plan assets is based upon historical returns of
specified benchmark investment categories that are weighted by targeted allocations of plan
assets. Adjustments are made to the expected long-term rate of return assumption when
deemed necessary based upon revised expectations of future investment performance of the
overall capital markets. The expected long-term rate of return assumption used in computing
2013 net periodic pension cost was 7.75%.
28
June 30, 2013 and 2012
The following table sets forth by level, within the fair value hierarchy, the plan assets at fair
value as of June 30, 2013:
Quoted
Prices in
Active
Markets
(Level 1)
SEI Large cap disciplined
equity 295
SIIT World equity ex-us fund
class A
SEI Institutional investment trust
high yield bond
SEI Institutional investor fund long
duration bond
SEI Special situations collective
fund
Cash pending SEI Core property
collective investment fund
SEI Structured credit collective
fund
Money market funds,
SEI Daily Income Prime oblig
Total
$
$
29
Other
Observable
Inputs
(Level 2)
11,747,363
3,424,932
$
Total
-
$
11,747,363
3,424,932
7,255,701
-
7,255,701
2,080,307
-
2,080,307
6,267,333
1,427,101
992,987
-
6,267,333
1,427,101
992,987
2,398,190
-
2,398,190
-
3,165,340
3,165,340
-
3,466,012
3,466,012
-
5,023,419
5,023,419
400,000
-
400,000
35,993,914
$
11,654,771
$
47,648,685
June 30, 2013 and 2012
The following table sets forth by level, within the fair value hierarchy, the plan assets at fair
value as of June 30, 2012:
Quoted
Prices in
Active
Markets
(Level 1)
SEI Large cap disciplined
equity 295
SIIT World equity ex-us fund
class A
SEI Institutional investment trust
high yield bond
SEI Institutional investor fund long
duration bond
SEI Opportunity collective fund
SEI Special situations collective
fund
Cash pending SEI Core property
collective investment fund
SEI Structured credit collective
fund
Total
$
$
30
Other
Observable
Inputs
(Level 2)
10,025,679
2,841,942
$
Total
-
$
10,025,679
2,841,942
6,595,965
-
6,595,965
1,923,924
-
1,923,924
5,989,697
1,446,871
941,581
-
5,989,697
1,446,871
941,581
2,180,854
-
2,180,854
-
31,823
31,823
-
2,868,461
2,868,461
-
3,200,000
3,200,000
-
4,143,338
4,143,338
31,946,513
$
10,243,622
$
42,190,135
June 30, 2013 and 2012
The following is a description of the valuation methodologies used for assets measured at fair
value. There have been no changes in the methodologies used at June 30, 2013.
Mutual funds are valued at the quoted net asset value (“NAV”) of shares held by the Plan at
year end.
The common and collective trust funds are valued based upon the NAV of the funds held by
the Plan at year end and the units of funds held by the Plan times the respective unit value.
The unit value of the funds is based upon significant observable inputs, although is not
based upon quoted market prices in an active market. The significant investment strategy of
the common and the collective trust funds is investing in private investment or hedge funds.
The Plan’s investment in the funds is subject to a one-year lockup upon initial investment
and is generally redeemable on a quarterly basis given a 65 day notice, at which time
quarterly distributions may be taken, subject to a 10% holdback. At this time, there is no
intention to liquidate the funds. The Plan has no unfunded commitments relating to the funds
as of June 30, 2013 or 2012.
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 Corporation
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.
Estimated future benefit payments at June 30, 2013 are as follows:
2014
2015
2016
2017
2018
2019 – 2023
Total
$
2,331,201
2,466,013
2,727,257
3,017,354
3,251,238
19,222,523
$
33,015,586
Defined Contribution Pension Plan
The Corporation established a defined contribution plan in 2009 that is available to
substantially all employees. Pension expense was approximately $1,733,000 and
$1,322,000 for the years ended June 30, 2013 and 2012, respectively.
31
June 30, 2013 and 2012
15. Postretirement Healthcare and Life Insurance Benefits
SHS sponsors a noncontributory defined benefit postretirement healthcare plan that provides
medical benefits and life insurance to eligible employees of South Jackson Medical Center.
Medical benefits are available to those non-union employees having at least five years of
service as of June 30, 1998 and union registered nurses who had reached retirement age as of
June 30, 2006. Effective July 1, 1999, the medical benefits portion of the plan contains costsharing features which are determined based upon years of service of the participant as of
June 30, 1998. The life insurance portion of the plan was frozen as of June 30, 1998. Effective
January 1, 2011, postretirement benefits for non-union active employees were discontinued
along with prescription drug and life insurance benefits for non-union retirees with coverage,
who will only receive medical coverage going forward. Non-union retirees with coverage as of
January 1, 2011 will continue with medical coverage only. The Corporation’s policy is to fund the
cost of the plan in amounts equal to the Corporation’s share of costs.
The following table sets forth the change in benefit obligation, the fair value of plan assets, and
the amounts recognized in the consolidated balance sheet at June 30, 2013 and 2012:
2013
Change in accumulated postretirement
benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
$
Benefit obligation, end of year
2012
2,366,311
13,588
97,052
(110,072)
(138,160)
$
2,228,719
Change in plan assets:
Fair value of plan assets, beginning of year
Employer contributions
Benefits paid
2,366,311
138,160
(138,160)
Fair value of plan assets, end of year
1,728,425
95,041
684,631
(141,786)
141,786
(141,786)
-
Total
$
(2,228,719)
$
(2,366,311)
The postretirement benefit liability is classified in the accompanying consolidated balance sheet
at June 30, 2013 and 2012 as follows:
2013
Accrued expenses
Postretirement benefit liability
Total
32
2012
$
169,333
2,059,386
$
165,466
2,200,845
$
2,228,719
$
2,366,311
June 30, 2013 and 2012
The following table sets forth the components of net periodic postretirement benefit cost for the
years ended June 30, 2013 and 2012:
2013
2012
Service cost
Interest cost
Amortization of unrecognized prior service cost
$
13,588
97,052
36,335
$
95,091
-
Net periodic postretirement cost
$
146,975
$
95,091
The Corporation anticipates contributing approximately $169,000 to the plan in 2014.
The measurement date used to determine the plan asset and benefit obligation information was
June 30.
A net loss of $647,596 represents the unrecognized components of net periodic postretirement
benefit cost included in unrestricted net assets at June 30, 2013.
The weighted-average assumptions used in computing the Corporation’s benefit obligation for
the plan at June 30, 2013 and 2012 are as follows:
Discount rate
2013
2012
4.50%
N/A
4.25%
N/A
The weighted-average assumptions used in the measurement of net periodic postretirement
benefit cost in 2013 and 2012 are as follows:
Discount rate
Expected long-term return on plan assets
2013
2012
4.25%
N/A
N/A
5.75%
N/A
N/A
Assumed healthcare costs trend rates are as follows at June 30, 2013 and 2012:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
33
2013
2012
8.5%
9.0%
5.0%
2021
5.0%
2021
June 30, 2013 and 2012
The healthcare cost trends were calculated based upon the Corporation's recent history of
health and life insurance costs and projections of future increases of insurance benefits. The
Corporation expects these trends in insurance costs to continue throughout the period that the
postretirement benefits are available to eligible employees. However, because of inherent
uncertainties in estimating these costs, it is at least reasonably possible that the estimates used
will change in the near term.
The effects of a 1% point increase or decrease in the assumed health care cost trend rates for
2013 are as follows:
1% Point Increase:
Effect on total service and interest cost components
Effect on accumulated postretirement benefit obligation
$
1% Point Decrease:
Effect on total service and interest cost components
Effect on accumulated postretirement benefit obligation
7,357
155,587
(6,634)
(138,196)
The following benefit payments, which reflect expected future services, as appropriate, are
expected to be paid:
2014
2015
2016
2017
2018
2019 - 2023
Total
$
169,333
156,651
158,372
160,345
161,821
734,070
$
1,540,592
16. Medical Malpractice Claims Coverage
The Corporation's medical malpractice insurance coverages are provided under the provisions
of the following insurance arrangements:
Primary coverage - Primary coverage is provided under the terms of an insurance contract
which covers losses, if any, which are reported during the period the contract is in force,
“claims-made coverage,” subject to the per occurrence and aggregate limits of such
contract.
34
June 30, 2013 and 2012
MCARE Fund coverage - The Pennsylvania Medical Care Availability and Reduction of Error
Fund (“MCARE Fund”) provides excess coverage per the Pennsylvania law governing the
MCARE Fund. Pursuant to the per occurrence and aggregate limits set forth in the
controlling Pennsylvania statutes, the MCARE Fund provides coverage for losses in excess
of the primary coverage that was in effect on the date of the incident. The cost of MCARE
Fund coverage is recognized as expense in the period incurred. Increases in annual
surcharges and concerns over the MCARE Fund’s ability to manage and pay claims
continues to result in proposals to reform or restructure the MCARE Fund. MCARE Fund
coverage is currently scheduled to be reduced in 2014, unless the State Insurance
Commissioner determines that additional primary insurance capacity is not available at that
time, and eliminated three years after such reduction. The Corporation will be required to
purchase additional primary insurance to take the place of the MCARE Fund coverage if it is
reduced. Depending upon the ultimate resolution of this matter, the Corporation may incur
additional insurance costs.
Excess coverage - The Corporation has two excess liability insurance contracts which insure
against losses in excess of the primary and MCARE Fund coverage reported during the
period of policy coverage.
The Corporation is a member of Pennsylvania Community Hospital Association (“PCHA”), a
Pennsylvania not-for-profit corporation. PCHA formed PACE Risk Retention Group, Inc.
(“PACE”) as a risk retention group to provide liability insurance and risk management services
to its members. The above primary and excess coverages are provided by PACE.
The annual primary and excess coverage premiums may be retrospectively adjusted based on
the actual costs incurred by PACE on behalf of the Corporation. The Corporation can be
assessed additional premiums up to 150% of annual premiums paid.
At June 30, 2013, the Corporation cannot determine the amount of any additional premiums it
may be assessed and has, therefore, expensed the billed premiums ratably over the term of the
policy.
The Corporation believes it has adequate insurance coverages for all asserted claims and it has
no knowledge of unasserted claims which would exceed its insurance coverages.
The Corporation’s estimated medical malpractice claims liability for both asserted and
unasserted claims was $3,582,165 and $2,902,174 as June 30, 2013 and 2012, respectively.
The Corporation has recorded a receivable, and related claim liability, for anticipated medical
malpractice insurance recoveries of $2,193,227 and $1,580,720 at June 30, 2013 and 2012,
respectively. The receivable is included in other non-current assets and the related claim liability
is included in other liabilities in the accompanying consolidated balance sheet. The
Corporation’s medical malpractice claims liability after anticipated insurance recoveries is
$1,388,938 and $1,321,454 at June 30, 2013 and 2012, respectively. It is reasonably possibly
that the estimates used could change materially in the near term.
35
June 30, 2013 and 2012
17. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets were available for the following purposes at June 30, 2013
and 2012:
2013
Other
Rehabilitation services
Community health
Diabetic services
Dental services
Renovations
Total
2012
$
131,959
99,133
88,412
59,171
31,001
-
$
175,190
99,369
78,628
58,898
30,858
236,357
$
409,676
$
679,300
Permanently restricted net assets consist of permanent endowment funds held by the
Corporation in perpetuity and the Corporation’s beneficial interests in a perpetual trusts held
by a bank serving as trustee. The terms of the perpetual trust are such that the Corporation
receives a portion of the income earned on the trust assets as earned in perpetuity. Trust
assets consist primarily of marketable equity securities, debt securities, mutual funds, and
cash equivalents and are recorded at their fair value as of June 30, 2013 and 2012 as
follows:
2013
Permanent endowment funds, the income from which
is expendable to support various healthcare
services (reported as investment income)
Beneficial interest in perpetual trusts, the income
from which is expendable for purchases of
property and equipment and then to support
certain healthcare services (reported as
temporarily restricted investment income)
Beneficial interest in perpetual trusts, the income
from which is expendable for the Corporation’s
charitable purpose (reported as other operating
revenue)
Total
$
$
36
901,881
2012
$
901,881
4,331,346
3,912,702
170,324
163,393
5,403,551
$
4,977,976
June 30, 2013 and 2012
18. Commitments and Contingencies
Operating Leases
Certain leases for property, equipment, and automobiles, which expire at various dates
through 2014 are classified as operating leases. Most of the leases provide for minimum
annual rentals plus payment of taxes and other operating expenses applicable to the leased
assets. In most cases, management expects that in the normal course of business, leases
will be renewed or replaced by other leases.
Rental expense for operating leases was $136,778 and $361,565 for the years ended
June 30, 2013 and 2012, respectively. The following is a schedule, by year, of future
minimum rental payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of June 30, 2013:
2014
2015
2016
2017
2018
$
Total
82,071
83,132
84,225
85,351
86,511
$ 421,290
Real Estate Taxes
As a not-for-profit corporation in the Commonwealth of Pennsylvania, the Corporation is an
organization which qualifies for an exemption from real property taxes; however, a number
of cities, municipalities, and school districts in the Commonwealth of Pennsylvania have
challenged and continue to challenge such exemption. The possible future financial effects
of this matter on the Corporation, if any, are not presently determinable.
Asbestos
The Corporation’s facilities, a portion of which were constructed prior to the passage of the
Clean Air Act, contain encapsulated asbestos material. Current law requires that this
asbestos be removed in an environmentally safe fashion prior to the demolition and
renovation of such facility. At this time, the Corporation has no plans to demolish or renovate
its facilities that contain encapsulated asbestos material, and as such, cannot reasonably
estimate the fair value of the liability for such asbestos removal. If plans change with respect
to the use of its facilities and information becomes available to estimate such a liability, it will
be recognized at that time.
Healthcare Industry
The healthcare industry is subject to numerous laws and regulations of federal, state, and
local governments. Compliance with these laws and regulations is subject to future
government review and interpretation as well as regulatory actions unknown or unasserted
at this time. Government activity continues to increase with respect to investigations and
allegations concerning possible violations by healthcare providers of fraud and abuse
statutes and regulations, which could result in the imposition of significant fines and
penalties as well as significant repayments for patient services previously billed.
Management is not aware of any material incidents of noncompliance; however, the
possible future financial effects of this matter on the Corporation, if any, are not presently
determinable.
37
June 30, 2013 and 2012
Medical Assistance Modernization (Act 49 of 2010)
Effective July 1, 2010, DPW implemented Act 49 of 201 (the “Act”) which modernized
Pennsylvania’s fee-for-service hospital payment system, established enhanced hospital
payments through the state’s Medical Assistance managed care program, and secured
additional matching of Medicaid funds through the establishment of the Assessment
(Note 4). Effective July 1, 2013 DPW implemented Act 55 of 2013, which reauthorized the
Assessment through June 30, 2016, after which time the additional reimbursement is not
guaranteed to remain. The potential effects of this are not known at this time.
19. Concentrations of Credit Risk
The Corporation grants credit to patients, substantially all of whom are local residents. The
Corporation generally does not require collateral or other security in extending credit; however,
it routinely obtains assignments of (or is otherwise entitled to receive) patients’ benefits
receivable under their health insurance programs, plans or policies.
At June 30, 2013 and 2012, concentrations of net receivables from third-party payors and others
are as follows:
2013
Commercial
Medicare
Blue Cross
Self pay
Medicaid
2012
39 %
31
13
11
6
27 %
34
17
11
11
100 %
100 %
Net patient service revenue, by payor class, consisted of the following for the years ended
June 30:
2013
Medicare
Blue Cross
Commercial
Medicaid
Self pay
Capitated
2012
39 %
31
18
6
5
1
39 %
32
17
7
5
-
100 %
100 %
The Corporation maintains its cash and cash equivalents in several financial institutions located
in Pennsylvania. The aggregate balance, for each corporation in the consolidated group, in each
financial institution is insured.
38
June 30, 2013 and 2012
20. Functional Expenses
The Corporation provides general acute care and related services to individuals within its
geographic location. Expenses related to providing these services for the years ended June 30,
2013 and 2012 are approximately as follows (in thousands):
Healthcare and other related services
General and administrative
Fundraising
Total expenses
2013
2012
$ 123,833
24,828
118
$ 120,756
28,473
104
$ 148,779
$ 149,333
21. Meaningful Use of Electronic Health Records
The American Recovery and Reinvestment Act of 2009 established one-time incentive
payments under the Medicare and Medicaid programs for hospitals that meaningfully use
certified electronic health records (“EHR”) technology. In general, a hospital may receive an
incentive payment for up to four years, provided it successfully demonstrates meaningful use of
certified EHR technology for the EHR reporting period. The key component of receiving the
EHR incentive payments is “demonstrating meaningful use,” which means meeting a series of
objectives that make use of an EHR’s potential related to the improvement of quality, efficiency,
and patient safety. Meaningful use will be assessed on a year-by-year basis.
Once the Corporation meets the requirements for an incentive payment, a preliminary payment
is made by The Centers for Medicare & Medicaid Services based on discharge data from the
Hospital’s most recently filed cost report. The final amount of the payment is determined at the
time the cost report for the period beginning in the payment year is settled, based on discharge
data from that cost report. The Corporation attested as a meaningful user for the year ended
June 30, 2013 and has recognized approximately $3,327,000 of EHR incentive funds for the
year ended June 30, 2013. The EHR incentive funds are included in other operating revenues in
the accompanying consolidated statement of operations.
The other operating revenues recognized are based on management’s estimate and it is
reasonably possible that the estimates used could change materially in the near term. Any such
changes would affect operations in the period in which they occur. The Corporation’s attestation
as a meaningful user is subject to audit by the Federal Government or its designee.
39
Consolidating Schedule, Balance Sheet
June 30, 2013
Schuylkill
Medical Center South Jackson
Street
Schuylkill
Rehabilitation
Center, Inc.
Schuylkill
Medical Center East Norwegian
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
Schuylkill
Health System
Foundation
Schuylkill Health
System Development
Corporation
Schuylkill Medical
Group, Inc.
Schuylkill Health
System Medical
Mall Limited
Partnership
Consolidation
Eliminations
Consolidated
Assets
Current Assets
doubtful collections of $43,029,000)
Other
$
Total
Beneficial Interest in Assets Held By
Affiliate
Other Assets
Total assets
$
1,682,742
2,150,441
$
997,440
-
$
-
$
2,680,182
2,150,441
$
94,714
-
$
685,422
-
$
-
$
367,586
-
$
75,965
-
9,597,563
156,085
1,403,816
1,375,711
539,632
337,032
199,336
-
9,934,595
156,085
1,403,816
1,375,711
738,968
1,618
74,380
1,000
6,172,741
399,911
241,705
1,094,871
980,341
522,058
-
130,575
-
-
807
16,905,990
1,533,808
-
18,439,798
171,712
10,097,049
-
1,650,252
2,794,651
-
560,078
-
-
2,210,330
2,794,651
-
-
2,991,834
730,113
-
4,444,903
560,078
-
5,004,981
-
3,721,947
538,019
-
-
538,019
-
948,042
3,427,892
-
-
3,427,892
-
403,754
$
273,302
-
$
-
$
4,177,171
2,150,441
-
20,047
2,625
(150,292)
(2,376,099)
(190,000)
16,237,911
557,614
91,413
2,573,067
1,075,458
498,968
75,965
295,974
(2,716,391)
26,863,075
-
-
-
-
5,202,164
2,794,651
730,113
-
-
-
-
-
8,726,928
-
-
-
-
-
1,486,061
-
-
-
-
-
3,831,646
-
-
-
-
-
-
-
-
-
-
-
-
4,331,346
-
-
4,331,346
-
170,324
-
-
-
-
-
4,501,670
-
-
-
-
-
224,404
-
-
220,442
-
23,945,999
2,131,645
-
26,077,644
-
16,234,826
-
-
-
378,921
-
42,691,391
998,297
-
-
998,297
-
1,460,044
-
-
-
-
-
2,458,341
60,720
-
-
60,720
-
-
-
-
-
-
-
54,653,166
$
4,225,531
$
-
$
58,878,697
$
171,712
$
40
33,260,390
$
-
$
498,968
$
296,407
$
674,895
(444,846)
$
(3,161,237)
-
60,720
$
90,619,832
June 30, 2013
Schuylkill
Street
Schuylkill
Rehabilitation
Center, Inc.
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
Schuylkill
Health System
Foundation
Schuylkill Health
System Development
Corporation
Schuylkill Medical
Group, Inc.
Schuylkill Health
System Medical
Mall Limited
Partnership
Consolidation
Eliminations
Consolidated
Current Liabilities
Accrued expenses
Estimated Third Party Settlements
Amounts due to affiliates
$
479,000
226,071
-
15,038,362
226,071
-
15,264,433
16,730
6,638,938
-
2,417,718
11,983
17,999
22,588,377
4,346,629
-
-
22,588,377
4,346,629
-
937,566
1,589,496
-
-
-
-
-
22,588,377
937,566
5,936,125
26,935,006
-
-
26,935,006
-
2,527,062
-
-
-
-
-
29,462,068
22,443,410
-
-
22,443,410
-
717,741
-
-
-
-
-
23,161,151
2,059,386
-
-
2,059,386
-
-
-
-
-
-
-
2,059,386
Other Liabilities
2,052,562
-
-
2,052,562
-
2,550,066
-
-
-
-
212,052
4,814,680
68,528,726
226,071
-
68,754,797
16,730
12,433,807
-
2,417,718
11,983
17,999
(2,504,338)
81,148,696
3,999,460
-
(14,745,466)
146,138
4,723,228
154,482
500
-
19,883,222
263,038
680,323
-
(1,918,750)
-
284,424
-
656,896
-
(656,899)
-
3,657,909
409,676
5,403,551
Long-Term Debt
Mortgage payable
Loan payable
Total long-term debt
Pension Liability
Total liabilities
Unrestricted
$
(18,744,926)
146,138
4,723,228
Total net assets (deficit)
750,000
1,475,000
1,870,351
3,973,151
6,340,568
150,292
-
(13,875,560)
$
54,653,166
$
3,999,460
$
4,225,531
-
$
$
-
750,000
1,475,000
1,870,351
4,199,222
6,340,568
150,292
479,000
$
(9,876,100)
$
58,878,697
$
16,730
-
$
500,000
403,583
1,088,203
2,809,705
1,417,847
419,600
154,982
20,826,583
171,712
$ 33,260,390
41
$
-
$
$
-
28,589
36,514
2,352,615
-
$
(1,918,750)
$
498,968
11,983
-
$
284,424
$
296,407
17,999
-
$
674,895
$
(2,716,390)
656,896
$
(201,500)
(150,292)
(2,364,598)
-
21,651,411
(656,899)
$
(3,161,237)
1,250,000
1,878,583
2,958,554
6,870,745
7,794,929
898,600
9,471,136
$
90,619,832
Consolidating Schedule, Statement of Operations
Year Ended June 30, 2013
Schuylkill
Street
Unrestricted Revenues, Gains
and Other Support
Patient service revenues (net of contractual allowance and discounts)
$
Net assets released from restrictions
for operations
Total unrestricted revenues,
gains, and other support
Expenses
Salaries and wages
Employee benefits
Personnel services
Maintenance expense
Other expenses
Interest
Insurance
Total expenses
Operating income (loss)
Other Income (Loss)
Investment income
Other
Total other (loss) income
95,252,669
(10,230,173)
Schuylkill
Rehabilitation
Center, Inc.
$
3,120,294
176,398
$
-
$
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
98,372,963
(10,053,775)
$
-
$
57,703,166
(3,911,780)
Schuylkill Health
Schuylkill
Health System Schuylkill Medical System Development
Corporation
Foundation
Group, Inc.
$
-
$
1,424,762
(63,747)
$
-
88,319,188
-
53,791,386
-
1,361,015
-
-
-
143,471,589
-
3,465,475
249,745
3,013,024
-
30,375
48,991
450,096
(503,471)
6,754,235
57,846
-
-
57,846
-
30,033
-
-
-
-
-
87,879
88,446,651
3,395,858
-
91,842,509
249,745
56,834,443
-
1,391,390
48,991
450,096
(503,471)
150,313,703
40,531,779
13,639,926
8,813,706
8,165,046
4,598,239
3,555,747
3,830,331
1,634,329
961,778
1,751,711
41,858
571,623
319,350
106,577
295,227
41,937
18,000
-
42,283,490
13,681,784
9,385,329
8,165,046
4,917,589
3,662,324
4,125,558
1,676,266
979,778
101,079
16,859
-
26,824,344
7,477,909
7,865,063
5,336,715
3,667,517
2,540,835
3,155,718
226,785
882,777
-
1,414,819
182,540
202,514
6,015
3,098
48,523
45,019
6,854
-
49,248
24,166
6,520
29,643
114,750
6,631
4,475
(338,150)
-
70,571,901
21,450,166
17,477,072
13,514,296
8,614,749
6,321,007
7,015,139
1,903,051
1,912,049
85,730,881
3,146,283
-
88,877,164
117,938
57,977,663
-
1,902,528
6,854
235,433
(338,150)
148,779,430
2,715,770
249,575
-
2,965,345
131,807
(1,143,220)
-
(511,138)
42,137
214,663
(165,321)
1,534,273
9,509
-
15,135
-
-
24,644
-
-
(16,920)
-
-
-
70
-
-
-
24,644
-
(16,920)
-
-
70
2,989,989
131,807
(1,160,140)
-
(511,138)
42,207
5,983,191
-
-
5,983,191
-
-
-
-
-
146,407
-
-
146,407
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Net Transfers to Affiliates
181,000
(81,000)
-
100,000
(100,000)
-
-
-
Net Assets Released from Restrictions Used
202,935
-
-
202,935
-
310,074
-
-
$
$ 157,500,891
(14,029,302)
-
-
Increase (decrease) in
unrestricted net assets
-
99,166
15,135
Distribution to Partners
$
3,296,692
264,710
Postretirement Benefit Liability Adjustmen
-
3,366,309
9,509
$
Consolidation
Eliminations
Consolidated
85,022,496
2,725,279
Schuylkill Health
System Medical
Mall Limited
Partnership
9,238,812
$
183,710
$
-
$
9,422,522
$
31,807
42
$
(850,066)
$
-
$
(511,138)
$
(352)
-
(48,992)
(352)
7,442
(48,992)
(48,992)
(41,550)
(214,313)
1,492,723
-
-
5,983,191
-
-
146,407
(160,000)
160,000
-
-
-
-
-
-
-
45,719
558,728
42,207
214,311
$
54,311
$
(8,594)
$
8,181,049
Consolidating Schedule, Statement of Changes in Net Assets
Schuylkill
Street
Distributions to partners
Net transfers to (from) affiliates
Net assets released from restrictions used
for purchase of property and equipment
$
$
181,000
Contributions
Investment income
Net transfers from affiliate
for operations
(Decrease) increase in temporarily
Valuation gain
Increase in permanently
Net Assets (Deficit), Beginning
Net Assets (Deficit), Ending
2,725,279
5,983,191
146,407
Schuylkill
Rehabilitation
Center, Inc.
$
-
$
2,989,989
5,983,191
146,407
100,000
$
131,807
(100,000)
$
(1,160,140)
-
Schuylkill
Health System
Foundation
$
-
202,935
-
-
202,935
-
310,074
-
9,238,812
183,710
-
9,422,522
31,807
(850,066)
-
180,638
6,277
82,455
-
-
180,638
6,277
82,455
148,486
(384,434)
38,016
3,566
301,979
-
(57,846)
-
-
(57,846)
(30,033)
(202,935)
-
-
(202,935)
(310,074)
8,589
-
-
8,589
3,454
418,644
-
-
418,644
6,931
-
(235,948)
-
418,644
-
-
418,644
9,666,045
183,710
-
9,849,755
(204,141)
3,815,750
-
(19,725,855)
359,123
(23,541,605)
$
264,710
(81,000)
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
(13,875,560)
$
3,999,460
$
-
$
(9,876,100)
-
$
154,982
43
6,931
21,666,264
20,826,583
$
$
(511,138)
-
Schuylkill Health
System Development
Corporation
$
-
42,207
-
Schuylkill Health
System Medical
Mall Limited
Partnership
$
214,311
(160,000)
-
Consolidation
Eliminations
Consolidated
$
(214,313)
160,000
-
$
-
54,311
-
-
-
-
-
-
-
-
-
-
-
(45,719)
(558,728)
-
-
-
-
(45,719)
(269,624)
-
-
-
-
558,728
(8,594)
8,181,049
-
367,140
9,843
-
-
(87,879)
-
425,575
-
-
-
(511,138)
42,207
54,311
(54,313)
8,337,000
-
(1,407,612)
242,217
602,585
(602,586)
1,134,136
-
-
45,719
1,492,723
5,983,191
146,407
-
42,207
(511,138)
-
(839,681)
$
Schuylkill Medical
Group, Inc.
$
(1,918,750)
$
284,424
$
656,896
-
$
(656,899)
425,575
$
9,471,136
June 30, 2012
Schuylkill
Street
Schuylkill
Rehabilitation
Center, Inc.
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
Schuylkill
Health System
Foundation
Schuylkill Medical
Group, Inc.
Schuylkill Health
System Development
Corporation
Schuylkill Health
System Medical
Mall Limited
Partnership
Consolidation
Eliminations
Consolidated
Assets
Current Assets
doubtful collections of $38,027,000)
Other
$
Total
Long Term Investments
Beneficial Interest in Assets Held By
Affiliate
Other Assets
Total assets
$
1,153,205
2,045,217
$
740,791
-
$
-
$
1,893,996
2,045,217
$
308,030
-
$
746,349
$
-
$
234,634
$
40,174
$
188,296
$
-
-
$
3,411,479
2,045,217
9,736,763
165,132
316,926
1,213,330
666,603
280,311
203,440
-
10,017,074
165,132
316,926
1,213,330
870,043
2,629
69,259
5,169
5,970,966
618,919
188,540
1,035,606
2,636,372
600,277
-
277,628
798
-
18,995
4,414
(2,655,367)
(190,000)
16,265,668
786,680
505,466
2,318,195
1,290,701
15,297,176
1,224,542
-
16,521,718
385,087
11,797,029
-
513,060
40,174
211,705
(2,845,367)
26,623,406
1,489,763
2,988,339
-
1,704,821
-
-
3,194,584
2,988,339
-
-
2,973,560
686,686
-
-
-
-
-
6,168,144
2,988,339
686,686
4,478,102
1,704,821
-
6,182,923
-
3,660,246
-
-
-
-
-
9,843,169
529,430
-
-
529,430
-
899,144
-
-
-
-
-
1,428,574
3,327,892
-
-
3,327,892
-
368,754
-
-
-
-
-
3,696,646
-
-
-
-
-
-
-
-
-
-
-
-
3,912,702
-
-
3,912,702
-
163,393
-
-
-
-
-
4,076,095
-
-
-
-
-
202,526
-
-
208,027
-
23,253,283
2,434,327
-
25,687,610
-
15,440,906
-
-
-
408,564
-
41,537,080
848,467
-
-
848,467
-
991,242
-
-
-
-
-
1,839,709
66,240
-
-
66,240
-
-
-
-
-
-
-
66,240
51,713,292
$
5,363,690
$
-
$
57,076,982
$
385,087
$
44
33,523,240
$
-
$
513,060
$
248,201
$
620,269
(410,553)
$
(3,255,920)
-
$
89,110,919
June 30, 2012
Schuylkill
Street
Schuylkill
Rehabilitation
Center, Inc.
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
Schuylkill
Health System
Foundation
Schuylkill Medical
Group, Inc.
Schuylkill Health
System Development
Corporation
Schuylkill Health
System Medical
Mall Limited
Partnership
Consolidation
Eliminations
Consolidated
Current Liabilities
Accrued expenses
Amounts due to affiliates
$
Long-Term Debt
Mortgage payable
Loan payable
Total long-term debt
Pension Liability
Other Liabilities
Total liabilities
Unrestricted
Total net assets (deficit)
1,500,000
1,400,000
1,296,565
3,762,577
6,201,039
812,049
479,000
$
$
-
$
1,500,000
1,724,784
1,296,565
3,978,224
6,201,039
812,049
479,000
$
25,964
-
$
1,000,000
386,272
693,228
3,327,441
1,261,595
419,600
$
-
$
26,909
54,661
1,839,102
-
$
5,984
-
$
17,684
-
$
(188,232)
(2,657,135)
-
$
(2,845,367)
2,500,000
2,111,056
1,989,793
7,187,990
7,517,295
898,600
15,451,230
540,431
-
15,991,661
25,964
7,088,136
-
1,920,672
5,984
17,684
24,039,498
1,877,834
1,007,509
-
-
24,039,498
1,007,509
1,877,834
-
1,341,149
817,683
-
-
-
-
-
24,039,498
1,007,509
1,341,149
2,695,517
25,917,332
1,007,509
-
26,924,841
-
2,158,832
-
-
-
-
-
29,083,673
29,786,473
-
-
29,786,473
-
596,415
-
-
-
-
-
30,382,888
2,200,845
-
-
2,200,845
-
-
-
-
-
-
-
2,200,845
1,899,017
-
-
1,899,017
-
2,013,593
-
-
-
-
75,254,897
1,547,940
-
76,802,837
25,964
11,856,976
-
1,920,672
5,984
17,684
(2,653,334)
(27,983,738)
137,549
4,304,584
3,815,750
-
-
(24,167,988)
137,549
4,304,584
122,675
236,448
-
20,733,288
259,584
673,392
-
(1,407,612)
-
242,217
-
602,585
-
(648,305)
45,719
-
(23,541,605)
$
324,784
215,647
-
51,713,292
3,815,750
$
5,363,690
$
-
(19,725,855)
$
57,076,982
359,123
$
21,666,264
385,087
$
45
33,523,240
$
-
(1,407,612)
$
513,060
242,217
$
248,201
192,033
602,585
$
620,269
22,204,734
4,104,643
87,976,783
(4,523,140)
679,300
4,977,976
(602,586)
$
(3,255,920)
1,134,136
$
89,110,919
Consolidating Schedule, Statement of Operations
Schuylkill
Street
Unrestricted Revenues, Gains,
and Other Support
Patient service revenues (net of contractual allowances and discounts)
for operations
Total unrestricted revenues,
gains, and other support
Expenses
Salaries and wages
Employee benefits
Personnel Services
Maintenance expense
Other expenses
Interest
Insurance
Total expenses
Operating income (loss)
Other Income (Loss)
Investment (loss) income
Other
Total other income (loss)
Postretirement Benefit Liability Adjustment
$
93,184,373
(7,543,968)
Schuylkill
Rehabilitation
Center, Inc.
$
3,390,102
(83,859)
$
-
$
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
96,574,475
(7,627,827)
$
-
$
59,300,924
(3,077,780)
Schuylkill
Health System
Foundation
Schuylkill Medical
Group, Inc.
$
$
-
1,113,425
(102,704)
Schuylkill Health
System Development
Corporation
$
-
$
-
85,640,405
3,306,243
-
88,946,648
-
56,223,144
-
1,010,721
-
-
1,630,827
115,623
-
1,746,450
193,745
1,597,546
-
-
42,286
450,096
22,041
-
-
22,041
1,755
7,083
-
-
-
-
87,293,273
3,421,866
-
90,715,139
195,500
57,827,773
-
1,010,721
42,286
450,096
39,846,391
13,647,451
10,352,698
7,649,398
4,670,673
3,432,646
3,691,338
1,645,780
1,016,890
1,753,333
48,569
539,587
319,866
104,640
270,166
59,748
18,000
-
41,599,724
13,696,020
10,892,285
7,649,398
4,990,539
3,537,286
3,961,504
1,705,528
1,034,890
91,211
13,029
-
26,572,067
7,964,801
7,838,937
5,417,277
3,787,759
2,702,021
3,395,044
226,946
711,951
-
1,112,690
241,083
155,900
2,437
766
39,238
52,532
13,067
-
48,919
20,786
10,129
29,643
143,731
6,632
510
4,475
85,953,265
3,113,909
-
89,067,174
104,240
58,616,803
-
1,604,646
13,067
1,340,008
307,957
-
1,647,965
91,260
(789,030)
-
29,219
703,214
-
26,557
-
-
729,771
-
-
(5,365)
-
-
703,214
26,557
-
729,771
-
(5,365)
-
2,043,222
334,514
-
2,377,736
91,260
(794,395)
-
-
(593,925)
-
55
-
-
Consolidation
Eliminations
Consolidated
$
-
-
(480,848)
-
$ 156,988,824
(10,808,311)
146,180,513
3,549,275
30,879
149,760,667
(338,150)
-
69,333,400
22,006,182
18,907,908
13,079,241
8,807,941
6,383,804
7,077,297
1,932,984
1,803,848
264,825
(338,150)
149,332,605
185,271
(142,698)
428,062
(42,287)
724,174
(42,287)
(287)
29,274
-
(480,848)
(287)
-
55
(593,925)
184,984
(42,287)
681,887
(184,985)
1,109,949
(14,421,644)
-
-
(14,421,644)
-
-
-
-
-
-
-
(14,421,644)
(684,631)
-
-
(684,631)
-
-
-
-
-
-
-
(684,631)
Distribution to Partners
-
-
-
-
-
-
-
-
-
-
-
-
-
26,800
-
-
-
-
-
101,770
-
-
151,745
-
Net Transfers to Affiliates
196,770
Net Assets Released from Restrictions
151,745
(Decrease) increase in
unrestricted net assets
Schuylkill Health
System Medical
Mall Limited
Partnership
$ (12,714,538)
(95,000)
-
$
239,514
$
-
$ (12,475,024)
(85,980)
3,076,738
-
$
32,080
46
(3,115,708)
29,163
$
2,311,506
-
$
(3,115,708)
$
(593,925)
$
120,000
-
-
-
26,800
-
-
23,180
-
-
-
-
180,908
29,274
(120,000)
$
64,984
$
(41,805)
$ (13,788,618)
Consolidating Schedule, Statement of Changes in Net Assets
Schuylkill
Street
Distributions to partners
Other net asset activity
Net transfers to (from) affiliate
Net assets released from restrictions used
(Decrease) increase in unrestricted net assets
Contributions
Investment income
Transfer to permanently restricted net assets
for operations
(Decrease) increase in temporarily
Transfer from temporarily restricted net assets
Valuation loss
Increase (decrease) in permanently
(Decrease) increase in net assets
Net Assets (Deficit), Beginning
Net Assets (Deficit), Ending
$
2,043,222
(14,421,644)
(684,631)
196,770
Schuylkill
Rehabilitation
Center, Inc.
$
151,745
334,514
(95,000)
$
-
$
2,377,736
(14,421,644)
(684,631)
101,770
-
-
239,514
-
265,847
7,752
3,012
-
-
-
265,847
7,752
3,012
-
(22,041)
-
-
(22,041)
(151,745)
-
-
(151,745)
102,825
-
-
102,825
(13,364)
-
-
(13,364)
(13,364)
-
-
(12,714,538)
Schuylkill
Street
Schuylkill
Health
System
Obligated Group
Eliminations
Combined
$
151,745
(12,475,024)
91,260
26,800
(85,980)
$
(794,395)
3,076,738
Schuylkill
Health System
Foundation
$
(3,115,708)
-
29,163
32,080
2,311,506
(3,115,708)
36,246
7,560
252,025
-
(252,025)
(510,000)
179,720
(48,731)
(1,755)
-
129,234
Schuylkill Health
Schuylkill Medical System Development
Group, Inc.
Corporation
$
-
(593,925)
-
$
29,274
-
Schuylkill Health
System Medical
Mall Limited
Partnership
$
184,984
(120,000)
29,274
64,984
-
-
-
45,719
-
481,813
15,312
(510,000)
(593,925)
23,180
1,109,949
(14,421,644)
(684,631)
26,800
-
-
-
180,908
(41,805)
(13,788,618)
(7,083)
-
-
-
-
-
(30,879)
(29,163)
-
-
-
-
-
(180,908)
259,585
(762,025)
-
-
-
45,719
(224,662)
-
682,735
(9,343)
510,000
(682,735)
-
-
-
-
-
510,000
(22,707)
(13,364)
-
673,392
(172,735)
-
-
-
-
487,293
239,514
-
(12,385,563)
161,314
3,244,483
(4,050,468)
(593,925)
29,274
64,984
-
(7,340,292)
197,809
18,421,781
4,050,468
(813,687)
212,943
537,601
-
$ (19,725,855)
$
$
-
3,576,236
3,815,750
(184,985)
120,000
-
(10,916,528)
$
$
-
-
(12,625,077)
$ (23,541,605)
Consolidation
Eliminations
Consolidated
$
359,123
47
$
21,666,264
$
-
$
(1,407,612)
$
242,217
$
602,585
3,914
(13,525,987)
(606,500)
$
(602,586)
14,660,123
$
1,134,136
APPENDIX C
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF DOCUMENTS
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF DOCUMENTS
In addition to the terms defined in the Offering Memorandum, the following terms, when used in this
Appendix C, have the meanings ascribed to them below:
“Accountant” means a Person engaged in the practice of accounting who is a certified public accountant
and who (except as otherwise expressly provided herein) may be employed by or affiliated with any member of the
Combined Group.
“Act” means the Municipality Authorities Act (Act of June 19, 2001, P.L. 22, as amended).
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with such specified Person. For purposes of this definition, “control”
when used with respect to any specified Person means the power to direct the policies of such Person, directly or
indirectly, whether through the power to appoint and remove its directors or trustees, the ownership of voting
securities, by contract, or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the
foregoing.
“Annual Debt Service Requirements” of any specified Person means, for any Fiscal Year, the principal of
(and premium, if any) and interest and other debt service charges (which include for purposes hereof, any fees or
premiums for any letter of credit, surety bond, policy of insurance, bond purchase agreement, or any similar credit or
liquidity support secured in connection therewith) on all Long Term Indebtedness of such Person coming due at
Maturity or Stated Maturity, and, for such purposes, any one or more of the following rules shall apply at the
election of the Obligated Group Agent:
(1) Committed Take Out - if such Person has received a binding commitment, within normal
commercial practice, from any bank, savings and loan association, insurance company, or similar institution to
refund or purchase any of its Long Term Indebtedness at its Stated Maturity (or, if due on demand, or payable in
respect of any required purchase of such Debt by such Person, at any date on which demand may be made), then the
portion of the Long Term Indebtedness committed to be refunded or purchased shall be excluded from such
calculation and the principal of (and premium, if any) and interest on the Long Term Indebtedness incurred for such
refunding or purchase that would be due in the Fiscal Year for which the calculation is being made, if incurred at the
Maturity or purchase date of the Long Term Indebtedness to be refunded or purchased, shall be added;
(2) Pro Forma Refunding – in the case of Balloon Debt, if the Person obligated thereon shall, after
consultation with a nationally recognized firm of investment bankers or financial consultants, deliver to the Master
Trustee an Officer’s Certificate dated within 90 days prior to the date of delivery of such certificate to the Master
Trustee stating that financing at a stated interest rate (which shall not be less than the Bond Buyer Revenue Bond
Index) with a Stated Maturity not greater than 30 years is reasonably attainable on the date of such certificate to
refund any of such Balloon Debt, then any installment of principal of (and premium, if any) and interest and other
debt service charges on such Balloon Debt that could so be refunded shall be excluded from such calculation and the
principal of (and premium, if any) and interest and other debt service charges on the Long Term Indebtedness which
would result from the financing so certified due in such Fiscal Year shall be added;
(3) Consensual Sinking Fund – in the case of Balloon Debt, if the Person obligated thereon shall
deliver to the Master Trustee a Board Resolution of such Person providing for the retirement of (and the instrument
creating such Balloon Debt shall permit the retirement of), or for the establishment of a sinking fund for, such
Balloon Debt according to a fixed schedule not in excess of thirty (30) years stated in such resolution ending on or
before the Fiscal Year in which such principal (and premium, if any) is due, then for so long as all installments
previously scheduled have been paid or deposited to the sinking fund established with respect to such Debt on or
before the times required by such schedule, the principal of (and, in the case of retirement, or to the extent provided
for by the sinking fund, the premium, if any, and interest and other debt service charges on) such Balloon Debt shall
be computed as if the same were due in accordance with such schedule;
C-1
(4) Prefunded Payments – principal of (and premium, if any) and interest and other debt service
charges on Debt, or portions thereof, shall not be included in the computation of the Annual Debt Service
Requirements for any Fiscal Year for which such principal, premium, interest, or other debt service charges are
payable from funds irrevocably deposited or set aside in trust for the payment thereof at the time of such calculations
(including, without limitation, capitalized interest and accrued interest so deposited or set aside in trust or escrowed
with the Master Trustee or another Independent Person approved by the Master Trustee);
(5) Variable Rate Debt – as to any Debt that bears interest at a variable interest rate which cannot
be ascertained at the time of calculation, an interest rate equal to the lesser of an annual interest rate equal to the
Bond Buyer Revenue Bond Index and the average rate of interest born by such Debt (or other indebtedness of
comparable credit quality, maturity and purchase terms in the event that such Debt was not outstanding) during the
preceding Fiscal Year (or any period of comparable length ending within 180 days) prior to the date of calculation
shall be presumed to apply for all future dates;
(6) Guarantees and Contingent Obligations – in the case of any Guarantees, the aggregate annual
principal and interest payments on, and the principal amount of, any Debt of a Person which is the subject of a
Guaranty under the Master Indenture and which would, if such obligation were incurred by the Obligated Group,
constitute parity Debt, shall be deemed equivalent to twenty percent (20%) of the actual Annual Debt Service
Requirements on, and principal amount of, such Debt, so long as such Guaranty constitutes a contingent liability
under generally accepted accounting principles; provided, however, that the Annual Debt Service Requirements on,
and principal amount of, any Long Term Indebtedness represented by a Guaranty shall be deemed equivalent to one
hundred percent (100%) of the actual Annual Debt Service Requirements on, and principal amount of, such Debt, if
a payment has been made by the Obligated Group on such Guaranty within one (1) year of the date of any
computation to be made under this paragraph; and
7) Financial Products – If a Financial Products Agreement has been entered into by any Member
with respect to Long Term Indebtedness, interest on such Long Term Indebtedness shall be included in the
calculation of Annual Debt Service Requirements by including for such period an amount equal to the amount
payable on such Long Term Indebtedness in such period at the rate or rates stated in such Long Term Indebtedness
plus any payments payable by such Person in respect of such Financial Products Agreement minus any payments
receivable by such Person in respect of such Financial Products Agreement.
“Authorized Denominations” means, respect to 2014 Bonds, $100,000 or any integral multiple of $5,000 in
excess thereof; and with respect to Master Notes, the amount set forth in the Supplemental Master Indenture
authorizing any series of Master Notes.
“Authorized Newspaper” means a newspaper of general circulation in the relevant area, printed in the
English language and customarily published on each business day, whether or not published on Saturdays, Sundays
or holidays. Whenever successive weekly publications in an Authorized Newspaper are required under the Master
Indenture they may be made (unless otherwise expressly provided herein) on the same or different days of the week
and in the same or in different Authorized Newspapers.
“Available Revenues” of any specified Person means, for any period, the amount of excess (deficit) of
Gross Revenues over Expenses of such Person for such period, plus income, if any, for such period from the
investment of unrestricted or restricted funds not otherwise included in such Gross Revenues (but only to the extent
that the Annual Debt Service Requirements of such Person for such period includes amounts to which such income
may be applied, assuming any necessary action by the Governing Body of such Person) but less: (a) any income
from any amounts deposited for payment of principal (and premium, if any) and interest and other debt service
charges (1) as provided in the definition of Debt or (2) to the extent such income was used in any adjustment of
Annual Debt Service Requirements pursuant to clause (iv) of the definition of Annual Debt Service Requirements,
(b) any interest or other debt service charges on Long Term Indebtedness thereby excluded from the definition of
Annual Debt Service Requirements and (c) pledges for such period to make a donation, gift, or other charitable
contribution to the extent encumbered, as permitted herein to secure the payment of Debt that is not Long Term
Indebtedness.
C-2
“Balloon Debt” means Long Term Indebtedness where the principal of (and premium, if any) and interest
and other debt service charges on such Long Term Indebtedness due (or payable in respect of any required purchase
of such Debt by such Person on demand) in any Fiscal Year either are equal to at least 25% of the total principal of
(and premium, if any) and interest and other debt service charges on such Long Term Indebtedness or exceed by
more than 50% the greatest amount of principal of (and premium, if any) and interest and other debt service charges
on such Long Term Indebtedness due in any preceding or succeeding Fiscal Year.
“Beneficial Owner” means any Person which (i) has the power, directly or indirectly, to vote or consent
with respect to, or to dispose of ownership of, any Bond (including any Person holding a Bond through nominees,
depositories or other intermediaries), or (ii) is treated as the owner of any Bond for federal income tax purposes.
“Board Resolution” of any specified Person means a copy of a resolution certified by the Person
responsible for maintaining the records of the Governing Body of such Person to have been duly adopted by the
Governing Body of such Person and to be in full force and effect on the date of such certification and delivered to
the Master Trustee.
“Bond Counsel” means any attorney at law or firm of attorneys selected by the Obligated Group Agent of
nationally or regionally recognized standing in matters pertaining to the validity of and the tax-exempt nature of
interest on bonds issued by states and their political subdivisions, duly admitted to the practice of law before the
highest court of any state of the United States of America.
“Bond Fund” means the fund designated as such and created under the Bond Indenture.
“Bond Indenture” means the Trust Indenture dated as of April 1, 2014, between the Issuer and the Bond
Trustee.
“Bond Trustee” or “Trustee” means The Bank of New York Mellon Trust Company, N.A. and its
successors and assigns, as Bond Trustee under the Bond Indenture.
“Bondholder” or “Holder” or “owner” means, as of any time, the registered owner of any Bond as shown in
the register kept by the Bond Trustee as bond registrar.
“Bonds” or “2014 Bonds” means the Issuer’s Health Center Revenue Bonds (Schuylkill Health System
Project) Series of 2014 from time to time Outstanding under the Bond Indenture.
“Book Value” means (a) when used with respect to Property of a Member, the value of such Property, net
of accumulated depreciation and amortization, as reflected in or derived from the most recent audited financial
statements of such Member of the Obligated Group which have been prepared in accordance with generally
accepted accounting principles; and (b) when used with respect to Property of all Members, the aggregate of the
values of such Property, net of accumulated depreciation and amortization, as reflected in or derived from the most
recent audited consolidated financial statements, provided that such aggregate shall be calculated in such a manner
that no portion of the value of any Property of any Member is included more than once.
“Borrower” means, collectively, SHS, SMC-SJ, SMC-EN and SRC comprising an obligated group of nonprofit corporations each incorporated under the laws of the Commonwealth of Pennsylvania.
“Business Day” means any day other than a Saturday, Sunday or a day on which banks located (a) in the
city in which the corporate trust office of the Bond Trustee responsible for the administration of the Bond Indenture
is located and (b) in the city in which the corporate trust office of the Master Trustee responsible for the
administration of the Master Indenture is located are required or authorized to remain closed.
“Closing Date” means the date of delivery of the 2014 Bonds to the Underwriter against payment therefor.
“Code” means the Internal Revenue Code of 1986, as from time to time amended, and any regulations
promulgated thereunder.
C-3
“Combined Group” means the Obligated Group Agent, all other Members of the Obligated Group and all
Restricted Affiliates at the relevant time.
“Commonwealth” means the Commonwealth of Pennsylvania.
“Completion Indebtedness” shall mean any Debt incurred for the purpose of financing the completion of
constructing or equipping facilities for the construction or equipping of which some Debt has theretofore been
incurred in accordance with the provisions of the Master Indenture, to the extent necessary to provide a completed
and equipped facility of the type and scope contemplated at the time, and in accordance with the general plans and
specifications for such facility as originally prepared with only such changes as have been made in conformity with
the documents pursuant to which such Debt was originally incurred, including funding debt service reserve funds
related thereto.
“Consent”, “Order”, and “Request” of any specified Person or Persons means, respectively, a written
consent, order or request signed in the name of such Person or Persons and delivered to the Master Trustee by the
Chairman of the Governing Body, the president, an executive or senior vice president, the chief financial officer or
any other Person or Persons designated by any of such Persons to execute any such instrument as evidenced by an
Officer’s Certificate. Any Consent, Order or Request of the Members of the Obligated Group shall be signed in the
name of the Obligated Group Agent.
“Cost” or “Costs” or “Project Cost” or “Project Costs” in connection with the Project means all expenses
which are properly chargeable thereto under generally accepted accounting principles or which are incidental to the
financing of the Project, or which are otherwise financeable under the Act.
“Counsel” means an attorney or a firm of attorneys admitted to practice law in the highest court of any state
in the United States of America or in the District of Columbia, including an attorney employed by any of the
Obligated Group or one of their affiliates.
“Credit Facility” means any Liquidity Facility, letter of credit, bond insurance policy, bond purchase
agreement, guaranty, line of credit, surety bond or similar credit or liquidity facility securing any Debt of any
Obligated Group Member.
“Current Assets” means cash and cash equivalent deposits, marketable securities, accounts receivable,
accrued interest receivable, funds permitted to be designated by a Member of the Obligated Group for any specific
purpose and any other tangible and intangible assets of the Obligated Group ordinarily considered Current Assets
under generally accepted accounting principles.
“Current Value” means (a) with respect to property, plant and equipment, the aggregate fair market value
of such property, plant and equipment as determined by (1) a written report of an Independent appraiser acceptable
to the Master Trustee and, in the case of real property, who is a member of the American Institute of Real Estate
Appraisers (MAI), delivered to the Master Trustee (which report shall be dated not more than three years prior to the
date as of which Current Value is to be calculated), or (2) a bona fide offer for the purchase of such property made
on an arm’s length basis within one year of the date of determination as established by an Officer’s Certificate; and
(b) with respect to any other Property, the fair market value of such Property.
“Days Cash on Hand” means the number determined as of June 30 of each fiscal year by dividing (A) the
sum of the amount of the Obligated Group’s unrestricted cash, investments and board designated funds (excluding
amounts held in any debt service reserve fund created under a Related Bond Indenture, amounts held in a debt
service or bond fund for the accumulation of payments on the outstanding obligations of the Obligated Group and
the proceeds of any Short-Term Indebtedness of the Obligated Group) by (B) the quotient of (i) operating expenses
of the Obligated Group for such Fiscal Year less, to the extent included in such operating expenses, any bad debts,
all depreciation, and all amortization on the outstanding obligations of the Obligated Group payable during such
Fiscal Year divided by (ii) the number of calendar days in such fiscal year.
C-4
“Debt” of any specified Person means all:
(1) indebtedness incurred or assumed by such Person for borrowed money or for the acquisition,
construction or improvement of property other than goods that are acquired in the ordinary course of business of
such Person;
(2) lease or installment sale obligations of such Person that, in accordance with generally accepted
accounting principles, are shown on the liability side of a balance sheet as a capital lease, excluding any lease
obligations of such Person with an Affiliate;
(3) Guarantees; and
(4) all indebtedness secured by any mortgage, lien, charge, encumbrance, pledge or other security
interest upon property owned by such Person whether or not such Person has assumed or become liable for the
payment thereof.
For the purpose of computing the “Debt” of any Person, there shall be excluded any particular Debt if, upon or prior
to the Maturity thereof, there shall have been deposited with the proper depository in trust the necessary funds (or
evidences of such Debt or investments that will provide sufficient funds, if permitted by the instrument creating such
Debt) for the payment, redemption or satisfaction of such Debt; and thereafter such funds, evidences of Debt and
investments so deposited shall not be included in any computation of the assets of such Person, and the income from
any such deposits shall not be included in the calculation of Gross Revenues or Available Revenues of such Person.
In addition, reimbursement or other payment obligations arising under a letter of credit or other credit enhancement
or liquidity arrangements or facilities securing or supporting Debt shall not constitute Debt in addition to or separate
from the enhanced or supported Debt.
“Debt Service Coverage Ratio” means (a) for the Fiscal Years ending June 30, 2014 and June 30, 2015, the
ratio calculated by dividing (i) the Obligated Group’s excess of revenues over Expenses, plus depreciation,
amortization and other non-cash expenses, plus unrealized losses and minus unrealized gains on investments and
Financial Product Agreements, plus interest expense, all for the immediately preceding four-quarter period ending
on the date of determination by (ii) Maximum Annual Debt Service Requirement of the Obligated Group plus
interest on Short-Term Indebtedness for the applicable period and (b) for the Fiscal Year commencing June 30, 2016
and for each Fiscal Year thereafter, the ratio calculated by dividing (i) the Obligated Group’s and SHSMG’s excess
of revenues over Expenses, plus depreciation, amortization and other non-cash expenses, plus unrealized losses and
minus unrealized gains on investments and Financial Product Agreements, plus interest expense, all for the
immediately preceding four-quarter period ending on the date of determination by (ii) Maximum Annual Debt
Service Requirement of the Obligated Group and SHSMG plus interest on Short-Term Indebtedness for the
applicable period.
“Defeasance Obligations” means:
(1) Direct obligations of the United States of America or obligations to the full and prompt
payment of which the full faith and credit of the United States of America is irrevocably pledged or evidences of
direct ownership of interests in future interest and principal payments on such obligations held by a bank or trust
company as custodian, under which the owner of the investment is the real party in interest and has the right to
proceed directly and individually against the obligor on such obligations, and which underlying obligations are not
available to satisfy any claim of the custodian or any Person claiming through the custodian or to whom the
custodian may be obligated; or
(2) Obligations the interest on which is excludable from the gross income of all owners thereof
for federal income tax purposes, and provision for the payment of the principal of (and premium, if any) and interest
on which shall have been made by the irrevocable deposit at least 123 days preceding the date of determination with
a bank or trust company acting as a trustee or escrow agent for holders of such obligations of money, or obligations
described in clause (i) above, the maturing principal of and interest on which, when due and payable, without
reinvestment, will provide money sufficient to pay when due the principal of (and premium, if any) and interest on
C-5
such obligations, and which money, or obligations described in clause (i) above, are not available to satisfy any
other claim, including any claim of the Bond Trustee or escrow agent or any claim of any Person claiming through
the Bond Trustee or escrow agent or any claim of any Person to whom the Person on whose behalf such irrevocable
deposit was made, the Bond Trustee or the escrow agent may be obligated, whether arising out of the insolvency of
the Person on whose behalf such irrevocable deposit was made, the Bond Trustee or escrow agent or otherwise
provided that, at the time of their purchase, such obligations are rated in the highest generic long-term debt rating
category by Moody’s or S&P.
“DTC” means The Depository Trust Company, New York, New York.
“Electronic Means” means the following communications methods: S.W.I.F.T., e-mail, facsimile
transmission, secure electronic transmission containing applicable authorization codes, passwords and/or
authentication keys issued by the Master Trustee, or another method or system specified by the Master Trustee as
available for use in connection with its services hereunder.
“Event of Default” means any of the events listed as such under the Bond Indenture or the Master
Indenture, as the case may be.
“Excluded Property” means (a) any assets of “employee pension benefit plans” as defined in the Employee
Retirement Income Security Act of 1974, as amended, or any similar funds established for provision of pension or
other post-retirement benefits, (b) any assets of a self-insurance trust which prohibits any application of such assets
for purposes which are not related to claims as defined in the governing trust document, (c) all endowment funds
and property derived from gifts, grants, research contracts, bequests, donations and contributions heretofore or
hereafter made to or with any Member which are specifically restricted by the donor, testator or grantor to a
particular purpose inconsistent with the payment of debt service on Debt, and the income and gains derived
therefrom and (d) any other Property that is designated as Excluded Property by the Obligated Group Agent in an
Officer’s Certificate delivered to the Master Trustee that such property does not constitute a material or integral part
of the primary operations of the Combined Group and is not material in the determination of Available Revenues.
“Expenses” means, for any period, the aggregate of all operating expenses calculated under generally
accepted accounting principles, including, without limitation, any taxes incurred by the Person or group of Persons
involved during such period, minus (a) depreciation and amortization, (b) extraordinary expenses, losses on the sale,
disposal or abandonment of assets other than in the ordinary course of business and losses on the extinguishment of
debt or termination of pension plans, (c) any expenses resulting from a forgiveness of or the establishment of
reserves against Debt of an Affiliate which does not constitute an extraordinary expense, (d) losses resulting from
any reappraisal, revaluation or write-down of assets other than bad debts, (e) any losses from the sale or other
disposition of fixed or capital assets, (f) any losses resulting from changes in the valuation of investment securities
and unrealized changes in the value of Financial Products Agreements or resulting from the temporary impairment
of investment securities and (g) any other non-cash expenses. If such calculation is being made with respect to the
Obligated Group, any such expenses attributable to transactions between any Member and any other Member shall
be excluded.
“Facilities” means the healthcare facilities and real property located in the City of Pottsville, Schuylkill
County, Pennsylvania, owned and operated by an Obligated Group Member, the costs of which were financed or
refinanced with the proceeds of the 2014 Bonds.
“Favorable Opinion of Bond Counsel” means, with respect to any action relating to the 2014 Bonds, the
occurrence of which requires such an opinion, a written legal opinion of Bond Counsel addressed to the Issuer, the
Bond Trustee and the Obligated Group, as applicable, to the effect that such action will not impair the exclusion of
interest on the 2014 Bonds from gross income for purposes of federal income taxation or the exemption of interest
on the 2014 Bonds from personal income taxation under the laws of the Commonwealth (subject to customary
exceptions).
“Financial Products Agreement” means any type of financial management instrument or contract, which
shall include, but not be limited to, (i) any contract known as or referred to or which performs the function of an
interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract;
C-6
(ii) any contract providing for payments based on levels of, or changes or differences in, interest rates, currency
exchange rates, or stock or other indices; (iii) any contract to exchange cash flows or payments or a series of
payments; (iv) any type of contract called, or designed to perform the function of, interest rate floors or caps,
options, puts or calls, to hedge or minimize any type of financial risk, including, without limitation, payment,
currency, rate or other financial risk forward supply agreements; and (v) any other type of contract or arrangement
that the Governing Body of the Obligated Group Agent or the Member or Restricted Affiliate proposing to enter into
such contract or arrangement determines is to be used, or is intended to be used, to manage or reduce the cost of
Debt (including, but not limited to, a bond insurance policy), to convert any element of Debt from one form to
another, to maximize or increase investment return, to minimize investment return risk or to protect against any type
of financial risk or uncertainty. A Financial Products Agreement may but need not be associated with or entered
into in connection with a specific item of Debt.
“Fiscal Year” means any twelve-month period beginning on July 1 of any calendar year and ending on
June 30 of the next year or such other twelve month period selected by the Obligated Group Agent as the fiscal year
for the Members of the Obligated Group.
“Fitch” means Fitch Ratings, Inc., a corporation organized and existing under the laws of the State of New
York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform
the functions of a securities rating agency, shall be deemed to refer to any other nationally recognized securities
rating agency designated by the Obligated Group Agent by notice to the Issuer and the Bond Trustee.
“Fund” means any of the Project Fund, the Bond Fund and the Rebate Fund.
“Governing Body” of any specified Person means the board of directors or board of trustees of such Person
or any duly authorized committee of that board, or if there be no board of trustees or board of directors, then the
Person which pursuant to law or the Organizational Documents of such Person is vested with powers similar to
those vested in a board of trustees or a board of directors. The Governing Body of the System may constitute the
Governing Body of any other Affiliate of the System to the extent the action in question is subject to approval or
determination by the Governing Body of the System pursuant to the bylaws or other corporate charter documents of
the respective Persons.
“Gross Revenues” shall mean, when used with reference to the Members of the Obligated Group and with
respect to any period of time, all net receipts, revenues and other operating and non-operating income of the
Members of the Obligated Group, including, but not limited to, all rates, fees and charges fixed, charged and
collected for services rendered by or on behalf of the Members of the Obligated Group or arising in any other
manner from or on account of the operation of the Property or other facilities of the Members of the Obligated
Group and from any other source, Accounts (including accounts receivable), contract rights, general intangibles,
payment intangibles, investment property, instruments, chattel paper, other rights to the payment of money, all
unrestricted income from the investment of funds of the Members of the Obligated Group, and any gains from the
sale or other disposition of capital assets, including all proceeds (whether cash proceeds or noncash proceeds) of any
of the foregoing including, without limitation, proceeds of insurance payable by reason of loss or damage to the
foregoing property and of eminent domain or condemnation awards; excluding, however, (i) any gifts, grants,
bequests, funds, donations and contributions, and income therefrom, to the extent they constitute Excluded Property,
and (ii) any unrealized gain on investments or on Financial Products Agreements. Terms used in this definition and
not otherwise defined herein shall have the meaning given such terms in the Uniform Commercial Code in effect
from time to time in the Commonwealth.
“Guaranty” means all obligations of a Person guaranteeing, or in effect guaranteeing, any Debt or other
obligation of any Primary Obligor in any manner, whether directly or indirectly including but not limited to
obligations incurred through an agreement, contingent or otherwise, by such Person: (l) to purchase such Debt or
obligation or any Property constituting security therefor; (2) to advance or supply funds: (i) for the purchase or
payment of such Debt or obligation, or (ii) to maintain working capital or other balance sheet condition; (3) to
purchase securities or other Property or services primarily for the purpose of assuring the owner of such Debt or
obligation of the ability of the Primary Obligor to make payment of the Debt or obligation; or (4) otherwise to assure
the owner of such Debt or obligation against loss in respect thereof.
C-7
“Holder” or “Master Note Holder” means a Person in whose name a Master Note is registered in the Master
Note Register.
“Independent” when used with respect to any specified Person means such a Person who (i) is in fact
independent, (ii) does not have any direct financial interest or any material indirect financial interest in any member
of the Combined Group, and (iii) is not connected with any member of the Combined Group as an officer,
employee, promoter, trustee, partner, director or person performing similar functions. Whenever it is herein
provided that any Independent Person’s opinion or certificate shall be furnished to the Master Trustee, such Person
shall be appointed by Order of the Obligated Group Agent and such opinion or certificate shall state that the signer
has read this definition and that the signer is Independent within the meaning hereof.
“Independent Counsel” means an attorney or firm of attorneys duly admitted to practice law before the
highest court of any State of the United States and who is not a full-time employee of the Issuer or the Obligated
Group.
“Insurance Consultant” means a Management Consultant or a firm of Independent professional insurance
consultants knowledgeable in the operations of hospitals and having a favorable reputation for skill and experience
in the field of hospital insurance consultation and which may include a broker or agent with whom any member of
the Combined Group transacts business.
“Issuer” means the City of Pottsville Hospital Authority and its successors and assigns.
“Issuer Representative” means the person or each alternate designated to act for the Issuer by written
certificate furnished to the Obligated Group Agent and the Bond Trustee, containing the specimen signature of such
person and signed on behalf of the Issuer by the Chairman or the Vice Chairman of the Issuer.
“Interest Payment Date” means, with respect to the Master Notes, the Stated Maturity of an installment of
interest on any Master Note.
“Interest Payment Date” means, with respect to the 2014 Bonds, each January 1 and July 1, commencing
July 1, 2014.
“Investor Letter” means a letter required to be executed by the initial purchasers of the 2014 Bonds in the
form of Exhibit C to the Bond Indenture.
“Legal Restrictions” means federal, state, or other applicable governmental laws or regulations affecting
any member of the Combined Group and its health care facilities.
“Lien” shall mean any mortgage or pledge of, security interest in or lien or encumbrance on any Property of
any Member of the Obligated Group, excluding liens applicable to Property in which a Member of the Obligated
Group has only a leasehold interest, unless such leasehold interest secures Debt of any Member of the Obligated
Group.
“Liquidity Facility” means a written commitment to provide money to purchase or retire any Debt if (i) on
the date of delivery of such Liquidity Facility, the unsecured indebtedness of the provider of such Liquidity Facility
is rated by each Rating Service in one of its three highest rating categories and (ii) as of any particular date of
determination, no amount realized under such Liquidity Facility for the payment of the principal or the purchase or
redemption price of such Debt (exclusive of amounts realized for the payment of accrued interest on such Debt)
shall be required to be repaid by any Obligated Group Member for a period of at least one year.
“Loan” means the loan by the Issuer to the Obligated Group of the proceeds of the 2014 Bonds pursuant to
the Loan Agreement.
“Loan Agreement” means the Loan Agreement dated as of April 1, 2014 between the Issuer and the
Obligated Group, and any amendments and supplements thereto.
C-8
“Loan Payment” means a payment by the Obligated Group pursuant to the Loan Agreement or by the
Obligated Group pursuant to the Master Note of amounts which correspond to interest, or principal and interest then
due on account of debt service on the 2014 Bonds, plus related fees and expenses, all in accordance with Section 4
of the Loan Agreement and the Master Note.
“Long Term Indebtedness” means, without duplication, all Debt, including Short-Term Indebtedness if a
commitment by a financial lender exists to provide financing to retire such Short-Term Indebtedness, such
commitment is for the time period through the maturity of the Short-Term Indebtedness and does not contain any
contingencies related to financial performance of the Obligated Group after the date of the commitment and such
commitment provides for the repayment of principal on terms that would, if such commitment were implemented,
constitute Long-Term Indebtedness, and the current portion of Long-Term Indebtedness, for any of the following:
(1) money borrowed for a remaining term, or renewable at the option of the Obligated Group for a
period from the date originally incurred, longer than one year;
(2) leases required to be capitalized in accordance with generally accepted accounting principles
applicable when incurred that have a remaining term, or are renewable at the option of the lessee for a period from
the date originally incurred, longer than one year; and
(3) installment sale or conditional sale contracts having a remaining term in excess of one year;
provided, however, that any Guaranty by an Obligated Group Member of any obligation of any Person which
obligation would, if it were a direct obligation of the Obligated Group Member, constitute Short-Term Indebtedness,
shall be excluded.
“Majority of the Bondholders” means the Holders of more than 50 percent of the aggregate principal
amount of the Outstanding Bonds.
“Management Consultant” means a nationally recognized firm of Independent professional management
consultants or an Independent hospital management organization knowledgeable in the operation of hospitals and
having a favorable reputation for skill and experience in the field of hospital management consultation.
“Master Indenture” means the Master Trust Indenture, as amended and supplemented from time to time in
accordance with its terms.
“Master Note” or “Master Note No. 1” means the Master Note (City of Pottsville Hospital Authority)
Series of 2014 of the Obligated Group issued, authenticated and delivered under the Master Indenture and
Supplemental Master Indenture No. 1.
“Master Trustee” means The Bank of New York Mellon Trust Company, N.A., in its capacity as Master
Trustee under the Master Indenture.
“Maturity” when used with respect to any Debt (or any Master Note) means the date on which the principal
of such Debt (or Master Note) becomes due and payable as therein or herein provided, whether at the Stated
Maturity thereof or by declaration of acceleration, call for redemption or otherwise.
“Maximum Annual Debt Service Requirements” means the maximum amount of Annual Debt Service
Requirements as computed for the then current or any future Fiscal Year.
“Mechanical Completion” means the date on which the degree of completion of a construction project
occurs that would allow operation of the project at a level that would substantially fulfill its purpose without any
further construction being required and without causing any unanticipated substantial economic hardship not within
the control of any Person obligated in connection with such project.
C-9
“Moody’s” means Moody’s Investors Service, Inc., a corporation organized and existing under the laws of
the State of Delaware, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no
longer perform the functions of a securities rating agency, “Moody’s” shall be deemed to refer to any other
nationally recognized securities rating agency designated by the Obligated Group Agent by notice to the Issuer and
the Bond Trustee.
“Mortgages” means the mortgages each dated the date of the issuance of the 2014 Bonds from SMC-SJ and
SMC-EN to the Master Trustee, and any amendments, modifications and supplements thereto.
“Mortgagors” mean the applicable Members of the Obligated Group, as mortgagors under their respective
mortgages granted to the Master Trustee as described in the Master Indenture.
“Notice Address” means:
(a) As to the Obligated Group Agent: Schuylkill Health System
400 South Jackson Street
Pottsville, Pennsylvania 17901
Attention: President & CEO
(b) As to the Issuer:
c/o David Rattigan, Esq.
Williamson Friedberg & Jones LLC
Ten Westwood Road
Pottsville, PA 17901
(c) As to the Bond Trustee:
The Bank of New York Mellon Trust Company, N.A.
525 William Penn Place – 38th Floor
Pittsburgh, Pennsylvania 15259
Attention: Global Corporate Trust – Public Finance
As to any other Person from time to time required to receive notice under the Bond Indenture (excluding
the Bondholders), such address as such Person shall have provided in writing to the Obligated Group Agent, the
Issuer and the Bond Trustee, or, in each case, such other address or addresses as any such Person shall designate by
notice actually received by the addressor.
“Obligated Group” means all Obligated Group Members.
“Obligated Group Agent”, until another Person becomes Obligated Group Agent pursuant to the Master
Indenture, means SHS, acting through its Governing Body, the Chairman of its Governing Body, its President, an
Executive Vice President or the Chief Financial Officer, Persons holding comparable titles if another Person
succeeds SHS as Obligated Group Agent, or any other Person designated by any of such Persons to take such action
as evidenced by an Officer’s Certificate.
“Obligated Group Member,” “Member” or “Member of the Obligated Group” means the SHS, SMC-SJ,
SMC-EN, SRC and any other Person who has satisfied the requirements set forth in the Master Indenture for
becoming a Member of the Obligated Group and its permitted successors until such Person or a successor or
transferee Person satisfies the requirements set forth in the Master Indenture for ceasing to be a Member of the
Obligated Group. From time to time Exhibit A to the Master Indenture may be amended to reflect the addition or
withdrawal of Members of the Obligated Group.
“Officer’s Certificate” of any specified Person means a certificate delivered to the Master Trustee and
signed by the Chairman of its Governing Body, the president, a senior or executive vice president, the chief financial
officer or any other Person designated by any of such Persons to execute an Officer’s Certificate as evidenced by a
certificate of any of such Persons delivered to the Master Trustee.
C-10
“Offering Memorandum” means the Limited Offering Memorandum relating to the 2014 Bonds, including
all appendices thereto.
“Operating Assets” of any Person means all tangible real or tangible personal property owned by such
Person and used in the primary business of such Person.
“Operating Revenues” means the total operating revenues of the Obligated Group, less applicable
deductions from operating revenues, as determined in accordance with generally accepted accounting principles
consistently applied.
“Opinion of Counsel” means a written opinion of counsel selected by the Obligated Group Agent, who may
(except as otherwise expressly provided) be counsel to any party to any transaction involving the issuance of Master
Notes under the Master Indenture.
“Optional Tender Indebtedness” means any Debt that is subject to optional or mandatory tender by the
holder thereof (including, without limitation, any mandatory tender in connection with the expiration of any Credit
Facility securing such Debt) for purchase or redemption prior to the stated maturity date thereof if the purchase or
redemption price of such Debt is under any circumstances payable by any Obligated Group Member.
“Organizational Documents” of any corporation means the articles of incorporation, certificate of
incorporation, corporate charter or other document pursuant to which such corporation was organized, and its
bylaws, each as amended from time to time, and as to any other Person, means the instruments pursuant to which it
was created and which govern its powers and the authority of its representatives to act on its behalf.
“Outstanding” when used with respect to the Master Notes means, as of the date of determination, all
Master Notes theretofore authenticated and delivered under the Master Indenture, except:
(1) Master Notes theretofore cancelled by the Master Trustee or the Paying Agent;
(2) Master Notes for whose payment or redemption money (or Defeasance Obligations to the
extent permitted by the Master Indenture) in the necessary amount has been theretofore deposited with the Master
Trustee or any Paying Agent for such Master Notes in trust for the Holders of such Master Notes pursuant to the
Master Indenture or any Supplemental Master Indenture authorizing such Master Notes; provided, that if such
Master Notes are to be redeemed, notice of such redemption has been duly given pursuant to the Master Indenture or
irrevocable provision therefor satisfactory to the Master Trustee has been made; and
(3) Master Notes upon transfer of or in exchange for or in lieu of which other Master Notes have
been authenticated and delivered pursuant to the Master Indenture or any Supplemental Master Indenture
authorizing such Master Notes;
provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Master
Notes have given any request, demand, authorization, direction, notice, consent or waiver under the Master
Indenture, Master Notes owned by any member of the Combined Group shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Master Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only Master Notes which the Master Trustee
knows to be so owned, based solely on the Master Note Register, shall be so disregarded. Master Notes so owned
which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction
of the Master Trustee the pledgee’s right so to act with respect to such Master Notes and that the pledgee is not a
member of the Combined Group.
“Outstanding” or “Outstanding Bonds” or “Bonds outstanding” means the amount of principal of the 2014
Bonds which has not at the time been paid, exclusive of (a) 2014 Bonds in lieu of which others have been
authenticated under the Bond Indenture, (b) principal of any 2014 Bond which has become due (whether by
maturity, call for redemption or otherwise) and for which provision for payment as required herein has been made,
C-11
and (c) for purposes of any direction, consent or waiver under the Bond Indenture, 2014 Bonds deemed not to be
outstanding under the Bond Indenture.
“Participant” means, with respect to DTC or another Securities Depository, a member of or participant in
DTC or such other Securities Depository, respectively.
“Paying Agent” means, with respect to the 2014 Bonds, the Bond Trustee or any other paying agent
appointed in accordance with the applicable provisions of the Bond Indenture; and, with respect to Master Notes, the
Master Trustee or any other Person authorized by the Obligated Group Agent to pay the principal of (and premium,
if any) or interest on any series of Master Notes.
“Payment Date” means each Interest Payment Date or any other date on which any principal of, premium,
if any, or interest on any Bond is due and payable for any reason, including without limitation upon any redemption
of 2014 Bonds pursuant to the Bond Indenture.
“Permitted Encumbrances” with respect to any specified Person means:
(1) the rights of the Master Trustee created under the Master Indenture and liens securing all
obligations issued under the Master Indenture on a parity basis;
(2) the rights of Related Bond Trustee s and Related Issuers created under Related Bond
Indentures and Related Loan Documents, respectively;
(3) any lien granted to one or more lenders or lessors in connection with the creation or
continuance of non-parity indebtedness;
(4) any lien, encumbrance or charge which is subordinate in all respects to the lien of the Master
Indenture;
(5) any lien arising by reason of a good faith deposit, a deposit to a debt service reserve fund or
similar fund, or an irrevocable deposit to a special redemption fund;
(6) liens for taxes, assessments and other governmental charges not delinquent or which can be
paid without penalty;
(7) unfiled inchoate mechanic’s and materialmen’s liens for construction work in progress;
(8) workmen’s, repairmen’s, warehousemen’s, landlord’s and carrier’s liens and other similar
liens;
(9) easements, rights-of-way, restrictions, mineral, oil, gas and mining rights and reservations,
zoning laws and other encumbrances or defects in title, if they do not individually or in the aggregate materially
impair the use of the collateral or detract from the value thereof to the Obligated Group;
(10) any lien (including those referred to above) for the satisfaction and discharge of which a sum
of money is on deposit with a fiduciary or trustee and pledged to and sufficient to satisfy such lien or resulting from
the entry of a judgment which is the subject of perfected appeal proceedings or as to which the time within which an
appeal therefrom may be perfected has not yet expired (but only so long as no Person in favor of whom such
judgment was rendered has taken any action to enforce the lien resulting from such judgment);
(11) liens on property received by Members of the Obligated Group through gifts, grants or
bequests, such liens being due to restrictions imposed by the donor, grantor or testator on such gifts, grants or
bequests of property or the income therefrom or such liens having been in existence at the time of such gift, grant or
bequest;
C-12
(12) liens arising by reason of deposits or pledges in connection with leases of real estate, bids,
contracts (other than contracts for the payment of money), or to secure statutory obligations or surety or
performance bonds or other pledges of like nature and all in the ordinary course of business;
(13) liens and encumbrances on Property of Members of the Obligated Group, or any mortgage,
security interest or other lien or encumbrance with respect to any property of any Person which becomes collateral
which is existing on the date that such Person becomes a Member of the Obligated Group or shall merge into or
whose assets shall otherwise be acquired by a Member of the Obligated Group in a transaction permitted by the
Master Indenture, and which shall not have been incurred in contemplation of such merger or acquisition; provided
that:
(i) no such mortgage, security interest, lien or encumbrance so described or the
indebtedness secured thereby may be extended or renewed (which terms shall not apply to the filing of any
continuation statements under the Uniform Commercial Code) or modified to apply to any property of any obligor
not subject to such mortgage, security interest, lien or encumbrance on the date of such merger or acquisition, except
to the extent that such mortgage, security interest, lien or encumbrance, as so extended, renewed or modified could
have been granted or created under any provision of the Master Indenture;
(ii) no additional Debt may thereafter be incurred that is secured by such lien; and
(iii) no lien so described was created in order to avoid the limitations contained in the
Master Indenture or the impositions of liens upon the security;
(14) leases which relate to Property which is of the type that is customarily the subject of leases,
including, without limitation, equipment leases, office space for physicians and educational institutions, food service
facilities, parking facilities, and health and beauty facilities;
(15) purchase money security interests and other security interests created in equipment owned or
acquired by a Member of the Obligated Group;
(16) any lien arising out of a capitalized lease of equipment;
(17) rights of set-off and banker’s liens with respect to funds on deposit in a financial institution
in the ordinary course of business;
(18) any lien on any Related Bond or any evidence of Debt of any Member of the Obligated
Group acquired by or on behalf of any Member of the Obligated Group by the provider of liquidity or credit support
for such Related Bond or Debt;
(19) Liens on accounts receivable arising as a result of the sale, pledge, factoring or encumbrance
with respect to such accounts receivable, with or without recourse, provided that such liens do not exceed in the
aggregate twenty percent (20%) of net accounts receivable of the obligated group for the most recent audited Fiscal
Year; and
(20) Any existing liens as of date of execution of the Master Indenture set forth on Exhibit C
attached to the Master Indenture.
Notwithstanding the foregoing, no Permitted Encumbrance shall (i) prevent Mortgagors from having good and
marketable title to the Mortgaged Premises or (ii) affect the priority of the Mortgage.
“Person” means any individual, corporation, partnership, joint venture association, limited liability
company, joint-stock company, trust, unincorporated organization or government or any agency or political
subdivision thereof.
C-13
“Place of Payment” for any series of Master Notes means a city or any political subdivision thereof
designated as such in the Master Notes of such series.
“Preferred Stock”, as applied to the Stock of any corporation, means Stock ranking prior to the shares of at
least one other class of Stock of said corporation as to the payment of dividends or the distribution of assets on any
voluntary or involuntary liquidation.
“Primary Obligor” means the Person who is primarily obligated on an obligation which is guaranteed by
another Person.
“Principal Office” means, with respect to the Bond Trustee, the address of such Person identified as its
Notice Address in the Bond Indenture or otherwise notified in writing by such Person to the Issuer and the Obligated
Group Agent.
“Project” means (i) refunding the Issuer’s outstanding Hospital Revenue Bonds (The Pottsville Hospital
and Warne Clinic Project) Series of 1998 (the “Prior Bonds”); (ii) refunding a loan evidenced by that certain
promissory note dated August 5, 2009, by and between SMC-EN and Rural Housing Service, U.S. Department of
Agriculture (the “RUS Loan”), (iii) designing, acquiring, constructing, renovating, improving, installing and
equipping various capital projects of the Borrower, including, but not limited to, renovations, improvements and
additions to the existing facilities of the Borrower; (iv) acquiring various capital equipment for use in or in
connection with the facilities of the Borrower (the projects described in (iii) and (iv) are referred to collectively as
the “Construction Project”); (v) funding a debt service reserve fund for the 2014 Bonds (as hereinafter defined), and
(vi) paying expenses incurred in connection with the issuance of the 2014 Bonds.
“Project Fund” means the fund designated as such and created pursuant to the Bond Indenture.
“Property” means any and all rights, titles and interests of any Person in and to any and all property
whether real or personal, tangible or intangible, and wherever situated including cash. Property shall not include
Excluded Property.
“Qualified Investments” mean investments identified in Exhibit A to the Bond Indenture.
“Qualified Provider” means any financial institution or insurance company which is a party to a Financial
Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company
(or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary
guarantees the performance of such financial institution or insurance company under such Financial Products
Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance
policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or
subsidiary), are rated in one of the three highest rating categories (without modifier) of Moody’s or S&P at the time
of the execution and delivery of the Financial Products Agreement.
“Rating Agency” means, as of any date, each of Moody’s, if the 2014 Bonds are then rated by Moody’s,
Fitch, if the 2014 Bonds are then rated by Fitch, and S&P, if the 2014 Bonds are then rated by S&P. Initially the
2014 Bonds will not be rated by any rating agency.
“Rating Category” means a generic securities rating category, without regard, in the case of a long-term
rating category, to any refinement or gradation of such long-term rating category by a numerical modifier or
otherwise.
“Rating Service” means each nationally recognized securities rating service which at the time has a credit
rating assigned to any series of Master Notes (or any other indebtedness secured by Master Notes) at the Request of
the Obligated Group Agent.
“Rebate Fund” means the rebate fund created under the Bond Indenture.
C-14
“Record Date” means, with respect to the 2014 Bonds, the fifteenth day of the calendar month next
preceding an Interest Payment Date.
“Record Date” means, with respect to Master Notes, the regular record date specified for each series of
Master Notes.
“Related Bond Indenture” means any indenture, bond resolution or similar instrument pursuant to which
any series of Related Bonds is issued.
“Related Bond Trustee” means any Bond Trustee under any Related Bond Indenture and any successor
Bond Trustee thereunder or, if no Bond Trustee is appointed under a Related Bond Indenture, the Related Issuer.
“Related Bondholders” mean any registered owner of a Related Bond.
“Related Bonds” means the bonds with respect to which any Master Notes are issued and any other revenue
bonds or similar obligations issued by any state of the United States or any municipal corporation or other political
subdivision formed under the laws thereof or any constituted authority, agency or instrumentality of any of the
foregoing empowered to issue obligations on behalf thereof, the proceeds of which are loaned or otherwise made
available to any Member in consideration, whether in whole or in part, of the execution, authentication and delivery
of a Master Note or Master Notes to such governmental issuer.
“Related Bonds Outstanding” or “Outstanding Related Bonds” means all Related Bonds which have been
duly authenticated and delivered by a Related Bond Trustee under a Related Bond Indenture, except:
(1) Related Bonds theretofore cancelled by the Related Bond Trustee or delivered to the Related
Bond Trustee for cancellation;
(2) Related Bonds for whose payment or redemption money (or defeasance obligations to the
extent permitted by the Related Bond Indenture) in the necessary amounts has been theretofore deposited with the
Related Bond Trustee or any paying agent for such Related Bonds in trust for the holders of such Related Bonds
pursuant to the Related Bond Indenture; provided, that, if such Related Bonds are to be redeemed, notice of such
redemption has been duly given pursuant to the Related Bond Indenture or irrevocable provision therefor
satisfactory to the Related Bond Trustee has been made;
(3) Related Bonds upon transfer of or in exchange for or in lieu of which other Related Bonds
have been authenticated and delivered pursuant to the Related Bond Indenture; provided, however, that in
determining whether the holders of the requisite principal amount of Outstanding Related Bonds have given any
request, demand, authorization, direction, notice, consent or waiver under the Master Indenture, Related Bonds
owned by any Obligated Group Member or any Affiliate thereof or any other obligor thereon shall be disregarded
and deemed not to be Outstanding except that, in determining whether the Related Bond Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Related Bonds
which the Related Bond Trustee knows to be so owned shall be so disregarded. Related Bonds so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to satisfaction of the
Related Bond Trustee the pledgee’s right so to act with respect to such Related Bonds and that the pledgee is not the
Obligated Group Member or any other obligor upon the Related Bonds or any Affiliate of the Obligated Group
Member or any other person obligated thereon; and
(4) Related Bonds held by a member of the Combined Group.
“Related Issuer” means any issuer of a series of Related Bonds.
“Related Loan Documents” means any loan agreement, credit agreement or other document pursuant to
which a Related Issuer loans the proceeds of a series of Related Bonds to any Member of the Obligated Group.
C-15
“Required Reserve Amount” means, with respect to the Bonds and as calculated as of the date of issuance
of the 2014 Bonds, the least of (A) one hundred percent (100%) of Maximum Annual Debt Service Requirements on
the Bonds, (B) one hundred twenty-five percent (125%) of average annual debt service requirements on the 2014
Bonds, and (C) ten percent (10%) of the proceeds of the 2014 Bonds determined on the basis of their initial offering
prices to the public, and which amount shall be certified in writing by the Obligated Group Agent to the Bond
Trustee.
“Responsible Officer” means, with respect to the Bond Trustee or the Master Trustee, as applicable, any
officer or authorized representative in its corporate trust department or similar group administering the trusts under
the Related Bond Indenture or any other officer of the Bond Trustee or the Master Trustee, as applicable,
customarily performing functions similar to those performed by any of the above designated officers to whom a
particular matter is referred by the Bond Trustee because of such officer’s or authorized representative’s knowledge
of and familiarity with the particular subject.
“Restricted Affiliate” means any Affiliate of a Member of the Obligated Group that:
(1) is either (a) a non-stock membership corporation of which a Member of the Obligated Group
or one of its Restricted Affiliates is the sole member, or (b) a non-stock, non-membership corporation or a trust of
which the sole beneficiary is a Member of the Obligated Group or one of its Restricted Affiliates, or (c) a stock
corporation of which at least 80% of the outstanding shares of each class of Stock are owned by one or more
Members of the Obligated Group or one of its Restricted Affiliates;
(2) if it is a non-stock corporation or a trust,
(3) has the legal power, with approval of a majority of the members of its Governing Body but
without the consent of any other Person, to transfer to an Obligated Group Member (or to a Restricted Affiliate of
which a permissible power is to transfer to a Member) money required for the payment of Debt of a Member; and
(4) in the case of a membership corporation, one or more Members of the Obligated Group or a
Restricted Affiliate of such Member has the sole right to elect or appoint and to remove, with or without cause, a
majority of the members of the Governing Body thereof; and
(5) has the ability under applicable law and its Organizational Documents, with approval of a
majority of the members of its Governing Body, to transfer, upon the liquidation or dissolution of such Affiliate, all
assets of such Affiliate remaining after payment of its debts to a Member (or to a Restricted Affiliate whose
remaining assets may be so transferred upon liquidation or dissolution), provided that if such Affiliate is an
organization described in Section 501(c)(3) of the Code, then for so long as such Member is an organization
described in Section 501(c)(3) of the Code, the Organizational Documents of such Affiliate and applicable law may
(i) provide for the naming of another Member of the Obligated Group as a substitute beneficiary if the then current
beneficiary ceases to be an organization described in Section 501(c)(3) of the Code and (ii) prohibit transfers to
organizations not described in Section 501(c)(3) of the Code; and
(6) has satisfied (or a predecessor has satisfied) the requirements set forth herein for becoming a
Restricted Affiliate and has not thereafter ceased to satisfy the requirements of clauses (i) and (ii) above or satisfied
the requirements set forth herein for ceasing to be a Restricted Affiliate. A list of the Restricted Affiliates as of the
date of the Master Indenture is attached as Exhibit B to the Master Indenture. Such Exhibit may be amended from
time to time to reflect the addition or withdrawal of Restricted Affiliates.
“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., a
corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such
corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency,
“S&P” shall be deemed to refer to any other nationally recognized securities rating agency designated by the
Obligated Group Agent by notice to the Issuer and the Bond Trustee.
“Securities Act” means the Securities Act of 1933, as amended, and any successor thereto.
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“Securities Depository” means DTC or, if applicable, any successor securities depository appointed
pursuant to the provisions of the Bond Indenture.
“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor
thereto.
“Short-Term Indebtedness” means any Debt (i) incurred or assumed by any Obligated Group Member for a
term not exceeding 365 days, except any such Debt with respect to which a Liquidity Facility is then in effect, and
(ii) any Guaranty of any Debt that would be described in clause (i) above if such Debt were incurred directly by an
Obligated Group Member. Optional Tender Indebtedness shall not be deemed to constitute Short-Term Indebtedness
solely by reason of the option of the holder thereof to require the redemption or purchase thereof or any required
redemption or purchase thereof in connection with the termination of the Liquidity Facility securing such Optional
Tender Indebtedness prior to the stated maturity thereof.
“SHS” means the Schuylkill Health System, a Pennsylvania non-profit corporation.
“SHSMG” means the Schuylkill Health System Medical Group, Inc., a Pennsylvania non-profit
corporation.
“SMC-EN” means Schuylkill Medical Center-East Norwegian Street, a Pennsylvania non-profit
corporation.
“SMC-SJ” means Schuylkill Medical Center-South Jackson Street, a Pennsylvania non-profit corporation.
“SRC” means Schuylkill Rehabilitation Center, Inc, a Pennsylvania non-profit corporation.
“Stated Maturity” when used with respect to any Debt or any Master Note or any installment of interest
thereon means the date specified in such Debt or Master Note as the fixed date on which the principal of such Debt
or Master Note or such installment of interest is due and payable.
“Stock” includes all shares, interests, participations, or other equivalents (however designated) of or in
corporate stock.
“Supplemental Master Indenture” means an indenture amending or supplementing the Master Indenture as
provided therein.
“Supplemental Master Indenture No. 1” means the Supplemental Master Trust Indenture No. 1, dated as of
April 1, 2014, between the Obligated Group and the Master Trustee, as amended and supplemented from time to
time.
“Trust Estate” means, as applicable, the property described as the Trust Estate in the Granting Clauses of
the Master Indenture or any Supplemental Master Indenture that is subject to the lien and security interest of the
Master Indenture or the property and other rights assigned by the Issuer to the Bond Trustee in the granting clauses
of the Bond Indenture.
“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended, and any successor thereto.
“Unassigned Issuer’s Rights” means (i) all of the rights of the Issuer to receive fees and expenses under the
Loan Agreement, to be held harmless and indemnified under the Loan Agreement, to inspect the Facilities as
provided in the Loan Agreement, to be reimbursed for attorney’s fees and expenses under the Loan Agreement and
to give or withhold consent to or approval of amendments, modifications, termination or assignment of the Loan
Agreement and (ii) all obligations of the Obligated Group which by their nature are for the benefit of the Issuer and
not the Bond Trustee or the holders of the Bonds.
“Underwriter” means PNC Capital Markets, LLC.
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“Uniform Commercial Code” means 13 Pa.C.S. §1102, et seq., as amended.
“United States Obligations” means direct general obligations of, or obligations the payment of the principal
of and interest on which is unconditionally guaranteed as to full and timely payment by, the United States of
America, which obligations are non-callable.
THE BOND INDENTURE
The following is a summary of certain provisions of the Bond Indenture. This summary does not purport to
be complete and is qualified in its entirety by reference to the Bond Indenture.
Defeasance of Lien
When the Issuer has paid or has been deemed to have paid to the Holders of all of the Bonds, the principal
and interest and premium, if any, due or to become due with respect to the Bonds at the times and in the manner
stipulated therein and in the Bond Indenture, and all other obligations owing to the Bond Trustee under the Bond
Indenture or under the Loan Agreement have been paid or provided for with respect to the Bonds, the lien of the
Bond Indenture on the Trust Estate with respect to the Bonds shall terminate. Upon the written request of the Issuer
or the Obligated Group Agent, the Bond Trustee shall, upon the termination of the lien of the Bond Indenture,
promptly execute and deliver to the Issuer, with a copy to the Obligated Group Agent, an appropriate discharge of
the Bond Indenture except that, subject to the provisions of the Bond Indenture, the Bond Trustee shall continue to
hold in trust, but without liability for interest, amounts held pursuant to the Bond Indenture for the payment of the
principal of, premium, if any, and interest on the Bonds.
Outstanding Bonds shall be deemed to have been paid within the meaning of the Bond Indenture if the
Bond Trustee shall have paid to the Holders of such Bonds, or shall be holding in trust for and shall have irrevocably
committed to the payment of such Outstanding Bonds, moneys sufficient for the payment of all principal of and
interest and premium, if any, on such Bonds to the date of maturity or redemption, as the case may be; provided that
if any such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly
given to the Bondholders and the Obligated Group Agent or irrevocable provision satisfactory to the Bond Trustee
shall have been duly made for the giving of such notice.
Outstanding Bonds also shall be deemed to have been paid for the purposes of the provisions described
under this heading if the Bond Trustee shall be holding in trust for and shall have irrevocably committed to the
payment of such Outstanding Bonds cash or non-callable United States Obligations, the payments on which when
due, without reinvestment, will provide moneys which, together with moneys, if any, so held and so committed,
shall be sufficient for the payment of all principal of and interest and premium, if any, on such Bonds to the date of
maturity or redemption, as the case may be; provided, that if any of such Bonds are deemed to have been paid prior
to the earlier of the redemption or the maturity thereof, the Bond Trustee, the Issuer and the Obligated Group Agent
shall have received a report in form and substance acceptable to the Bond Trustee and the Obligated Group Agent of
a firm of independent public accountants acceptable to the Bond Trustee and the Obligated Group Agent verifying
that the payments on such United States Obligations, if paid when due and without reinvestment, will, together with
any moneys so deposited, be sufficient for the payment of all principal of and interest and premium, if any, on such
Bonds to the date of maturity or redemption, as the case may be; and provided, further, that if any such Bonds are to
be redeemed prior to the maturity thereof, unconditional notice of such redemption shall have been duly given or
irrevocable provision satisfactory to the Bond Trustee shall have been duly made for the giving of such notice.
Any moneys held by the Bond Trustee in the manner provided by the provisions described under this
heading shall be invested by the Bond Trustee in the manner provided by the Bond Indenture (but only to the extent
that such investments are available) only in United States Obligations which do not contain provisions permitting
redemption at the option of the issuer, the maturities or redemption dates, without premium, of which shall coincide
as nearly as practicable with, but not be later than, the time or times at which said moneys will be required for the
aforesaid purposes.
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After all of the Outstanding Bonds shall be deemed to have been paid and all other amounts required to be
paid under the Bond Indenture shall have been paid, then upon the termination of the Bond Indenture any amounts
in the Project Fund, the Debt Service Reserve Fund or the Bond Fund shall be paid first to the Trustee and then to
the Issuer to the extent necessary to repay any unpaid obligations owing to the Trustee and/or the Issuer hereunder or
under the Loan Agreement, and thereafter the remainder, if any, shall be paid to the Borrower.
Exchange and Transfer of 2014 Bonds
Upon surrender of a 2014 Bond at the designated corporate trust office of the Trustee, as bond registrar,
together with an assignment duly executed by the Bondholder or his or her attorney or legal representative in such
form and with such guaranty of signature as shall be satisfactory to the Trustee, a 2014 Bond may be exchanged for
fully registered 2014 Bonds of the same interest rate and maturity, aggregating in amount the then unpaid principal
amount of the 2014 Bonds surrendered, of Authorized Denominations.
As to any 2014 Bonds, the Bondholder shall be deemed and regarded as the absolute owner thereof for all
purposes and none of the Issuer, the Borrower and the Trustee shall be affected by any notice, actual or constructive,
to the contrary.
Any 2014 Bond may be registered as transferred upon the books kept for the registration and transfer of
2014 Bonds only upon surrender thereof to the Trustee, as bond registrar, together with an assignment duly executed
by the Bondholder or his or her attorney or legal representative in such form and with such guaranty of signature as
shall be satisfactory to the Trustee; provided that the Trustee shall not be obligated to register any exchange or
transfer during the period between a Record Date and the corresponding Interest Payment Date. Upon the
registration of transfer of any such 2014 Bonds and on request of the Trustee, the Issuer shall execute, and the
Trustee shall authenticate and deliver, a new 2014 Bond, registered in the name of the transferee or transferees, of
the same maturity, aggregating in amount the then unpaid principal amount of the 2014 Bond surrendered, of
Authorized Denominations.
In all cases in which 2014 Bonds shall be issued in exchange for or in replacement of other 2014 Bonds, the
2014 Bonds to be issued shall be signed and sealed on behalf of the Issuer and authenticated by the Trustee, and
shall have attached thereto an executed authentication certificate, all as provided in Section 303. The obligation of
the Issuer and the rights of the Bondholders with respect to such 2014 Bonds shall be the same as with respect to the
2014 Bonds being exchanged or replaced. Such registrations of transfers or exchanges of 2014 Bonds shall be
without charge to the Bondholders, except that any taxes or other governmental charges required to be paid with
respect to the same shall be paid by the Bondholder requesting such registration of transfer or exchange as a
condition precedent to the exercise of such privilege. Any service charge made by the Trustee for any such
registration of transfer or exchange shall be paid by the Borrower.
The 2014 Bonds will be issued initially as one fully registered bond for each maturity in the name of Cede
& Co., as nominee of DTC, and deposited in the custody of DTC or the Trustee as agent for DTC. The Beneficial
Owners will not receive physical delivery of the 2014 Bonds. Individual purchases of the 2014 Bonds may be made
in book-entry form only in principal amounts equal to Authorized Denominations thereof. Payments of principal
and premium, if any, and interest on the 2014 Bonds will be made to DTC or its nominee as Bondholder.
DTC shall pay interest to the Beneficial Owners of record through its Participants as of the close of
business on the Record Date. DTC shall pay the redemption price of the 2014 Bonds called for redemption to the
Beneficial Owners of record through its Participants in accordance with its customary procedures.
Transfer of beneficial ownership interests in the 2014 Bonds shall be made by DTC and its Participants,
acting as nominees of the Beneficial Owners, in accordance with rules specified by DTC and its Participants.
2014 Bond certificates will be issued directly to owners of the 2014 Bonds other than DTC, or its nominee,
upon the occurrence of the following events (subject, however, to operation of the paragraph following clause (c)
below):
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(a) DTC determines not to continue to act as securities depository for the 2014 Bonds; or
(b) the Borrower has advised DTC and the Trustee in writing of its determination that DTC is incapable of
discharging its duties; or
(c) the Borrower has determined that it is in the best interest of the Bondholders not to continue the bookentry system of transfer or that interests of the Beneficial Owners of the 2014 Bonds might be adversely affected if
the book-entry system of transfer is continued.
Upon occurrence of the event described in (a) or (b) above, the Borrower shall attempt to locate another
qualified Securities Depository. If the Borrower fails to locate another qualified Securities Depository to replace
DTC, the Trustee shall authenticate and deliver 2014 Bonds in certificated form. In the event the Borrower makes
the determination noted in (b) or (c) above (as to which the Borrower undertakes no obligation to make any
investigation to determine the occurrence of any events that would permit the Borrower to make any such
determination), and has made provisions to notify the Beneficial Owners of the 2014 Bonds of the availability of
2014 Bonds certificates by mailing an appropriate notice to DTC, the Issuer shall cause the Trustee to authenticate
and deliver 2014 Bonds in certificated form to DTC’s Participants or the Beneficial Owners (as directed in writing
by DTC) in appropriate amounts. The Trustee may conclusively rely on information from DTC or other Securities
Depository and its Participants as to the names, addresses, amounts of 2014 Bonds beneficially owned and taxpayer
identification numbers of the Beneficial Owners of the 2014 Bonds.
Anything contained in the Bond Indenture to the contrary notwithstanding, the 2014 Bonds may only
be transferred, exchanged or pledged in Authorized Denominations, and to a Person that is a “qualified
institutional buyer” as defined in Rule 144A promulgated under the Securities Act of 1933, as amended. The
initial purchasers of the 2014 Bonds shall be required to execute and deliver to the Trustee, the Issuer and the
Borrower an Investor Letter.
Funds and Accounts
Project Fund. There will be established with the Bond Trustee a Project Fund. Upon the issuance and
delivery of the Bonds, a portion of the proceeds of the sale thereof shall be deposited in the Project Fund, which will
be used to pay costs incurred by the Issuer and the Obligated Group in connection with the issuance of the Bonds
and to reimburse the Obligated Group for costs of the Construction Project paid prior to the Closing Date with funds
of the Obligated Group. Amounts deposited to the Project Fund and not applied pursuant to the provisions described
in the preceding sentence shall be applied to pay costs of the Construction Project, including capitalized interest
during the construction period. All such payments shall be made in accordance with written instructions given to the
Bond Trustee by a Obligated Group Agent as set forth in the Bond Indenture. Upon completion of the Construction
Project, and at the written direction of the Obligated Group Agent, any moneys remaining in the Project Fund shall
be transferred to the Bond Fund and applied to the next ensuing payment of principal or redemption price of the
Bonds or transferred and/or applied as may be specified in a Favorable Opinion of Bond Counsel. In either case,
following such transfer the Project Fund shall be closed.
If the principal of the 2014 Bonds shall have become due and payable pursuant to the Bond Indenture, any
balance remaining in the Project Fund shall without further authorization be transferred into the Bond Fund.
Bond Fund. There will be established with the Bond Trustee a Bond Fund, which shall be used to pay
when due the principal of, premium, if any, and interest on the 2014 Bonds. Moneys shall be deposited in the Bond
Fund from time to time and shall be applied solely to pay principal and redemption price of and interest on the 2014
Bonds.
Rebate Fund. There will be established with the Bond Trustee a Rebate Fund. So long as any 2014 Bonds
remain Outstanding, moneys held in the Rebate Fund shall be held separate and apart from all other funds and
accounts established under the Bond Indenture. The Obligated Group has agreed to pay or provide the Bond Trustee
with funds sufficient to pay the amounts (if any) payable pursuant to Section 148(f) of the Code with respect to the
Bonds. The Bond Trustee shall have no obligation with respect to the determinations of the required timing or
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amounts of deposits to the Rebate Fund or of payments of rebatable amounts to the United States government or of
the accuracy of any calculation of such required amounts.
Debt Service Reserve Fund. There will be established with the Bond Trustee, solely for the benefit and
security of the 2014 Bonds, a Debt Service Reserve Fund which shall be held in trust by the Bond Trustee until
applied as provided in the Bond Indenture and shall be funded in an amount not less than the Required Reserve
Amount for the 2014 Bonds. The Debt Service Reserve Fund may consist of cash or Qualified Investments of the
type specified in the Bond Indenture with maturity dates not longer than five (5) years, or which are subject to
withdrawal by the Trustee for the purposes permitted under the Bond Indenture upon not more than seven (7) days’
notice. Authorized Investments in the Debt Service Reserve Fund shall be valued in the manner provided in the
Bond Indenture.
The Bond Trustee shall be authorized, without any direction from the Issuer, to transfer money from the
Debt Service Reserve Fund to the Bond Fund to the extent that the money in the Bond Fund may at any time be
insufficient to pay the principal of or the interest due on the Bonds, as the same shall become due and payable. The
Debt Service Reserve Fund shall be valued initially upon issuance of the Bonds and thereafter semi-annually on
each January 1 and July 1, beginning on July 1, 2014. Qualified Investments then constituting part of the Debt
Service Reserve Fund shall be valued at the then fair market value thereof. If on any valuation date the amount in
the Debt Service Reserve Fund, as so valued, is less than the Required Reserve Amount, the Bond Trustee shall give
notice of such deficiency to the Borrower and the Authority; provided, however, that failure to give such notice or
any defect therein shall not affect the obligations of the Issuer and the Borrower to make good the deficiency in the
Debt Service Reserve Fund as provided in the Bond Indenture.
On or before the first day of each month following (1) any withdrawal of money from the Debt Service
Reserve Fund to eliminate any deficiency in the Bond Fund, or (2) any valuation date on which the value of the Debt
Service Reserve Fund is less than the Required Reserve Amount, the Bond Trustee, after having made or made
provision for the transfers and deposits provided for in the Bond Indenture, shall transfer to the Debt Service
Reserve Fund an amount equal to the additional payments made by the Borrower to restore the value of the Debt
Service Reserve Fund as required by the Loan Agreement until the value of the Debt Service Reserve Fund is not
less than the Required Reserve Amount.
If on any valuation date the amount on deposit in the Debt Service Reserve Fund, valuing any securities
therein at current market value, exceeds the Required Reserve Amount, the Trustee shall notify the Issuer and the
Borrower of such excess and (1) to the extent that such value is in excess of the Maximum Annual Debt Service
Requirements on the Bonds, shall, upon the written direction of the Obligated Group Agent, (a) invest such excess in
Qualified Investments that the Obligated Group Agent certifies constitute obligations the interest on which is
excluded from gross income for federal income tax purposes under Section 103 of the Code and which are not
specified private activity bonds (within the meaning of Section 57(a)(5)(C) of the Code) or (b) restrict the yield on
the investment of such excess so that the yield thereon, as computed by the Obligated Group Agent in accordance
with Section 148 of the Code and applicable Treasury Regulations, does not exceed the “yield” on the Bonds (unless
the Trustee shall have received an opinion from Bond Counsel to the effect that such investment in tax-exempt
obligations and such restriction upon investment yield is not required to preserve the tax-exempt status of the
Bonds), or (2) at the written request of the Obligated Group Agent, shall transfer such excess as provided in the
following paragraph.
If on any date the amount on deposit in the Debt Service Reserve Fund exceeds the Required Reserve
Amount, the Bond Trustee, upon the written request of the Obligated Group Agent, shall transfer such excess to the
Bond Fund or to the Obligated Group Agent, provided, however, that if any amounts to be transferred to the
Obligated Group Agent represent original proceeds of the Bonds, such transfer shall be made only upon receipt by
the Bond Trustee of an opinion of Bond Counsel to the effect that such transfer is permitted by the Act and will not
adversely affect the tax-exemption of interest on the Bonds.
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Investment of Moneys in Funds
Any moneys held as a part of the Project Fund, Bond Fund, Debt Service Reserve Fund or the other funds
established under the Bond Indenture shall be invested or reinvested by the Bond Trustee, to the extent permitted by
law, at the written request of and as directed by the Obligated Group Agent, in any Qualified Investments.
The Issuer covenants and certifies to and for the benefit of the Owners of the 2014 Bonds Outstanding that
so long as any of the 2014 Bonds remains Outstanding, the Issuer shall not direct that moneys on deposit in any fund
or account in connection with the 2014 Bonds (whether or not such moneys were derived from the proceeds of the
sale of the Bonds or from any other sources), be used in a manner which will cause the 2014 Bonds to be classified
as “arbitrage bonds” within the meaning of Section 148 of the Code. The Issuer further agrees to cooperate with any
reasonable request of the elating to maintaining the exclusion of interest on the 2014 Bonds from gross income;
provided, however, that the Issuer shall have no responsibility for directing the investment of any moneys,
determining the amount of moneys subject to any applicable yield restriction under Section 148 of the Code, or
calculating or paying any rebate pursuant to Section 148(f) of the Code.
The Issuer covenants that it will file such returns and make payments as directed by the Obligated Group
Agent (but only from moneys provided to the Issuer by or on behalf of the Obligated Group expressly for such
purposes), if any, required to be made to the United States pursuant to the Code in order to establish or maintain the
exclusion of the interest on the 2014 Bonds from gross income for federal income tax purposes.
Avoidance of Arbitrage
In reliance upon the covenant of the Obligated Group in the Loan Agreement regarding avoidance of
arbitrage, the Issuer agrees that it will not take or cause, or fail to take or cause, any action which may cause interest
on the Bonds to become includable in gross income for federal income tax purposes. Without limiting the generality
of the foregoing, the Issuer agrees that it will take all actions reasonably requested by the Obligated Group Agent to
comply with the provisions of Section 148 of the Code, provided, however, that the Obligated Group and not the
Issuer or the Bond Trustee shall be responsible for the computation of all amounts required to be paid pursuant to
Section 148 of the Code.
Covenant Against Encumbrances
The Issuer covenants that it will not voluntarily create any lien, encumbrance or charge upon the Loan
Agreement or the Master Note, the payments made pursuant thereto or the Trust Estate, except the pledge, lien and
charge for the security of the Bonds created by the Bond Indenture.
Events of Default
The occurrence of any one or more of the following events shall constitute an “Event of Default” under the
Bond Indenture:
(a)
failure to pay interest on any Bond when due and payable;
(b)
failure to pay any principal of or premium on any Bond when due and payable, whether at stated
maturity or pursuant to any redemption requirement under the Bond Indenture;
(c)
failure of the Issuer to duly and punctually perform any other of the covenants, conditions,
agreements and provisions on its part contained in the Bonds or in the Bond Indenture, which failure shall continue
for 60 days after written notice specifying such default and requiring the same to be remedied has been given to the
Issuer and the Obligated Group Agent by the Bond Trustee; provided, however, if the failure stated in such notice
cannot be corrected within the applicable period, the Bond Trustee will not unreasonably withhold its consent to an
extension of such time if it is possible to correct such failure and corrective action is instituted by the Issuer within
the applicable period and is diligently pursued until such failure is corrected;
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(d)
the occurrence of an Event of Default under the Loan Agreement after giving effect to any notice
or rights to cure applicable thereto;
(e)
the occurrence of an Event of Default under the Master Indenture after giving effect to any notice
or rights to cure applicable thereto; or
(f)
the Obligated Group shall fail to comply with any covenant or agreement contained in the
Mortgage, and such failure continues for the period described in subsection (c) above.
Within five (5) days after actual knowledge by a Responsible Officer of the Bond Trustee of an Event of
Default described under clause (a), (b) or (d) above relating to the Obligated Group’s failure to make a payment of
principal of or interest on the Bonds as required under the Loan Agreement, the Bond Trustee shall give written
notice, by registered or certified mail, to the Issuer, the Obligated Group Agent, the Master Trustee and, by first
class mail, to the Bondholders, and upon notice as provided in the Bond Indenture, shall give similar notice of any
other Event of Default.
Remedies; Acceleration
If an Event of Default shall occur and be continuing, then in each and every such case the Bond Trustee
may, and upon the written direction of a Majority of the Bondholders and the provision of indemnity as provided in
the Bond Indenture, by notice to the Issuer and the Obligated Group Agent (a) proceed to protect and enforce its
rights of the owners of the Bonds under the laws of the Commonwealth and under the Loan Agreement and the
Bond Indenture by a suit, action or special proceeding in equity or at law, by mandamus or otherwise, either for the
specific performance of any covenant or agreement contained in the Bond Indenture or in aid or execution of any
power in the Bond Indenture granted or for any enforcement of any proper legal or equitable remedy as the Bond
Trustee, being advised by Counsel, shall deem most effectual to protect and enforce the rights aforesaid; (b) proceed
to protect and to enforce its rights as a holder of the Master Note, on behalf of the Bondholders, in accordance with
the Master Indenture; and (c) declare the principal of all Bonds then Outstanding and the interest accrued thereon to
be immediately due and payable. The Bond Trustee, if it is also not the Master Trustee, shall give notice of any
Event of Default and any such declaration as soon as practicable to the Master Trustee by Electronic Means.
However, the right of the Bond Trustee or the owners of a Majority of the Bondholders to make any such
declaration as aforesaid is subject to the condition that if, at any time after such declaration, but before the Bonds
shall have been paid in full, all overdue installments of interest upon such Bonds, together with interest on such
overdue installments of interest to the extent permitted by law, and the reasonable and proper charges, expenses and
liabilities of the Bond Trustee, and all other sums then payable by the Issuer under the Bond Indenture (except the
principal of and interest accrued since the next preceding Interest Payment Date on the Bonds due and payable
solely by virtue of such declaration) shall either be paid by or for the account of the Issuer or provision satisfactory
to the Bond Trustee shall be made for such payment, all defaults under the Bonds or under the Bond Indenture (other
than the payment of principal and interest due and payable solely by reason of such declaration) shall be made good
or be secured to the satisfaction of the Bond Trustee or provision deemed by the Bond Trustee to be adequate shall
be made therefor, then and in every such case, the Bond Trustee may rescind such declaration and annul such default
in its entirety, but no such rescission or annulment shall extend to or affect any subsequent default or impair or
exhaust any right or power consequent thereon. The Bond Trustee, if it is also not the Master Trustee, shall give
notice of any such rescission to the Master Trustee.
In lieu of or in addition to a declaration of acceleration, the Bond Trustee may also exercise any other right
or remedy available to it at law or in equity, including the appointment of a receiver to the extent permitted by law
or any other right or remedy available under the Act or the Pennsylvania Uniform Commercial Code.
Other Remedies; Rights of Bondholders
Whenever any Event of Default shall have happened and be continuing, the Bond Trustee shall, but only
upon the written direction of a Majority of the Bondholders and the provision of indemnity as provided in the Bond
Indenture, the Bond Trustee shall take the following remedial steps:
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(a)
In the case of an Event of Default described in clauses (a) and (b) under “Events of Default”
above, the Bond Trustee may take whatever action at law or in equity is necessary or desirable to collect the Loan
Payments then due or payments due under the Master Note;
(b)
In the case of an Event of Default described in clause (d) under “Event of Default” above, the
Bond Trustee may take whatever action the Issuer would be entitled to take, and shall take whatever action the
Issuer would be required to take, pursuant to the Loan Agreement in order to remedy the Event of Default in
question;
(c)
In the case of an Event of Default described in clause (c) under “Event of Default” above, the
Bond Trustee may take whatever action at law or in equity is necessary or desirable to enforce the performance,
observance or compliance by the Issuer with any covenant, condition or agreement by the Issuer under the Bond
Indenture;
(d)
By mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the
Bondholders, and require the Issuer to carry out any agreements with or for the benefit of the Bondholders and to
perform its duties under the Act or the Loan Agreement;
(e)
By action or suit in equity require the Issuer to account as if it were the Bond Trustee of an express
trust for the Bondholders;
(f)
By action or suit in equity enjoin any acts or things which may be unlawful or in violation of the
rights of the Bondholders; and
(g)
To bring suit upon the Bonds.
Upon the continuation of an Event of Default, if so requested by a Majority of the Bondholders, and if
satisfactory indemnity has been furnished to it as provided in the Bond Indenture, the Bond Trustee shall exercise
such of the rights and powers conferred by the Bond Indenture and the Loan Agreement and the Master Note as the
Bond Trustee, being advised by Counsel, shall deem most effective to enforce and protect the interests of the
Bondholders; provided that the Bond Trustee may take action with respect to the Loan Agreement only to enforce
the rights expressly and specifically assigned to the Bond Trustee under the Granting Clauses of the Bond Indenture.
No remedy under the Bond Indenture is intended to be exclusive, and to the extent permitted by law each
remedy shall be cumulative and in addition to any other remedy under the Bond Indenture or now or thereafter
existing. No delay or omission to exercise any right or power shall impair such right or power or constitute a waiver
of any Event of Default or acquiescence therein; and each such right and power may be exercised as often as
deemed expedient. No waiver by the Bond Trustee or the Bondholders of any Event of Default shall extend to any
subsequent Event of Default.
Right of Bondholders to Direct Proceedings
Anything else in the Bond Indenture to the contrary notwithstanding, a Majority of the Bondholders shall
have the right, by an instrument in writing executed and delivered to the Bond Trustee, to direct the method and
place of conducting all remedial proceedings to be taken by the Bond Trustee under the Bond Indenture or under the
Loan Agreement and the Master Note in respect of the Bonds; provided that such direction shall not be otherwise
than in accordance with law and the Bond Indenture and, if applicable, the Loan Agreement and the Master Note
and the Bond Trustee shall be indemnified to its satisfaction against the costs, expenses and liabilities which may be
incurred therein or thereby.
Application of Moneys
All moneys received by the Bond Trustee, pursuant to any right given or action taken under the provisions
described under this heading shall, after payment of the Bond Trustee’s outstanding fees and expenses, the costs and
expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances
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owing to or incurred or made by the Bond Trustee or the Issuer, be deposited in the Bond Fund and the moneys in
the Bond Fund shall be applied as follows:
(a)
Unless the principal of all the Bonds shall have become or shall have been declared due and
payable, all such moneys shall be applied:
FIRST - To the payment to the Persons entitled thereto of all installments of interest then due on
the Bonds in the order of the maturity of the installments of such interest (with interest on overdue
installments of such interest, to the extent permitted by law, at the rate of interest borne by the
corresponding Bonds and, if the amount available shall not be sufficient to pay in full any particular
installment, then to the payment ratably, according to the amounts due on such installment, to the Persons
entitled thereto, without any discrimination or privilege; and
SECOND - To the payment to the Persons entitled thereto of the unpaid principal of and premium,
if any, on any of the Bonds which shall have become due (other than Bonds matured or called for
redemption for the payment of which moneys are held pursuant to the provisions of the Bond Indenture),
(with interest on overdue installments of principal and premium, if any, to the extent permitted by law, at
the rate of interest borne by the Bonds to which such principal and premium relates) and, if the amount
available shall not be sufficient to pay in full all Bonds, due on any particular date, then to the payment
ratably according to the amount of principal due on such date, to the Persons entitled thereto without any
discrimination or privilege; and
THIRD - To the payment to the Persons entitled thereto as the same shall become due of the
principal of and premium, if any, and interest on the Bonds which may thereafter become due and, if the
amount available shall not be sufficient to pay in full Bonds, due on any particular date, together with
interest and premium, if any, then due and owing thereon, payment shall be made ratably according to the
amount of interest, principal and premium, if any, due on such date to the Persons entitled thereto without
any discrimination or privilege.
(b)
If the principal of all the Bonds shall have become due or shall have been declared due and
payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the
Bonds without preference or priority of principal over interest or of interest over principal, or of any installment of
interest over any other installment of interest, or of any Bonds over any other Bonds, ratably, according to the
amounts due, respectively, for principal and interest, to the Persons entitled thereto without any discrimination or
privilege, with interest on overdue installments of interest or principal, to the extent permitted by law, at the rate of
interest borne by the Bonds to which such principal and premium relates.
(c)
If the principal of all the Bonds shall have been declared due and payable and if such declaration
shall thereafter have been rescinded and annulled under the provisions described under this heading, then, subject to
the provisions of paragraph (b) above, in the event that the principal of all the Bonds shall later become due or be
declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) above.
Rights and Remedies of Bondholders
No Holder of any of the Bonds shall have any right to institute any suit, action or proceeding in equity or at
law for the execution of any trust under the Bond Indenture, or for any other remedy under the Bond Indenture or on
the Bonds unless (a) such Holder previously shall have given to the Bond Trustee written notice of an Event of
Default as above provided, (b) a Majority of the Bondholders shall have made written request of the Bond Trustee
after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have
afforded the Bond Trustee a reasonable opportunity either to proceed to exercise the powers granted above, or to
institute such action, suit or proceeding in its name, (c) there shall have been offered to the Bond Trustee security
and indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby,
and (d) the Bond Trustee shall have refused or neglected to comply with such question within a reasonable period of
time. The parties to the Bond Indenture intend that no one or more Holders of the Bonds shall have any right in any
manner whatever by his or their action to affect, disturb or prejudice the security of the Bond Indenture, or to
enforce any right under the Bond Indenture, except in the manner provided in the Bond Indenture, and that all
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proceedings at law or in equity shall be instituted, had and maintained in the manner provided in the Bond Indenture
and for the equal benefit of all Holders of the Outstanding Bonds.
However, nothing in the Bond Indenture shall affect or impair the right of any Holder of a Bond, which is
absolute and unconditional, to enforce the payment of the principal of and interest on such Holder’s Bonds out of the
moneys provided for such payment, or the obligation of the Issuer to pay the same out of the sources pledged under
the Bond Indenture, at the time and place expressed in the Bond Indenture.
Waivers of Events of Default
The Bond Trustee shall waive any Event of Default under the Bond Indenture and its consequences and
rescind any declaration of acceleration of principal upon the written request of (a) a Majority of the Bondholders, in
respect of which default in the payment of principal or interest, or both, exists or (b) a Majority of the Bondholders
in the case of any other Event of Default; provided that there shall not be waived any Event of Default described in
clause (a) or (b) under the heading “THE BOND INDENTURE—Events of Default” above, unless prior to such
waiver or rescission, the Obligated Group shall have caused to be paid to the Bond Trustee (i) all arrears of principal
and interest (other than principal of or interest on the Bonds, which became due and payable by declaration of
acceleration), with interest at the rate then borne by the Bonds on overdue installments, to the extent permitted by
law, and (ii) the Bond Trustee’s outstanding fees and expenses and all expenses of the Bond Trustee or the Issuer in
connection with such Event of Default. In case of any waiver or rescission described above, or in case any
proceeding taken by the Bond Trustee on account of any such Event of Default shall have been discontinued or
concluded or determined adversely, then and in every such case the Issuer, the Bond Trustee and the Holders of
Bonds shall be restored to their former positions and rights under the Bond Indenture, respectively, but no such
waiver or rescission shall extend to any subsequent or other Event of Default, or impair any right consequent
thereon.
Trustee and Bondholders Entitled to all Remedies Under Act
It is the purpose of the Bond Indenture to provide such remedies to the Bond Trustee and the Bondholders
as may be lawfully granted under the provisions of the Act; but should any remedy granted in the Bond Indenture to
be held unlawful, the Bond Trustee and the Bondholders shall nevertheless be entitled to every other remedy
provided by the Act. If is further intended that, insofar as lawfully possible, the provisions of the Bond Indenture
shall apply to and be binding upon the Bond Trustee or receiver appointed under the Act.
Resignation by Bond Trustee; Removal
The Bond Trustee may at any time resign from the trusts created by the Bond Indenture by giving 45 days’
written notice to the Issuer, to the Obligated Group Agent and to each Bondholder, but such resignation shall not
take effect until the appointment of a successor Bond Trustee, acceptance by the successor Bond Trustee of such
trusts and assignment to such successor Bond Trustee of the rights of the predecessor Bond Trustee under the Loan
Agreement and the Master Note. The Bond Trustee may be removed at any time by an instrument or concurrent
instruments in writing delivered to the Bond Trustee, the Issuer and the Obligated Group Agent and signed by the
Obligated Group Agent or a Majority of the Bondholders, but such removal shall not take effect until the
appointment of a successor Bond Trustee and acceptance by the successor Bond Trustee of such trusts, provided that
notice of such removal must be provided by the Obligated Group Agent to the Bondholders at least 30 days prior to
the effective date of such removal. The Bond Trustee may also be removed at any time for any breach of trust, or
for acting or proceeding in violation of, or for failing to act or proceeding in accordance with, any provision of the
Bond Indenture with respect to the duties and obligations of the Bond Trustee, by any court of competent
jurisdiction upon the application of the Issuer, the Obligated Group Agent or a Majority of the Bondholders.
Appointment of Successor Bond Trustee
If the Bond Trustee under the Bond Indenture shall resign or be removed, or be dissolved, or otherwise
become incapable of acting under the Bond Indenture, or in case it shall be taken under the control of any public
officer or officers, or of a receiver appointed by a court, a successor shall be appointed by the Obligated Group
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Agent. If the Obligated Group Agent does not appoint a successor Bond Trustee within 45 days of the Bond Trustee
providing notice of its resignation or removal, the Bond Trustee, at the Obligated Group’s expense, may petition a
court of competent jurisdiction to appoint a successor Bond Trustee. At any time within one (1) year after any such
vacancy shall have occurred and provided a court has not appointed a successor Bond Trustee, as provided above, a
Majority of the Bondholders may appoint a successor Bond Trustee by an instrument or concurrent instruments in
writing signed by or on behalf of such Holders, which appointment shall supersede any Bond Trustee theretofore
appointed by the Obligated Group Agent. Each successor Bond Trustee shall be a trust company or bank having the
powers of a trust company which is in good standing and has a reported capital, surplus and undivided profits of not
less than $100,000,000. Any such successor Bond Trustee shall become the Bond Trustee upon giving notice to the
Obligated Group Agent, the Issuer and the Bondholders, if any, of its acceptance of the appointment, vested with all
the property, rights and powers of the Bond Trustee under the Bond Indenture, without any further act or
conveyance. Any predecessor Bond Trustee shall execute, deliver and record and file such instruments as the Bond
Trustee may reasonably require to confirm or perfect any such succession.
Trustee Authorized to Vote Master Note; Exercise of Remedies
Except as provided below, the Bond Trustee, as assignee of the Master Note, shall be entitled to vote the
Master Note or the indebtedness represented thereby in connection with any proposed amendment, change,
modification, waiver, consent or direction (hereinafter in this paragraph referred to as an “amendment”) to or in
respect of the Master Indenture. The Bond Trustee may agree to any such amendment, without obtaining the
consent of or the provision of notice to the owners of the Bonds as provided in the Bond Indenture; provided that the
Bond Trustee shall not agree to an amendment which alters the time, amounts, currency or terms of any payment
terms of the Master Note without the consent of the Holders of all Outstanding Bonds affected thereby. The Bond
Trustee shall exercise the rights available to it as the holder of the Master Note under the Master Indenture in
accordance with the terms thereof for the equal and ratable benefit and protection of the Holders of all Outstanding
Bonds.
Supplemental Indentures Not Requiring Consent of Bondholders
The Issuer and the Bond Trustee from time to time and at any time, subject to the conditions and
restrictions in the Bond Indenture contained and to the written consent of the Obligated Group Agent, may enter into
an indenture or indentures supplemental to the Bond Indenture, which indenture or indentures thereafter shall form a
part of the Bond Indenture, for any one or more or all of the following purposes:
(a)
to add to the covenants and agreements of the Issuer in the Bond Indenture contained, other
covenants and agreements thereafter to be observed or to surrender, restrict or limit any right or power reserved in
the Bond Indenture to or conferred upon the Issuer;
(b)
to make such provisions for the purpose of curing any ambiguity, or curing, correcting or
supplementing any defective provision, contained in the Bond Indenture as may be requested or required by any
nationally recognized rating agency, or in regard to matters or questions arising under the Bond Indenture, as the
Issuer may deem necessary or desirable and not inconsistent with the Bond Indenture;
(c)
to modify, amend or supplement the Bond Indenture or any indenture supplemental to the Bond
Indenture in such manner as to permit the qualification of the Bond Indenture and thereof under the Trust Indenture
Act of 1939, as amended, or any similar federal statute hereafter in effect or any state securities or trust indenture
law and, if they so determine, to add to the Bond Indenture, or any indenture supplemental to the Bond Indenture,
such other terms, conditions and provisions as may be permitted by said Trust Indenture Act of 1939, as amended,
or similar federal statute or such state securities or trust indenture law;
(d)
to grant additional rights and powers to the Bond Trustee;
(e)
to create such accounts or subaccounts within the funds and accounts created under the Bond
Indenture as the Obligated Group Agent shall deem necessary or desirable to enable the Obligated Group Agent to
account for expenditures of Bond proceeds or as otherwise shall be requested by the Obligated Group Agent;
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(f)
to provide for, or modify existing provisions to, a book-entry system of registration for the Bonds;
(g)
to obtain, maintain or improve a rating on the Bonds from any Rating Agency; or
(h)
to make any change that, in the judgment of the Bond Trustee, does not materially adversely affect
the right of any Bondholder.
In the event any Rating Agency has issued a rating of any of the Bonds, such Rating Agency or Rating
Agencies, as the case may be, shall receive prior written notice from the Bond Trustee of the proposed amendment
but such notice shall not be a condition of the effectiveness of such amendment.
Supplemental Indentures Requiring Consent of Bondholders
Upon notice to the Bondholders and with the consent of a Majority of the Bondholders which would be
affected and the consent of the Obligated Group Agent, the Issuer and the Bond Trustee may from time to time and
at any time enter into an indenture or indentures supplemental to the Bond Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of the Bond Indenture or of any
Supplemental Indenture; provided, however, that no such Supplemental Indenture shall (a) extend the fixed maturity
of any bond or reduce the rate of interest thereon or extend the time for payment of interest, or reduce the amount of
the principal thereof, or reduce or extend the time for payment of any premium payable on the redemption thereof,
without the consent of the owners of each bond so affected, or (b) reduce the aforesaid percentage of owners of
Bonds required to approve any such Supplemental Indenture, or (c) deprive the Holders of the Bonds (except as
aforesaid) of the lien created by the Bond Indenture without the consent of all of the Bonds then Outstanding
affected thereby, or (d) adversely affect the tax-exempt status of the Bonds, without the consent of the Bondholders
of all the Bonds then Outstanding affected thereby.
In the event any Rating Agency has issued a rating of any of the Bonds, such Rating Agency or Rating
Agencies, as the case may be, shall receive prior written notice from the Bond Trustee of the proposed amendment
but such notice shall not be a condition of the effectiveness of such amendment.
Obligated Group Agent Consent
Anything in the Bond Indenture to the contrary notwithstanding, a supplemental indenture under the Bond
Indenture shall not become effective unless and until the Obligated Group Agent shall have consented to the
execution and delivery of such supplemental indenture.
Modification by Unanimous Consent
Notwithstanding anything contained elsewhere in the Bond Indenture, the rights and obligations of the
Obligated Group, the Issuer, the Bond Trustee and the Holders of the Bonds and the terms and provisions of the
Bonds and the Bond Indenture or any supplemental agreement may be modified or altered in any respect with the
consent of the Obligated Group Agent, the Issuer, the Bond Trustee and the Holders of all of the Bonds then
Outstanding.
Execution of Amendments and Supplements by Bond Trustee
The Bond Trustee shall not be obligated to sign any amendment or supplement to the Bond Indenture or the
Bonds if the amendment or supplement, in the judgment of the Bond Trustee, could adversely affect the rights,
duties, liabilities, protections, privileges, indemnities or immunities of the Bond Trustee. In signing an amendment
or supplement, the Bond Trustee (subject to the Bond Indenture) shall be fully protected in relying on an opinion of
Bond Counsel stating that such amendment or supplement is authorized by the Bond Indenture and will not
adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds.
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Amendments to Loan Agreement and Master Note Not Requiring Consent of Bondholders
The Issuer and the Obligated Group may from time to time and at any time, with the consent of the Bond
Trustee, enter into a supplemental loan agreement or an amendment or supplement to the Master Note for any one or
more of the following purposes:
(a)
to add to the covenants and agreements of the Obligated Group contained therein, other covenants
and agreements thereafter to be observed or to surrender, restrict or limit any right or power in the Bond Indenture
reserved to or conferred upon the Obligated Group;
(b)
to make such provisions for the purpose of curing any ambiguity, or curing, correcting or
supplementing any defective provision, contained in the Loan Agreement or the Master Note, or in regard to matters
or questions arising under the Loan Agreement or the Master Note, as the Issuer and the Obligated Group Agent or
the Obligated Group, as the case may be, may deem necessary or desirable and not inconsistent therewith and which
shall not materially adversely affect the interest of the registered owners of the Bonds;
(c)
to make any changes in the Loan Agreement or the Master Note required in connection with a
supplemental indenture authorized under the Bond Indenture or a supplement to the Master Indenture authorized
pursuant to the Bond Indenture; or
(d)
to grant additional rights and powers to the Bond Trustee or the Issuer.
Any supplemental loan agreement or supplement or amendment to the Master Note authorized by the
provisions described under this subheading may be executed by the Issuer and the Obligated Group and any change
to the Master Note authorized by the Bond Indenture may be executed by the Members of the Obligated Group, and
consented to by the Bond Trustee, without the consent or notice to the owners of any of the Bonds at the time
Outstanding.
Amendments to Loan Agreement and Master Note Requiring Consent of Bondholders
Without limiting the provisions described under the subheading “THE BOND INDENTURE—
Amendments to Loan Agreement and Master Note Not Requiring Consent of Bondholders” above, if the Issuer and
the Obligated Group propose to amend the Loan Agreement or the Master Note in such a manner as would adversely
affect the interests of the Bondholders, the Bond Trustee shall notify the Bondholders of the proposed amendment
and may consent thereto with the consent of at least a Majority of the Bondholders which would be affected by the
action proposed to be taken; provided, that the Bond Trustee shall not, without the unanimous consent of the owners
of all Bonds then Outstanding, consent to any amendment which would (a) decrease the amount payable on the
Master Note or under the Loan Agreement or (b) change the date of payment of principal of or interest on the Master
Note or change any of the prepayment provisions of the Master Note.
Supplements to the Master Indenture
If the consent of the Bond Trustee, as the registered owner of the Master Note, is required for any
supplement to the Master Indenture pursuant to the terms thereof, the Bond Trustee shall consent to any such
supplement if (a) the Bond Trustee determines that such supplement is of a type that does not require the consent of
the Bondholders, or (b) the Bond Trustee determines that such supplement is of a type that does require the consent
of the Bondholders and the Bond Trustee has received the consent of the Holders of a Majority of the Bonds
affected thereby, and (c) in either case, in the opinion of Bond Counsel, the tax-exempt status of the Bonds will not
be adversely affected; provided, however, that no such supplement to the Master Indenture shall extend the maturity
of the Master Note or reduce the rate of interest thereon or extend the time for payment thereof or reduce the amount
payable thereon unless corresponding changes are being made to the provisions of the Bonds pursuant to a
Supplemental Indenture authorized pursuant to the Bond Indenture.
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Execution of Amendments and Supplements by Master Trustee
The Bond Trustee shall not be obligated to sign any amendment or supplement to the Bond Indenture, the
Master Indenture, the Loan Agreement or the Master Note if the amendment or supplement, in the judgment of the
Bond Trustee, could adversely affect the rights, duties, liabilities, protections, privileges, indemnities or immunities
of the Bond Trustee. In signing an amendment or supplement, the Bond Trustee (subject to the Bond Indenture)
shall be fully protected in relying on, an opinion of Bond Counsel stating that such amendment or supplement is
authorized by the Bond Indenture, and will not adversely affect the exclusion from gross income for federal income
tax purposes of interest on the Bonds.
Bonds Owned by Obligated Group
In determining whether Holders of the requisite aggregate principal amount of the Bonds have concurred in
any direction, consent or waiver under the Bond Indenture, Obligated Group Bonds (unless one or more of such
Persons own all of the Bonds which are then Outstanding are Obligated Group Bonds, determined without regard to
this paragraph) shall be disregarded and deemed not to be Outstanding for the purpose of any such determination,
except that, for the purpose of determining whether the Bond Trustee shall be protected in relying on any such
direction, consent or waiver, only Bonds which the Bond Trustee knows are Obligated Group’ Bonds shall be so
disregarded. Bonds so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Bond Trustee, the pledgee’s right so to act with respect to such Bonds and that
the pledgee is not the Issuer or one or more of the Obligated Group (unless all of the Bonds which are then
Outstanding are Obligated Group Bonds, determined without regard to this paragraph). In case of a dispute as to
such right, any decision by the Bond Trustee taken in good faith upon the advice of Counsel shall be full protection
to the Bond Trustee in accordance with its standards of performance under the Bond Indenture.
THE LOAN AGREEMENT
The following summarizes certain provisions of the Loan Agreement; however, it is not a comprehensive
description, and reference is made to the full text of the Loan Agreement for a complete recital of its terms.
Term
The Loan Agreement provides that the Issuer will lend to the Obligated Group the proceeds of the Bonds
and make available such proceeds for application to the Costs of the Project. The Obligated Group agrees to borrow
such proceeds from the Issuer and to cause such proceeds to be applied to pay the Costs of the Project, and to the
extent that the Bond proceeds are not sufficient or the restrictions of the Code relating to tax-exempt bonds prevent
their application, to pay such costs from other available funds.
Sums Payable by the Obligated Group
The Obligated Group is required to pay to the Issuer, at the times and in the manner stipulated in the Loan
Agreement, amounts sufficient: (a) to pay principal and interest and other sums due on the Bonds; (b) to increase the
value of the Debt Service Reserve Fund to the Required Reserve Amount; (c) to pay amounts equal to costs and
expenses of the Issuer, in connection with the Project, the Bonds or the Facilities; and (d) to pay the fees and
expenses of the Bond Trustee and the Master Trustee.
The Obligated Group acknowledges that the sums payable under the Loan Agreement (except the
administrative fees and rights to indemnification) will be transferred, assigned and set over unto the Bond Trustee
under the Bond Indenture to secure the Bonds.
Operation, Maintenance and Repair
The Obligated Group has covenanted to comply with the provisions of the Master Indenture governing
operation, maintenance and repair of the Facilities and to comply with all final and legally enforceable acts, rules
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and regulations, orders and directives of any legislative, executive, administrative or judicial body applicable to and
having jurisdiction with respect to the Facilities.
Records and Audits
The Obligated Group has agreed to cause a complete annual, certified audit of its operations for each Fiscal
Year to be completed, in accordance with generally accepted accounting principles, by an Independent Accountant.
Such report shall be furnished to the Issuer and the Bond Trustee.
Insurance
The Obligated Group is required to provide or shall cause to be provided continuously from the effective
date of the Loan Agreement, insurance covering such risks, in such amounts and with such deductibles as shall be in
compliance with the Master Indenture.
In addition, the Obligated Group is required to maintain, for the term of the Loan Agreement and so long as
any Bond is Outstanding, medical liability, malpractice and other hospital operations liability insurance, as required
by the Master Indenture or as required by law, including coverage provided under Act No. 1975-111 of the
Commonwealth of Pennsylvania, 40 Pa.C.S.A. §1301.701 et seq. (or any similar legislation).
Destruction, Damage and Eminent Domain
In the event that the Facilities shall be wholly or partially destroyed or damaged by fire or other casualty
covered by insurance, or shall be wholly or partially condemned, taken or injured by any Person, including any
Person possessing the right to exercise the power of or a power in the nature of eminent domain or transferred to
such a Person by way of a conveyance in lieu of the exercise of such power, the Obligated Group shall have the
options provided to it under the Master Indenture.
Additional Debt
In addition to the Bonds, the Members of the Obligated Group may incur, assume or guarantee Debt as
provided in the Master Indenture. The Issuer may issue bonds for the benefit of the Obligated Group or the other
Members of the Obligated Group under other trust indentures and the Loan Agreement may be extended to provide
for the payment and other obligations of the Obligated Group in respect of such bonds, to secure such bonds and to
make available to the holders thereof the remedies therein provided. In such event, the Loan Agreement, as so
amended and supplemented, and the obligations, security and remedies provided for in the Loan Agreement shall be
for the equal and ratable benefit of the holders from time to time of such bonds as well as the Bonds.
Default and Remedies
The following are events of default under the Loan Agreement:
(a)
the Obligated Group fails to make or fails to provide for any payment in respect of principal of or
interest on the Bonds, when the same shall become due and payable or an Event of Default occurs under the Bond
Indenture, whichever occurs first; or
(b)
the Obligated Group fails to pay or cause to be paid any other payment required by the Loan
Agreement or the Bond Indenture and such failure continues for 30 days thereafter or fails to comply with any other
covenant or agreement contained in the Loan Agreement or the Bond Indenture and such failure continues for the
period described in the Bond Indenture;
(c)
the principal of all Master Notes issued under the Master Indenture shall be declared by the Master
Trustee immediately due and payable or the principal of the Bonds shall have been accelerated under the Bond
Indenture and such acceleration remains and is not rescinded; or
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(d)
an Event of Default shall have occurred and be continuing under the Master Indenture; or
(e)
the mortgagor shall fail to comply with any covenant or agreement contained in the Mortgage, and
such failure continues for the periods described in clause (c) under the heading “THE BOND INDENTURE—
Events of Defaults.”
Whenever any of the Events of Default shall have happened and is continuing, the Bond Trustee on behalf
of the Issuer may, in accordance with the procedures and provisions of the Bond Indenture, take any one or more of
the following remedial steps:
(a)
by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the
Issuer, and require the Obligated Group to carry out any agreements with or for the benefit of the holders of the
Bonds and to perform its duties under the Act or the Loan Agreement; or
(b)
by action or suit in equity require the Obligated Group to account as if it were the Bond Trustee of
an express trust for the Issuer; or
(c)
by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the
rights of the Issuer; or
(d)
upon the filing of a suit or other commencement of judicial proceeding to enforce the rights of the
Bond Trustee and the holders of Bonds, have appointed a receiver or receivers with respect to the Obligated Group
and the Facilities, with such powers as the court making such appointment shall confer; or
(e)
withhold any payments, advances or reimbursement from any proceeds to which the Obligated
Group may otherwise be entitled under the Loan Agreement and, in the Bond Trustee’s sole discretion, apply any
such proceeds or money to the payment of any obligation of the Obligated Group thereunder; or
(f)
upon notice to the Obligated Group Agent, accelerate the due dates of all sums due or to become
due under the Loan Agreement, if and to the extent that the Bonds have been accelerated under the Bond Indenture
and such acceleration has not been annulled; or
(g)
enforce all rights and remedies as the holder of the Master Note under the Master Indenture.
The remedies conferred or reserved in the Loan Agreement are not exclusive and the Bond Trustee, with
the prior written consent of the Master Trustee, shall be free to pursue any and all remedies at law or in equity.
Maintenance of Corporate Existence by the Obligated Group
The Members of the Obligated Group are required to maintain and preserve their corporate existence as
required by the Master Indenture, and to maintain and preserve their authority to do business in the Commonwealth
except as otherwise provided in the Master Indenture.
Indemnification
The Obligated Group has agreed to protect and indemnify the Issuer, their agents, attorneys and employees
against and to hold them harmless and defend them from any loss, expense or liability of any nature whatsoever
incurred by the Issuer’s participation in the Project, among other things, and releases the Issuer from, agrees that the
Issuer shall not be liable for, and agrees to defend and to hold the Issuer harmless against, any loss or damage to
property or any injury to or death of a person that may be occasioned by any cause whatsoever pertaining to the
Facilities or the use thereof, other than those arising as a result of the gross negligence or willful misconduct of the
Issuer or any of their agents, attorneys or employees.
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Covenant to Preserve Tax-Free Status of Bonds
The Obligated Group has covenanted that it shall not take any action or suffer or permit any action to be
taken or any condition to exist (inclusive of the application, use or investment of the “proceeds” of any Bonds or
revenues or funds held for payment of debt service on the Bonds), including the failure to preserve and maintain its
tax-exempt status under Section 501(c)(3) of the Code, which causes or may cause the interest payable on the Bonds
to be subject to federal income taxes, or which will cause the Issuer to be in violation of the Issuer’s covenants with
respect to compliance with the provisions of the Code applicable to the Bonds, or which, if the Issuer were taking
such action, would cause the Issuer to be in violation of such covenants. The Obligated Group has covenanted to
take all action, to do all things and to cause all things to be done which may be necessary so that the interest payable
on the Bonds shall be and shall continue to be exempt from federal income taxes to the same extent as on the date of
original issuance thereof.
The Obligated Group has covenanted to abide by the provisions of Section 148 of the Code, as the same
may be amended from time to time, and regulations proposed or promulgated with respect thereto, as applicable,
including the limitation on the amount of “proceeds” of the Bonds and other funds that may be invested at a yield
higher than the yield on the Bonds. The Obligated Group has agreed to maintain, and to cause the Bond Trustee to
maintain, the necessary records of investments, and the Obligated Group has covenanted to perform, or to engage a
certified public accountant or other Person having knowledge and experience in matters relating to the “arbitrage
regulations” to perform, at least every five years commencing in the fifth year following the date of issuance of the
Bonds, the necessary calculations of the “Rebate”, as required by such Section 148 of the Code and such regulations,
at the cost and expense of the Obligated Group. The Obligated Group has also covenanted that they shall, at the
appropriate times, cause the Bond Trustee to pay the “Rebate” to the United States of America, from funds held in
the Rebate Fund under the Bond Indenture, and, to the extent funds available thereunder for such purpose are not
sufficient, the Obligated Group has covenanted that it shall pay such “Rebate” on behalf of the Issuer from funds of
the Obligated Group, as and for an additional amount under the Loan Agreement and not in diminution of any other
sum payable by the Obligated Group under the Loan Agreement.
THE MASTER INDENTURE
The following is a summary of certain provisions of the Master Indenture. This summary does not purport
to be complete and is qualified in its entirety by reference to the Master Indenture.
General
The Members of the Obligated Group have granted a security interest to the Master Trustee, in: (a) all
Gross Revenues and accounts of each Member of the Obligated Group, including without limitation rights to receive
payments from third party payors such as Medicare, Medicaid, and Blue Cross, but except and excluding all
Excluded Property and all other items, whether now owned or hereafter acquired by each Member of the Obligated
Group, which by their terms or by reason of applicable law would become void if granted, assigned, or pledged
under the Master Indenture by the Members of the Obligated Group, provided that the Obligated Group may subject
to the lien of the Master Indenture any such Excluded Property or excepted property, whereupon the same shall
cease to be Excluded Property or excepted property; (b) all moneys and securities, if any, at any time held by the
Master Trustee in the Revenue Fund and any other fund or account established under the terms of the Master
Indenture; (c) the Mortgage; (d) any and all other property of every kind and nature from time to time hereafter, by
delivery or by writing of any kind, conveyed, pledged, assigned or transferred as additional security under the
Master Indenture by any Member or by anyone on their behalf to the Master Trustee, subject to the terms thereof,
including without limitation, funds of any Member held by the Master Trustee as security for the Master Notes; and
(e) all proceeds of the foregoing.
The Master Trustee is required to hold all such property in trust upon the terms set for in the Master
Indenture for the equal and proportionate benefit and security of the Holders from time to time of all Outstanding
Master Notes without privilege, priority or distinction as to the lien or otherwise of any of the Master Notes over any
other except as otherwise expressly provided in the Master Indenture.
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Covenants of the Obligated Group
Payment of Master Notes.
(a)
Each Member has unconditionally and irrevocably (subject to the right of such Member to cease
its status as a Member of the Obligated Group pursuant to the terms and conditions of the Master Indenture) and
jointly and severally agreed that it will promptly pay the principal of, premium, if any, and interest and any other
amount due on every Master Note issued under the Master Indenture at any time at the place, on the dates and in the
manner provided in said Master Notes.
(b)
Solely for purposes of defining their payment responsibilities among themselves, and without
limiting the provisions of subsection (a) above, the Members of the Obligated Group have covenanted and agreed
among themselves that, with respect to Debt incurred by or on behalf of a Member or for its direct benefit and
secured or evidenced by a Master Note, such Member will be primarily liable among the Members to make full and
timely payment on such Master Note and, if another Member or other Members makes payment on behalf of such
Member as a result of the joint and several obligations incurred under the Master Indenture, such Member will be
obligated to and shall reimburse each such other Member or Members for all amounts paid on behalf of such
Member. Such reimbursement obligations are subordinate to any payment obligations under a Master Note.
(c)
Each Member of the Obligated Group covenants it will not take any action which would limit its
ability to make the payments required under the Master Indenture.
Payment of Taxes and Other Claims. Each Member covenants that it will, and will cause each of its
Restricted Affiliates to, pay or discharge or cause to be paid or discharged before the same become delinquent:
(a) all taxes, assessments, and other governmental charges lawfully levied or assessed or imposed upon it or upon its
income, profits, or property, and (b) all lawful claims for labor, materials, and supplies which, if unpaid, might by
law become a lien upon its property; provided, however, that no such Person will be required to pay and discharge
or cause to be paid and discharged any such tax, assessment, governmental charge, or claim to the extent that the
amount, applicability, or validity thereof is currently being contested in good faith by appropriate proceedings and
such Person has established and maintained adequate reserves on its books for the payment of the same.
Maintenance of Properties. Each Member covenants that it will, and will require each of its Restricted
Affiliates to, cause all its properties used or useful in the conduct of its business to be maintained and kept in good
condition, repair, and working order and supplied with all necessary equipment, ordinary wear and tear excepted.
Each Member further covenants that it will, and will require each of its Restricted Affiliates to, cause to be made all
necessary repairs, renewals, replacements, betterments, and improvements thereof to be made, all as in the judgment
of such Member may be necessary so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that no provision described under this subheading may
prevent any such Person from discontinuing the operation and maintenance of any of its properties if such
discontinuance is, in the judgment of such Person (which shall be stated in a resolution of the Governing Body of
such Person if the property involved is any substantial part of the properties of such Person taken in the aggregate),
desirable in the conduct of its business and not disadvantageous in any material respect to the Master Note Holders.
Corporate Existence. Except as otherwise permitted in the Master Indenture, each Member covenants that
it will (and, subject to certain provisions set forth in the Master Indenture, will require each of its Restricted
Affiliates to) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory), and franchises; provided, however, that no Person will be required to
preserve any right or franchise if the Governing Body of such Person determines that the preservation thereof is no
longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect
to the Holders of the Master Notes.
Records; Financial Reports and Right of Inspection. Each Member covenants that it will, and will cause
each of its Restricted Affiliates to, at all times keep books of record and account, in accordance with generally
accepted accounting principles, and the Obligated Group Agent will furnish to the Master Trustee as soon as
available and in any event within 180 days after the end of each Fiscal Year a combined or consolidated balance
sheet of the Combined Group as of the end of such Fiscal Year, and related statements of revenue and expenses,
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changes in net assets, and statements of cash flow for such Fiscal Year then ended, shown in each case (to the extent
possible) in comparative form with the preceding Fiscal Year, together with the report of a nationally or regionally
recognized, Independent Accountant selected by the Obligated Group Agent who has audited such statements in
accordance with generally accepted auditing standards, as to the fairness of presentation of such statements.
At any and all times during normal business hours, upon the written request of the Master Trustee (who is
under no duty to make such request unless directed in writing to do so by the Holders of at least a majority in
principal amount of Master Notes then Outstanding), each Member will permit the Master Trustee, by its agents and
attorneys, to inspect the property of such Member or any of its Restricted Affiliates, or any of their consolidated
subsidiaries and to examine all the books of account, records, reports, and other financial papers of such Persons
(other than materials the confidentiality of which is protected by law) and to take copies and extracts therefrom, and
each Member will, and will cause each of its Restricted Affiliates to, furnish the Master Trustee any and all such
other information as the Master Trustee may reasonably request (the Master Trustee is under no duty to make such
request unless directed to do so by the Holders of at least a majority in principal amount of Master Notes then
Outstanding) with respect to the performance or observance by such Persons of their covenants in the Master
Indenture.
The Master Trustee’s obligations with respect to the items received by it as provided in the first paragraph
under this subheading will be limited to making copies thereof available to any Holder of a Master Note requesting
the same and the Master Trustee shall have no duty to review any audit and financial statement delivered to it and
does not have a duty to verify the accuracy of such audit and financial statements. In addition, the Master Trustee
shall not be considered to have notice of the contents of such audit and financial statements or of a default or Event
of Default under the Master Indenture based on such contents.
Insurance. Each Member covenants that it will (and will cause each of its Restricted Affiliates to) at all
times keep all its property and operations of an insurable nature and of the character usually insured by companies
operating similar properties and engaged in similar operations insured in amounts customarily carried, and against
loss or damage from such causes as are customarily insured against, by similar companies. All such insurance is
required to be effected with responsible insurance carriers except to the extent a program of self-insurance in
compliance with the requirements described below is in effect.
At least once every two Fiscal Years, each Member will file with the Master Trustee (a) an Officer’s
Certificate containing a detailed list of its insurance and the insurance of its Restricted Affiliates in force on a date
therein specified (which date must be within 30 days of the filing of such Officer’s Certificate), including the names
of the insurers with which the policies and other contracts of insurance are carried, the numbers, amounts, and
expiration dates of such policies and other contracts, and the property and hazards covered thereby, and stating that
the insurance so listed complies with this subheading and (b) a certificate of an Insurance Consultant which states
that such insurance complies with the provisions of the Master Indenture.
Each Member may (and may permit its Restricted Affiliates to) establish and maintain, in lieu of the
maintenance of any policy of insurance against damage or loss otherwise required by the provisions of this
subheading, a program of self-insurance against any such damage or loss and, in such event:
(a)
the actuarially determined fund reasonably required for such program of self-insurance is required
to be held in trust by any corporation designated by the Member, or the Members, organized and doing business
under the laws of the United States of America or of any state, authorized under such laws to exercise corporate trust
powers, and subject to supervision or examination by federal or state authority;
(b)
each Officer’s Certificate required by this subheading must also state that, in the opinion of the
signer, the amount then held for the credit of such trust fund is not less than the amount reasonably required to
satisfy future losses which may result from past acts or omissions of the insured or its agents and employees, to the
extent not subject to statutory limitation, as determined actuarially from the claims history of the insured during the
period of coverage of such program of self-insurance; and
(c)
such program of self-insurance is reviewed by an Independent Consultant annually and such
Independent Consultant certifies that the aforesaid requirements have been met.
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The Master Trustee’s obligations with respect to the items received by it as provided in the second
paragraph under this subheading shall be at the Obligated Group’s expense and will be limited to making copies
thereof available to any Holder of a Master Note requesting the same.
Limitation on Liens. Each Member covenants that it will not, and will not permit any of its Restricted
Affiliates to, grant, create, assume, or incur or suffer to be granted, created, assumed, or incurred or to exist any
mortgage, lien, charge, or encumbrance of any kind upon, or pledge of or security interest in any property of such
Person whether owned at the date of the Master Indenture or thereafter acquired except:
(a)
Intercompany. Mortgages, liens, charges, encumbrances, pledges, or other security interests
created by any Member of the Obligated Group as security for Debt owed to any other Member of the Obligated
Group; or
(b)
Permitted Encumbrances; or
(c)
Purchase and Construction Money. Purchase or construction money mortgages, liens, charges,
encumbrances, pledges, or security interests (which term for purposes of this clause includes conditional sale
agreements or other title retention agreements and leases in the nature of title retention agreements) upon or in
property acquired or improved after the date of the Master Indenture, or renewals of any such mortgages, liens,
charges, encumbrances, pledges, or security interests in connection with the replacement, extension, or renewal
(without increase in principal amount) of the Debt secured thereby, provided that no such mortgage, lien, charge,
encumbrance, pledge, or security interest extends or will extend to or cover any property of any member of the
Combined Group other than the property then being acquired or constructed or property on which improvements are
being so constructed, and fixed improvements then or thereafter erected thereon and related insurance coverage and
proceeds; or
(d)
Pari Passu. Any mortgage, lien, charge, encumbrance, pledge, or other security interest of any
kind upon any property of any character of any Member or any of its Restricted Affiliates including but not limited
to any conditional sale agreement or similar title retention agreement with respect to any such property, if such
Person makes effective provision, and each Member covenants that in any such case it will make or cause to be
made effective provision, whereby the Outstanding Master Notes will be directly secured by such mortgage, lien,
charge, encumbrance, pledge, or other security agreement equally and ratably upon the same property, or upon other
property with a fair market value at least equal to the fair market value of property to be mortgaged, with any and all
other obligations and indebtedness thereby secured for so long as such obligations or indebtedness are so secured; or
(e)
Nonrecourse. Any mortgage, lien, charge, encumbrance, pledge or other security interest upon
any property of a Member or Restricted Affiliate acquired, constructed or improved with the proceeds of the Debt
secured thereby or any conditional sale agreement or title retention agreement with respect to any such property if
the Debt so secured has been incurred in compliance with the provisions of the Master Indenture and upon any
default in payment of such Debt the remedy of the holder thereof is limited under the terms of the instrument
creating the Debt to foreclosure or taking possession of such property with no right to seek payment of any
deficiency from such Member or Restricted Affiliate or from any other property of such Member or Restricted
Affiliate; or
(f)
Basket. Any mortgage, lien, charge, encumbrance, pledge or other security interest of any kind if
the book value (or, at the option of the Obligated Group Agent, Current Value) of all Property of the Combined
Group subjected to mortgages, liens, charges, encumbrances, pledges, or other security interests pursuant to the
provisions described in this clause (f) does not exceed 15% of the book value (or, if the Obligated Group Agent
chooses to use the Current Value of the property so subjected, 15% of the Current Value) of all Property of the
Combined Group; or
(g)
Existing Liens. The liens securing debt of Members of the Obligated Group on the effective date
of the Master Indenture.
(h)
Mortgages. The lien of the Mortgages.
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An oil or gas royalty, overriding royalty, or production payment will not be deemed to be a charge or
encumbrance upon the related working interest.
Limitations on Debt and Preferred Stock. Each Member covenants that it will not, nor will it permit any
of its Restricted Affiliates to, incur, assume, guarantee, or otherwise become liable in respect of any Debt except:
(a)
Each Member shall not, nor shall it permit any of its Restricted Affiliates to, incur, assume,
guarantee, or otherwise become liable in respect of any Debt, after the issuance of Master Note No. 1, except:
(i)
Intercompany. Debt of a Member of the Obligated Group owing to another Member of
the Obligated Group;
(ii)
Short-Term Indebtedness. Short-Term Indebtedness, provided that immediately after the
incurrence of such Debt the aggregate Outstanding principal amount of all Short-Term Indebtedness does
not exceed twenty percent (20%) of the aggregate Operating Revenues of the Obligated Group for the
immediate preceding Fiscal Year;
(iii)
Credit Enhancement and Liquidity Support. Debt consisting of an obligation to
reimburse payments made under a letter of credit, surety bond, policy of insurance, bond purchase
agreement or similar credit or liquidity support obtained to secure payment of other Debt incurred as
permitted by this Section and to pay interest thereon until paid;
(iv)
Completion Indebtedness. Completion Indebtedness, if prior to the incurrence of such
Completion Indebtedness there is delivered to the Master Trustee an Officer’s Certificate (i) to the effect
that the net proceeds of such proposed Completion Indebtedness are needed for the completion of the
construction or equipping of the facilities in question; (ii) to the effect that the original Debt for the
facilities in question when incurred was assumed to be sufficient for the projected costs; (iii) describing the
reasons why such Completion Indebtedness is necessary; (iv) certifying as to the amount needed for the
completion of the facilities in question; and (v) certifying that the principal amount of such Completion
Indebtedness will not exceed twenty percent (20%) of the initial principal amount of the Debt originally
incurred for the facilities in question;
(v)
Subordinated Debt. Subordinated Debt subordinate in right of payment to the payment of
the Master Notes upon liquidation or reorganization and upon the occurrence and continuance of an Event
of Default may be incurred without limit;
(vi)
Refunding Debt. Long Term Indebtedness incurred for the purpose of refunding,
including advance refunding, any outstanding Long Term Indebtedness, if prior to the incurrence of such
Long Term Indebtedness there is delivered to the Master Trustee an Officer’s Certificate to the effect that
either (i) such refunding will not increase Maximum Annual Debt Service Requirements by more than ten
percent (10%) during the years that the Long Term Indebtedness to be refunded would have been
outstanding but for such proposed refunding or (ii) such refunding will result in a present value savings in
the long-term debt service requirement;
(vii)
Basket. Installment purchase contracts, capitalized leases, Debt existing at the time of
acquisition of property assumed as a full or partial consideration for such acquisition, Debt incurred to
finance the construction of property and all other Debt incurred pursuant to this clause (7), if prior to the
incurrence of such Debt there is delivered to the Master Trustee an Officer’s Certificate to the effect that
the total principal amount of Debt to be incurred at such time, when added to the aggregate principal
amount of all other Debt, will not exceed ten percent (10%) of the Operating Revenues of the Obligated
Group;
(viii)
Long Term Indebtedness. Long Term Indebtedness if prior to the incurrence of the Debt
there is delivered to the Master Trustee an Officer’s Certificate setting forth the intended uses of the
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proceeds of such Long Term Indebtedness and, if such intended uses include the acquisition, construction
or installation of land, facilities, equipment or other capital improvements, the estimated cost thereof, and:
(1)
an Officer’s Certificate certifying that (a) the Debt Service Coverage
Ratio for the most recently ended Fiscal Year was not less than 1.10:1.00 for all Outstanding Long
Term Indebtedness (exclusive of any Outstanding Long Term Indebtedness that is to be refunded
or redeemed with proceeds of the Debt proposed to be incurred) and the Long Term Indebtedness
then proposed to be incurred; and (b) the estimated annual Debt Service Coverage Ratio for each
of the first two Fiscal Years following the estimated completion of the acquisition, construction,
renovation or replacement being paid for with the proceeds of such additional Long Term
Indebtedness, or following the incurrence of Long Term Indebtedness for other purposes, will not
be less than 1.10:1.00, after giving effect to the incurrence of such additional Long Term
Indebtedness and the application of the proceeds thereof; or
(2)
a Certificate of a Management Consultant certifying that the estimated
annual Debt Service Coverage Ratio for each of the first two Fiscal Years following the estimated
completion of the acquisition, construction, renovation or replacement being paid for with the
proceeds of such additional Long Term Indebtedness, or following the incurrence of Long Term
Indebtedness for other purposes, will not be less than 1.20:1.00, after giving effect to the
incurrence of such additional Long Term Indebtedness and the application of the proceeds thereof;
(ix)
Interim Indebtedness. Debt having a term of less than five years incurred in anticipation
of permanent financing may be incurred without limitation, if (a) there is delivered to the Master Trustee an
Officer’s Certificate stating that permanent financing of such Debt is expected to be completed within five
years of the date of incurrence of such Debt or (b) the conditions set forth in clause (9) above hereof are
met with respect to such Debt;
(x)
Guaranty Indebtedness. Debt in the form of a Guaranty, if (i) such Guaranty could then
be incurred by the Obligated Group as Long Term Indebtedness or as Short-Term Indebtedness or as
Balloon Indebtedness or (ii) such Guaranty is of Debt of another Member of the Obligated Group, which
Debt has been or could be incurred as permitted indebtedness represented by a letter of credit
reimbursement agreement or other similar reimbursement agreement entered into by any Member of the
Obligated Group and a financial institution providing either a liquidity or credit support with respect to any
other indebtedness incurred in the form of a borrowing from another Member of the Obligated Group;
(xi)
Self-Insurance Guarantees. Debt in the form of a guaranty or confirmation of liability of
a Member of the Obligated Group incurred directly or indirectly with respect to a self-insurance benefiting
any member of the Obligated Group; and
(xii)
Accounts Receivable Indebtedness. Debt incurred or deemed incurred by virtue of any
recourse obligation associated with any sale or assignment of accounts receivable, but in no event in an
amount in excess of (i) the monetary consideration received from any such sale or assignment; or
(ii) twenty percent (20%) of the total amount of accounts receivable of the Obligated Group as of the end of
the immediate preceding Fiscal Year.
Each Member will not permit any of its Restricted Affiliates to issue its Preferred Stock to anyone other
than to a Member or another Restricted Affiliate, and no such Person holding Preferred Stock of any Restricted
Affiliate will sell or otherwise dispose of such Preferred Stock except to a Member of the Combined Group.
For all purposes of this subheading:
(1)
Debt is generally deemed to be “incurred” by a Person whenever such Person creates,
assumes, guarantees, or otherwise becomes liable in respect thereof. In the case of a line of credit or other drawdown credit facility, Debt shall be deemed incurred only as amounts are actually drawn.
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(2)
The sale or other transfer of Debt of a member of the Combined Group by any member of
the Combined Group to any Person not a member of the Combined Group is deemed to be the incurrence of such
Debt as of the date of sale or transfer.
(3)
Debt and Preferred Stock of any Person that becomes a member of the Combined Group
is deemed to be incurred or issued on the date such Person becomes a member of the Combined Group.
(4)
In conjunction with a Person becoming a Member of the Obligated Group, the Obligated
Group may issue a Master Note as an amendment and restatement of any outstanding Debt of such Person so long as
the terms of this subheading are met.
(5)
Any Person that becomes a successor to a Member as set forth under the subheadings,
“THE MASTER INDENTURE—Covenants of the Obligated Group—Consolidation, Merger, Conveyance, or
Transfer Only on Certain Terms” and “—Successor Obligated Group Member Substituted,” will be deemed to incur
all Outstanding Debt of such Person at the date of such succession.
(6)
Notwithstanding the provisions of this subheading, in the event that the generally
accepted accounting principles governing the classification and reporting of leases change after the date hereof, all
leases of any member of the Combined Group in existence as of the implementation date of such change then
required to be reported as capital leases for financial reporting purposes for the first time shall not be required to
comply with the provisions of the Master Indenture and summarized under this subheading.
Limitation on Disposition of Assets. Except in certain circumstances set forth in the Master Indenture,
each Member covenants that it will not (and will not permit any of its Restricted Affiliates to) sell, lease or transfer
any properties of such Person (other than Excluded Property) unless:
(i)
Ordinary Course or Intercompany – such conveyance or transfer shall be in the ordinary
course of business or to a member of the Combined Group; or
(ii)
Transfer of Real Property – such conveyance or transfer shall be with respect to real
property that is not subject to the lien of the Mortgages and will not have a material adverse effect on the
operations or financial condition of the Obligated Group or such real property is the subject of
condemnation or taking for public or quasi-public use of the property or any portion thereof; or
(iii)
Disposition of Accounts Receivable – such disposition of property constitutes the sale,
assignment or other disposition of accounts receivable, provided that the transaction is commercially
reasonable and for consideration deemed fair and adequate in an Officer’s Certificate delivered to the
Master Trustee and in an amount not greater than 20% of the aggregate amount of such account as shown
on the Obligated Group’s most recent audited consolidated financial statements; or
(iv)
Operating Assets – such property shall be an Operating Asset; and
(1)
the aggregate amount of the Book Value or, at the option of the
Obligated Group Agent, the Current Value of the Operating Asset to be conveyed or transferred
and all other conveyances and transfers of Operating Assets of the Combined Group during the
current Fiscal Year pursuant to this clause (i) and not otherwise permitted by this Section does not
exceed 10% of the aggregate Book Value or Current Value of the consolidated Operating Assets
of the Combined Group; or
(2)
such Operating Assets are, or within the next succeeding twenty-four
(24) calendar months are reasonably expected to become, obsolete, worn out, or unnecessary, or,
in the opinion of the Governing Body of the relevant member of the Combined Group,
unprofitable or undesirable; or
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(3)
such Operating Assets are replaced promptly by other property of
comparable utility or worth; or
(4)
such Operating Assets do not constitute part of the health care facilities
of the obligated group; or
(5)
the disposition of such Operating Assets is in connection with a
permitted reorganization; or
(v)
such property shall be cash or other non-Operating Assets, if the aggregate amount of
cash and Book Value of such other non-Operating Assets transferred pursuant to this clause (5) and not
otherwise permitted by this Section within the immediately preceding 12 month period by the Person
making such transfer does not exceed 10% of the aggregate cash or other non-Operating Assets of the
Obligated Group; or
(vi)
such conveyance or transfer shall be for fair market value.
Except as permitted under the subheading “THE MASTER INDENTURE—Covenants of the Obligated
Group—Consolidation, Merger, Conveyance, or Transfer Only on Certain Terms,” each Member covenants that it
will not and will not permit any Restricted Affiliate within its control to:
(1)
Stock Offerings - issue or sell any shares of Stock of such Restricted Affiliate to any Person (other
than a member of the Combined Group), except for the purpose of paying a common Stock dividend on, or splitting,
common Stock of such Restricted Affiliate;
(2)
Disposition of Stock - sell, transfer, or otherwise dispose of any shares of Stock (except to a
member of the Combined Group) of such Restricted Affiliate or permit any Restricted Affiliate to sell, transfer, or
otherwise dispose of (except to a member of the Combined Group) any shares of Stock of any other Restricted
Affiliate except in a transaction in which all shares of stock of such Restricted Affiliate owned by a member of the
Combined Group are sold and, after giving effect to such sale, the Member or such Restricted Affiliate could incur
$1.00 of additional Long Term Debt pursuant to the provisions described in clause (h) under the subheading, “THE
MASTER INDENTURE—Covenants of the Obligated Group—Limitations on Debt and Preferred Stock”; or
(3)
Mergers - consolidate with or merge into any other corporation or to transfer all or substantially all
of its assets to another Person, unless the successor formed by or resulting from such consolidation or merger or the
transferee is, or will immediately upon consummation of the subject transaction become, a member of the Combined
Group or, if such successor or the transferee is not or will not become a member of the Combined Group,
immediately after such consolidation or merger or transfer (A) the Obligated Group is not in default under the
Master Indenture and the Obligated Group could incur at least $1.00 of additional Long Term Debt as set forth
under clause (h) under the subheading “THE MASTER INDENTURE—Covenants of the Obligated Group—
Limitations on Debt and Preferred Stock,” in the absence of such Restricted Affiliate, and (B) there is delivered to
the Master Trustee the Officer’s Certificate, certificates, and reports described in the Master Indenture; or
(4)
Assign Debt - sell, transfer, or dispose of any Debt of a Restricted Affiliate or permit any
Restricted Affiliate to sell, transfer, or dispose of any Debt of a member of the Combined Group, in each case to
anyone other than a member of the Combined Group, unless immediately after such sale, transfer, or other
disposition and giving effect thereto, the Obligated Group is not in default under the Master Indenture and the
Member or such Restricted Affiliate could incur at least $1.00 of additional Long Term Debt as set forth in
clause (h) under the subheading “THE MASTER INDENTURE—Covenants of the Obligated Group—Limitations
on Debt and Preferred Stock.”
Mortgages. (a) At the time the Master Indenture is executed, SMC – SJ and SMC-EN will each separately
deliver to the Master Trustee to secure the payment of all Master Notes and other amounts payable under the Master
Indenture:
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(i) a Mortgage from SMC-SJ, as mortgagor to the Master Trustee, as mortgagee with respect to
the Property described therein (the “SMC-SJ Premises”);
(ii) a Mortgage from SMC-EN, as mortgagor to the Master Trustee, as mortgagee with respect to
the Property described therein (the “SMC-EN Premises” and together with the SMC-SJ Premises, collectively the
“Mortgaged Premises”); and
(iii) a lender’s policy of title insurance in an amount reasonably acceptable to the Master Trustee,
but in no event less than the original principal amount of Master Note No. 1, issued by a title insurance company
licensed to do business in the Commonwealth, in form and substance reasonably acceptable to the Master Trustee,
insuring the Mortgages as first-lien mortgages on the respective Mortgaged Premises.
(b)
The Members of the Obligated Group each covenant and agree with the Master Trustee, upon the
Request of the Master Trustee, to cause to be done, executed, or otherwise authenticated, acknowledged and
delivered, at its expense, each and every such further act, conveyance and assurance as the Master Trustee shall
reasonably require for accomplishing the purposes of this Section. Without limiting the generality of the foregoing,
the Members of the Obligated Group shall execute or otherwise authenticate and deliver all such documents and
instruments as shall be required or as may be requested by the Master Trustee, from time to time in order to
establish, protect and perfect the rights and remedies intended to be created by the Mortgages and the Master
Trustee’s lien on the Mortgaged Premises in accordance with the terms hereof and of the Mortgages.
Debt Service Coverage Ratio. (a) So long as any Master Notes are Outstanding under the Master
Indenture, in each Fiscal Year, the Obligated Group shall maintain a Debt Service Coverage Ratio of at least 1.10 to
1.00. The measurement date for testing the Debt Service Coverage Ratio shall be the last day of each Fiscal Year,
commencing with the Fiscal Year ending June 30, 2014. If the Debt Service Coverage Ratio in any Fiscal Year
shall be less than 1.10 to 1.00, the Obligated Group Agent, at the expense of the Obligated Group, within 210 days
after the close of such Fiscal Year, shall engage a Management Consultant to make recommended changes in rates,
fees, and charges or expenses, or in such other affairs, that will restore the Debt Service Coverage Ratio in the
following Fiscal Year to the required level or, if in the opinion of the Management Consultant the attainment of such
level is impracticable, to the highest level attainable. Subject to any contractual commitments or Legal Restrictions
to which each Member or SHSMG may be subject, (i) each Member shall implement such changes to the fullest
extent practicable (as determined by the Governing Body of such Member) and permitted by law and (ii) if
applicable, SHS shall cause SHSMG to implement such changes to the fullest extent practicable (as determined by
SHS) and permitted by law. This Section shall not be construed to prohibit any Member or SHSMG from serving
indigent residents to the extent required for it to continue its qualification as a tax-exempt organization or from
serving any other class or classes of residents without charge or at reduced rates so long as such service does not
prevent the Obligated Group from satisfying the other requirements of this Section.The failure of the Obligated
Group to maintain a Debt Service Coverage Ratio of at least 1.10 to 1.00 shall not be an Event of Default under the
Master Indenture if a Management Consultant is so retained and the recommendations of such Management
Consultant are so implemented as set forth in clause (a) above and the Obligated Group maintains a Debt Service
Coverage Ratio of at least 1.00 to 1.00.
(c)
1.00 shall be an Event of Default under the Master Indenture, and in such event, the Obligated Group Agent, at the
expense of the Obligated Group shall, within 180 days after the close of such Fiscal Year, engage a new
Management Consultant to make recommended changes in rates, fees, and charges or expenses, or in such other
affairs, that will restore the Debt Service Coverage Ratio in the following Fiscal Year to a level in excess of 1.00 to
1.00 and shall implement the recommendations of such Management Consultant as set forth in clause (a) above.
Days Cash on Hand. (a) So long as any Master Notes are Outstanding under the Master Indenture, in
each Fiscal Year, the Obligated Group shall maintain Days Cash on Hand of at least 15. The measurement date for
testing Days Cash on Hand shall be the last day of each Fiscal Year, commencing with the Fiscal Year ending
June 30, 2014. If Days Cash on Hand in any Fiscal Year shall be less than 15, the Obligated Group Agent, at the
expense of the Obligated Group, within 210 days after the close of such Fiscal Year, shall engage a Management
Consultant to make recommended changes in rates, fees, and charges or expenses, or in such other affairs, that will
restore the Days Cash on Hand in the following Fiscal Year to the required level or, if in the opinion of the
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Management Consultant the attainment of such level is impracticable, to the highest level attainable. Subject to any
contractual commitments or Legal Restrictions to which each Member may be subject, each Member shall
implement such changes to the fullest extent practicable (as determined by the Governing Body of such Member)
and permitted by law. This liquidity covenant shall not be construed to prohibit any Member from serving indigent
residents to the extent required for it to continue its qualification as a tax-exempt organization or from serving any
other class or classes of residents without charge or at reduced rates so long as such service does not prevent the
Obligated Group from satisfying the requirements of this liquidity covenant.
(b)
The failure of the Obligated Group to maintain Days Cash on Hand of at least 15 shall not be an
Event of Default under the Master Indenture if a Management Consultant is so retained and the recommendations of
such Management Consultant are so implemented as set forth in the paragraph above.
Statement as to Compliance. (a) The Obligated Group Agent on behalf of itself and any other Members,
will deliver to the Master Trustee within 210 days after the end of each Fiscal Year, a written statement signed by
the president or senior vice president (or an officer holding a comparable title to either of the above) or by the chief
financial officer (or an officer holding a comparable title) of the Obligated Group Agent, stating, as to each signer
thereof, that:
(1)
a review of the activities of the Members during such year and of performance under the
Master Indenture has been made under the signer’s supervision; and
(2)
based on such review and to the best of the signer’s knowledge the Members have
fulfilled all their obligations under the Master Indenture throughout such year, or, if there has been any default in the
fulfillment of any such obligation, specifying each such default known to the signer and the nature and status
thereof.
(b)
Promptly upon the discovery of any default, the Obligated Group Agent or each Member which is
in default will deliver to the Master Trustee a written statement describing each default and status thereof which has
not been cured or waived under any instrument creating any material Debt of such Member.
Revenue Fund. At the written direction of the Obligated Group there shall be created and established with
the Master Trustee the special fund designated the “Obligated Group Revenue Fund” (herein referred to as the
“Revenue Fund”). The money deposited to the Revenue Fund, together with all investments thereof and investment
income therefrom, is required to be held in trust and applied solely as provided in this subheading and under the
subheading “THE MASTER INDENTURE—Defaults and Remedies—Application of Money Collected.”
If an Event of Default (a “Payment Default”) described in clause (a) under the subheading “THE MASTER
INDENTURE—Defaults and Remedies—Events of Default,” occurs and is continuing, each Obligated Group
Member shall deposit with the Master Trustee all of its Gross Revenues during each succeeding month beginning on
the first day thereof and on each day thereafter until no Payment Default then exists.
On the fifth business day preceding the end of each month in which the Members have made payments to
the Master Trustee for deposit into the Revenue Fund pursuant to the provisions of the Master Indenture described
under this subheading, the Master Trustee is required to withdraw and pay or deposit from the amounts on deposit in
the Revenue Fund the following amounts in the order indicated:
(a)
to the Master Trustee any fees or expenses which are then payable;
(b)
equally and ratably to the Holder of each Master Note on which there has been a Payment Default
an amount equal to all defaulted principal of (and premium, if any) and interest or other amounts payable on such
Master Note;
(c)
equally and ratably to the Holder of each Master Note an amount equal to all interest accrued and
any other amounts payable on such Master Note during the current month plus 1/12 of the principal of and any
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mandatory sinking fund redemption payments on such Master Note (other than by reason of acceleration of maturity
or other demand for payment) within the next 12-month period;
(d)
to the Holder of any Master Note entitled to maintain a reserve fund for the payment of such
Master Note, an amount sufficient to cause the balance on deposit in such reserve fund to equal the required balance
in 12 equal monthly installments; and
(e)
to each Obligated Group Member, the amount specified in a Request of such Obligated Group
Member as the amount of ordinary and necessary expenses of such Obligated Group Member for its operations for
the following month.
Any amounts remaining on deposit in the Revenue Fund, which have been deposited therein pursuant to the
provisions of the Master Indenture described under this subheading, on the last day of any Fiscal Year, or on the day
following the end of the month in which all Payment Defaults have been cured or waived, are required to be paid to
the Obligated Group Members to be used for any lawful purpose.
Pending disbursements of the amounts on deposit in the Revenue Fund, which have been deposited therein
pursuant to the provisions of the Master Indenture described under this subheading, the Master Trustee is required to
promptly invest and reinvest such amounts in the Defeasance Obligations specified in any Obligated Group Agent
Order. All such investments are required to have a maturity not greater than 91 days from the date of purchase.
The Master Trustee may conclusively rely upon the Obligated Group Agent’s Order as to both the
suitability and legality of the directed investments. Ratings of permitted investments shall be determined at the time
of purchase of such permitted investments and without regard to ratings subcategories. The Master Trustee may
make any and all such investments through its own investment department or that of its affiliates or subsidiaries, and
may charge its ordinary and customary fees for such trades, including cash sweep account fees. In the absence of
written investment instructions from the Obligated Group Agent, the Master Trustee shall not be responsible or
liable for keeping the moneys held by it hereunder fully invested in permitted investments.
Waiver of Certain Covenants. The Members are not obligated to comply with certain covenants or
conditions set forth in the Master Indenture if before or after the time for such compliance the Holders of the same
percentage in principal amount of all Master Notes then Outstanding the consent of which would be required to
amend the provisions of the Master Indenture to permit such noncompliance will either waive such compliance in
such instance or generally waive compliance with such covenant or condition, but no such waiver will extend to or
affect such covenant or condition except to the extent so expressly waived and, until such waiver becomes effective,
the obligations of the Members and the duties of the Master Trustee in respect of any such covenant or condition
will remain in full force and effect.
Consolidation, Merger, Conveyance, or Transfer Only on Certain Terms. Each Member covenants that it
will not consolidate with or merge into any corporation or convey or transfer its properties substantially as an
entirety to any Person, unless:
(a)
(b)
such consolidation, merger, or transfer:
(i)
is between such Member and another Member of the Obligated Group; and
(ii)
the surviving Person is a Member; or
all of the following conditions exist:
(i)
the Person formed by such consolidation or into which the Member merges or the Person
which acquires substantially all of the properties of such Member as an entirety is a Person organized and
existing under the laws of the United States of America or any state or the District of Columbia and
expressly assumes by instrument supplemental to the Master Indenture executed and delivered to the
Master Trustee, in form satisfactory to the Master Trustee, the due and punctual payment of the principal
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(and premium, if any) and interest on the Master Notes and any other amounts due thereunder or in
accordance with the Master Indenture and the performance and observance of every covenant and condition
of the Master Indenture on the part of such Member to be performed or observed;
(ii)
the Member would be in compliance with the Debt Service Coverage Ratio covenant of
the Master Indenture as described under the subheading “THE MASTER INDENTURE—Covenants of the
Obligated Group—Debt Service Coverage Ratio”, after giving effect to such consolidation, merger, or
transfer;
(iii)
immediately after giving effect to such transaction, no default under the Master Indenture
has occurred and is continuing; and
(iv)
the Member has delivered to the Master Trustee an Officer’s Certificate and an Opinion
of Counsel, each of which states that such consolidation, merger, conveyance, or transfer and such
supplemental instrument comply with this subheading and the subheading “THE MASTER
INDENTURE—Covenants of the Obligated Group—Successor Corporation Substituted,” that such
consolidation, merger, conveyance, or transfer will not affect the status of interest on any indebtedness
secured by Outstanding Master Notes under the Code, and that all conditions precedent relating to such
transaction provided for in the Master Indenture have been complied with.
Successor Corporation Substituted. Upon any consolidation or merger, or any conveyance or transfer of
the properties and assets of any Member substantially as an entirety as set forth in the previous subheading, the
successor Person formed by such consolidation or into which such Member is merged or to which such conveyance
or transfer is made succeeds to, and shall be substituted for, and may exercise every right and power of, such
Member under the Master Indenture with the same effect as if such successor Person had been named as the
Member in the Master Indenture; provided, however, that no such conveyance or transfer will have the effect of
releasing any other Person which will theretofore have become a Member in the manner described in the Master
Indenture from its liability as obligor and/or maker on any of the Master Notes.
Membership in the Combined Obligated Group
Admission of Additional Obligated Group Members. Any Person may become a Member of the Obligated
Group if:
(a)
Such Person executes and delivers to the Master Trustee a Supplemental Master Indenture
acceptable to the Master Trustee which is executed by the Master Trustee, containing the agreement of such Person
(i) to become a Member of the Obligated Group and thereby to become subject to compliance with all provisions of
the Master Indenture, (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a
Member of the Obligated Group pursuant to the terms and conditions set forth under the subheading “THE
MASTER INDENTURE—Membership in the Combined Group—Withdrawal of Obligated Group Members”)
agreeing to make payments upon each Master Note at the times and in the amounts provided in each such Master
Note pursuant to the terms of the Master Indenture, and (iii) pledging its Gross Revenues to the Master Trustee as
part of the Trust Estate as security for payment of the Master Notes;
(b)
The Obligated Group Agent, by appropriate action of its Governing Body, has approved the
admission of such Person to the Obligated Group;
(c)
The Master Trustee has received an Officer’s Certificate of the Obligated Group Agent which
demonstrates that, immediately upon such Person becoming a Member of the Obligated Group, (i) the Members
would not, as a result of such transaction (including, but not limited to, the assumption of any Debt of such Person),
be in default in the performance or observance of any covenant or condition to be performed or observed by the
Obligated Group under the Master Indenture, including but not limited to the Debt Service Coverage Ratio covenant
set forth in the Master Indenture, and (2) as a result of such transaction no Event of Default exists under the Master
Indenture and no event shall have occurred which with the passage of time or the giving of notice or both would
become an Event of Default; and
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(d)
The Master Trustee has received an Opinion of Counsel to the effect that
(i)
the instrument described in clause (a) above has been duly authorized, executed and
delivered and constitutes a legal, valid and binding agreement of such Person, enforceable in accordance
with its terms,
(ii)
the addition of such Person to the Obligated Group will not adversely affect the status as
a tax-exempt entity of any Member which otherwise has such status,
(iii)
if any Related Bonds or Master Notes are Outstanding, under then existing law the
consummation of such transaction, whether or not contemplated on the date of delivery of any such Related
Bonds, would not adversely affect the validity of any Related Bonds or the exemption from federal or state
income taxation of interest payable on any such Related Bonds otherwise entitled to such exemption, and
would not adversely affect the exemption from registration of any Related Bonds under the Securities Act
of 1933, as amended, or the qualification of the Related Bond Indenture under the Trust Indenture Act of
1939, as amended, or that any such registration or qualification requirements have been satisfied; and
(iv)
the Person which is to become a Member of the Obligated Group is liable on all Master
Notes Outstanding under the Master Indenture, as if such Master Notes were originally issued by such
Person.
Each successor, assignee, surviving, resulting or transferee corporation of a Member must agree to become
or to withdraw from being, and satisfy the above-described conditions to becoming, a Member of the Obligated
Group prior to any such succession, assignment or other change in such Member’s corporate status.
Obligated Group Members. Upon any Person’s becoming an Obligated Group Member as provided in the
preceding subheading:
(a)
The Master Trustee may pursue any remedies consequent upon an Event of Default against any
Member, or all of them, without notice to, demand upon or joinder of any of the others, or against any one or more
or all of them at the same time or at different times without in any way releasing any one or more or all Members
against which such remedies were pursued;
(b)
Any right of contribution or right acquired by subrogation by any Member against any other
Member arising out of the payment of Debt is subordinated to the rights of the Master Trustee and the Master Note
Holders;
(c)
Each Member, by its execution of the Master Indenture and by becoming a Member of the
Obligated Group, irrevocably appoints the Obligated Group Agent as its agent and true and lawful attorney-in-fact
and grants to the Obligated Group Agent (i) full and exclusive power to execute Supplemental Master Indentures
authorizing amendments or supplements to the Master Indenture, including for the purpose of the issuance of Master
Notes, and (ii) full power to prepare, or authorize the preparation of, all Related Loan Documents, the Master Notes,
and any and all other documents, certificates or disclosure materials reasonably and ordinarily prepared in
connection with the issuance of Master Notes under the Master Indenture, or Related Bonds associated therewith,
and to execute and deliver all such items to the appropriate parties in connection therewith.
(d)
Each Member of the Obligated Group agrees that it interprets the Master Indenture as a continuing
agreement which permits the Obligated Group Agent to issue the Master Notes on behalf of any Member of the
Obligated Group, and permits any Member of the Obligated Group to issue Master Notes with the consent of the
Obligated Group Agent, without further authority or approval from the other Members of the Obligated Group other
than the Members on whose behalf the Master Notes are issued, but subject to the provisions set forth under the
subheading “THE MASTER INDENTURE—Covenants of the Obligated Group—Limitations on Debt and
Preferred Stock,” and any provisions of any Supplemental Master Indenture authorizing the issuance of Master
Notes. Each Member may agree in any Related Bond Indenture or document under which a Master Note is issued to
a bank to such representations, warranties, covenants, defaults and other provisions in favor of such bank as the
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Member may deem appropriate, which representations, warranties, covenants, defaults and other provisions will not
be deemed to be included in the Master Indenture.
(e)
The Obligated Group Agent is authorized to act as attorney-in-fact with full power of substitution
to perform, satisfy, and discharge every obligation, covenant, duty or liability to be performed on the part of the
Members of the Obligated Group under the Master Indenture, and to execute and deliver in the name and on behalf
of the Members of the Obligated Group any instrument required to be executed by such Members of the Obligated
Group under the Master Indenture. Should SHS resign as Obligated Group Agent or withdraw from the Obligated
Group as set forth under the subheading “THE MASTER INDENTURE—Admission to the Combined Group—
Withdrawal of Obligated Group Members”, the remaining Members, by Board Resolution, will designate another
Member to be Obligated Group Agent. Should any Person become in control of all Members of the Obligated
Group, such Person may be appointed Obligated Group Agent by Resolution of the Governing Body of each of the
Members delivered to the Master Trustee.
(f)
All Members of the Obligated Group are entitled to the rights and are liable for the obligations,
covenants, representations and warranties contained in the Master Indenture.
Withdrawal of Obligated Group Members
(a)
Each Member covenants that it will not take any action, corporate or otherwise, which would
cause it to cease to be a Member of the Obligated Group (except for a merger of one Member into another Member
permitted by the Master Indenture) unless:
(i)
prior to withdrawal, there is delivered to the Master Trustee an Opinion of Counsel to the
effect that (a) the withdrawal by such Member of its status as a Member of the Obligated Group will not
adversely affect the status as a tax-exempt organization of any other Member which otherwise has such
status; and (b) the withdrawal by the Member of its status as a Member will not adversely affect the validity
of any Related Bond or the exemption from federal or, if applicable, state income taxation of interest
payable on any Related Bond otherwise entitled to such exemption;
(ii)
the Master Trustee shall have received an Officer’s Certificate which demonstrates that
(A) immediately after such withdrawal the Obligated Group would be in compliance with the Debt Service
Coverage Ratio covenant set forth in the Master Indenture; and (B) prior to and immediately after such
withdrawal, no Event of Default exists under the Master Indenture and no event shall have occurred which
with the passage of time or the giving of notice or both would become an Event of Default; and
(iii)
prior to withdrawal of such status, each Member of the Obligated Group consents in
writing to the withdrawal by such Member.
(b)
Upon such cessation in accordance with the foregoing provisions, such Person shall cease to be
obligated to the payment of the Master Notes, Exhibit A to the Master Indenture shall be amended to delete such
withdrawing Member, and Exhibit B to the Master Indenture shall be amended to delete any of the Restricted
Affiliates of such withdrawing Member.
Any Person that has withdrawn as a Member of the Obligated Group may again become a Member of the
Obligated Group in accordance with the provisions of the Master Indenture.
Designation as a Restricted Affiliate
(a)
In addition to the Restricted Affiliates listed in Exhibit B to Master Indenture and incorporated
therein by reference, any Affiliate of any Member or Members of the Obligated Group which satisfies the conditions
set forth in the definition of “Restricted Affiliate” in the Master Indenture may become a Restricted Affiliate. If
such Affiliate is a subsidiary that is described in Section 501(c)(3) of the Code, its governing documents may:
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(i)
provide for the naming of a substitute beneficiary if the then-current beneficiary ceases to
be an organization described in Section 501(c)(3) of the Code; and
(ii)
prohibit transfers
Section 501(c)(3) of the Code.
to
organizations
that
are
not
organizations
described
in
(b)
Such Affiliate will become a Restricted Affiliate upon Obligated Group Agent Request that such
Affiliate be a Restricted Affiliate accompanied by:
(i)
an instrument executed by the Chairman or Vice Chairman of the Governing Body, the
president or any vice president of such Affiliate evidencing the agreement of such Affiliate (A) to observe
and perform the obligations which the Members have covenanted to cause Restricted Affiliates to observe
and perform under the Master Indenture, and (B) to covenant, subject to the legal restrictions relating to
disposition of assets by organizations described in Section 501(c)(3) of the Code, that upon the liquidation
or dissolution of such Affiliate all remaining assets thereof will be transferred to a Member or another
Restricted Affiliate;
(ii)
a Board Resolution of such Affiliate authorizing such instrument;
(iii)
an Officer’s Certificate of the Obligated Group Agent dated within 10 days of the date of
such Obligated Group Agent Request, stating that all conditions provided for under the Master Indenture
relating to the addition of such Affiliate as a Restricted Affiliate have been complied with and that, were
such Affiliate a Restricted Affiliate on the date of such Officer’s Certificate, no Event of Default under the
Master Indenture would exist; and
(iv)
the certificates and reports required by the Master Indenture to evidence the ability to
issue $1.00 of additional Long Term Indebtedness pursuant to clause (h) under the subheading “THE
MASTER INDENTURE—Covenants of the Obligated Group—Limitations on Debt and Preferred Stock,”
after the admission of such Person as a Restricted Affiliate.
Release of a Restricted Affiliate. Any Person will be released from its obligations and status as a
Restricted Affiliate upon Request of the Obligated Group Agent and such Restricted Affiliate that such Person no
longer be a Restricted Affiliate accompanied by:
(a)
the certificates and reports required by the Master Indenture to establish that estimated Available
Revenues of the Combined Group (assuming the release of such Restricted Affiliate) for each of the two
immediately succeeding Fiscal Years (or, in case any construction project of any such Persons is then in progress,
for each of the two Fiscal Years immediately following the anticipated date of mechanical completion of such
project), are at least 125% of the Maximum Annual Debt Service Requirements (assuming the release of such
Restricted Affiliate) of the Combined Group for any future Fiscal Year; provided, however that the requirements
described in this clause (a) shall be deemed satisfied if government restrictions exist and if there is delivered to the
Master Trustee a signed Management Consultant’s opinion to the effect that the projected Available Revenues of the
Combined Group will not be less than 100% of the Maximum Annual Debt Service Requirements for each of the
two immediately succeeding Fiscal Years following the transaction.
(b)
an Officer’s Certificate of the Obligated Group Agent, dated within 10 days of the date of such
Request, stating that all conditions precedent provided for under the Master Indenture relating to the release of such
Person as a Restricted Affiliate have been complied with and that, were such Person released as a Restricted
Affiliate on the date of such Officer’s Certificate, no Event of Default under the Master Indenture would exist; and
(c)
the certificates and reports required by the Master Indenture to evidence the ability of the
Obligated Group to issue $1.00 of additional Long Term Indebtedness pursuant to clause (h) under the subheading
“THE MASTER INDENTURE—Covenants of the Obligated Group—Limitations on Debt and Preferred Stock,”
after the release of such Person.
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Defaults and Remedies
Events of Default. The phrase “Event of Default”, as used in the Master Indenture, means any of the
following events (whatever the reason for such Event of Default and whether it is voluntary or involuntary or comes
about or is effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental body):
(a)
default in the payment of the principal of (premium, if any) or interest or any other amount due on
any Master Note when due; or
(b)
default in the performance, or breach, of any covenant or agreement on the part of the Obligated
Group contained in the Master Indenture or the Mortgage (other than a covenant or agreement the default in the
performance or observance of which is elsewhere under this subheading specifically addressed) and, if such default
is capable of cure, continuance of such default or breach for a period of 60 days after a written notice specifying
such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” under the
Master Indenture has been given by registered or certified mail or a recognized overnight delivery service by (i) the
Holders of at least 25% in principal amount of Master Notes then Outstanding or (ii) the Master Trustee to the
Obligated Group Agent (with a copy to the Master Trustee in the case of notice by the Holders); provided that if
such default under the Master Indenture can be cured by the Obligated Group but cannot be cured within the 60-day
curative period described above, it shall not constitute an Event of Default if corrective action is instituted by the
Obligated Group within such 60-day period and diligently pursued until the default is corrected; or
(c)
a decree or order by a court having jurisdiction in the premises shall have been entered adjudging
any Member of the Obligated Group a bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization or arrangement of any Member of the Obligated Group under the federal Bankruptcy Code of 1978,
as amended (the “Bankruptcy Code”), or any other similar applicable federal or state law, and such decree or order
shall have continued undischarged and unstayed for a period of 90 days; or a decree or order of a court having
jurisdiction in the premises for the appointment of a receiver or trustee or assignee in bankruptcy or insolvency of
any Member of the Obligated Group or of any Member of the Obligated Group’s Property, or for the winding up or
liquidation of any Member of the Obligated Group’s affairs, shall have been entered, and such decree or order shall
have remained in force undischarged and unstayed for a period of 90 days; or
(d)
any Member of the Obligated Group 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 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 of its Property, or shall make assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action
shall be taken by any Member in furtherance of any of the aforesaid purposes; or
(e)
an event of default, as therein defined, under any instrument under which any Master Note may be
incurred or secured, or under any Related Bond Indenture or Related Loan Document occurs and is continuing
beyond the applicable period of grace, if any; or
(f)
(i) an event of default shall occur under a reimbursement agreement with a provider of a liquidity
facility or letter of credit requiring the immediate repayment of amounts evidenced thereby, or (ii) in the case of a
liquidity drawing under a letter of credit or liquidity facility, any amounts owing by a Member of the Obligated
Group shall be required to be repaid over a period of less than five (5) years from the date of such drawing; or
(g)
a Qualified Provider under a Financial Products Agreement secured by a Master Note or the credit
enhancer of such Financial Products Agreement notifies the Master Trustee in writing that an event of default under
the Financial Products Agreement has occurred and is continuing beyond the applicable grace period, if any, and the
applicable Obligated Group Member has failed to make any termination payment in respect thereof.
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Acceleration of Maturity; Rescission and Annulment
(a)
If an Event of Default occurs and is continuing, then and in every such case the Master Trustee
may, and upon the Request of the Holders of not less than 25% in principal amount of the Master Notes Outstanding
(or, in the case of any Event of Default described in clause (e) under the previous subheading resulting in the loss of
any exclusion from gross income of interest on, or the invalidity of, any Debt secured by a pledge of Master Notes,
the Holders of not less than 25% in principal amount of the Master Notes Outstanding of the affected series) must,
by a notice in writing to the Obligated Group Agent, accelerate the Maturity of the Master Notes and upon any such
declaration such principal (premium, if any) and interest and any other amount due on any Master Note will become
immediately due and payable.
(b)
At any time after such a declaration of acceleration has been made and before a judgment or
decree for payment of the money due has been obtained by the Master Trustee as provided in the Master Indenture,
the Holders of a majority in principal amount of the Master Notes Outstanding, by written notice to the Obligated
Group Agent and the Master Trustee, may rescind and annul such declaration and its consequences if:
(i)
the Obligated Group has caused to be paid or deposited with the Master Trustee a sum
sufficient to pay:
(1)
all overdue installments of interest on all Master Notes;
(2)
the principal of (and premium, if any, on) any Master Notes which have
become due otherwise than by such declaration of acceleration and interest thereon at the rate
borne by the Master Notes as well as any other amounts due and owing as provided in such Master
Notes; and
(3)
all sums paid or advanced by the Master Trustee under the Master
Indenture and the reasonable compensation, expenses, disbursements and advances of the Master
Trustee, its agents and counsel; and
(ii)
all Events of Default, other than the non-payment of the principal of Master Notes which
have become due solely by such acceleration, have been cured or waived as provided in the Master
Indenture.
No such rescission will affect any subsequent default or impair any right consequent thereon.
Collection of Indebtedness and Suits for Enforcement by the Master Trustee. Each Member of the
Obligated Group covenants that if:
(a)
default is made in the payment of any installment of interest on any Master Note when such
interest becomes due and payable;
(b)
default is made in the payment of the principal of (or premium, if any) on any Master Note when
such principal (or premium, if any) becomes due and payable; or
(c)
default is made in the payment of any other amount when such amount is due and payable;
the Members of the Obligated Group, jointly and severally, will, upon demand of the Master Trustee, pay to it, for
the benefit of the Holders of such Master Notes, the whole amount then due and payable on such Master Notes for
principal (and premium, if any) and interest, with interest upon the overdue principal (and premium, if any) and any
other amount due; and, in addition thereto, such further amount as is sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and advances of the Master Trustee, its
agents and counsel.
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If the Members of the Obligated Group fail to pay any of the foregoing amounts forthwith upon demand,
the Master Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the
collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may
enforce the same, jointly and severally, against the Members of the Obligated Group and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the Property of the Members of the
Obligated Group.
If an Event of Default occurs and is continuing, the Master Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of Master Notes by such appropriate judicial proceedings as the
Master Trustee deems most effectual to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in the Master Indenture or in aid of the exercise of any power granted therein, or to
enforce any other proper remedy.
Master Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative
to any Member of the Obligated Group or Property of any Member of the Obligated Group or of such other obligor
or their creditors, the Master Trustee (irrespective of whether the principal of the Master Notes are then due and
payable as therein expressed or by declaration or otherwise and irrespective of whether the Master Trustee has made
any demand on any Member of the Obligated Group for the payment of overdue principal or interest) is entitled and
empowered, by intervention in such proceeding or otherwise:
(a)
to file and prove a claim for the whole amount of principal (and premium, if any) and interest and
any other amounts owing and unpaid in respect of the Master Notes and to file such other papers or documents as
may be necessary or advisable in order to have the claims of the Master Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the Master Trustee, its agents and counsel) and
of the Holders of Master Notes allowed in such judicial proceeding; and
(b)
to collect and receive any moneys or other property payable or deliverable on any such claims and
to distribute the same;
and any receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding
is authorized under the Master Indenture by each Holder of Master Notes to make such payments to the Master
Trustee, and in the event that the Master Trustee consents to the making of such payments directly to the Holders of
Master Notes, to pay to the Master Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Master Trustee, its agents and counsel, and any other amounts due the Master
Trustee under the Master Indenture.
Nothing in the Master Indenture will be deemed to authorize the Master Trustee to authorize or consent to
or accept or adopt on behalf of any Holder of Master Notes any plan of reorganization, arrangement, adjustment or
composition affecting the Master Notes or the rights of any Holder thereof, or to authorize the Master Trustee to
vote in respect of the claim of any Holder of Master Notes in any such proceeding.
Master Trustee May Enforce Claims Without Possession of Master Notes. All rights of action and claims
under the Master Indenture or the Master Notes may be prosecuted and enforced by the Master Trustee without the
possession of any of the Master Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Master Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Master Trustee, its agents and counsel, be for the ratable benefit of the Holders of
the Master Notes in respect of which such judgment has been recovered.
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Limitation on Suits. No Holder of any Master Note has any right to institute any proceeding, judicial or
otherwise, with respect to the Master Indenture, or for the appointment of a receiver or trustee, or for any other
remedy under the Master Indenture, unless:
(a)
Such Holder has previously given written notice to the Master Trustee of a continuing Event of
Default;
(b)
The Holders of not less than 25% in principal amount of the Outstanding Master Notes have made
written request to the Master Trustee to institute proceedings in respect of such Event of Default in its own name as
Master Trustee under the Master Indenture;
(c)
Such Holder or Holders have offered to the Master Trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in compliance with such request;
(d)
The Master Trustee for 60 days after its receipt of such notice, request and offer of indemnity has
failed to institute any such proceeding; and
(e)
No direction inconsistent with such written request has been given to the Master Trustee during
such 60-day period by the Holders of a majority in principal amount of the Outstanding Master Notes;
it being understood and intended that no one or more Holders of Master Notes has any right in any manner whatever
by virtue of, or by availing of, any provision of the Master Indenture to affect, disturb or prejudice the rights of any
other Holders of Master Notes, or to obtain or to seek to obtain priority or preference over any other Holders, or to
enforce any right under the Master Indenture, except in the manner provided in the Master Indenture and for the
equal and ratable benefit of all the Holders of Master Notes.
Unconditional Right of Holders of Master Notes to Receive Principal, Premium and Interest.
Notwithstanding any other provision in the Master Indenture, the Holder of any Master Note has the right which is
absolute and unconditional to receive payment of the principal of (and premium, if any) and interest and other
amounts payable (including the purchase price, if any, specified therein) on such Master Note, but solely from the
sources provided in the Master Indenture, on the respective Stated Maturities expressed in such Master Note (or, in
the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment, and
such rights will not be impaired without the consent of such Holder.
Control by Holders of Master Notes. The Holders of a majority in principal amount of the Outstanding
Master Notes have the right to direct the time, method and place of conducting any proceeding for any remedy
available to the Master Trustee or exercising any trust or power conferred on the Master Trustee, provided that such
direction is not in conflict with any rule of law or with the Master Indenture, and the Master Trustee may take any
other action deemed proper by the Master Trustee which is not inconsistent with such direction.
Compliance Certificates and Reports
Whenever the amount or date of any of the following is a condition to the taking of any action permitted by
the Master Indenture:
(a)
Estimated Available Revenues of any Person for any future Fiscal Year will be established by
either:
(i)
a certificate or report of a Management Consultant stating the amount of such estimated
Available Revenues based upon assumptions provided by such Person and stating that such assumptions
are, in the opinion of the Management Consultant, reasonable; or
(ii)
a report of the Obligated Group Agent stating the amount of such estimated Available
Revenues accompanied by an Officer’s Certificate of such Person adopting such report and, unless such
report demonstrates that the amount of estimated Available Revenues of such Person (assuming the
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occurrence of such proposed action) for each of the two immediately succeeding Fiscal Years (or, in case
any a construction project of any such Person is then in progress, for each of the two Fiscal Years
immediately following the anticipated date of mechanical completion of such project), are not less than
151% of the maximum Annual Debt Service Requirements of such Person for any future Fiscal Year, then
such report of the Obligated Group Agent must be accompanied by a certificate or report of a Management
Consultant stating that it has reviewed the assumptions and methodologies upon which such report is based
and that, in the opinion of the Management Consultant, such assumptions and methodologies are
reasonable and provide a reasonable basis for the conclusions of such report.
(b)
Any of:
(i)
Available Revenues of any Person for any prior Fiscal Year or period;
(ii)
Gross Revenues of any Person for any prior Fiscal Year or period;
(iii)
maximum Annual Debt Service Requirements of any Person;
(iv)
principal of (and premium, if any) and interest and other debt service charges on any
(v)
Book Value of any assets;
(vi)
accounts receivable of any Person for any period;
(vii)
Total Operating Revenues of any Person for any period;
(viii)
Property, plant and equipment of any Person; and
(ix)
unrestricted net assets of any Person or Persons at any time,
Debt;
is required to be established by an Officer’s Certificate of such Person stating the amount of such item and that,
where such data is historical, such amounts have been derived from the most recent financial statements of the
Combined Group delivered to the Master Trustee pursuant to the Master Indenture;
(c)
the anticipated date of mechanical completion of any construction project of any Person must be
established by an Officer’s Certificate of such Person; and
(d)
all calculations required to be made under the Master Indenture with respect to the Combined
Group are made after elimination of intercompany items on a combined basis. The character or amount of any asset,
liability or item of income or expense required to be determined or any consolidation, combination or other
accounting computation required to be made for the purposes of the Master Indenture, must be determined or made
in accordance with generally accepted accounting principles at the time in effect, except (i) that assets, liabilities,
items of income and expenses of Affiliates which are not included in the Combined Group will not be taken into
account, and (ii) where such principles are inconsistent with the requirements of the Master Indenture; provided,
however, that there will not be included in the calculation of Gross Revenues, Annual Debt Service Requirements or
Available Revenues or accounts receivable of any Person, any item otherwise required to be included in such
calculation with respect to any other Person for any period during which it was not a member of the Combined
Group, or of any Person which has withdrawn or is withdrawing from the Combined Group or any such item with
respect to any material business, properties, or assets acquired (by way of merger, consolidation, purchase, or
otherwise) by any Person, for any period prior to the acquisition thereof.
Concerning the Master Trustee
Liability and Duties of Master Trustee. The Master Indenture contains various limitations on the liability
of the Master Trustee. The Master Trustee is not liable for any error of judgment made in good faith by a
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Responsible Officer, unless the Master Trustee was grossly negligent in ascertaining the pertinent facts. The Master
Trustee is not liable for any action taken or omitted to be taken by it in good faith in accordance with the direction of
the Holders of not less than a majority in aggregate principal amount of the Master Notes then Outstanding relating
to the time, method, and place of conducting any proceeding for any remedy available to the Master Trustee, or
exercising any trust or power conferred upon the Master Trustee, under the Master Indenture. No provision of the
Master Indenture requires the Master Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under the Master Indenture or in the exercise of any of its rights or
powers, if it has reasonable grounds for believing that repayment of such funds or adequate indemnity against such
risk or liability or the payment of its fees and expenses is not reasonably assured to it. In the absence of bad faith on
its part, and prior to the occurrence of an event of default and after the curing of all events of default that may have
occurred, the Master Trustee may conclusively rely, as to the truth of statements and the correctness of the opinions
expressed therein, upon any certificates or opinions furnished to the Master Trustee and conforming to the
requirements of the Master Indenture. If an Event of Default under the Master Indenture has occurred and is
continuing (of which the Master Trustee has actual knowledge or is deemed to have actual knowledge under the
Master Indenture), the Master Trustee is required to exercise the rights and powers vested in it by the Master
Indenture, and to use the same degree of care and skill in their exercise, as a reasonably prudent man would exercise
or use under the circumstances in the conduct of his own affairs.
Master Bond Trustee May Own Master Notes. The Master Trustee or other agent of any Members, in its
individual or any other capacity, may become the owner or pledgee of Master Notes and may otherwise deal with
any Member with the same rights it would have if it were not Master Trustee or such other agent.
Moneys to Be Held in Trust. All moneys received by the Master Trustee will, until used or applied as
provided in the Master Indenture, be held in trust for the purposes for which they were received, but need not be
segregated from other funds except to the extent required by law. The Master Trustee is under no liability for
interest on any moneys received by it under the Master Indenture other than such interest as it expressly agrees to
pay.
Removal; Appointment of Successor Master Trustee. The Master Trustee may be removed by the
Obligated Group Agent giving at least 30 days written notice to the Master Trustee of its selection of a successor
qualified Master Trustee so long as no Event of Default or default which with the passage of time would be a default
has occurred and is continuing. If the Master Trustee resigns, is removed or becomes incapable of acting, or if a
vacancy occurs in the office of Master Trustee for any cause, the Obligated Group Agent is required to promptly
appoint a successor Master Trustee. If, within 60 days after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Master Trustee is appointed by act of the Holders of a majority in principal
amount of the Outstanding Master Notes delivered to the Obligated Group Agent and the retiring Master Trustee,
the successor Master Trustee so appointed is required to, upon its acceptance of such appointment, become the
successor Master Trustee and supersede the successor Master Trustee appointed by the Obligated Group Agent. If
no successor Master Trustee has been so appointed by the Obligated Group Agent or the Master Note Holders and
accepted appointment in the manner provided in the Master Indenture, the Master Trustee, at the Obligated Group’s
expense, or any Master Note Holder who has been a bona fide Master Note Holder for at least 6 months may, on
behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of
a successor Master Trustee.
The Obligated Group Agent is required to give notice of each resignation and each removal of the Master
Trustee and each appointment of a successor Master Trustee by mailing written notice of such event by first-class
mail, postage prepaid, to the Holders of Master Notes at their addresses as shown in the Master Note Register. Each
notice is required to include the name and address of the designated corporate trust office of the successor Master
Trustee.
Supplements and Amendments
Supplemental Master Indentures Without Consent of the Holders of Master Notes. Without the consent
of the Holders of any Master Notes, the Obligated Group Agent, when authorized by a Board Resolution of each
Member, and the Master Trustee at any time may enter into one or more indentures supplemental to the Master
Indenture for any of the following purposes:
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(a)
to cure any ambiguity or to correct or supplement any provision in the Master Indenture which
may be inconsistent with any other provision in the Master Indenture, or to make any other provisions with respect
to matters or questions arising under the Master Indenture which are not inconsistent with the Master Indenture,
provided such action does not adversely affect materially the interests of the Holder of any Master Notes;
(b)
to grant to or confer upon the Master Trustee for the benefit of the Holders of the Master Notes
any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Holders
of the Master Notes and the Master Trustee, or either of them, to add to the covenants of the Members of the
Obligated Group for the benefit of the Holders of the Master Notes or to surrender any right or power conferred
under the Master Indenture upon the Obligated Group;
(c)
to assign and pledge under the Master Indenture additional revenues, properties or collateral;
(d)
to evidence the succession of another corporation to the agreements of the Master Trustee, or a
successor thereof under the Master Indenture;
(e)
to evidence the succession of another Person to any Member of the Obligated Group, or successive
successions, and the assumption by the successor Person of the covenants, agreements and obligations of any
Member of the Obligated Group as permitted by the Master Indenture;
(f)
to reflect the admission or withdrawal of a Restricted Affiliate;
(g)
to modify or supplement the Master Indenture in such manner as may be necessary or appropriate
to qualify the Master Indenture under the Trust Indenture Act of 1939 as then amended, or under any similar federal
or state statute or regulation, including provisions whereby the Master Trustee accepts such powers, duties,
conditions and restrictions under the Master Indenture and each Member undertakes such covenants, conditions or
restrictions additional to those contained in the Master Indenture as would be necessary or appropriate so to qualify
the Master Indenture; provided, however, that nothing contained in the Master Indenture will be deemed to authorize
inclusion in the Master Indenture or in any indenture supplemental thereto, provisions referred to in
Section 316(a)(2) of the said Trust Indenture Act or any corresponding provision provided for in any similar statute
hereafter in effect;
(h)
to provide for the refunding or advance refunding of any Master Note, in whole or in part;
(i)
to provide for the issuance of (1) additional series of Master Notes, or (2) replacement or amended
and restated Master Notes upon the admission of an Obligated Group Member;
(j)
to reflect the addition of a Member to, or the withdrawal of a Member from, the Obligated Group,
or to reflect the succession of another Person as Obligated Group Agent;
(k)
to permit a Master Note to be secured by new security which may or may not be extended to all
Holders of Master Notes or to establish special funds or accounts under the Master Indenture;
(l)
to allow for the issuance of any series of Master Notes in uncertificated form;
(m)
to make any other change which does not materially adversely affect the Holders of any of the
Master Notes and, in the opinion of each Related Bond Trustee, does not materially adversely affect the owners of
the Related Bonds with respect to which it acts as Bond Trustee, including without limitation any modification,
amendment or supplement to the Master Indenture or any indenture supplemental thereto or any amendment thereto
in such a manner as to establish or maintain exemption of interest on any Related Bonds under a Related Bond
Indenture from federal income taxation under applicable provisions of the Code;
(n)
so long as no Event of Default has occurred and is continuing under the Master Indenture and so
long as no event which with notice or the passage of time or both would become an Event of Default under the
Master Indenture has occurred and is continuing, to make any other change in the Master Indenture which, in the
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judgment of an Independent Management Consultant, a copy of whose report is required be filed with the Master
Trustee:
(i)
is in the best interest of the Members of the Obligated Group;
(ii)
provided that, with respect to each applicable series of Related Bonds, an Opinion of
Counsel acceptable to the Master Trustee, and on which the Master Trustee may conclusively rely, to the
effect that the amendment proposed to be adopted by such Supplemental Master Indenture will not
adversely affect the exclusion from gross income for federal income tax purposes of the interest on such
Related Bonds otherwise entitled to such exclusion; and
(iii)
provided that, no such amendment, directly or indirectly, may (1) change the provisions
described in this clause (n), (2) make any modification of the type prohibited under clauses (a)(i), (a)(ii) or
(a)(iii) under the subheading “THE MASTER INDENTURE—Supplements and Amendments—
Supplemental Master Indentures With Consent of Holders of Master Notes,” (3) make a modification
intended to subordinate the right to payment of a Holder of any Master Note to the right of payment of any
Holder of any other Master Note or any other Debt, or (4) change any defined term used to calculate any
ratio or formula or utilized in the definition of Permitted Encumbrances, or under the subheadings, “THE
MASTER INDENTURE—Covenants of the Obligated Group—Limitation on Liens,” “—Limitations on
Debt and Preferred Stock,” and “—Limitation on Disposition of Assets”;
(o)
to make any amendment to any provision of the Master Indenture or to any supplemental
indenture which is only applicable to Master Notes issued thereafter or which will not apply so long as any Master
Notes then Outstanding remains Outstanding; and
(p)
to modify, eliminate or add to the provisions of the Master Indenture if the Master Trustee shall
have received (i) written confirmation from each Rating Service that such change will not result in a withdrawal or
reduction of its credit rating assigned to any series of Master Notes or Related Bonds, as the case may be, and (ii) a
Board Resolution to the effect that, in the judgment of the Governing Body of the Obligated Group Agent, such
change is necessary to permit any Member of the Obligated Group to affiliate or merge with one or more other
health care providers on acceptable terms and such change and affirmation are in the best interests of the Holders of
the Outstanding Master Notes.
Supplemental Master Indentures With Consent of Holders of Master Notes.
(a)
With the consent of the Holders of not less than a majority in principal amount of the Outstanding
Master Notes, by act of said Holders delivered to the Obligated Group Agent and the Master Trustee, the Obligated
Group Agent, when authorized by a Board Resolution of the Obligated Group Agent, and the Master Trustee may
enter into or consent to an indenture or indentures supplemental to the Master Indenture for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions of the Master Indenture or of
modifying in any manner the rights of the Holders of the Master Notes under the Master Indenture; provided,
however, that no such Supplemental Master Indenture may, without the consent of the Holder of each Outstanding
Master Note affected thereby:
(i)
change the Stated Maturity of the principal of, or any installment of interest on, any
Master Notes or any date for mandatory redemption thereof, or reduce the principal amount thereof or the
interest thereon or any premium payable upon the redemption thereof or any other amount payable
thereunder, or change the coin or currency in which, any Master Notes or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the redemption date) or make a modification intended to
subordinate the right to payment of a Holder of any Master Note to the right of payment of any Holder of
any other Master Note or any other Debt; or
(ii)
reduce the percentage in principal amount of the Outstanding Master Notes, the consent
of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is
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required for any waiver (of compliance with certain provisions of the Master Indenture or certain defaults
under the Master Indenture and their consequences) provided for in the Master Indenture; or
(iii)
modify any of the provisions of described under subheading or certain other provisions of
the Master Indenture, except to increase any such percentage or to provide that certain other provisions of
the Master Indenture cannot be modified or waived without the consent of the Holder of each Master Note
affected thereby.
(b)
It is not necessary for any act of Holders of Master Notes under this subheading to approve the
particular form of any proposed Supplemental Master Indenture, but it will be sufficient if such act of Holders of
Master Notes approves the substance thereof.
Satisfaction and Discharge of Master Indenture
Satisfaction and Discharge of Master Indenture.
(a)
If at any time any Member or Members have paid or caused to be paid the principal of (and
premium, if any) and interest and all other amounts due and owing on all the Master Notes Outstanding under the
Master Indenture, as and when the same have become due and payable, and if such Member or Members also pay or
provide for the payment of all other sums payable under the Master Indenture by the Members and the Members
have paid or made provisions satisfactory to the Master Trustee for all of the Master Trustee’s fees and expenses
provided for in the Master Indenture, then the Master Indenture will cease to be of further effect (except as to
(i) rights of registration of transfer and exchange, (ii) substitution of mutilated, defaced, or apparently destroyed, lost
or stolen Master Notes, (iii) rights of Holders to receive payments of principal thereof (and premium, if any) and
interest thereon and remaining obligations of the Members to make mandatory sinking fund payments, (iv) the
rights, remaining obligations, if any, and immunities of the Master Trustee under the Master Indenture and (v) the
rights of the Holders as beneficiaries of the Master Indenture with respect to the property so deposited with the
Master Trustee payable to all or any of them) and the Master Trustee, on Request accompanied by an Officer’s
Certificate and an Opinion of Counsel to the effect that the conditions precedent to the satisfaction and discharge of
the Master Indenture have been fulfilled and at the cost and expense of the Members, is required to execute proper
instruments acknowledging satisfaction of and discharging the Master Indenture.
(b)
Notwithstanding the satisfaction and discharge of the Master Indenture, the obligations of the
Members to the Master Trustee under the Master Indenture and, if funds have been deposited with the Master
Trustee pursuant to the provisions described under the following subheading, certain specified obligations of the
Master Trustee under the Master Indenture will survive.
Master Notes Deemed Paid. Master Notes of any series will be deemed to have been paid if:
(a)
In case said Master Notes are to be redeemed on any date prior to their Stated Maturity, the
Obligated Group Agent (or any Member) by Request has given to the Master Trustee in form satisfactory to it
irrevocable instructions to give notice of redemption of such Master Notes on said redemption date;
(b)
There has been deposited with the Master Trustee either money sufficient, or Defeasance
Obligations the principal of and the interest on which will provide money sufficient without reinvestment (as
established by an Officer’s Certificate delivered to the Master Trustee accompanied by a report of an Independent
certified public Accountant setting forth the calculations upon which such Officer’s Certificate is based), to pay
when due the principal of (and premium, if any) and interest due and to become due and any other amounts due or to
become due on said Master Notes on and prior to the Maturity thereof;
(c)
In the event said Master Notes are not by their terms subject to redemption within the next 45
days, the Obligated Group Agent (or any Member) by Request has given the Master Trustee in form satisfactory to it
irrevocable instructions to give a notice to the Holders of such Master Notes that the deposit required by clause (b)
above has been made with the Master Trustee and that said Master Notes are deemed to have been paid in
accordance with the provisions described under this subheading and stating such Maturity date upon which moneys
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are to be available for the payment of the principal of (and premium, if any) and interest and any other amounts due
or to become due on said Master Notes; or
(d)
If the Related Bonds with respect to that Master Note are no longer outstanding under the Related
Bond Indenture.
THE MORTGAGES
The following summarizes certain provisions of the Mortgages; however, it is not a comprehensive
description, and reference is made to the full text of the Mortgages for a complete recital of its terms.
Secured Debt
SMC-EN and SMC-SJ shall each execute and deliver a mortgage to the Master Trustee, to secure the
following (the “Secured Debt”) and the outstanding 2014 Bonds:
(a)
all present and future Master Notes issued and outstanding under the Master Indenture, including,
without limitation, all principal, interest, default interest, reimbursement obligations, fees and other sums payable
under or evidenced, secured or supported by such Master Notes under the applicable Related Loan Documents;
(b)
interest, default interest, late charges and other sums, as provided in the Master Notes or the
Master Indenture;
(c)
all other monies agreed or provided to be paid by Mortgagor in the Mortgage or any Master Notes
or the Master Indenture;
(d)
all sums advanced pursuant to the Mortgage to protect and preserve the Mortgaged Property and
the lien and the security interest created by the Mortgage; and
(e)
all sums advanced and costs and expenses incurred by Mortgagee in connection with collection or
enforcement of the Secured Debt or any part thereof, any renewal, extension, or change of or substitution for the
Secured Debt or any part thereof, or the perfection of the security therefor, whether made or incurred at the request
of Mortgagor or Mortgagee.
The Secured Debt shall be paid from the Revenue Fund established under the Master Indenture in the order
of priority set forth in the Master Indenture.
Mortgaged Property
The Mortgages grant and convey to the Master Trustee a first lien mortgage on the real estate,
improvements, fixtures and related equipment of SMC-EN and SMC-SJ, respectively.
Mortgage Covenants
Under each Mortgage, the respective mortgagors have made various covenants to the Master Trustee with
respect to the Mortgaged Property, including, a covenant to timely pay the Secured Debt, to maintain and not permit
waste of the Mortgaged Property, to maintain specified insurance coverage on the Mortgaged Property, to pay taxes
and other governmental charges that might become a lien on the Mortgaged Property, to provide the financial
information required under the Master Indenture, to comply with environmental laws affecting the Mortgaged
Property, to not permit liens upon, or transfers of the Mortgaged Property other than as permitted under the Master
Indenture, to use the Mortgaged Property for hospital and health care related facilities, to pay all costs and expenses
of the Master Trustee in enforcing the Mortgage or collecting the Secured Debt thereunder and to comply with all of
the terms and conditions of the Master Indenture.
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Defaults
The occurrence of any Event of Default under the Master Indenture, after giving effect to any notice or
right to cure applicable thereto, constitutes an Event of Default under the Mortgage; provided, however, that any
Event of Default will be deemed to be cured if and to the extent waived or cured pursuant to the Master Indenture,
including, without limitation, the provisions of the Master Indenture relating to waivers of certain past defaults.
Remedies on Default
Upon the happening and during the continuance of any Event of Default, the Master Trustee shall have, and
may exercise, any or all of its rights and remedies as Master Trustee under the Master Indenture. In addition, the
Master Trustee has the right (i) to institute an action of mortgage foreclosure, or take such other action as the law
may allow, in rem or in personam, at law or in equity, for the enforcement of the Mortgage and realization on the
Mortgage Property or any other security for the Secured Debt, and proceed thereon to final judgment and execution
thereon for the payment of the Secured Debt, (ii) to enter into possession of the Mortgaged Property, with or without
legal action, and by force if necessary; lease the same; collect all rents and profits therefrom and, after deducting all
costs of collection and administration expense, apply the net rents and profits to the payment of taxes, water and
sewer rents, charges and claims, insurance premiums, assessments, and all other carrying charges (including but not
limited to agents’ compensation and fees and costs of counsel and receivers) and to the maintenance, repair or
restoration of the Mortgaged Property, or on account and in reduction of the Secured Debt, in such order and
amounts as the Master Trustee may elect; and have a receiver appointed to enter into possession of the Mortgaged
Property, collect the rents and profits therefrom, and apply the same as the court may direct and (iii) to pursue such
other remedies as the Master Trustee may have under the Master Indenture or applicable law.
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APPENDIX D
FORM OF
CONTINUING DISCLOSURE AGREEMENT
CONTINUING DISCLOSURE AGREEMENT
This Continuing Disclosure Agreement (this “Agreement”), dated as of April 1,
2014, is by and among The Bank of New York Mellon Trust Company, N.A. (the
“Dissemination Agent”) and the Obligated Group currently consisting of Schuylkill Health
System, a Pennsylvania non-profit corporation (“SHS” or the “System”), Schuylkill Medical
Center – South Jackson Street, a Pennsylvania non-profit corporation (“SMC-SJ”), Schuylkill
Medical Center – East Norwegian Street, a Pennsylvania non-profit corporation (“SMC-EN”)
and Schuylkill Rehabilitation Center, Inc., a Pennsylvania non-profit corporation (“SRC” and,
together with SHS, SMC-SJ and SMC-EN, the “Obligated Group”) in connection with the
issuance by the City of Pottsville Hospital Authority (the “Issuer”) of its $29,765,000 aggregate
principal amount of Health Center Revenue Bonds (Schuylkill Health System Project) Series of
2014 (the “Series 2014 Bonds”). The Series 2014 Bonds are issued under and secured by a Trust
Indenture, dated as of April 1, 2014 (the “Bond Indenture”), between the Issuer and The Bank of
New York Mellon Trust Company, N.A., Pittsburgh, Pennsylvania, as trustee (the “Bond
Trustee”) and the proceeds are being loaned to the Obligated Group pursuant to a Loan
Agreement dated as of April 1, 2014 (the “Loan Agreement”), between the Issuer and the
Obligated Group. As evidence of its obligation to repay such loan, the Obligated Group will
deliver to the Issuer the Master Note (City of Pottsville Hospital Authority) Series of 2014,
issued pursuant to and secured by the Master Trust Indenture, dated as of April 1, 2014, as
supplemented by Supplemental Master Trust Indenture No. 1, dated as of April 1, 2014
(collectively, the “Master Indenture”) between the Obligated Group and The Bank of New York
Mellon Trust Company, N.A., Pittsburgh, Pennsylvania, as master trustee (the “Master Trustee”).
The Obligated Group covenants and agrees as follows for the benefit of the
Bondholders (as defined below):
Section 1. Purpose of Agreement. This Agreement is being executed and delivered by
the Obligated Group for the benefit of the Bondholders and in order to assist the Underwriter
(defined below) in complying with the Rule (defined below). The Obligated Group
acknowledges that none of the Issuer, the Dissemination Agent and the Bond Trustee have
undertaken any responsibility with respect to any reports, notices or disclosures provided or
required under this Agreement (except for the Dissemination Agent’s obligation to file with the
MSRB reports provided by the Obligated Group pursuant to this Agreement), including their
accuracy and completeness, and have no liability to any Person, including any Bondholder and
the Underwriter, with respect to any such reports, notices or disclosures.
Section 2. Definitions. In addition to the definitions set forth in the Master Indenture,
which apply to any capitalized term used in this Agreement unless otherwise defined in the first
paragraph of this Agreement or in this Section, the following capitalized terms shall have the
meanings indicated below.
“Annual Report” shall mean any Annual Report provided by the Obligated Group
pursuant to Section 4(a) of this Agreement.
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“Bondholder” or “Holder” of a Series 2014 Bond shall mean any registered owner
of any of the Series 2014 Bonds or any Person which (i) has the power, directly or indirectly, to
vote or consent with respect to, or to dispose of ownership of, any of the Series 2014 Bonds
(including Persons holding through any nominee, securities depository or other intermediary,
including any beneficial owner), or (ii) is treated as the holder of any of the Series 2014 Bonds
for federal income tax purposes.
“Dissemination Agent” means, initially, The Bank of New York Mellon Trust
Company, N.A., and any other Person designated from time to time in writing by the Obligated
Group and which has filed with the Obligated Group a written acceptance of such designation
and of the duties of the Dissemination Agent under this Agreement.
“EMMA” means the Electronic Municipal Market Access system of the MSRB as
provided at http://www.emma.msrb.org, or any similar system that is acceptable to or as may be
prescribed by the MSRB for purposes of the Rule and approved by the SEC from time to time.
A current list of such systems may be obtained from the SEC at
http://www.sec.gov/info/municipal/nrmsir.htm.
“Fiscal Year” means the fiscal year of the Obligated Group ending on June 30 of
each calendar year.
“Listed Events” shall mean any of the events listed in Section 4(c) of this
Agreement.
“MSRB” means the Municipal Securities Rulemaking Board established pursuant
to Section 15(B)(b)(1) of the Securities Exchange Act of 1934, as amended, or any successor
organization.
“Official Statement” shall mean the Limited Offering Memorandum dated April
10, 2014 used in connection with the sale of the Series 2014 Bonds.
“Quarterly Report” shall mean any Quarterly Report provided by the Obligated
Group pursuant to Section 4(b) of this Agreement.
“Rule” shall mean Rule 15c2-12(b)(5) adopted by the SEC under the Securities
Exchange Act of 1934, as the same may be amended from time to time.
“SEC” shall mean the United States Securities and Exchange Commission.
“Underwriter” shall mean PNC Capital Markets LLC.
Section 3. Content of Annual Reports and Quarterly Reports.
(a)
Each Annual Report shall contain:
(i)
A copy of the annual financial statements with respect to
Schuylkill Health System and Controlled Entities, prepared in accordance with generally
accepted accounting principles and audited by a certified public accountant;
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(ii)
Certain financial information and annual operating data, including
updates of the financial and operating data included in Appendix A to the Official Statement in
the tables under the headings “SERVICES - Licensed and Staffed Beds,” “MEDICAL STAFF Active Medical Staff by Department” and “- Top Ten Admitting Physicians,” “SELECTED
UTILIZATION AND REVENUE SOURCE INFORMATION - Utilization Statistics” and “Sources of Revenue” and “SUMMARY FINANCIAL AND OPERATING INFORMATION –
Historical and Pro Forma Debt Service Coverage”; and
(iii)
The Debt Service Coverage Ratio for such Fiscal Year.
(b)
(i)
Each Quarterly Report shall contain unaudited financial statements
of Schuylkill Health System and Controlled Entities, including statement of revenues and
expenses and statement of cash flows for the most recently completed fiscal quarter, a balance
sheet as of the end of each such fiscal quarter, and a calculation of Debt Service Coverage Ratio
at the end of such quarter.
(ii)
For each second and fourth fiscal quarter of each Fiscal Year,
conference calls will be conducted with the Holders of the Series 2014 Bonds to discuss the
operating results of the Obligated Group relating to the prior fiscal year or the unaudited
financial statements of the two most recent fiscal quarters, as applicable.
Section 4. Filing of Annual Reports, Quarterly Reports, Additional Information and
Notices of Listed Events.
(a)
Within five (5) calendar months after the end of each Fiscal Year
commencing with the Fiscal Year ending June 30, 2014, the Obligated Group shall file, directly
or through the Dissemination Agent, copies of the Annual Report with the MSRB; provided,
however, if the Obligated Group’s audited financial statements are not available within five (5)
months after the end of the Fiscal Year, unaudited financial statements shall be filed and
subsequently replaced by the audited financial statements when available; provided, further, that
the audited financial statements shall be filed no later than forty-five (45) days after such five (5)
month period. In each case, the Annual Report may be submitted as a single document or as
separate documents comprising a package, and may cross-reference other information to the
extent permitted by the Rule.
(b)
Within 60 days after the end of each fiscal quarter commencing with the
fiscal quarter ending June 30, 2014, the Obligated Group shall file, directly or through the
Dissemination Agent, copies of the Quarterly Report with the MSRB.
(c)
In a timely manner not in excess of ten Business Days (as defined in the
Bond Indenture) after the occurrence of the event, the Obligated Group shall file with the MSRB
or deliver to the Dissemination Agent for filing with the MSRB notice of any of the following
events with respect to the Series 2014 Bonds:
(i)
Principal and interest payment delinquencies;
(ii)
Non-payment related defaults, if material;
D-3
(iii)
Unscheduled draws on debt service reserves reflecting financial
(iv)
Unscheduled draws on credit enhancements reflecting financial
(v)
Substitution of credit or liquidity providers, or their failure to
difficulties;
difficulties;
perform;
(vi)
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 Series 2014
Bonds, or other material events affecting the tax status of the Series 2014 Bonds;
(vii)
Modifications to rights of the Holders of the Series 2014 Bonds, if
material;
(viii) Bond calls (other than mandatory sinking fund redemptions), if
material, and tender offers;
(ix)
Defeasances;
(x)
Release, substitution, or sale of property, if any, securing
repayment of the Series 2014 Bonds, if material;
(xi)
Rating changes;
(xii)
Bankruptcy, insolvency, receivership or similar event of the
Obligated Group;
(xiii) The consummation of a merger, consolidation, or acquisition
involving the Obligated Group or the sale of all or substantially all of the assets of the Obligated
Group, 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; and
(xiv) Appointment of a successor or additional trustee or the change of
name of a trustee, if material.
(d)
If the Obligated Group files the reports, notices or other information
required by subsections (a), (b) and (c) above directly with the MSRB, it shall promptly notify the
Dissemination Agent and provide the Dissemination Agent with a copy of such filing(s).
(e)
At the same time that it provides any report or notice to the MSRB
pursuant to this Section 4, the Obligated Group shall provide a copy of such report or notice to the
Bond Trustee.
D-4
(f)
All reports, notices and information to be provided to the MSRB by the
Obligated Group shall be in such electronic or other format as prescribed by the MSRB.
Section 5. Report by Dissemination Agent. If the Obligated Group elects to meet the
requirements of Section 4 above through the Dissemination Agent, then concurrently with the
delivery to the MSRB of any information required pursuant to Section 4(a), 4(b) or 4(c) above,
the Dissemination Agent shall confirm to the Obligated Group that it has filed such information
with the MSRB.
Section 6. Termination of Agreement. The obligations of the Obligated Group under
this Agreement shall terminate upon the defeasance, prior redemption or payment in full of all of
the Series 2014 Bonds. The Obligated Group shall provide the Bond Trustee and the
Dissemination Agent with written notice that the obligations of the Obligated Group under this
Agreement have terminated and shall file a copy of such notice with the MSRB or provide a
written request to the Dissemination Agent that it file a copy of such notice with the MSRB. If
the obligations of the Obligated Group under the Loan Agreement or the Master Indenture are
assumed in full by another obligated person (as defined in the Rule), such Person shall be
responsible for compliance with this Agreement in the same manner as if it were the Obligated
Group, and the Obligated Group shall have no further responsibility hereunder.
Section 7. Amendment. The obligations of the Obligated Group under this Agreement
may be amended, without notice to or consent of the Holders of the Series 2014 Bonds, to the
extent required or permitted as a result of a change in the legal requirements, or in connection
with a change in the identity, nature, corporate organization, or status of the Obligated Group, or
the type of business conducted by the Obligated Group, or in connection with a corporate
reorganization of the Obligated Group; provided that any such modification of the obligations of
the Obligated Group under this Agreement shall be done in a manner consistent with the Rule
and either (i) does not materially impair the interests of Bondholders, in the determination of the
Obligated Group or the Dissemination Agent, if one has been appointed (which determination
shall be based on an opinion of counsel); or (ii) is approved by the Holders of a majority in
aggregate principal amount of the Series 2014 Bonds.
Section 8. Additional Information. Nothing in this Agreement shall be deemed to
prevent the Obligated Group from disseminating any other information, using the means of
dissemination set forth in this Agreement or any other means of communication, or including
any other information in any Annual Report or Quarterly Report or notice of occurrence of a
Listed Event, in addition to that which is required by this Agreement. If the Obligated Group
chooses to include any information in any Annual Report or Quarterly Report or notice of
occurrence of a Listed Event, in addition to that which is specifically required by this
Agreement, the Obligated Group shall have no obligation under this Agreement to update such
information or include it in any future Annual Report or Quarterly Report or notice of occurrence
of a Listed Event.
Section 9. Transmission of Information and Notices. Unless otherwise required by law,
all documents provided to the MSRB in compliance with Section 4 shall be provided to the
MSRB in an electronic format and shall be accompanied by identifying information, in each case
as prescribed by the MSRB. As of the date of this Agreement, the MSRB has established
D-5
EMMA as its continuing disclosure service for purposes of the Rule, and unless and until
otherwise prescribed by the MSRB, all documents provided to the MSRB in compliance with
Section 4 shall be submitted through EMMA in the format prescribed by the MSRB.
Section 10. Default. Any Bondholder may enforce the obligations of the Obligated
Group and the Dissemination Agent, if any, under this Agreement; provided however that (i) any
breach of such obligations shall not constitute or give rise to a default or an Event of Default
under the Bond Indenture, the Loan Agreement, the Master Indenture, the Series 2014 Bonds or
any other document or agreement relating to the Series 2014 Bonds, and (ii) the sole remedy for
any such breach shall be to compel specific performance of the obligations of the Obligated
Group under this Agreement.
Section 11. Beneficiaries. This Agreement shall inure solely to the benefit of the
Dissemination Agent, the Underwriter, the Obligated Group and Bondholders, and shall create
no rights in any other Person.
Section 12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania and the Rule.
Section 13. Severability. In case any one or more of the provisions of this Agreement
shall for any reason be held to be illegal or invalid, such illegality or invalidity shall not affect
any other provision of this Agreement, but this Agreement shall be construed and enforced as if
such illegal or invalid provision had not been contained herein.
Section 14. Dissemination Agent’s Rights and Duties; Termination and Resignation.
The Dissemination Agent shall have only such duties as are specifically set forth herein. The
Dissemination Agent (i) shall not be liable for any error in judgment or for any act done or step
taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it
may do or refrain from doing in connection therewith, except for its own gross negligence or
willful misconduct, (ii) shall not be obligated to take any legal action or other action hereunder,
which might in its judgment involve any expense or liability unless it has been furnished with
indemnification satisfactory to it, and (iii) shall be entitled to consult with counsel satisfactory to
it, and the opinion of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance
with the opinion of such counsel. The duties and responsibilities of the Dissemination Agent
hereunder shall be determined solely by the express provisions of this Agreement, and no further
duties or responsibilities shall be implied. The Dissemination Agent shall not have any liability
under, or duty to inquire into the terms and provisions of any agreement or instructions, other
than as outlined in the Agreement. The Dissemination Agent may rely and shall be protected in
acting or refraining from acting upon any written notice, instruction or request furnished to it
hereunder and believed by it to be genuine and to have been signed or presented by the proper
party or parties. The Dissemination Agent shall be under no duty to inquire into or investigate
the validity, accuracy or content of any such document. The Dissemination Agent shall not incur
any liability for following the instructions herein contained or expressly provided for, or written
instructions given by the other parties hereto. In the administration of this Agreement, the
Dissemination Agent may execute any of its powers and perform its duties hereunder directly or
through agents or attorneys and may consult with counsel, accountants and other skilled persons
D-6
to be selected and retained by it. The Dissemination Agent shall not be liable for anything done,
suffered or omitted in good faith by it in accordance with the advice or opinion of any such
counsel, accountants or other skilled persons. The Obligated Group may, in its sole discretion,
discharge and terminate the duties of the Dissemination Agent hereunder upon written notice
delivered to the Dissemination Agent. The Dissemination Agent may resign and be discharged
of its duties and obligations hereunder by giving notice in writing thirty (30) days in advance of
such resignation specifying a date when such resignation shall take effect. Any corporation or
association into which the Dissemination Agent in its individual capacity may be merged or
converted or with which it may be consolidated, or any corporation or association resulting from
any merger, conversion or consolidation to which the Dissemination Agent in its individual
capacity shall be a party, or any corporation or association to which all or substantially all the
corporate trust business of the Dissemination Agent in its individual capacity may be sold or
otherwise transferred, shall be the Dissemination Agent under this Agreement without further
act. The Obligated Group covenants and agrees to defend, indemnify and hold the Dissemination
Agent and its directors, officers, agents and employees (collectively, the “Indemnitees”)
harmless from and against any and all liabilities, losses, damages, fines, suits, actions, demands,
penalties, costs and expenses, including out-of-pocket, incidental expenses, reasonable legal fees
and expenses and the costs and expenses of defending or preparing to defend against any claim
(“Losses”) that may be imposed on, incurred by, or asserted against, the Indemnitees or any of
them for following any instruction or other direction upon which the Dissemination Agent is
authorized to rely pursuant to the terms of this Agreement. In addition to and not in limitation of
the immediately preceding sentence, the Obligated Group also covenants and agrees to
indemnify and hold the Indemnitees and each of them harmless from and against any and all
Losses that may be imposed on, incurred by, or asserted against the Indemnitees or any of them
in connection with or arising out of the Dissemination Agent’s performance under this
Agreement provided the Dissemination Agent has not acted with gross negligence or engaged in
willful misconduct. Anything in this Agreement to the contrary notwithstanding, in no event
shall the Dissemination Agent be liable for special, indirect or consequential loss or damage of
any kind whatsoever (including but not limited to lost profits), even if the Dissemination Agent
has been advised of such loss or damage and regardless of the form of action. This Section 14
shall survive termination of this Agreement and the resignation or removal of the Dissemination
Agent for any reason.
Section 15. Execution. This Agreement may be executed in any number of counterparts,
each of which shall be an original and all of which shall constitute but one and the same
instrument.
Section 16. Notices. Unless otherwise provided herein, all notices, certificates, requests
or other communications hereunder shall be given by telephone and promptly confirmed in
writing and shall be deemed given when given by telephone or addressed as follows:
Obligated Group:
Pottsville, Pennsylvania 17901
Attention: President & CEO
Telephone: (570) 621-5111
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Dissemination Agent: The Bank of New York Mellon Trust Company, N.A.
Pittsburgh, Pennsylvania 15259
Attention: Global Corporate Trust – Public Finance
Telephone: (412) 234-7999
Each of the above parties may, by written notice given hereunder to the others, designate any
further or different addresses to which subsequent notices, certificates, requests, or other
communications shall be sent. In addition, the parties hereto may agree to any other means by
which subsequent notices, certificates, requests or other communications may be sent.
[SIGNATURE PAGE FOLLOWS]
D-8
IN WITNESS WHEREOF, the parties hereto have each caused this Continuing
Disclosure Agreement to be executed in its name and in its behalf, all as of the date and year first
above written.
SCHUYLKILL HEALTH SYSTEM
By:
Name: John E. Simodejka
Title: President
SCHUYLKILL MEDICAL CENTER – SOUTH
JACKSON STREET
By:
Title: President
SCHUYLKILL MEDICAL CENTER – EAST
NORWEGIAN STREET
By:
Title: President
SCHUYLKILL
INC.
REHABILITATION
CENTER,
By:
Title: President
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Dissemination Agent
By:
Authorized Officer
S-1
APPENDIX E
PROPOSED FORM OF
APPROVING OPINION OF BOND COUNSEL
STEVENS & LEE
LAWYERS & CONSULTANTS
111 North 6th Street
P.O. Box 679
Reading, PA 19603-0679
(610) 478-2000 Fax (610) 376-5610
www.stevenslee.com
April 30, 2014
RE:
$29,765,000 City of Pottsville Hospital Authority Health Center Revenue Bonds
(Schuylkill Health System Project) Series of 2014 (the “Bonds”)
TO:
THE REGISTERED OWNERS OF THE ABOVE-CAPTIONED BONDS
We have acted as Bond Counsel in connection with the issuance by the City of Pottsville
Hospital Authority (the “Authority”) of the above-captioned Bonds under the Pennsylvania
Municipality Authorities Act (Act 22 of 2001, approved June 18, 2001, 53 Pa. Cons. Stat. § 5601
et seq.), as amended (the “Act”). The Bonds are being issued pursuant to the provisions of a
Trust Indenture, dated as of April 1, 2014 (the “Trust Indenture”), by and between the Authority
and The Bank of New York Mellon Trust Company, N.A., Pittsburgh, Pennsylvania, as bond
trustee (the “Bond Trustee”). The proceeds of the Bonds, together with other available funds,
will be used by the Authority to finance a project (the “2014 Project”) for the benefit of
Schuylkill Health System (“SHS”), Schuylkill Medical Center – South Jackson Street
(“SMC-SJ”), Schuylkill Medical Center – East Norwegian Street (“SMC-EN”) and Schuylkill
Rehabilitation Center, Inc. (“SRC”), each a Pennsylvania non-profit corporation (collectively,
the “Obligated Group”), consisting of, among other things: (i) the refunding of the Authority’s
Hospital Revenue Bonds (The Pottsville Hospital and Warne Clinic Project) Series of 1998 (the
“1998 Bonds”); (ii) the refunding of a loan evidenced by that certain promissory note dated
August 5, 2009, by and between SMC-EN and Rural Housing Service, U.S. Department of
Agriculture; (iii) the design, acquisition, construction, reconstruction, renovation, rehabilitation,
improvement, furnishing and equipping real and personal property of, including, but not limited to,
information technology and facilities for the Obligated Group; (iv) the funding of a debt service
reserve fund for the Bonds; and (v) financing contingencies and paying all or any portion of the
costs and expenses incident to the issuance of the Bonds. All capitalized terms used in this
opinion and not defined herein shall have the meanings assigned to them in the Trust Indenture
unless the context clearly requires otherwise.
The Authority and the Obligated Group have entered into a Loan Agreement, dated as of
April 1, 2014 (the “Loan Agreement”), pursuant to which the Authority has agreed to loan the
proceeds of the Bonds to the Obligated Group to finance the 2014 Project and the Obligated
Group has agreed, among other things, to make certain loan payments to the Authority in such
amounts and at such times as to permit the Authority to pay, among other things, the principal of,
premium, if any, and interest on the Bonds when due.
Philadelphia
 Reading
Wilkes-Barre


Valley Forge
Princeton


Lehigh Valley
Cherry Hill
 Harrisburg  Lancaster  Scranton

New York

Wilmington
A PROFESSIONAL CORPORATION
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STEVENS & LEE
April 30, 2014
Page 2
Pursuant to the provisions of the Trust Indenture, the Authority has, among other things,
pledged, assigned and granted to the Bond Trustee all of its right, title and interest in and to the
Loan Agreement (except for certain indemnification rights, rights to be reimbursed for certain
costs and expenses that it may incur as provided in the Loan Agreement and amounts required to
be rebated to the federal government).
The Obligated Group and The Bank of New York Mellon Trust Company, N.A., as
master trustee (the “Master Trustee”), have entered into a Master Trust Indenture, dated as of
April 1, 2014 (the “Master Trust Indenture”). The Bonds will be secured by, among other things,
a Master Note (City of Pottsville Hospital Authority) Series of 2014, dated April 30, 2014 (the
“Master Note”), issued pursuant to the provisions of the Master Trust Indenture, as supplemented
by Supplemental Master Trust Indenture No. 1, dated as of April 1, 2014 (the “Supplemental
Indenture” and together with the Master Trust Indenture, the “Master Indenture”).
As additional security for the holders of the Bonds, SMC-SJ and SMC-EN have each
executed and delivered an Open-End Mortgage and Security Agreement, dated as of April 1,
2014, but effective as of April 30, 2014 (collectively, the “Mortgages”), to the Master Trustee as
the beneficiary, under which SMC-SJ and SMC-EN have each granted a mortgage lien on certain
of its respective real property.
The Bonds issued this date are dated, mature and bear interest and are subject to
redemption prior to maturity upon the terms and conditions stated therein and in the Trust
Indenture. The Bonds are issuable as registered bonds in denominations of $100,000 or any
integral multiple of $5,000 in excess thereof.
In our capacity as Bond Counsel, we have reviewed the following:
1.
The Act;
2.
A certified copy of the Articles of Incorporation of the Authority;
3. Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as
amended (the “Code”) and the regulations and rulings promulgated thereunder;
4.
5.
exhibits thereto;
The General Certificate of the Authority and all exhibits thereto;
The General Certificate of each member of the Obligated Group and all
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STEVENS & LEE
April 30, 2014
Page 3
6. The opinion of Williamson, Friedberg & Jones, LLC, in its capacity as
counsel to the Authority;
7. The Bond Purchase Agreement among the Authority, the Obligated Group
and PNC Capital Markets LLC (the “Underwriter”), dated April 10, 2014;
8.
A specimen copy of one of the Bonds;
9. An executed Nonarbitrage Certificate and Compliance Agreement of the
Authority delivered this day;
10. An executed Confirmation Certificate of the Obligated Group delivered this
day;
11. An executed Certificate of the Underwriter delivered this day;
12. An executed Certificate Regarding Information Contained in Form 8038
delivered this day;
13. The information return of the Authority on Form 8038 delivered this day; and
14. Original counterparts or certified copies of the Loan Agreement, the Trust
Indenture, the Master Indenture, the Master Note, the Mortgages and the other documents,
agreements, certificates and opinions delivered at the closing held this day.
__________________________
Based and in reliance upon the foregoing, our attendance at the closing held this day and
subject to the caveats, qualifications, exceptions and assumptions set forth herein, it is our
opinion that, as of the date hereof, under existing law:
1. The Authority is a body corporate and politic, validly existing under the laws
of the Commonwealth of Pennsylvania (the “Commonwealth”), with full power and authority to
execute and deliver the Trust Indenture and the Loan Agreement and to issue and sell the Bonds.
2. The Trust Indenture and the Loan Agreement have each been duly
authorized, executed and delivered by the Authority and each such document constitutes the
valid and binding obligation of the Authority.
3. The issuance of the Bonds has been duly authorized by the Authority. The
Bonds have been duly and validly authorized, executed and delivered by the Authority and, when
E-3
STEVENS & LEE
April 30, 2014
Page 4
duly authenticated by the Bond Trustee, will constitute valid and binding obligations of the
Authority.
4. Under the laws of the Commonwealth, the Bonds and interest on the Bonds
shall be free from taxation for State and local purposes within the Commonwealth, but this
exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not
levied directly on the Bonds or the interest thereon. Under the laws of the Commonwealth,
profits, gains or income derived from the sale, exchange or other disposition of the Bonds are
subject to State and local taxation within the Commonwealth.
5.
Interest on the Bonds is not includable in gross income under Section 103(a)
of the Code.
6. Under the Code, interest on the Bonds held by persons other than
corporations (as defined for federal tax purposes) does not constitute an item of tax preference
under Section 57 of the Code and thus is not subject to alternative minimum tax for federal
income tax purposes.
7. Under the Code, interest on the Bonds held by a corporation (as defined for
federal tax purposes) does not constitute an item of tax preference under Section 57 of the Code;
however, corporations subject to alternative minimum tax will be required to include, among
other things, amounts treated as interest on the Bonds as an adjustment in computing alternative
minimum taxable income in the manner provided in Section 56 of the Code.
__________________________
In connection with providing the foregoing opinions, we call to your attention the
following:
A. As to questions of fact material to our opinion, we have relied upon the
representations, statements, expectations and certifications contained in the documents and other
certified proceedings reviewed by us (including, without limitation, certificates, agreements and
representations by the Authority and the Obligated Group as to the expected use of the proceeds
of the Bonds and as to continuing compliance with Section 148 of the Code to assure that the
Bonds do not become “arbitrage bonds” and continue to be “qualified 501(c)(3) bonds” within
the meaning of Section 145 of the Code), without undertaking to verify the same by independent
investigation. We have also relied upon the genuineness, authenticity, truthfulness and
completeness of all facts, information, representations, and certifications contained in the
agreements, certificates, documents, records and other instruments executed and delivered at or
in connection with the closing held this day and have assumed compliance with the state and
E-4
STEVENS & LEE
April 30, 2014
Page 5
federal securities laws. We have also assumed the genuineness of the signatures appearing upon
all the certificates, documents and instruments executed and delivered at the closing held this
day.
B. In connection with the opinions set forth in paragraphs 2 and 3 above, we call to
your attention that the legality, validity, binding nature and enforceability of the documents
referred to therein may be limited by: (a) the availability or unavailability of equitable remedies
including, but not limited to, specific performance and injunctive relief; (b) the effect of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws
or equitable principles generally affecting creditors’ rights or remedies; and (c) the effect of
certain laws and judicial decisions limiting on constitutional or public policy grounds any
provisions set forth in such documents purporting to waive rights of due process and legal
procedure.
C. In providing the opinion set forth in paragraph 5 above, we have assumed continuing
compliance by the Authority and the Obligated Group with requirements of the Code and the
applicable regulations thereunder which must be met subsequent to the issuance of the Bonds in
order that the interest thereon be and remain excluded from gross income for federal income tax
purposes. The Authority and the Obligated Group have covenanted to comply with such
requirements. Failure to comply with such requirements could cause the interest on the Bonds to
be included in gross income retroactive to the date of issuance of such Bonds. We further advise
you that we have not undertaken to determine (or to inform any person) whether any actions
taken (or not taken) or events occurring (or not occurring) after the date of issuance of the Bonds
may affect the tax status of interest on the Bonds.
D. In providing the opinions set forth in paragraphs 6 and 7 above, we have assumed
continuing compliance by the Authority and the Obligated Group with requirements of the Code
and applicable regulations thereunder which must be met subsequent to the issuance of the
Bonds in order that the interest thereon not constitute an item of tax preference under Section 57
of the Code. Failure to comply with such requirements could cause the interest on the Bonds to
constitute an item of tax preference under Section 57 of the Code retroactive to the date of
issuance of the Bonds.
E. Except as specifically set forth above, we express no opinion regarding other federal
income tax consequences arising with respect to the Bonds, including, without limitation, the
treatment for federal income tax purposes of gain or loss, if any, upon the sale, redemption or
other disposition of the Bonds prior to the maturity of the Bonds subject to original issue
discount and the effect, if any, of certain other provisions of the Code which could result in
collateral federal income tax consequences to certain investors as a result of adjustments in the
computation of tax liability dependent on tax-exempt interest.
E-5
STEVENS & LEE
April 30, 2014
Page 6
F. The Bonds are special limited obligations of the Authority, payable only out of
amounts that may be held by or available to the Bond Trustee under the Trust Indenture, the
Loan Agreement and the Master Indenture, including amounts payable pursuant to the Master
Note. The Bonds do not pledge the credit or taxing power of the Commonwealth or any political
subdivision thereof. The Authority has no taxing power.
G. We have not been engaged to verify, nor have we independently verified, nor do we
herein express any opinion to the registered owners of the Bonds with respect to, the accuracy,
completeness or truthfulness of any statements, certifications, information or financial statements
set forth in the Preliminary Limited Offering Memorandum dated March 27, 2014, as
supplemented (the “Preliminary Limited Offering Memorandum”), or in the Limited Offering
Memorandum dated April 10, 2014 (the “Limited Offering Memorandum”), or with respect to
any other materials used in connection with the offer and sale of the Bonds.
H. We express no opinion with respect to whether the Authority or the Obligated
Group, in connection with the sale of the Bonds or the preparation of the Preliminary Limited
Offering Memorandum or the Limited Offering Memorandum has made any untrue statement of
a material fact or omitted to state a material fact necessary in order to make any statements made
therein, not misleading. Further, we have not verified, and express no opinion as to the accuracy
of, any “CUSIP” identification number which may be printed on any Bond.
Very truly yours,
STEVENS & LEE, P.C.
E-6
APPENDIX F
INFORMATION REGARDING
The information provided in this APPENDIX F has been provided by DTC. No
representation is made by the Issuer, the Obligated Group, the Bond Trustee or the Underwriter as
to the accuracy or adequacy of such information provided by DTC or as to the absence of material
adverse changes in such information subsequent to the date of this Limited Offering Memorandum.
The following description of the Depository Trust Company (“DTC”), the procedures and record
keeping with respect to beneficial ownership interests in the Series 2014 Bonds, payment of principal,
interest and other payments on the Series 2014 Bonds to DTC Participants or Beneficial Owners,
confirmation and transfer of beneficial ownership interest in the Series 2014 Bonds and other related
transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on
information provided by DTC. Accordingly, no representations can be made concerning these matters
and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information
with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as
the case may be.
No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute
to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Series
2014 Bonds, (b) certificates representing ownership interest in or other confirmation or ownership
interest in the Series 2014 Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its
nominee, as the registered owner of the Series 2014 Bonds, or that they will so do on a timely basis, or
that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this
Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange
Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are
on file with DTC.
DTC will act as securities depository for the Series 2014 Bonds. The Series 2014 Bonds 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 Series
2014 Bonds certificate will be issued for each issue of the Series 2014 Bonds, each in the aggregate
principal amount of such issue, 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 nonU.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or
F-1
maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect
Participants”). DTC has 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. The information contained on this Internet site is not incorporated herein by reference.
Purchases of Series 2014 Bonds under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Series 2014 Bonds on DTC’s records. The ownership
interest of each actual purchaser of each Series 2014 Bonds (“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 2014 Bonds 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 Series 2014 Bonds, except in the event that
use of the book-entry system for the Series 2014 Bonds is discontinued.
To facilitate subsequent transfers, all Series 2014 Bonds 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 2014 Bonds with DTC and
their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2014 Bonds;
DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2014
Bonds 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.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to
Series 2014 Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures.
Under its usual procedures, DTC mails an Omnibus Proxy to Issuer 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 Series 2014 Bonds are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the Series 2014 Bonds 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 Issuer or Agent, on payable 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 securities 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 Bond Trustee or Issuer, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co.
(or such other nominee as may be requested by an authorized representative of DTC) is the responsibility
of Issuer or Bond Trustee, 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.
F-2
DTC may discontinue providing its services as securities depository with respect to the Series
2014 Bonds at any time by giving reasonable notice to the Obligated Group or the Bond Trustee. Under
such circumstances, in the event that a successor securities depository is not obtained, such Series 2014
Bond certificates are required to be printed and delivered. The Obligated Group, in its sole discretion and
without the consent of any other person, may terminate the services of DTC with respect to the Series
2014 Bonds if the Obligated Group determines that (i) DTC is unable to discharge its responsibilities with
respect to the Series 2014 Bonds, or (ii) a continuation of the requirement that all of the Outstanding
Bonds be registered in the registration books kept by the Bond Trustee in the name of Cede & Co., as
nominee of DTC, is not in the best interests of the Beneficial Owners. In the event that no substitute
securities depository is found by the Obligated Group or restricted registration is no longer in effect,
Series 2014 Bond certificates will be delivered.
The information herein concerning DTC and DTC’s book-entry system has been obtained from
sources that the Issuer, the Obligated Group and the Underwriter believe to be reliable, but the Issuer, the
Obligated Group and the Underwriter take no responsibility for the accuracy thereof.
Each person for whom a Participant acquires an interest in the Series 2014 Bonds, as nominee,
may desire to make arrangements with such Participant to receive a credit balance in the records of such
Participant, and may desire to make arrangements with such Participant to have all notices of redemption
or other communications to DTC, which may affect such persons, to be forwarded in writing by such
Participant and to have notification made of all interest payments. NEITHER THE ISSUER, THE
OBLIGATED GROUP NOR THE BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR
OBLIGATION TO SUCH PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO THE SERIES 2014 BONDS.
Redemption notices will be sent to DTC. If less than all of the Series 2014 Bonds are being
redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant to be
redeemed.
So long as Cede & Co. is the registered owner of the Series 2014 Bonds, as nominee for DTC,
references herein to Bondholders or registered owners of the Series 2014 Bonds means Cede & Co., as
aforesaid, and shall not mean the Beneficial Owners of the Series 2014 Bonds.
When reference is made to any action which is required or permitted to be taken by the Beneficial
Owners, such reference shall only relate to those permitted to act (by statute, regulation or otherwise) on
behalf of such Beneficial Owners for such purposes. When notices are given, they shall be sent by the
Bond Trustee to DTC only.
For every transfer and exchange of Series 2014 Bonds, the Beneficial Owner may be charged a
sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto.
NONE OF THE ISSUER, THE OBLIGATED GROUP, THE UNDERWRITER NOR THE
BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT
PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH
RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT
PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (II) ANY NOTICE THAT IS PERMITTED OR
REQUIRED TO BE GIVEN TO THE OWNERS OF THE SERIES 2014 BONDS UNDER THE BOND
INDENTURE; (III) THE SELECTION BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT
PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL
REDEMPTION OF THE SERIES 2014 BONDS; (IV) THE PAYMENT BY DTC OR ANY DIRECT
PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE
F-3
PRINCIPAL OR REDEMPTION PRICE, IF ANY, OR INTEREST DUE WITH RESPECT TO THE
SERIES 2014 BONDS; (V) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE
OWNER OF THE SERIES 2014 BONDS; OR (VI) ANY OTHER MATTER.
F-4
APPENDIX G
FORM OF INVESTOR LETTER
________, 2014
The Bank of New York Mellon Trust Company, N.A., as Trustee
Pittsburgh, PA 15259
Attention: Global Corporate Trust
240 West Sunbury Street
Minersville, PA 17954
Attention: Chairman
Schuylkill Health System, as Obligated Group Agent
Pottsville, PA 17901
Attention: Vice President & CFO
Re:
$29,765,000 City of Pottsville Hospital Authority Health Center Revenue Bonds
(Schuylkill Health System Project), Series of 2014
Ladies and Gentlemen:
The undersigned (the “Purchaser”) hereby acknowledges receipt of $_______ in aggregate
principal amount of the above-referenced bonds (collectively, the “Bonds”).
The undersigned acknowledges that the Bonds were issued as revenue bonds and further
acknowledges that the Bonds are authorized by, issued pursuant to, and payable from the sources of funds
identified in, a Trust Indenture dated as of April 1, 2014 (the “Indenture”) between the City of Pottsville
Hospital Authority (the “Issuer”) and The Bank of New York Mellon Trust Company, N.A. (the
“Trustee”) and a Master Trust Indenture, as amended by a Supplemental Master Trust Indenture No. 1
(collectively, the “Master Indenture”), each dated as of April 1, 2014 and each between the Obligated
Group currently consisting of Schuylkill Health System (“SHS”), Schuylkill Medical Center – South
Jackson Street (“SMC-SJ”), Schuylkill Medical Center – East Norwegian Street (“SMC-EN”) and
Schuylkill Rehabilitation Center, Inc. (“SRC” and, together with SHS, SMC-SJ and SMC-EN, the
“Obligated Group”), each a Pennsylvania non-profit corporation, and The Bank of New York Mellon
Trust Company, N.A., as master trustee. All capitalized terms used but not defined herein shall have the
meaning ascribed to them in the Indenture, the Master Indenture and the herein defined Limited Offering
Memorandum.
The Purchaser, by its purchase of the Bonds, hereby acknowledges that:
(i)
The Bonds are special, limited obligations of the Issuer and do not constitute a debt or
liability of the City of Pottsville (the “City”), Schuylkill County, Pennsylvania (the “County”), the
Commonwealth of Pennsylvania (the “Commonwealth”) or of any political subdivision of the
Commonwealth. Neither the credit nor the taxing power of the City, the County, the Commonwealth or
of any political subdivision thereof is pledged for payment of the principal or redemption price of, or
interest on the Bonds. The Issuer has no taxing power.
G-1
(ii)
The Bonds may be purchased only by a “qualified institutional buyer” as defined in Rule
144A promulgated under the Securities Act of 1933, as amended (the “Securities Act”).
(iii)
The Issuer, the Financial Advisor, the Trustee and the Underwriter have not undertaken
and will not undertake steps to ascertain the accuracy or completeness of the information furnished to the
Purchaser with respect to the Bonds, including, without limitation, the information set forth in the Limited
Offering Memorandum dated April 10, 2014 (the “Limited Offering Memorandum”). The Purchaser has
not relied, nor will rely, upon the Issuer, the Financial Advisor or, subject to clause (vi) below, the
Underwriter in any way with regard to the accuracy or completeness of the information furnished to the
Purchaser in connection with its purchase of the Bonds, including, without limitation, the information set
forth in the Limited Offering Memorandum, nor have any such parties (except for the Underwriter to the
limited extent set forth in clause (vi) below) made any representation to the Purchaser with respect to that
information.
(iv)
The Bonds will not be listed on any stock or other securities exchange and were issued
without registration under the provisions of the Securities Act, or any state securities laws. The Series
2014 Bonds will not carry any rating from any rating service.
(v)
Neither the Issuer, the Financial Advisor, the Trustee nor the Underwriter have any
responsibility (except as set forth in clause (vi) below) for the accuracy or completeness of the
information supplied to the Purchaser or any other information that the Purchaser has received or relied
upon in making its decision to purchase and own the Bonds purchased by it.
(vi)
The Underwriter has reviewed the information in the Limited Offering Memorandum in
accordance with, and as part of, its responsibilities under the federal securities laws as applied to the facts
and circumstances of this transaction, but the Underwriter does not guarantee the accuracy of
completeness of the information set forth in the Limited Offering Memorandum.
The Purchaser, by its purchase of the Bonds, hereby represents and warrants that:
(i)
The Purchaser has full power and authority to carry on its business as being conducted at
the time the Bonds are purchased.
(ii)
The Purchaser has the ability to bear the economic risks of an investment in the Bonds,
and is a “qualified institutional buyer,” as defined in the Securities Act.
(iii)
The Purchaser is not and has never been controlled by, or under common control, with
the Issuer or the Obligated Group. The Purchaser has not entered into any arrangements with the Issuer,
the Obligated Group, the Financial Advisor or the Underwriter in connection with the Bonds, other than
as disclosed to the Issuer, the Obligated Group, the Financial Advisor and the Underwriter.
(iv)
The Purchaser is sufficiently knowledgeable and experienced in financial and business
matters, including the purchase and ownership of municipal and other conduit tax-exempt obligations, to
be able to evaluate the risks and merits of the investment represented by the purchase and ownership of
the Bonds purchased by it, and it is capable of and has made its own investigation of the Obligated Group,
in connection with the Purchaser’s decision to purchase and own the Bonds purchased by it.
(v)
The Bonds purchased by the Purchaser are purchased by the Purchaser for the purpose of
investment, and the Purchaser acknowledges and agrees that (a) the Purchaser currently intends to hold
the Bonds purchased by it for its own account as an investment, provided that the disposition of the Bonds
(in accordance with the following sentence) shall always be within the sole discretion and control of the
G-2
Purchaser, and (b) the Bonds are not transferable except to a “qualified institutional buyer” as defined in
Rule 144A promulgated under the Securities Act of 1933, as amended. The Purchaser will not transfer
the Bonds to any person or entity that is not a “qualified institutional buyer.”
(vi)
The Purchaser has received and read a copy of the Limited Offering Memorandum and
all Appendices thereto.
(vii)
In addition to the Purchaser’s receipt of the Limited Offering Memorandum, the
Purchaser acknowledges that it has received financial statements and other information from the
Obligated Group relating to: (i) the sources of repayment of the Bonds; (ii) the Obligated Group
(including financial and operating data with respect to the Obligated Group); and (iii) such other material
matters relating to the Bonds and the Obligated Group as the Purchaser deemed relevant. The Purchaser
acknowledges that the Limited Offering Memorandum is not guaranteed as to its accuracy or
completeness, and is not to be construed as a representation by the Issuer, the Financial Advisor or the
Underwriter. The Purchaser had the opportunity ask questions of, and request additional information
from, the Obligated Group regarding the information provided to it and any other matters that it
considered to be relevant to its decision to purchase and own the Bonds.
(viii) The Purchaser has reviewed and has made its decision to invest in the Bonds based
primarily on its review and analysis of the information provided by the Obligated Group.
(ix)
The Purchaser understands that the Bonds are a speculative investment; that there is a
high degree of risk in investing in the Bonds; and that it is capable of suffering a loss of the entirety of its
investment which is represented by the Bonds. The Purchaser can bear the economic risk associated with
a purchase of high risk securities such as the Bonds and the Purchaser has such knowledge and experience
in business and financial matters, including the analysis of a participation in the purchase of similar
investments, so as to be capable of independently evaluating the merits and risks of an investment in the
Bonds.
[Signature page follows]
G-3
When signed, this Investor Letter has been executed and delivered as of the date first written
above.
Very truly yours,
[PURCHASER]
By:
Name:
Title:
G-4

$29,765,000 City of Pottsville Hospital Authority Health Center

Transcription

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